10-K

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 15(d) of the Act. YES ☐ No ☒

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 its 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 issued its audit report. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the last reported sale price of the common stock quoted on The NASDAQ Capital Market, on June 30, 2022 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $148.6 million.

The number of shares of Registrant’s Common Stock outstanding as of March 27, 2023 was 5,338,650.

Certain statements contained or incorporated by reference in this annual report on Form 10-K are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses, plans and objectives for future operations, changes in laws and regulations applicable to the Company and its subsidiaries, adequacy of funding sources, actuarial expected benefit payments, valuation of foreclosed assets, regulatory requirements, economic environment and other statements contained herein regarding matters that are not historical facts. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgment of the Company and its management about future events. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only management’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside management’s control. Any forward-looking statements made by the Company speak only as of the date on which such statements are made. The Company’s actual results and financial position may differ materially from the anticipated results and financial condition indicated in or implied by these forward-looking statements. The Company makes no commitment to update or revise forward-looking statements in order to reflect new information or subsequent events or changes in expectations.

Factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:

More information on factors that could affect the Company’s forward-looking statements is included under Item 1A. Risk Factors. The foregoing list of important factors is not exclusive, and the Company is not obligated to update any forward-looking statement, whether written or oral, that may be made from time to time.

The Company was incorporated under the laws of the Commonwealth of Virginia on February 21, 2013 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the outstanding shares of the Bank and becoming the holding company of the Bank. On June 19, 2013, the shareholders of the Bank approved the Reorganization Agreement and Plan of Share Exchange, dated March 6, 2013, whereby the Bank would reorganize into a holding company structure. On December 16, 2013, when the Reorganization became effective, the Bank became a wholly-owned subsidiary of the Company, and each share of the Bank’s common stock was exchanged for one share of the Company’s common stock.

The Company is regulated under the BHCA and is subject to inspection, examination and supervision by the Federal Reserve. The Company is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Exchange Act as administered by the SEC.

Virginia National Bank, the principal operating subsidiary of the Company, was organized in 1998 under federal law as a national banking association to engage in a general commercial and retail banking business. The Bank received its charter from the OCC and commenced operations on July 29, 1998. The Bank received fiduciary powers in January 2000. The Bank’s deposits are insured up to the maximum amount provided by the FDIC.

Prior to July 2018, the Bank had one wholly owned subsidiary, VNBTrust, a national trust bank formed in 2007. Effective July 1, 2018, VNBTrust was merged into the Bank. The Bank continues to offer trust and estate administration services under the name of VNB Trust and Estate Services. The Bank offered wealth and investment advisory services under the name Sturman Wealth Advisors, formerly known as VNB Investment Services, until the sale of the business line effective December 19, 2022.

The Bank, through its financial subsidiary Fauquier Bank Services, Inc., has equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company, and Bankers Title Shenandoah, LLC, a title insurance company, both of which are owned by a consortium of Virginia community banks.

The Bank has another subsidiary, Special Properties Acquisition - VA, LLC, which was originally formed by Fauquier to hold other real estate owned; however, there are no assets currently held by this subsidiary.

The Bank is subject to the supervision, examination and regulations of the OCC and is also subject to regulations of the FDIC, the Federal Reserve and the CFPB.

During 2018, the Company formed Masonry Capital Management, LLC, a registered investment advisor, which offers investment advisory and management services to clients through separately managed accounts and a private investment fund. The Company believes the formation of Masonry Capital allows the Company to offer its investment strategy to a wider range of clients.

References to the Company’s subsidiaries in this document include both the Bank and Masonry Capital.

In addition, the Company owns Fauquier Statutory Trust II (“Trust II”), which is an unconsolidated subsidiary. The subordinated debt owed to Trust II is reported as a liability of the Company.

The main offices of the Company, the Bank, Masonry Capital and VNB Trust Estate Services, as well as corporate and Bank operations, are located in Charlottesville, Virginia.

On April 1, 2021, the Company merged with Fauquier, pursuant to the Agreement and Plan of Reorganization dated September 30, 2020, including a related Plan of Merger. Pursuant to the Merger Agreement, Fauquier shareholders received 0.675 shares of Company stock for each share of Fauquier common stock, with cash paid in lieu of fractional shares, resulting in the Company issuing 2,571,213 shares of common stock. In connection with the transaction, TFB, Fauquier's wholly-owned bank subsidiary, was merged with and into the Bank. Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.

The Bank offers a full range of banking and related financial services, including checking accounts, NOW accounts, money market deposit accounts, certificates of deposit, individual retirement accounts, CDARS™, ICS® and other depository services. The Bank actively solicits such accounts from individuals, businesses and charitable organizations within its trade areas. Other services offered by the Bank include ATMs, internet banking, treasury and cash management services and merchant card services. In addition, the Bank is affiliated with Visa® and MasterCard®, which are accepted worldwide, and offers debit cards to consumer and business customers.

The Bank also offers short to long term commercial, real estate and consumer loans. The Bank is committed to being a reliable and consistent source of credit, providing loans that are priced based upon an overall banking relationship, easy access to the Bank’s local decision makers who possess strong local market knowledge, local delivery, fast response, and continuity in the banking relationship.

Trust and estate administration services are offered through VNB Trust and Estate Services.

Investment management services are offered through Masonry Capital, whose flagship product for separately managed accounts and a private investment fund employs a value-based, catalyst-driven investment strategy. The financial instruments used include common and preferred stock, corporate bonds, bank loans and other debt securities, convertible securities, Exchange Traded Funds, options, warrants and cash equivalents.

The Company primarily serves the Virginia communities in and around the cities of Charlottesville, Winchester, Manassas and Richmond, and the counties of Albemarle, Fauquier, Frederick and Prince William. Refer to Item 2. Properties for additional information regarding locations. The Bank’s locations are well-positioned in attractive markets. Within its market areas, there are various types of industry including higher education, medical and professional services, research and development companies and retail.

The Company engages in highly competitive activities. Each activity involves competition with other banks, as well as with non-banking enterprises that offer financial products and services that compete directly with the Company’s product and service offerings. The Company actively competes with other banks in its efforts to obtain deposits and make loans, in the scope and types of services offered, in interest rates paid on time deposits and charged on loans, and in other aspects of banking.

In addition to competing with other community and commercial banks within and outside its primary service areas, the Company competes with other institutions engaged in the business of making loans or accepting deposits, such as credit unions, insurance companies, small loan companies, finance companies, fintech companies, certain governmental agencies and other enterprises. Competition for deposits and loans is affected by various factors including, without limitation, interest rates offered, the number and location of branches and types of products offered, digital capabilities, and the reputation of the institution. Credit unions increasingly have been allowed to expand their membership definitions, and because they enjoy a favorable tax status, they have been able to offer more attractive loan and deposit pricing.

The market areas served by the Company are highly competitive with respect to banking. Competition for loans to businesses and professionals is intense, and pricing is important. Many of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services such as extensive and established branch networks that the Company does not expect to match. Deposit competition is also very strong. Management believes, however, that a market exists for the personal and customized financial services an independent, community bank can offer.

In an effort to develop young talent in the financial industry, the Company has created the Finance Career & Leadership Academy (FCLA), which is an instructional program designed to not only provide advanced personal finance and employment readiness training, but also a path to career opportunities in banking for high school juniors and seniors within our communities. The FCLA runs as an in-person series of classroom meetings, currently held in Charlottesville and Warrenton, Virginia. This program is offered free-of-charge to those students accepted into the FCLA. Up to eight students are accepted into each session. The program provides quality financial training that gives young people the perspective and tools necessary to level the economic playing field and make responsible financial decisions. Also, included in the curriculum is a comprehensive study of employment readiness and professionalism concepts and strategies aimed to increase the marketability and employability of the participants. In order to begin a successful career and have a successful financial future, these young adults must be prepared to effectively communicate with a multi-generational workforce and have the skills necessary to manage their own finances intelligently and productively.

The Company has a shared vision of guiding principles, core values and strategies that work and have guided the Company through both good and challenging times. The Company strives to ensure that its constituents believe in it as well, including its shareholders, customers, board, executive management and high performing employees. The Company believes that the shared vision, when properly aligned and communicated to all constituents, will produce more than above average performance in key metrics. As part of the shared vision, the Company is dedicated and committed to its shareholders, customers, employees and communities. A critical part of this dedication and commitment is attracting and retaining high performing employees who desire to enrich the lives of customers and communities the Company serves. To attract and retain high performing employees, the Company provides a competitive compensation and benefits program, including wellness benefits.

At December 31, 2022, the Company had 157 full time equivalent employees, of which 9 were part-time employees. None of its employees are represented by any collective bargaining unit. The Company considers relations with its employees to be good. We strive for our workforce to reflect the diversity of the customers and communities we serve. Our selection and promotion process are without bias and include the active recruitment of minorities and women. At December 31, 2022, women represented 72% of our employees and racial and ethnic minorities represented 19% of our employees. We also aim for our employees to develop their careers in our businesses. At December 31, 2022, 35% of our employees have been employed by the Company or its subsidiaries for at least 10 years.

The Company owns BOLI policies on each executive officer and certain other senior officers of the Company. BOLI is a bank-eligible asset designed to recover costs of providing pre- and post-retirement benefits and/or to finance general employee benefit expenses. Under BOLI policies, each executive officer and certain other senior officers of the Company are the insured, and the Company is the owner and beneficiary of the policies. The insured has no claim to the insurance policy or to the policy’s cash value. Under separate split dollar agreements, a portion of any death benefit may be paid to the beneficiaries of the insured officer, subject to the terms and restrictions of the split dollar endorsement agreement between the insured officer and the Company.

The Company and the Bank are extensively regulated under both federal and state laws. The following description briefly addresses certain historic and current provisions of federal and state laws and certain regulations, proposed regulations and the potential impacts on the Company and the Bank. To the extent statutory or regulatory provisions or proposals are described in this report, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

General. As a bank holding company registered under the BHCA, the Company is subject to supervision, regulation, and examination by the Federal Reserve. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation, and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission.

Permitted Activities. The permitted activities of a bank holding company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be so closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.

Banking Acquisitions; Changes in Control. The BHCA and related regulations require, among other things, the prior approval of the Federal Reserve in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed acquisition, the Federal Reserve will consider, among other factors, the following: the effect of the acquisition on competition; the public benefits expected to be received from the acquisition; any outstanding regulatory compliance issues of any institution that is a party to the transaction; the projected capital ratios and levels on a post-acquisition basis; the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction; the parties’ managerial resources, as well as risk management and governance processes and systems; the parties’ compliance with the Bank Secrecy Act and anti-money laundering requirements; and the acquiring institution’s performance under the CRA and its compliance with fair housing and other consumer protection laws.

On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy, which, among other initiatives, encouraged the review of current practices and adoption of a plan for the revitalization of merger oversight under the BHCA and the Bank Merger Act. Making any formal changes to the framework for evaluating bank mergers would require an extended process, and any such changes are uncertain and cannot be predicted at this time. However, the adoption of more expansive or stringent standards may have an impact on the Company’s acquisition activity. Additionally, this Executive Order could influence the federal bank regulatory agencies’ expectations and supervisory oversight for banking acquisitions.

Subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company’s acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control may exist if a person or company acquires 5% or more but less than 25% of any class of voting securities and certain other relationships are present between the investor and the bank holding company, or if certain other ownership thresholds for voting or total equity have been exceeded.

In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or a Virginia bank holding company, or (ii) the acquisition by any other person of control of a Virginia bank holding company or a Virginia bank.

Source of Strength. Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Safety and Soundness. There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership, or default. For example, under the Federal Deposit Insurance Company Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

Under the Federal Deposit Insurance Act, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, information systems, data security, loan documentation, credit underwriting, interest rate exposure and risk management, vendor management, corporate governance, and asset growth, as well as compensation, fees, and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.

Capital Requirements. The Federal Reserve imposes certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “The Bank – Capital Requirements.” Subject to its capital requirements and certain other restrictions, the Company is able to borrow money to make a capital contribution to the Bank, and such loans may be repaid from dividends paid by the Bank to the Company.

Limits on Dividends and Other Payments. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company and to the payment of dividends by the Company to its shareholders. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. The OCC has advised that a national bank should generally pay dividends only out of current operating earnings. Under current regulations, prior regulatory approval is required if cash dividends declared by the Bank in any given year exceed net income for that year, plus retained net profits of the two preceding years. The payment of dividends by the Bank or the Company may be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting its respective business. The payment of dividends, depending on the financial condition of the Bank or the Company, could be deemed to constitute such an unsafe or unsound practice.

Under the FDIA, insured depository institutions, such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distributions, the institution would become “undercapitalized” (as such term is used in the statute). Based on the Bank’s current financial condition, the Company does not expect that this provision will have any impact on its ability to receive dividends from the Bank.

In addition, the Company’s ability to pay dividends is limited by restrictions imposed by the Virginia Stock Corporation Act on Virginia corporations. In general, dividends paid by a Virginia corporation may be paid only if, after giving effect to the distribution, (i) the corporation is still able to pay its debts as they become due in the usual course of business, or (ii) the corporation’s total assets are greater than or equal to the sum of its total liabilities plus (unless the corporation’s articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights, upon the dissolution, of shareholders whose preferential rights are superior to those receiving the distribution.

General. The Bank is supervised and regularly examined by the OCC. The various laws and regulations administered by the OCC and the other bank regulatory agencies affect corporate practices, such as the payment of dividends, incurrence of debt, and acquisition of financial institutions and other companies; they also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices. Certain of these laws and regulations are referenced above under “The Company.”

Regulatory Capital Requirements. The OCC and the other federal bank regulatory agencies have issued risk-based and leverage capital guidelines applicable to U.S. banking organizations. Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

The OCC and the other federal bank regulatory agencies have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the Basel III Final Rules) that apply to banking institutions they supervise. For the purposes of these capital rules, (i) CET1 capital consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules. The Basel III Final Rules also establish risk weightings that are applied to many classes of assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans. The Basel III Final Rules also include a requirement that banks maintain additional capital known as the “capital conservation buffer.”

The Basel III Final Rules and capital conservation buffer require banks and bank holding companies to maintain:

The Basel III Final Rules permanently include in Tier 1 capital trust preferred securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion in total assets, subject to a limit of 25% of Tier 1 capital. The Company expects that its trust preferred securities will be included in the Company’s regulatory capital as Tier 1 capital instruments until their maturity.

The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Company were 17.07%, 17.07%, 17.63% and 9.77%, respectively, as of December 31, 2022, thus exceeding the minimum requirements. The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Bank were 16.82%, 16.82%, 17.38% and 9.62%, respectively, as of December 31, 2022, also exceeding the minimum requirements.

With respect to the Bank, to be “well capitalized” under the revised “prompt corrective action” regulations, a bank must have the following minimum capital ratios: (i) a CET1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2022. See “Prompt Corrective Action” below.

On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as the community bank leverage ratio framework, as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the prompt corrective action regulations and will not be required to report or calculate risk-based capital under the Basel III Final Rules.

Prompt Corrective Action. Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal bank regulatory agencies have additional enforcement authority with respect to undercapitalized depository institutions. “Well capitalized” institutions may generally operate without additional supervisory restriction. With respect to “adequately capitalized” institutions, such banks (i) cannot normally pay dividends or make any capital contributions that would leave it undercapitalized, (ii) cannot pay a management fee to a controlling person if, after paying the fee, it would be undercapitalized, and (iii) cannot accept, renew, or roll over any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.

Immediately upon becoming “undercapitalized,” a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (a) requiring the institution to raise additional capital; (b) restricting transactions with affiliates; (c) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (d) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. The Bank met the definition of being “well capitalized” as of December 31, 2022.

As described above in “The Bank – Capital Requirements,” the capital rules issued by the OCC incorporate new requirements into the prompt corrective action framework.

Deposit Insurance. The deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments based on average total assets minus average tangible equity to maintain the DIF. The basic limit on FDIC deposit insurance coverage is $250 thousand per depositor. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations as an insured depository institution, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes. An institution’s assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS component rating. The CAMELS component is a supervisory rating system designed to reflect financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk. In 2022 and 2021, the Company expensed $511 thousand and $858 thousand, respectively, in deposit insurance assessments.

In October 2022, the FDIC adopted a final rule that increased the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. Further rate increases may occur in the future, including as a result of two prominent regional bank failures in the first quarter of 2023.

Transactions with Affiliates. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.

Loans to executive officers, directors, or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10% of any class of voting securities of a bank, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire Board of Directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.

Community Reinvestment Act. The Bank is subject to the requirements of the CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low- and moderate-income neighborhoods. The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting such credit needs. In addition, in order for a bank holding company, like the Company, to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the bank holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” The Bank received a “satisfactory” CRA rating in its most recent examination.

In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework. If implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.

Confidentiality of Customer Information. The Company and the Bank are subject to various laws and regulations that address the privacy of nonpublic personal financial information of customers. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy laws and regulations generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer.

Anti-Money Laundering Laws and Regulations. The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

Office of Foreign Assets Control. OFAC which is a division of the U.S. Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds a name of an “enemy” of the United States on any transaction, account, or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into a blocked account, and report it to OFAC. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.

Stress Testing. The federal banking agencies have implemented stress testing requirements for certain large or risky financial institutions, including bank holding companies and state-chartered banks and they emphasize that all banking organizations, regardless of size, should have the capacity to analyze the potential effect of adverse market conditions or outcomes on the organization’s financial condition. Based on existing regulatory guidance, the Company and the Bank are expected to consider the institution’s interest rate risk management, commercial real estate loan concentrations and other credit-related information, and funding and liquidity management during this analysis of adverse market conditions or outcomes.

Volcker Rule. The Dodd-Frank Act and regulations under that act prohibit insured depository institutions and their affiliates, except as permitted under certain limited circumstances, from (i) engaging in short-term proprietary trading for their own accounts and (ii) having certain ownership interests in, and relationships with, hedge funds or private equity funds. The Volcker Rule did not have a material impact on the Company's operations or financial position in 2022 or 2021.

Consumer Financial Protection. The Bank is subject to a number of other federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Servicemembers’ Civil Relief Act, Secure and Fair Enforcement for Mortgage Licensing Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Bank may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the CFPB, and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws; (ii) the markets in which firms operate and risks to consumers posed by activities in those markets; (iii) depository institutions that offer a wide variety of consumer financial products and services; and (iv) non-depository companies that offer one or more consumer financial products or services. The CFPB is responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets. While the Bank, like all banks, is subject to federal consumer protection rules enacted by the CFPB, because the Company and the Bank have total consolidated assets of $10 billion or less, the OCC oversees the application to the Bank of most consumer protection aspects of the Dodd-Frank Act and other laws and regulations.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to

act in the consumer’s interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further, regulatory positions taken by the CFPB with respect to financial institutions with more than $10 billion in assets may influence how other regulatory agencies apply the subject consumer financial protection laws and regulations.

Mortgage Banking Regulation. In connection with making mortgage loans, the Company and the Bank are subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered, and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Company and the Bank are also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers.

The Company’s and the Bank’s mortgage origination activities are subject to Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Creditors are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the creditor to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the creditor can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount, and the consumer’s debt-to-income ratio (“DTI”) must be below the prescribed threshold. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. Small creditors, as described below, may originate qualified mortgages that are not restricted by the specific DTI threshold (however, the DTI must still be considered). Small creditors are those financial institutions that meet the following requirements: (i) have assets below $2 billion (adjustable annually by CFPB); (ii) originated no more than 2 thousand first-lien, closed-end residential mortgages subject to the ability-to-repay requirements in the preceding calendar year; and (iii) hold the qualified mortgage loan in its portfolio after origination. The Company, as a small creditor, does comply with the “qualified mortgage rules” and the other applicable Truth in Lending requirements.

Incentive Compensation. Federal banking agencies have issued regulatory guidance (the Incentive Compensation Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The FDIC will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Bank, that are not “large, complex banking organizations.” The findings will be included in reports of examination, and deficiencies will be incorporated into the organization’s supervisory ratings. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed and a final rule has not yet been published.

In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including Nasdaq, the exchange on which the Company’s common stock is listed, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. In February 2023, Nasdaq posted its initial rule filing with the SEC to implement this directive. The final rule will require the Company to adopt a clawback policy that is compliant with the new listing standard within 60 days after such standard becomes effective.

Cybersecurity. The federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack. If the Company or the Bank fails to meet the expectations set forth in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions, including financial penalties. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats and the expanding use of technology-based products and services. The Company is, however, taking measures to combat these types of threats and manage risk to the Company and its customers.

On November 18, 2021, the federal bank regulatory agencies issued a final rule to improve the sharing of information about cyber incidents that may affect the U.S. banking system. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. Notification is required for incidents that have materially affected – or are reasonably likely to materially affect – the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. Compliance with the final rule was required by May 1, 2022. The Company does not anticipate any material impact to its respective operations at this time. With increased focus on cybersecurity, the Company and the Bank continue to monitor legislative, regulatory and supervisory developments related thereto.

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or the Bank.

The Company’s operations are affected not only by general economic conditions but also by the policies of various regulatory authorities. In particular, the Federal Reserve uses monetary policy tools to impact money market and credit market conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments, and deposits; they affect market interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future.

After an extended period of low interest rates, market interest rates began to rise during 2022. During the first quarter of 2022, the FOMC began to increase its federal funds target rates to a range of 25 bps to 50 bps, which was the first increase since December 2018. The FOMC further increased the target rates throughout 2022 and early 2023 to its current range of 4.75% to 5.00%.

The Company is subject to the periodic and other reporting requirements of the Exchange Act, including the filing of annual, quarterly and other reports with the SEC. Prior to the Reorganization in 2013, the Bank filed the periodic and annual reports required under the Exchange Act with the OCC. Annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, plus any amendments to these reports, are available, free of charge, at www.vnbcorp.com. The Company’s SEC filings are posted and available as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company’s website is not incorporated into this report or any other filing the Company makes with the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The Company’s business is subject to risk. The following discussion, along with management’s discussion and analysis and the financial statements and footnotes, sets forth the most significant risks and uncertainties that management believes could adversely affect the Company’s business, financial condition or results of operations. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also have a material adverse effect on the Company’s business, financial condition or results of operations. There is no assurance that this discussion covers all potential risks that the Company faces.

The Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

The Company assumes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and a continuous quality assessment process of credit already extended. The Company’s exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions, as well as excessive industry and other concentrations. The Company’s credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.

The Bank’s ALLL/ACL may be insufficient and any increases in the ACL may have a material adverse effect on the Company’s financial condition and results of operations.

The Bank has historically maintained an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents the Bank’s best estimate of probable losses that will be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The level of the allowance reflects management’s evaluation of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires the Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although the Bank believes the ALLL is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot precisely predict such losses or be certain that the loan loss allowance will be adequate in the future. Deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside the Bank’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies and the Bank’s auditors periodically review its ALLL and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Further, if charge-offs in future periods exceed the allowance for loan losses, the Bank will need additional provisions to increase the allowance for loan losses.

On January 1, 2023, the Company adopted ASC 326, more commonly referred to as "CECL," which replaces existing accounting principles for the recognition of loan losses based on losses that have been incurred with a requirement to record an allowance for credit losses that represents expected credit losses over the lifetime of all loans in the Company’s portfolio. Under ASC 326, the Company’s estimate of expected credit losses will be based on reasonable and supportable forecasts of future economic conditions and loan performance. While the adoption of ASC 326 will not affect ultimate loan performance or cash flows of the Company from making loans, the period in which expected credit losses affect net income of the Company may not be similar to the recognition of loan losses under prior accounting guidance, and recognizing an allowance based on expected credit losses may create more volatility in the level of our ACL and our results of operations, including based on volatility in economic forecasts and our expectations of loan performance in future periods, as actual results may differ materially from our estimates. If we are required to materially increase our level of ACL for any reason, such increase could adversely affect our business, financial condition, and results of operations.

The Company’s focus on lending to small to mid-sized community-based businesses may increase its credit risk.

Most of the Company’s commercial business and commercial real estate loans are made to small and mid-sized businesses and non-profits. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company’s results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle. Any deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on its financial condition and results of operations. Steps to mitigate such risks include underwriting multiple sources of repayment, including but not limited to, business cash flow, personal guarantees, collateral, and government guarantees, where applicable. Although the Company has taken these mitigation steps, there is no guarantee that such practices will be effective to prevent the increased credit risk.

The Company’s concentration in loans secured by real estate may increase its future credit losses, which would negatively affect the Company’s financial results.

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Credit risk and credit losses can increase if its loans are concentrated to borrowers who, as a group, may be uniquely or disproportionately affected by economic or market conditions. As of December 31, 2022, approximately 83.5% of the Company’s loans are secured by real estate, both residential and commercial. The Company has established concentration limits that are regularly monitored by management and reported to the Board. A major change in the real estate market in the regions in which the Company operates, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by the COVID-19 pandemic, could adversely affect the Company’s customers’ ability to pay these loans, which in turn could adversely impact the Company. Risk of loan defaults and foreclosures are inherent in the banking industry, and the Company tries to limit its exposure to this risk by carefully underwriting and monitoring its extensions of credit. The Company cannot fully eliminate credit risk, and as a result, credit losses may occur in the future.

The Company has a moderate concentration of credit exposure in commercial real estate and loans with this type of collateral are viewed as having higher risk of default.

As of December 31, 2022, the Company had approximately $329.0 million in loans secured by commercial real estate, which represented approximately 35.1% of total loans outstanding at that date; such loans consist of non-owner occupied commercial real estate, construction, land development, multi-family and other land loans. These types of loans are generally viewed as having higher risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the property to service the debt, successful completion of construction projects and, for development loans, sale of the underlying asset. It may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’ abilities to repay their loans frequently depends on the successful rental of their properties. Cash flows may be affected significantly by general economic conditions, and a sustained downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because the Company’s loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in its percentage of nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition. The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations. Steps to mitigate such risks include underwriting multiple sources of repayment, including but not limited to, business cash flow, personal guarantees, collateral, and government guarantees, where applicable. In addition, the Company has established concentration limits that are regularly monitored by management and reported to the Board. Although the Company has taken these mitigation steps, there is no guarantee that such practices will be effective to prevent the increased credit risk.

The Company’s results of operations are significantly affected by the ability of borrowers to repay their loans.

A significant source of risk for the Company is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Company’s loans are secured but some loans are unsecured. With respect to the secured loans, the collateral securing the repayment of

these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including the impacts of the COVID-19 pandemic, declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Company has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.

The fair value of the Company’s investment securities can fluctuate due to factors outside of its control.

As of December 31, 2022, the fair value of the Company’s portfolio of investment in debt securities was approximately $538.2 million. Factors beyond the Company’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect the Company’s business, financial condition or results of operations. The process for determining whether impairment of a security is OTTI usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security and the Company’s intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security. The Company’s failure to correctly and timely assess any impairments or losses with respect to the Company’s securities could have an adverse effect on its business, financial condition or results of operations.

The Company’s liquidity needs could adversely affect results of operations and financial condition.

The Company’s primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, pandemics or endemics, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments, customers' perceptions regarding the relative safety of their deposits, and general economic conditions. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if the Company continues to grow and experiences increasing loan demand. The Company may be required to slow or discontinue loan growth, capital expenditures or other investments, or liquidate assets should such sources not be adequate.

The Company may need to raise additional capital in the future and may not be able to do so on acceptable terms, or at all.

Access to sufficient capital is critical in order to enable the Company to implement its business plan, support its business, expand its operations and meet applicable capital requirements. The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact the Company’s ability to support and to grow its operations. If the Company grows its operations faster than it generates capital internally, it will need to access the capital markets. The Company may not be able to raise additional capital in the form of additional debt or equity on acceptable terms, or at all. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, the Company’s financial condition and its results of operations. Economic conditions and a loss of confidence in financial institutions may increase the Company’s cost of capital and limit access to some sources of capital. Further, if the Company needs to raise capital in the future, it may have to do so when many other

financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on the Company’s business, financial condition and results of operations.

The Company is directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a financial institution, market risk is inherent in the financial instruments associated with the Company’s operations and activities, including loans, deposits, securities, and short-term borrowings. A few of the market conditions that may shift from time to time, thereby exposing the Company to market risk, include fluctuations in interest rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. The Company’s investment securities portfolio, in particular, may be impacted by market conditions beyond its control, including rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and inactivity or instability in the credit markets. Any changes in these conditions, in current accounting principles or interpretations of these principles could impact the Company’s assessment of fair value and thus the determination of other-than-temporary impairment of the securities in the investment securities portfolio, which could adversely affect the Company’s earnings and capital ratios.

Asset values also directly impact revenues in the Company’s wealth management businesses. The Company receives asset-based management fees based on the value of clients’ portfolios or investments in funds managed by the Company and, in some cases, the Company may also receive performance fees based on increases in the value of such investments. Declines in asset values can reduce the value of clients’ portfolios or fund assets, which in turn can result in lower fees earned for managing such assets.

Changes in economic conditions, especially in the areas in which the Company conducts operations, could materially and negatively affect its business.

The Company’s business is directly impacted by economic conditions, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond its control. A deterioration in economic conditions, whether caused by global, national or local concerns (including the COVID-19 pandemic), especially within the Company’s market area, could result in the following potentially material consequences: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans. A continued economic downturn could result in losses that materially and adversely affect the Company’s business.

Inflation can have an adverse impact on the Company’s business and on its customers.

During 2022, the United States experienced the highest level of inflation since the 1980s. In response, the Federal Reserve increased the federal funds target rate seven times in 2022 to 4.25% to 4.50% at December 31, 2022 compared to 0% to 0.25% at the beginning of the year. As a result, market interest rates increased during the year. Price-wage inflation may cause the Company to give higher than normal raises to employees and start new employees at a higher wage. Furthermore, the Company’s customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with the Company. As market interest rates rise, the value of the Company’s investment securities generally decreases, although this effect can be less pronounced for floating rate instruments. Higher interest rates reduce the demand for loans and increase the attractiveness of alternative investment and savings products, like U.S. Treasury securities and money market funds, which can make it difficult to attract and retain deposits.

The Company’s business is subject to interest rate risk, and variations in interest rates and inadequate management of interest rate risk may negatively affect financial performance.

Changes in the interest rate environment may reduce the Company’s profits. It is expected that the Company will continue to realize income from the differential or “spread” between the interest earned on loans, securities, and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and the current interest rate environment

encourages extreme competition for new loan originations from qualified borrowers. The Company’s management cannot ensure that it can minimize interest rate risk. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Accordingly, changes in levels of market interest rates could materially and adversely affect the net interest spread, asset quality, loan origination volume and the Company’s overall profitability.

Transition away from LIBOR to another benchmark rate could adversely affect the Company’s operations.

The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023. Management cannot predict whether or when LIBOR will actually cease to be available or what impact such a transition may have on the Company’s business, financial condition and results of operations.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on SOFR for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected. There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR and other benchmark rates.

The market transition away from LIBOR to alternative reference rates is a complex process and could have a range of effects on the Company’s business, financial condition and results of operations, including but not limited to by (i) adversely affecting the interest rates received or paid on the revenues and expenses associated with, or the value of the Company’s LIBOR-based assets and liabilities; (ii) adversely affecting the interest rates paid on or received from other securities or financial arrangements, given LIBOR’s historically prominent role in determining market interest rates globally, or (iii) resulting in disputes, litigation or other actions with borrowers or other counterparties about the interpretation or enforceability of certain fallback language contained in LIBOR-based loans, securities or other contracts. In addition, uncertainty regarding the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for securities on which the interest or dividend is determined by reference to LIBOR, including the Company’s trust preferred securities. The discontinuation of LIBOR could also result in operational, legal and compliance risks, and if the Company is unable to adequately manage such risks, they could have a material adverse impact on the Company’s reputation and on its business, financial condition, results of operations or future prospects.

The Company relies upon independent appraisals to determine the value of the real estate that secures a significant portion of its loans and the value of any foreclosed properties that may be carried on its books, and the values indicated by such appraisals may not be realizable if it is forced to foreclose upon such loans or liquidate such foreclosed property.

As indicated above, a significant portion of the Company’s loan portfolio consists of loans secured by real estate and it may also hold foreclosed properties from time to time. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment that adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company’s loans and any foreclosed properties that may be held by the Company may be more or less valuable than anticipated. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan. It may also be unable to sell any foreclosed properties for the values estimated by their appraisals.

The Company faces strong and growing competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company’s business.

The Company encounters substantial competition from other financial institutions in its market area and competition is increasing. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers in its service area. These competitors include national, regional and community banks. The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations and financial technology companies. Increased competition may result in reduced business for the Company.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may otherwise be adversely affected.

The Company may not be able to successfully manage its long-term growth, which may adversely affect its results of operations and financial condition.

A key aspect of the Company’s long-term business strategy is its continued growth and expansion. The Company’s ability to continue to grow depends, in part, upon its ability to (i) open new branch offices or acquire existing branches or other financial institutions, (ii) attract deposits to those locations, and (iii) identify attractive loan and investment opportunities.

The Company may not be able to successfully implement its growth strategy if it is unable to identify attractive markets, locations or opportunities to expand in the future, or if the Company is subject to regulatory restrictions on growth or expansion of its operations. The Company’s ability to manage its growth successfully also will depend on whether it can maintain capital levels adequate to support its growth, maintain cost controls and asset quality and successfully integrate any businesses the Company acquires into its organization. As the Company identifies opportunities to implement its growth strategy by opening new branches or acquiring branches or other banks, it may incur increased personnel, occupancy and other operating expenses. In the case of new branches, the Company must absorb those higher expenses while it begins to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding assets.

The Company may consider acquiring other businesses or expanding into new product lines that it believes will help it fulfill its strategic objectives. The Company expects that other banking and financial companies, some of which have significantly greater resources, will compete with it to acquire financial services businesses. This competition could increase prices for potential acquisitions that the Company believes are attractive. Acquisitions may also be subject to various regulatory approvals. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate acquisitions that it believes are in its best interests.

When the Company enters into new markets or new lines of business, its lack of history and familiarity with those markets, customers and lines of business may lead to unexpected challenges or difficulties that inhibit its success. The Company’s plans to expand could depress earnings in the short run, even if it efficiently executes a growth strategy leading to long-term financial benefits.

The success of the Company’s strategy depends on its ability to identify and retain individuals with experience and relationships in its markets.

In order to be successful, the Company must identify and retain experienced key management members and sales staff with local expertise and relationships. Competition for qualified personnel is intense and there is a limited number of qualified persons with knowledge of and experience in the community banking and mortgage industry in the Company’s chosen geographic market. Even if the Company identifies individuals that it believes could assist it in building its franchise, it may be unable to recruit these individuals away from their current employers. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out the Company’s strategy is often lengthy. The Company’s inability to identify, recruit and retain talented personnel could limit its growth and could materially adversely affect its business, financial condition and results of operations.

The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, and the risk of fraud or theft by employees or outsiders.

The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or communications systems.

Reputational risk, or the risk to the Company’s earnings and capital from negative public opinion, could result from the Company’s actual or alleged conduct in any number of activities, including lending practices, corporate governance, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company’s ability to attract and keep customers and employees and can expose it to litigation and regulatory action.

Further, if any of the Company’s financial, accounting, or other data processing systems fail or have other significant issues, the Company could be adversely affected. The Company depends on internal systems and outsourced technology to support these data storage and processing operations. The Company’s inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of the Company’s business operations. It could be adversely affected if one of its employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates its operations or systems. The Company is also at risk of the impact of natural disasters, terrorism and international hostilities on its systems and from the effects of outages or other failures involving power or communications systems operated by others. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or communications outages), which may give rise to disruption of service to customers and to financial loss or liability. In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although the Company has policies and procedures in place to verify the authenticity of its customers, it cannot guarantee that such policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to the Company’s reputation. If any of the foregoing risks materialize, it could have a material adverse effect on the Company’s business, financial condition and results of operations.

The authorities that promulgate accounting standards, including the FASB, the SEC and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also require the Company to incur additional personnel or technology costs.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on the Company’s results of operation and financial condition.

Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. The Bank is also required to establish and maintain an adequate internal control structure over financial reporting pursuant to regulations of the FDIC. As a public company, the Company is required by the Sarbanes-Oxley Act to design and maintain a system of internal control over financial reporting and include management’s assessment regarding internal control over financial reporting. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company’s inability to maintain the operating effectiveness of the controls described above could result in a material misstatement to the Company’s financial statements or other disclosures, which could have an adverse effect on its business, financial condition or results of operations. In addition, any failure to maintain effective controls or to timely effect any necessary improvement of the Company’s internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company’s reputation or cause investors to lose confidence in its reported financial information, all of which could have a material adverse effect on its results of operation and financial condition.

The Company depends on the accuracy and completeness of information about customers and counterparties, and the Company’s financial condition could be adversely affected if it relies on misleading or incorrect information.

In deciding whether to extend credit or to enter into other transactions with customers and counterparties, the Company may rely on information furnished to it by or on behalf of customers and counterparties, including financial statements and other financial information, which it does not independently verify. The Company also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, the Company may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of that customer. The Company’s financial condition

and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.

The Company’s success depends on its management team, and the unexpected loss of any of these personnel could adversely affect operations.

The Company’s success is, and is expected to remain, highly dependent on its management team. This is particularly true because, as a community bank, the Company depends on the management team’s ties to the community and customer relationships to generate business. The Company’s growth will continue to place significant demands on management, and the loss of any such person’s services may have an adverse effect upon growth and profitability. If the Company fails to retain or continue to recruit qualified employees, growth and profitability could be adversely affected.

The Company relies on other companies to provide key components of its business infrastructure.

Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While the Company has selected these third-party vendors carefully, it does not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in communication services provided by a vendor and failure to handle current or higher volumes, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business, and may harm its reputation. Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to serve the Company. Replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third-parties creates an unavoidable inherent risk to the Company’s business operations.

The soundness of other financial institutions could adversely affect the Company.

The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or customer. In addition, credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the financial instrument exposure due. There is no assurance that any such losses would not materially and adversely affect results of operations.

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information related to its customers and employees in systems and on networks. The secure processing, maintenance, and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers, and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect its business and financial condition. Furthermore, as cyber threats continue to evolve and increase, the Company may be required to expend significant additional financial and operational resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.

In addition, multiple major U.S. retailers have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information and other financial or privileged data. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including Virginia National Bank. Although the Company’s systems are not breached in retailer incursions, these events can cause it to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Company and its customers. In some cases, the Company may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service

providers, electronic data security providers, data processing service providers, telecommunications companies, and smart phone manufacturers.

Consumers may increasingly decide not to use banks to complete their financial transactions, which would have a material adverse impact on the Company’s financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s ability to operate profitably may be dependent on its ability to integrate or introduce various technologies into its operations.

The market for financial services, including banking and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, online banking and tele-banking. The Company’s ability to compete successfully in its market may depend on the extent to which it is able to implement or exploit such technological changes. If the Company is not able to afford such technologies, properly or timely anticipate or implement such technologies, or effectively train its staff to use such technologies, its business, financial condition or operating results could be adversely affected.

The Company operates in a highly regulated industry and the laws and regulations that govern the Company’s operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in them or the Company’s failure to comply with them, may adversely affect the Company.

The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the Company’s business activities, limit the dividends or distributions that it can pay, restrict the ability of institutions to guarantee its debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in its capital than GAAP. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs.

The Company is currently facing increased regulation and supervision of its industry. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect the Company in substantial and unpredictable ways. Such additional regulation and supervision has increased, and may continue to increase, the Company’s costs and limit its ability to pursue business opportunities. Further, the Company’s failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject it to restrictions on its business activities, fines and other penalties, any of which could adversely affect the Company’s results of operations, capital base and the price of its securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect the Company’s business and financial condition.

Regulations issued by the CFPB could adversely impact earnings due to, among other things, increased compliance costs or costs due to noncompliance.

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. For example, the CFPB issued a final rule, effective January 10, 2014, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. The rule also contains additional disclosure requirements at mortgage

loan origination and in monthly statements. The requirements under the CFPB’s regulations and policies could limit the Company’s ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact the Company’s profitability.

The Company is subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage the Company’s reputation and otherwise adversely affect its business.

The Company’s business requires the collection and retention of large volumes of customer data, including PII in various information systems that the Company maintains and in those maintained by third party service providers. The Company also maintains important internal company data such as PII about its employees and information relating to its operations. The Company is subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees and other third-parties). For example, the Company’s business is subject to the Gramm-Leach-Bliley Act of 1999, which, among other things: (i) imposes certain limitations on the Company’s ability to share nonpublic PII about its customers with nonaffiliated third parties; (ii) requires that the Company provides certain disclosures to customers about its information collection, sharing and security practices and affords customers the right to “opt out” of any information sharing by it with nonaffiliated third parties (with certain exceptions); and (iii) requires that the Company develops, implements and maintains a written comprehensive information security program containing appropriate safeguards based on the Company’s size and complexity, the nature and scope of its activities, and the sensitivity of customer information it processes, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that the Company’s collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase the Company’s costs. Furthermore, the Company may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused, the Company could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of the Company’s measures to safeguard PII, or even the perception that such measures are inadequate, could cause the Company to lose customers or potential customers and thereby reduce its revenues. Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject the Company to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage the Company’s reputation and otherwise adversely affect its operations, financial condition and results of operations.

The Company’s business and earnings are impacted by governmental, fiscal and monetary policy over which it has no control.

The Company is affected by domestic monetary policy. The Federal Reserve regulates the supply of money and credit in the United States, and its policies determine in large part the Company’s cost of funds for lending, investing and capital raising activities and the return it earns on those loans and investments, both of which affect the Company’s net interest margin. The actions of the Federal Reserve also can materially affect the value of financial instruments that the Company holds, such as loans and debt securities, and also can affect the Company’s borrowers, potentially increasing the risk that they may fail to repay their loans. The Company’s business and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond the Company’s control and hard to predict.

The Company is not obligated to pay dividends and its ability to pay dividends is limited.

The Company’s ability to make dividend payments on its common stock depends primarily on certain regulatory considerations and the receipt of dividends and other distributions from the Bank. There are various regulatory restrictions on the ability of banks, such as the Bank, to pay dividends or make other payments to their holding companies. The Company is currently paying a quarterly cash dividend to holders of its common stock at a rate of $0.33 per share. Although the Company has paid a quarterly cash dividend to the holders of its common stock since July 2013, holders of its common stock are not entitled to receive dividends, and the Company is not obligated to pay dividends in any particular amounts or at any particular times. Regulatory, economic and other factors may cause the Company’s Board to consider, among other things, the reduction of dividends paid on its common stock.

Future issuances of the Company’s common stock could adversely affect the market price of the common stock and could be dilutive.

The Company’s Board, without the approval of shareholders, could from time to time decide to issue additional shares of common stock or shares of preferred stock, which may adversely affect the market price of the shares of common stock and could be dilutive to the Company’s shareholders. Any sale of additional shares of the Company’s common stock may be at prices lower than the current market value of the Company’s shares. In addition, new investors may have rights, preferences and privileges that are senior to, and that could adversely affect, the Company’s existing shareholders. For example, preferred stock would be senior to common stock in right of dividends and as to distributions in liquidation. The Company cannot predict or estimate the amount, timing, or nature of its future offerings of equity securities. Thus, the Company’s shareholders bear the risk of future offerings diluting their stock holdings, adversely affecting their rights as shareholders, and/or reducing the market price of the Company’s common stock.

The Company’s common stock is not a bank deposit and, therefore, it is not insured against loss by the FDIC or by any other public or private entity. An investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company and, as a result, shareholders may lose some or all of their investment.

The Company qualifies as a “smaller reporting company,” and the reduced disclosure obligations applicable to smaller reporting companies may make its common stock less attractive to investors.

The Company is a “smaller reporting company” as defined in federal securities laws, and will remain a smaller reporting company until the fiscal year following the determination that the market value of its voting and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of its second fiscal quarter, or its annual revenues are less than $100 million during the most recently completed fiscal year and the market value of its voting and non-voting common shares held by non-affiliates is more than $700 million measured on the last business day of its second fiscal quarter. Smaller reporting companies have reduced disclosure obligations, such as an exemption from providing selected financial data and an ability to provide simplified executive compensation information and only two years of audited financial statements. If some investors find the Company’s common stock less attractive because the Company may rely on these reduced disclosure obligations, there may be a less active trading market for its common stock and its stock price may be more volatile.

While the Company’s common stock is currently listed on the Nasdaq Capital Market, it has less liquidity than stocks for larger companies listed on national securities exchanges.

The trading volume in the Company’s common stock on the Nasdaq Capital Market has been relatively low when compared with larger companies listed on national securities exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of its common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock. Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock.

The Company is exposed to risk of environmental liabilities with respect to properties to which it takes title.

In the course of its business, the Company may foreclose and take title to real estate, potentially becoming subject to environmental liabilities associated with the properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs or the Company may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. Costs associated with investigation or remediation activities can be substantial. If the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business.

Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external events could significantly impact our business.

Severe weather, earthquakes, other natural disasters, pandemics (such as the COVID-19 pandemic), acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, results in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

The Company and its subsidiaries currently occupy fourteen full-service banking facilities in the cities of Charlottesville, Manassas, Richmond and Winchester, and the counties of Albemarle, Fauquier and Prince William. The Company’s main office, a full-service banking facility, operations, and offices of Masonry Capital are located at 404 People Place, Charlottesville, Virginia. VNB Trust and Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia. Of the fifteen locations used as bank branches and commercial lending offices, eight of the buildings are owned by the Company and seven are leased from nonaffiliates. Leases with affiliates are described below.

The five-story building located at 404 People Place, Charlottesville, Virginia, just east of the Charlottesville city limits on Pantops Mountain, was constructed by the Bank on a pad site leased in 2005 from Pantops Park, LLC for a term of twenty years, with seven five-year renewal options. William D. Dittmar, Jr., a director of the Company, is the manager and indirect owner of Pantops Park, LLC. The building, consisting of approximately 43,000 square feet, was completed in early 2008, and the Bank opened this full-service office in April 2008. In addition to the Company’s use of this building as outlined in the preceding paragraph, a portion of the additional space is leased to tenants.

The drive-through location at 301 East Water Street, Charlottesville, which is a limited-service banking facility, and the adjoining office space located at 112 Third Street, SE, Charlottesville Virginia is leased from East Main Investments, LLC. Hunter E. Craig, a director of the Company and the Bank, serves as manager of East Main Investments, LLC, which is owned by Mr. Craig and his spouse.

See Note 6 – Premises and Equipment and Note 7 – Leases in the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for information with respect to the amounts at which the Company’s premises and equipment are carried and commitments under long-term leases. All of the Company's properties are in good operating condition and are adequate for the Company's present and anticipated future needs.

In the ordinary course of its operations, the Company and/or its subsidiaries are parties to various legal proceedings from time to time. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome of such proceedings, in the aggregate, will not have a material adverse effect on the business or financial condition of the Company and its subsidiaries.

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Virginia National Bankshares Corporation’s common stock is listed for trading on the Nasdaq Capital Market under the symbol VABK. As of December 31, 2022, the Company had issued and outstanding 5,337,271 shares of common stock, which included 51,664 shares of restricted stock that have not yet vested. These shares were held by approximately 690 registered shareholders of record, not including beneficial holders of securities held in street name at a brokerage or other firm.

The payment of dividends is at the discretion of the Company’s Board of Directors and is subject to various federal and state regulatory limitations. As a bank holding company, the ability to pay dividends is dependent upon the overall performance and capital requirements of the Bank.

The data in the table below represents the high sales and low sales prices that occurred between April 1, 2021 and December 31, 2022 as reported by Nasdaq and the high bid and low bid quotations that occurred between January 1 and March 31, 2021 as reported by the OTCQX. The OTCQX over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Additionally, the table shows the dividends declared per quarter in 2022 and 2021.

American Stock Transfer and Trust Company is the Company’s stock transfer agent and registrar.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion provides information about the major components of the results of operations and financial condition, liquidity, and capital resources of Virginia National Bankshares Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Application of Critical Accounting Policies and Critical Accounting Critical Estimates

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

Following are the accounting policies and estimates that the Company considers as critical:

On a semi-annual basis, the Company evaluates the estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified as nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at semi-annual re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the Acquired Loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.

See Note 1 – Summary of Significant Accounting Policies and Note 11 – Income Taxes, in the Notes to Consolidated Financial Statements, for further detail on the accounting policies for income taxes and for components of the deferred tax assets and liabilities.

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, such as merger and merger-related expenses, (2) items that do not reflect the implicit percentage of the ALLL to total loans, such as the impact of fair value adjustment and PPP loans, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below:

1 References to merger expenses include merger and merger-related expenses and are net of tax.

3 The efficiency ratio, GAAP basis, is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

4 The efficiency ratio, FTE, is computed by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income.

The ratio of net income to average total assets and average shareholders' equity and certain other ratios for the years indicated are as follows:

Net income for the year ended December 31, 2022 was $23.4 million, or $4.38 per diluted share, a 132.7% increase compared to $10.1 million, or $2.14 per diluted share for the year ended December 31, 2021. This increase was primarily the result of a $8.6 million increase in net interest income, a $3.2 million increase in noninterest income, a $908 thousand reduction in provision for loan losses and a $4.0 million decrease in noninterest expense. Each component of such year-over-year changes are described in more detail below.

The efficiency ratio (FTE) was 57.1% for the year ended December 31, 2022, compared to 76.3% for the same period of 2021, decreasing due primarily to the increase in net interest income year-over-year and the one-time impact of merger and merger-related expenses incurred in 2021.

The Company had four reportable segments during the period presented: the Bank, VNB Trust and Estate Services, Sturman Wealth and Masonry Capital.

The Bank segment earned net income of $21.6 million in 2022, a $12.7 million increase over the $9.0 million netted in 2021. Sturman Wealth earned $122 thousand in 2022 compared to $384 thousand in the prior year. VNB Trust and Estate Services realized net income of $1.6 million in 2022, compared to $162 thousand in 2021. Masonry Capital realized net income of $103 thousand in 2022, compared to $561 thousand in 2021.

Details of the changes in the various components of net income are further discussed below.

Net interest income is computed as the difference between the interest income on earning assets and the interest expense on deposits and other interest bearing liabilities. Net interest income represents the principal source of revenue for the Company and accounted for 79.7% of the total revenue in 2022. Net interest margin (FTE) is the ratio of taxable-equivalent

net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income (FTE) and net interest margin (FTE).

The following table details the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest bearing liabilities, for the years ended December 31, 2022, 2021, and 2020.

The purpose of the volume and rate analysis below is to describe the impact on the net interest income (FTE) of the Company resulting from changes in average balances and average interest rates for the periods indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Interest income is reported on a tax-equivalent basis.

For 2022, net interest income (FTE) of $53.9 million was recognized, an increase of $8.6 million over 2021. Net interest income (FTE) for 2021 totaled $45.3 million, a $21.3 million increase over the 2020 total of $24.0 million. Average earning assets increased $139.7 million or 9.1% in 2022 compared to 2021 and increased $783.1 million or 103.5% in 2021 compared to 2020. The increases in volume and rate of the securities portfolio from 2021 to 2022 were the primary contributing factors of the increase in net interest income. The declines in rates paid on deposits over the same period also positively impacted net interest income. The average balance for loans as a percentage of earnings assets for 2022 was 58.3%, compared to 66.1% and 79.4% in 2021 and 2020, respectively.

The 2022 net interest margin (FTE) improved 27 bps to 3.21% from 2.94% in 2021. The 2021 net interest margin (FTE) declined 23 bps from 3.17% in 2020. The tax-equivalent yield on average earning assets for 2022 of 3.40% was 25 bps higher than the 2021 yield of 3.15%. The 2021 tax-equivalent yield on average earning assets was 47 bps lower than the comparable 2020 yield of 3.62%. Loan yields for 2022 were 4.52%, improving 20 bps from the loan yield of 4.32% for 2021. Average loans for 2022 of $978.3 million were $38.9 million lower than the 2021 average of $1.0 billion, due to the execution of the Company's planned strategy to further improve asset quality through negotiation of loan paydowns, as well as PPP forgiveness. 2021’s average loan balances were $416.4 million higher than the 2020 average of $600.9 million due to loans acquired through the Merger.

Interest expense as a percentage of average earning assets declined to 19 bps for 2022, compared to 21 and 44 bps for 2021 and 2020, respectively. Net interest margin will be impacted by future changes in short-term and long-term interest rate levels on deposits, as well as the impact from the competitive environment. A continuing primary driver of the Company’s low cost of funds is the Company’s level of non-interest bearing demand deposits and low-cost deposit accounts. Following is a table illustrating the average balances of deposit accounts as a percentage of total deposit account balances.

The level of the allowance reflects changes in the size of the portfolio or in any of its components, as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and economic, political and regulatory conditions. Additional information concerning management’s methodology in determining the adequacy of the allowance for loan losses is contained later in this section under Allowance for Loan Losses, in addition to Note 1 – Summary of Significant Accounting Policies and Note 5 – Allowance for Loan Losses of the Notes to Consolidated Financial Statements, found in Item 8. Financial Statements and Supplementary Data.

Based on management’s continuing evaluation of the loan portfolio in 2022, the Company recorded a provision for loan losses of $106 thousand compared to $1.0 million in 2021 and $1.6 million in 2020. The decreases in 2022 and 2021 are the result of the Company releasing a portion of the reserves that were added during 2020 since the credit deterioration was not experienced to the extent previously anticipated. The decrease in 2022 also was impacted by the decline in overall loan balances as part of the Company's strategy to further improve asset quality through negotiation of loan paydowns as well as PPP forgiveness.

The allowance for loan losses as a percentage of total loans was 0.59% at December 31, 2022 compared to 0.56% at December 31, 2021.

The following is a summary of the changes in the allowance for loan losses for the years ended December 31, 2022, 2021, and 2020:

The major components of noninterest income are detailed below. Year-to-year variances are shown for each noninterest income category.

Noninterest income of $13.7 million for the year ended December 31, 2022 experienced a net increase over the prior year of $3.2 million, as a result of the following:

The major components of noninterest expense are detailed below. Year-over-year variances are shown for each noninterest expense category.

Noninterest expense of $38.6 million for the year ended December 31, 2022 decreased $4.0 million from the prior year, predominantly due to no merger or merger-related expense recognition in the current year, compared to $7.4 million of merger and merger-related expenses incurred during the year ended December 31, 2021. An increase in salaries and employee benefits offset this positive variance, increasing 7.0% from $16.1 million in 2021 to $17.3 million in 2022. This increase was due to the Merger and the addition of Fauquier's employees effective April 1, 2021, offset by a reduction in

salaries for redundant positions, occurring throughout the 21 months since the Effective Date. At December 31, 2022, the Company had 157 full-time equivalent employees compared to 173 at December 31, 2021.

Core deposit intangible amortization expense is a result of the Merger and amounted to $1.7 million in 2022 and $1.4 million in 2021.

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and the income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

For 2022, the Company provided $5.1 million for Federal income taxes, resulting in an effective income tax rate of 17.9%. In 2021, the Company provided $1.8 million for Federal income taxes, resulting in an effective income tax rate of 15.5%. The effective tax rate was lower in 2021 due to the impact on the combined income statement of low-income housing tax credits acquired during the Merger. The effective income tax rates for 2022 and 2021 were lower than the U.S. statutory rate of 21% due to the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.

More information on income taxes, including net deferred taxes can be found in Note 11 – Income Taxes of the Notes to Consolidated Financial Statements which is found in Item 8. Financial Statements and Supplementary Data.

The investment securities portfolio has a primary role in the management of the Company’s liquidity requirements and interest rate sensitivity, as well as generating significant interest income. Investment securities also play a key role in diversifying the Company’s balance sheet. In addition, a portion of the investment securities portfolio is pledged as collateral for public fund deposits. Changes in deposit and other funding balances and in loan production will impact the overall level of the investment portfolio.

As of December 31, 2022, the Company’s investment portfolio totaled $543.3 million, with obligations of U.S. government corporations and government-sponsored enterprises amounting to $438.3 million, or approximately 81% of the total. The Company’s investment portfolio totaled $308.8 million as of December 31, 2021.

In 2022, $248 million of U.S. Treasury securities were purchased at an average yield of 2.66%, with maturities ranging from one to two years. During the years ended December 31, 2022 and December 31, 2021, there were no sales of securities. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company.

In accordance with ASC 320, “Investments - Debt and Equity Securities,” the Company has categorized its unrestricted securities portfolio as Available for Sale. Securities classified as AFS may be sold in the future, prior to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. AFS securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders’ equity. All of the Company’s unrestricted securities were investment grade or better as of December 31, 2022. Given the generally high credit quality of the Company’s AFS investment portfolio, management expects to realize all of its investment upon market recovery or the maturity of such instruments and thus believes that any impairment in value is interest-rate-related and therefore temporary. AFS securities included gross unrealized losses of $62.1 million as of December 31, 2022.

All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations. At December 31, 2022, the securities issued by political subdivisions or agencies were highly rated with 100% of the municipal bonds having A+ or higher ratings. Approximately 63% of the municipal bonds are general obligation bonds, and issuers are geographically diverse. The Company held no issues that exceeded 10% of the Company’s shareholders' equity at December 31, 2022.

The Company’s holdings of restricted securities totaled $5.1 million and $5.0 million at December 31, 2022 and December 31, 2021, respectively, and consisted of stock in the Federal Reserve Bank, stock in the FHLB, and stock in CBB Financial Corporation, the holding company for Community Bankers’ Bank, and an investment in an SBA loan fund. The Bank is required to hold stock in the Federal Reserve Bank and the FHLB as a condition of membership with each of these correspondent banks. The amount of stock required to be held by the Bank is periodically assessed by each bank, and the Bank may be subject to purchase or surrender stock held in these banks, as determined by their respective calculations. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Bank with several benefits that are not available to non-shareholder correspondent banks. None of these stock issues are traded on the open market and can only be redeemed by the respective issuer. Restricted stock holdings are recorded at cost.

The table shown below details the amortized cost and fair value of AFS securities at December 31, 2022 based upon contractual maturities, by major investment categories. Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. The tax-equivalent yield is based upon a federal tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations section earlier in Item 7.

Weighted average yield is calculated based on the relative amortized cost of the securities. Yields on tax-exempt securities have been computed on a tax-equivalent basis using the federal corporate income tax rate of 21 percent.

As stated, the preceding table reflects the distribution of the contractual maturities of the investment portfolio at December 31, 2022. Management’s investment portfolio strategy is to structure the portfolio so that it is a constant source of liquidity for the balance sheet. In order to achieve greater liquidity in the portfolio, securities that have a monthly flow of principal repayments become a key component. To illustrate the difference between contractual maturity and average life, consider the difference for the fixed rate mortgage-backed securities (MBS) component of this portfolio. At December 31, 2022, the weighted average maturity of the fixed rate MBS sector was 17.5 years, and the projected average life for this group of securities is 7.7 years.

Another indication of the investment portfolio’s liquidity potential is shown by the projected annual principal cash flow from maturities, callable bonds, and monthly principal repayments. For the next three years, the principal cash flows are estimated to be $220.9 million for 2023, $77.2 million for 2024, and $31.0 million for 2025, based upon rates remaining at current levels. This represents approximately 61% of the investment portfolio’s AFS balance at December 31, 2022 that will be available to support the future liquidity needs of the Company. Cash flow projections are subject to change based upon changes to market interest rates.

The Company’s objective is to maintain the historically strong credit quality of the loan portfolio by maintaining rigorous underwriting standards. These standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrower has helped the Company achieve this objective. The primary portfolio strategy includes seeking industry and loan size diversification in order to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for loans includes Charlottesville, Albemarle County, Fauquier County, Prince William County, Winchester, Frederick County, Manassas, Richmond and areas in the Commonwealth of Virginia, State of Maryland, District of Columbia and portions of West Virginia that are within a 100 mile radius of any Virginia National Bank location.

The Company’s loan portfolio totaled $936.4 million as of December 31, 2022 or 57.7% of total assets. Loan balances decreased $124.8 million, or 11.8%, from the balance of $1.1 billion as of December 31, 2021. Note that all loan balances are presented net of credit and other fair value discounts, when applicable. The table below shows the composition of the loan portfolio:

The Company's planned strategy to further improve asset quality through negotiation of loan paydowns as well as PPP forgiveness resulted in a decrease in loan balances from December 31, 2021 to December 31, 2022. The decrease from December 31, 2021 is due predominantly to: (1) workouts and paydowns of Acquired Loans of $61.8 million, (2) paydowns of legacy organic loans due mainly to business sales, property sales, refinances and participation fluctuations of $55.3 million, and (3) the forgiveness of SBA PPP loans in the amount of $20.5 million. As of December 31, 2022, only $231 thousand of PPP loans remain outstanding on the Bank's balance sheet.

At December 31, 2022, the loan-to-deposit ratio stood at 63.3%, compared to 59.1% at December 31, 2021.

Based on underwriting standards, loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory and real property. The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions.

The Company’s real estate loan portfolio decreased by $91.3 million to a balance of $819.9 million at December 31, 2022 from $911.1 million at December 31, 2021. This category comprises 87.6% of all loans, and these loans are secured by mortgages on real property located principally in our market area. Of this amount, approximately $323.2 million represented loans on 1-4 family residential properties. Commercial real estate loans totaled $459.1 million as of December 31, 2022. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral. The remaining real estate loans were comprised of construction and land development loans which totaled $37.5 million as of December 31, 2022.

As of December 31, 2022, the Company’s commercial and industrial loan portfolio totaled $71.1 million, a $25.6 million decline from the $96.7 million balance at year-end 2021. This category, representing approximately 7.6% of all loans, includes loans made to individuals and small to medium-sized businesses, as well as loans purchased on the syndicated and government guaranteed markets. The Company participated in the PPP loan initiative during 2020 and 2021 with balances of $20.7 million and $231 thousand as of December 31, 2021 and December 31, 2022, respectively. Forgiveness of a significant amount of PPP loans during 2022 contributed to the overall balance reductions.

Consumer loans, comprised of student loans purchased, revolving credit, and other fixed payment loans, totaled $45.4 million as of December 31, 2022 or 4.9% of all loans. Consumer loans ended 2022 with balances $8.0 million lower than the prior year-end, primarily due to normal amortization within the student loan portfolio.

The following table presents the maturity/repricing distribution of the Company’s loans at December 31, 2022. The table also presents the portion of loans that have fixed interest rates or variable/floating interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the Wall Street Journal prime rate or U.S. Treasury bond indices.

Total loans at December 31, 2022 and 2021 included loans purchased in connection with the Merger. These loans were recorded at estimated fair value on the date of acquisition without the carryover of the related ALLL. The following table presents the outstanding principal balance and the carrying amount of purchased loans:

For a description of the Company's accounting for purchased performing and PCI loans, see "Critical Accounting Estimates" earlier in Item 7.

Intrinsic to the lending process is the possibility of loss. While management endeavors to minimize this risk, it recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio, which in turn depend on current and future economic conditions, the financial condition of borrowers, the realization of collateral, and the credit management process.

Generally, loans are placed on non-accrual status when management believes, after considering economic and business conditions and collections efforts, that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, or when the loan is past due for 90 days or more, unless the debt is both well-secured and in the process of collection.

At December 31, 2022 and 2021, the Company had loans classified as non-accrual with balances of $673 thousand and $495 thousand, respectively. The non-accrual balance as of December 31, 2022 consists of four loans to three borrowers.

Acquired Loans that otherwise would be in non-accrual status are not included in this figure, as they earn interest through the yield accretion.

Loans 90 days or more past due and still accruing interest amounted to $705 thousand as of December 31, 2022, compared to $801 thousand as of December 31, 2021. The 2022 balance includes a $646 thousand loan which was brought current shortly after year-end. The current portfolio only includes three non-insured student loans that are 90 days or more past due and still accruing interest, amounting to $59 thousand. Loans acquired during the Merger that are greater than 90 days past due and still accruing interest are included in this figure, net of their fair value mark.

TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs that are considered to be performing continue to accrue interest under the terms of the restructuring agreement. TDRs that have been placed in non-accrual status are considered to be nonperforming.

Total performing TDR balances declined to $788 thousand as of December 31, 2022 compared to $1.0 million as of December 31, 2021. Based on regulatory guidance issued in 2016 on Student Lending, the Company classified 46 of its student loans purchased as TDRs for a total of $700 thousand as of December 31, 2022 and 58 of its student loans purchased as TDRs for a total of $935 thousand as of December 31, 2021. Nonperforming TDR balances remained at $495 thousand as of December 31, 2022 and December 31, 2021.

The table below summarizes the Company's credit ratios as of December 31, 2022 and 2022:

See Note 4 – Loans and Note 5 – Allowance for Loan Losses in the accompanying Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for further details regarding the Company’s loan asset quality measurements.

In general, the Company determines the adequacy of its allowance for loan losses by considering the risk classification and delinquency status of loans and other factors. Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification. The purpose of the allowance is to provide for losses inherent in the loan portfolio. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. The Company is committed to determining, on an ongoing basis, the adequacy of its allowance for loan losses.

The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the allowance is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations by further segmenting the loan classes. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

See Note 4 – Loans and Note 5 – Allowance for Loan Losses in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data, for further details of the risk factors considered by management in estimating the necessary level of the allowance for loan losses.

As of December 31, 2022, the ALLL was $5.6 million , a net decrease of $432 thousand from $5,984 at December 31, 2021. Management’s estimates for the ALLL resulted in the Company’s allowance to total loans outstanding ratio of 0.59% at December 31, 2022, compared to 0.56% at December 31, 2021. Note that without the impact of acquired loans and the fair value mark, the ALLL to total loans outstanding would have been 0.90% as of December 31, 2022 and 0.95% as of December 31, 2021; furthermore, the ALLL to total loans plus the fair value mark amount to 2.29% as of December 31, 2022 and 2.30% as of December 31, 2021 (for reconcilement of non-GAAP measures, see the “Non-GAAP Presentation” section earlier in Item 7).

During 2022, there were $1.3 million in loan balances charged off, with a total of $717 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of $538 thousand. During 2021, there were $835 thousand in loan balances charged off, with a total of $350 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of $485 thousand. The ratio of net charge-offs to average loans was 0.05% and 0.05% for 2022 and 2021, respectively.

The table below provides an allocation of year-end allowance for loan losses by loan type; however, allocation of a portion of the allowance to one loan category does not preclude its availability to absorb losses in other categories.

Depository accounts represent the Company’s primary source of funding and are comprised of demand deposits, interest-bearing checking accounts, money market deposit accounts and time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle County, Fauquier County, Manassas, Prince William County, Richmond and Winchester market areas.

Depository accounts held by the Company as of December 31, 2022, totaled $1.5 billion, a decrease of $317.8 million or 17.69% compared to the December 31, 2021 total of $1.8 billion.

At December 31, 2022, the balances of non-interest bearing demand deposits were $495.6 million or 33.5% of total deposits, a 5.10% decrease from $522.3 million at December 31, 2021. Interest-bearing transaction and money market accounts totaled $867.6 million at December 31, 2022, a decrease of $244.3 million compared to $1.1 billion at December 31, 2021. The Company offers ICS®, which allows customers access to multi-million-dollar FDIC insurance on funds placed into demand deposit and/or money market deposit accounts. As of December 31, 2022, the reciprocal ICS® balances included in demand deposit and money market accounts were $42.0 million and $92.6 million, respectively. The Company’s low-cost deposit accounts, which include both non-interest and interest bearing checking accounts as well as money market accounts, represented 92.2% of total deposit account balances at December 31, 2022 and compared favorably to the 91.0% of total deposit account balances at December 31, 2021.

Certificates of deposit and other time deposit balances decreased $46.9 million to $115.1 million at December 31, 2022 from the balance of $162.0 million at December 31, 2021. Included in this deposit total were reciprocal relationships under CDARS™, whereby depositors can obtain FDIC insurance on deposits up to $50 million. These reciprocal CDARS™ deposits totaled $4.0 million and $6.1 million at December 31, 2022 and 2021, respectively.

As of December 31, 2022 and 2021, the estimated amounts of total uninsured deposits were $459.4 million and $585.6 million, respectively.

Maturities of time deposits in excess of FDIC insurance limits as of December 31, 2022 were as follows:

Borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained.

The Company has a collateral dependent line of credit with the FHLB. During the third quarter of 2021, the Company prepaid 100% of its outstanding FHLB advances, which positively impacted interest expense by $416 thousand as a result of accelerating the accretion of the fair value purchase mark on such acquired Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand. The Company had no outstanding borrowings from the FHLB at December 31, 2022 or December 31, 2021.

As of December 31, 2022, the Company had an off-balance sheet letter of credit in the amount of $30.0 million, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. This letter of credit is secured by commercial mortgages.

Additional borrowing arrangements maintained by the Bank include formal federal funds lines with six correspondent banks. The Company had no outstanding balances in federal funds purchased as of December 31, 2022, 2021, or 2020.

Total borrowings consist of the following as of December 31, 2022, 2021, and 2020:

Details on available borrowing lines can be found later under Liquidity in the Asset/Liability Management section.

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of December 31, 2022, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR.

The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

The Company’s primary earnings source is its net interest income; therefore, the Company devotes significant time and resources to assist in the management of interest rate risk and asset quality. The Company’s net interest income is affected by changes in market interest rates and by the level and composition of interest-earning assets and interest-bearing liabilities. The Company’s objectives in its asset/liability management are to utilize its capital effectively, to provide adequate liquidity and to enhance net interest income, without taking undue risks or subjecting the Company unduly to interest rate fluctuations. The Company takes a coordinated approach to the management of its liquidity, capital and interest rate risk. This risk management process is governed by policies and limits established by the Bank’s Asset/Liability Committee, which are reviewed and approved by the Bank’s Board of Directors. This committee, which is comprised of directors and members of management, meets to review, among other things, economic conditions, interest rates, yield curves, cash flow projections, expected customer actions, liquidity levels, capital ratios and repricing characteristics of assets, liabilities and financial instruments.

Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates. The Company’s principal market risk exposure is interest rate risk. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Company monitors the interest rate sensitivity of its balance sheet positions by examining its near-term sensitivity and its longer-term gap position. In its management of interest rate risk, the Company utilizes several financial and statistical tools including traditional gap analysis and sophisticated income simulation models.

A traditional gap analysis is prepared based on the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets

exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on the net interest margin. The Company’s balance sheet structure is primarily short-term in nature with a substantial portion of rate-sensitive assets and rate-sensitive liabilities repricing or maturing within one year, as shown in the Gap Interest Sensitivity Analysis table below.

The Company utilizes the gap analysis to complement its income simulations modeling. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income.

ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. It also utilizes additional tools to monitor potential longer-term interest rate risk. The income simulation models measure the Company’s net interest income volatility or sensitivity to interest rate changes utilizing statistical techniques that allow the Company to consider various factors which impact net interest income. These factors include actual maturities, estimated cash flows, repricing characteristics, deposit growth/retention and, most importantly, the relative sensitivity of the Company’s assets and liabilities to changes in market interest rates. This relative sensitivity is important to consider as the Company’s core deposit base has not been subject to the same degree of interest rate sensitivity as its assets. The core deposit costs are internally managed and tend to exhibit less sensitivity to changes in interest rates than the Company’s adjustable rate assets whose yields are based on external indices and generally change in concert with market interest rates. The Company’s interest rate sensitivity is determined by identifying the probable impact of changes in market interest rates on the yields on the Company’s assets and the rates that would be paid on its liabilities. This modeling technique involves a degree of estimation based on certain assumptions that management believes to be reasonable. Utilizing this process, management projects the impact of changes in interest rates on net interest margin. The Company has established certain policy limits for the potential volatility of its net interest margin assuming certain levels of changes in market interest rates with the objective of maintaining a stable net interest margin under various probable rate scenarios. Management generally has maintained a risk position well within the policy limits.

As market conditions vary from those assumed in the income simulation models, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other variables. Furthermore, this sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.

In simulating the effects of upward and downward changes in market rates to net interest income over a rolling two-year horizon, the model utilizes a “static” balance sheet approach where balance sheet composition or mix as of the measurement date is maintained over the two-year horizon. Similarly, the base case simulation performed assumes interest rates on the measurement date are unchanged for the next 24 months. Then the simulation assumes all rate indices are instantaneously

shocked upward and downward by 100 bps to 400 basis points, in 100 basis point increments. Due to the low level of interest rates, the shock down analysis where the rates fall 300 basis points or more are not considered meaningful and are therefore not shown in the results below as of December 31, 2022.

In addition to monitoring the effects to interest income, the model computes the effects to the economic value of equity using the same “static” balance sheet with immediate and parallel rate changes for the same rate change horizons. The Asset/Liability Committee monitors the results compared to policy limits that have been established.

As individual rate indices have not historically moved to the same degree, non-parallel rate shocks are also performed to add a degree of sophistication over the parallel rate shocks. In these analyses, the effects to net interest income and market value of equity are computed using eight different scenarios. Changing slopes and twists of the yield curve are achieved by incorporating both likely and unlikely change across different tenors. Since Federal funds rates may not change to the same degree or direction that longer term Treasury bonds may move, the different scenarios are analyzed so that management and the Asset/Liability Committee can monitor risks as they more severely stress the Company’s balance sheet.

The shape of the yield curve can cause downward pressure on net interest income. In general, if and to the extent that the yield curve is flatter (i.e., the differences between interest rates for different maturities are relatively smaller) than previously anticipated, then the yield on the Company’s interest earning assets and its cash flows will tend to be lower. Management believes that an inverted or relatively flat yield curve could adversely the Company’s net interest income in 2023.

Liquidity represents the Company’s ability to provide funds to meet customer demand for loan and deposit withdrawals without impairing profitability. Effective management of balance sheet liquidity is necessary to fund growth in earning assets and to pay liability maturities and depository customers’ withdrawal requirements. The Company maintains a Liquidity Management Policy that is approved by the Board of Directors. The policy sets limits in a number of areas, including limits on the amount of non-core liabilities, and funding long-term assets with non-core liabilities.

The Bank’s customer base has provided a stable source of funds and liquidity. Limits contained within the Bank’s Investment Policy also provides for appropriate levels of liquidity through maturities and cash flows within the securities portfolio. Other sources of balance sheet liquidity are obtained from the repayment of loan proceeds and overnight investments. The Bank has numerous secondary sources of liquidity including access to borrowing arrangements from a number of correspondent banks. Available borrowing arrangements maintained by the Bank include formal federal funds lines with six major regional correspondent banks, access to advances from the Federal Home Loan Bank and access to the discount window at the Federal Reserve Bank.

Any excess funds are sold on a daily basis in the federal funds market or maintained on account at the Federal Reserve. The Company maintained an average of $100.0 million outstanding in federal funds sold, an average of $161.3 million at the Federal Reserve and an average of less than $1 thousand in federal funds purchased during 2022 due to annual testing

of the federal funds lines. On December 31, 2022 the Company had no balance outstanding in federal funds purchased. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Basel III Capital Rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

The Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios of the Bank were 16.82%, 16.82%, 17.38% and 9.62%, respectively, as of December 31, 2022, exceeding the minimum requirements.

With respect to the Bank, to be “well capitalized” under the PCA regulations, a bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2022.

On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the community bank leverage ratio framework, as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the PCA regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was made available for community banking organizations to use in their March 31, 2020 Call Report. The Company has not opted into the CBLR framework.

The Basel III capital regulations and CBLR framework are discussed in greater detail under the caption “Supervision and Regulation,” found earlier in this report under “Item 1. Business.” In addition, information regarding the Company’s risk-based capital at December 31, 2022 and December 31, 2021 is presented in Note 15 – Capital Requirements of the Notes to Consolidated Financial Statements, contained in Item 8. Financial Statements and Supplementary Data. Using the most recent capital requirements, the Bank’s capital ratios remain above the levels designated by bank regulators as "well capitalized" at December 31, 2022.

The Company’s financial statements included herein have been prepared in accordance with GAAP, which requires the financial position and operating results to be measured principally in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Inflation affects the Company’s results of operations mainly through increased operating costs, but since nearly all of the Company’s assets and liabilities are monetary in nature, changes in interest rates affect the financial condition of the Company to a greater degree than changes in the rate of inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. The Company’s management reviews pricing of its products and services, in light of current and expected costs due to inflation, to mitigate the inflationary impact on financial performance.

The Company is 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 consist primarily of commitments to extend credit and standby letters of credit. Additional information concerning the Company’s off-balance sheet arrangements is contained in Note 13 of the Notes to Consolidated Financial Statements, found in Item 8. Financial Statements and Supplementary Data.

The Company and its subsidiaries have business dealings with companies owned by directors and beneficial shareholders of the Company. In 2022 and 2021, leasing/rental expenditures of $528 thousand and $520 thousand respectively,

(including reimbursements for taxes, insurance, and other expenses) were paid to an entity indirectly owned by a director of the Company.

In the normal course of business, the Company and its subsidiaries enter into contractual obligations, including obligations on lease arrangements, contractual commitments for capital expenditures, and service contracts. The significant contractual obligations include the leasing of certain of its banking and operations offices under operating lease agreements on terms ranging from 1 to 10 years, most with renewal options.

Following is a schedule of future minimum rental payments under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2022:

To the Shareholders and Board of Directors
Virginia National Bankshares Corporation
Charlottesville, Virginia

We have audited the accompanying consolidated balance sheets of Virginia National Bankshares Corporation and Subsidiaries (the Corporation) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’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 Corporation in accordance with 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 Corporation 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 Corporation’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.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

As described in Note 1 – Summary of Significant Accounting Policies and Note 5 – Allowance for Loan Losses to the consolidated financial statements, the Corporation maintains an allowance for loan losses that represents management’s best estimate of probable losses inherent in the loan portfolio. For loans that are not specifically identified for impairment, management determines the allowance for loan losses based on historical loss experience adjusted for qualitative factors. Qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan segments established by management based on their assessment of shared risk characteristics within groups of similar loans.

Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors by loan segment, primarily considering changes in current economic conditions, collateral values, classified asset and delinquency trends, the existence and effect of concentrations, lending policies and procedures, the experience and depth of the lending team, and policy exception levels. Qualitative factors contribute significantly to the allowance for loan losses. Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

The primary audit procedures we performed to address this critical audit matter included:

Note 1 – Summary of Significant Accounting Policies

The Company - Headquartered in Charlottesville, Virginia, Virginia National Bankshares Corporation (the Company) (NASDAQ: VABK) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Company is authorized to issue (a) 10,000,000 shares of common stock with a par value of $2.50 per share and (b) 2,000,000 shares of preferred stock at a par value $2.50 per share. There is currently no preferred stock outstanding. The Company is regulated under the Bank Holding Company Act of 1956, as amended and is subject to inspection, examination, and supervision by the Federal Reserve Board.

Virginia National Bank (the Bank) is a wholly-owned subsidiary of the Company and was organized in 1998 under federal law as a national banking association to engage in a general commercial and retail banking business. The Bank is also headquartered in Charlottesville, Virginia and primarily serves the Virginia communities in and around the cities of Charlottesville, Winchester, Manassas and Richmond, and the counties of Albemarle, Fauquier, Frederick and Prince William. As a national bank, the Bank is subject to the supervision, examination and regulation of the OCC.

The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services. Until the sale of the business line on December 19, 2022, the Bank also offered, through networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors. Refer to Note 21 - Sale of Sturman Wealth Advisors for more information regarding the sale of such business line. Investment management services are offered through Masonry Capital Management, LLC, a registered investment adviser and wholly-owned subsidiary of the Company.

In addition, the Company owns Fauquier Statutory Trust II (“Trust II”), which is an unconsolidated subsidiary. The subordinated debt owed to Trust II is reported as a liability of the Company.

On April 1, 2021, the Company completed the Merger with Fauquier with and into the Company for total consideration paid of $78.0 million. In connection with the transaction, TFB, Fauquier's wholly-owned bank subsidiary, was merged with and into the Bank. Additional information about this transaction is presented in Note 2 – Business Combinations.

Basis of Financial Information - The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to the reporting guidelines prescribed by regulatory authorities. The following is a description of the more significant of those policies and practices.

Principles of consolidation – The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, the Bank and Masonry Capital. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses (including impaired loans), acquisition accounting, other-than-temporary impairment of securities, intangible assets, income taxes, and fair value measurements.

Cash flow reporting – For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on hand, funds due from banks, interest bearing deposits in other banks and federal funds sold.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities – Unrestricted investments are classified in two categories as described below.

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Securities held to maturity – Securities classified as held to maturity are those debt securities the Company has both the positive intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. Currently the Company has no securities classified as held to maturity because of Management’s desire to have more flexibility in managing the investment portfolio.

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Securities available for sale – Securities classified as AFS are those debt securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. AFS securities are carried at fair value. Unrealized gains or losses are reported as a separate component of other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities or to “call” dates, whichever occurs first. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) the Company intends to sell the security or (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

Restricted securities – As members of the FRB and the FHLB, the Company is required to maintain certain minimum investments in the common stock of the FRB and FHLB. Required levels of investments are based upon the Bank’s capital and a percentage of qualifying assets. Additionally, the Company has purchased common stock in CBB Financial Corp. (“CBBFC”), the holding company for Community Bankers’ Bank and an investment in an SBA loan fund. These restricted securities are carried at cost.

Loans – Loans are reported at the principal balance outstanding net of unearned discounts and of the allowance for loan losses. Interest income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs over the loan term. Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's allowance for loan losses or net deferred fee/costs. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows based on a discount rate that would be required by a market participant. Acquired Loans are classified as either (i) purchased credit-impaired loans or (ii) purchased performing loans. PCI loans are not classified as nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at semi-annual re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans. Purchased performing loans are accounted for using the contractual cash flows method of recognizing discount accretion based on the Acquired Loans' contractual cash flows. Further information regarding the Company’s accounting policies related to past due loans, non-accrual loans, impaired loans and troubled-debt restructurings is presented in Note 4 - Loans.

Allowance for loan losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in the loan portfolio. The allowance for loan losses includes allowance allocations calculated in accordance with FASB ASC Topic 310, “Receivables” and allowance allocations calculated in accordance

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

with ASC Topic 450, “Contingencies.” Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 5 – Allowance for Loan Losses.

Information concerning the Company’s adoption of ASC 326, effective January 1, 2023, is presented later in this Note 1 - Summary of Significant Accounting Policies, under Recent Accounting Pronouncements.

Transfers of financial assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company or its subsidiaries – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company or its subsidiaries does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets, which range from 3 to 40 years. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, the asset and related accumulated depreciation are removed from the books and any resulting gain or loss is charged to income. More information regarding premises and equipment is presented in Note 6 – Premises and Equipment.

Leases - The Company recognizes a lease liability and a right-of-use asset in connection with leases in which it is a lessee, except for leases with a term of twelve months or less. A lease liability represents the Company’s obligation to make future payments under lease contracts, and a right-of-use asset represents the Company’s right to control the use of the underlying property during the lease term. Lease liabilities and right-of-use assets are recognized upon commencement of a lease and measured as the present value of lease payments over the lease term, discounted at the incremental borrowing rate of the lessee. Further information regarding leases is presented in Note 7 – Leases.

Intangible assets – Goodwill is determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company performs the test as of December 31 of each year whereby the estimated fair value is compared to the carrying value. Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from 3 to 10 years, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life included on the Company’s Consolidated Balance Sheets. Management has concluded that no impairment of these assets existed as of the balance sheet date. More information regarding intangible assets is presented in Note 8 – Goodwill and Other Intangible Assets.

BOLI – The Company has purchased life insurance on certain key employees and acquired BOLI policies as part of the Merger. These policies are recorded at their cash surrender value on the Consolidated Balance Sheets. Income generated from polices is recorded as noninterest income.

Other Real Estate Owned - Assets acquired through or in lieu of loan foreclosures are held for sale and are initially recorded at fair value less selling costs at the date of foreclosure, establishing a new cost basis. When the carrying amount exceeds the acquisition date fair value less selling costs, the excess is charged off against the ALLL. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell, and any valuation adjustments occurring from post-acquisition reviews are charged to expense as incurred. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses on the Company’s Consolidated Statements of Income.

Fair value measurements – ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are based upon internally developed models that primarily use, as inputs, observable market-based parameters. Any such valuation adjustments are applied consistently over time. Additional information on fair value measurements is presented in Note 17 – Fair Value Measurements.

Stock-based compensation – The Company accounts for all plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and unrestricted or restricted stock grants. For stock options, compensation is estimated at the date of grant, using the Black-Scholes option valuation model for determining fair value. The model employs the following assumptions:

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Dividend yield - calculated as the ratio of historical cash dividends paid per share of common stock to the stock price on the date of grant;

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Expected life (term of the option) - based on the average of the contractual life and vesting schedule for the respective option;

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Expected volatility - based on the monthly historical volatility of the Company’s stock price over the expected life of the options;

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Risk-free interest rate - based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant.

The Company has elected to estimate forfeitures when recognizing compensation expense, and this estimate of forfeitures is adjusted over the requisite service period or vesting schedule based on the extent to which actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and also will impact the amount of estimated unamortized compensation expense to be recognized in future periods. Further information on stock-based compensation is presented in Note 19 – Stock Incentive Plans.

Net income per common share – Basic net income per share, commonly referred to as earnings per share, represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period, including restricted shares that have not yet vested as these are considered participating securities during the vesting period. Diluted net income per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Additional information on net income per share is presented in Note 20 – Net Income per Share.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on AFS securities and interest rate swaps, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Further information on the Company’s other comprehensive income is presented in the Consolidated Statements of Comprehensive Income.

Derivative Financial Instruments - The Company recognizes derivative financial instruments in the consolidated balance sheets at fair value. The fair value of a derivative is determined by quoted market prices and mathematical models using current and historical data. If certain hedging criteria are met, including testing for hedge effectiveness, special hedge accounting may be applied. The Company assesses each hedge, both at inception and on an ongoing basis, to determine whether the derivative used in a hedging transaction is effective in offsetting changes in the fair value or cash flows of the hedged item and whether the derivative is expected to remain effective during subsequent periods. The Company discontinues hedge accounting when (i) it determines that a derivative is no longer effective in offsetting changes in fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) probability exists that the forecasted transaction will no longer occur or; (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued and a derivative remains outstanding, the Company recognizes the derivative in the balance sheet at its fair value and changes in the fair value are recognized in net income.

At inception, the Company designates a derivative as (i) a fair value hedge of recognized assets or liabilities or of unrecognized firm commitments (fair value hedge) or (ii) a hedge of forecasted transactions or variable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cash flows to be received or paid in conjunction with recognized assets or liabilities (cash flow hedge). For a derivative treated as a fair value hedge, a change in fair value is recorded as an adjustment to the hedged item and recognized in net income. For a derivative treated as a cash flow hedge, the effective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized as a component of accumulated other comprehensive income (loss) within shareholders’ equity. For a derivative treated as a cash flow hedge, the ineffective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized in net income. Further information on the Company's derivative financial instruments is presented in Note 23 -Derivatives Instruments and Hedging Activities.

Advertising costs – The Company follows the policy of charging the costs of advertising to expense as they are incurred.

Income taxes – Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carry forwards, and tax credit carry forwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly probable that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits, if any, are classified as additional income taxes in the statements of income. For the years ended December 31, 2022 and 2021, there were no such interest or penalties recognized. Further information on the Company’s accounting policies for income taxes is presented in Note 11 – Income Taxes.

Securities and other property held in a fiduciary capacity – Securities and other property held by VNB Trust and Estate Services or Masonry Capital in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.

Revenue Recognition - ASU 2014-09, “Revenue from Contracts with Customers”, and all subsequent amendments to the ASU (collectively “Topic 606”), (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenue is from interest income, including loans and securities, which are outside the scope of the standard. The services that fall within the scope of the standard are presented within noninterest income on the consolidated statement of income and are recognized as revenue as the Company satisfies its obligations to the customer. The revenue that falls within the scope of Topic 606 is primarily related to service charges on deposit accounts, debit/credit card and ATM fees, asset management fees and sales of other real estate owned, when applicable.

Reclassifications – Certain reclassifications have been made to the prior year financial statements to conform to current year presentation. The results of the reclassifications are not considered material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Financial Instruments – Credit Losses - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available-for-sale securities and addressed purchased financial assets with deterioration.

The Company adopted ASU 2016-13 effective January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. The adjustment to retained earnings as a result of adoption is expected to be within a reasonable range of $2 million to $2.6 million from December 31, 2022 to January 1, 2023 and consists of adjustments to the ACL as well an adjustment to the Company's reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its ACL and reserve for unfunded commitments thought the provision for credit losses in the consolidated statements of income.

The Company established a working group to prepare for and implement changes related to ASC 326. This working group gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard related to the allowance for credit losses on loans, performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses and engaged a vendor to assist in modeling expected lifetime losses under ASC 326. The Company expects to primarily utilize discounted cash flow methods for estimating the ACL on loans and has implemented policies and procedures for developing that estimate. The Company will also use the remaining life method for certain consumer related pools of loans. The Company is implementing changes to its policies and procedures related to measuring impairment of available for sale securities and does not expect a significant effect on the carrying value of the Company’s available for sale securities as a result of the adoption of ASC 326. The adoption of ASC 326 and related changes in the Company’s accounting policies will result in significant changes to the Company’s consolidated financial statements, including differences in the timing of recognizing changes to the ACL, and will include expanded disclosures about the ACL, charge-offs and recoveries of loans, and certain loan modifications. The adoption of the standard also results in significant changes in the Company’s internal control over financial reporting related to the allowance for credit losses. During 2022, the Company calculated its CECL model in parallel to its incurred loss model in order to further refine the methodology and model. The Company performed an extensive comprehensive model validation internally by qualified personnel and has engaged an independent third party to perform a model review.

LIBOR and Other Reference Rates - In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides temporary, optional guidance to ease the potential burden in accounting for reference rate reform associated with the LIBOR transition. LIBOR and other interbank offered rates are widely used benchmark or reference rates that have been used in the valuation of loans, derivatives, and other financial contracts. Global capital markets are going to be required to move away from LIBOR and other interbank offered rates and toward rates that are more observable or transaction based and less susceptible to manipulation. Topic 848 provides optional expedients and exceptions, subject to meeting certain criteria, for applying current GAAP to contract modifications and hedging relationships, for contracts that reference LIBOR or another reference rate expected to be discontinued. Topic 848 is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at an instrument level.

To facilitate an orderly transition from LIBOR and other benchmark rates to alternative reference rates, the Company has established a focus committee, which includes members of senior management, including the Chief Credit Officer and Chief Financial Officer, among others. The task of this committee is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted customers in connection with the transition to alternative reference rates. A complete inventory of instruments tied to LIBOR has been developed, and the focus committee is working through each of the instruments to determine ultimate resolution.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TDRs and Vintage Disclosures In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company's financial position, results of operations or cash flows.

Note 2 - Business Combinations

On April 1, 2021, the Company completed the Merger with Fauquier with and into the Company, with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier.

Pursuant to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Effective Date of the Merger, plus cash in lieu of fractional shares. In connection with the transaction, the Company issued 2,571,213 shares of its common stock to the shareholders of Fauquier and paid $4 thousand in cash in lieu of fractional shares. Each share of the Company’s common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Shortly after the Effective Date of the Merger, TFB, Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving.

The Company accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the Merger and the common stock of the Company issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period may not exceed one year from the acquisition date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents as of April 1, 2021 the total consideration paid by the Company in connection with the Merger, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill:


(Dollars in thousands)	As Recorded		Fair Value			As Recorded
	by Fauquier		Adjustment			by the Company
Assets:
Cash and cash equivalents	$	153,282	$	-		$	153,282
Securities available for sale		93,133		-			93,133
Restricted securities		1,619		-			1,619
Loans, net		615,766		(13,123	)		602,643
Premises and equipment		16,276		3,872			20,148
Other real estate owned		1,356		(745	)		611
Bank-owned life insurance		13,677		-			13,677
Right-of-use assets		4,355		1,077			5,432
Core deposit intangible		-		9,660			9,660
Other assets		11,298		(1,009	)		10,289
Total assets acquired	$	910,762	$	(268	)	$	910,494

Liabilities:
Deposits	$	817,499	$	191		$	817,690
Short-term borrowings		12,582		473			13,055
Junior subordinated debt		4,124		(790	)		3,334
Lease liability		4,440		352			4,792
Other liabilities		1,355		-			1,355
Total liabilities assumed	$	840,000	$	226		$	840,226
Net assets acquired						$	70,268
Total consideration paid							78,036
Goodwill resulting from merger						$	7,768

In connection with the Merger, the Company recorded approximately $7.8 million of goodwill and $9.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset will be amortized over a period of seven years using the sum of years digits method.

Loans acquired from Fauquier had aggregate outstanding principal of $622.9 million and an estimated fair value of $602.6 million. The discount between the outstanding principal balance and fair value of $20.3 million represents expected credit losses and adjustments for market interest rates of $21.3 million, offset by elimination of net deferred fees/costs of $979 thousand. Under the acquisition method (ASC 805), the allowance for loan losses recorded in the books of Fauquier in the amount of $7.2 million was not carried over into the books of the Company.

As of the Effective Date, the fair value of the performing loans was $513.8 million, which was 1.7% less than the book value of the loans. The total fair value discount on performing loans of $9.0 million consisted of a credit discount of $8.4 million and an other fair value discount of $647 thousand. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired. As of the Effective Date, the fair value of PCI loans was $87.3 million, which was 12.3% below the book value of the loans. The total fair value mark on PCI loans of $12.3 million consisted of a credit discount of $11.2 million and an other fair value discount of $1.1 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information about PCI loans acquired from Fauquier as of April 1, 2021 is as follows:


(Dollars in thousands)	April 1, 2021
Contractual principal and interest at acquisition	$	136,476
Nonaccretable difference		(33,712	)
Expected cash flows at acquisition		102,764
Accretable yield		(15,499	)
Basis in PCI loans at acquisition, estimated fair value	$	87,265

Fair values of the major categories of assets acquired and liabilities assumed as part of the Merger were determined as follows:

Cash and due from banks: The carrying amount of cash and due from banks was used as a reasonable estimate of fair value.

Securities available for sale: The estimated fair value of AFS investment securities was based on quoted pricing from a third party portfolio accounting service vendor for the valuation of those securities.

Loans: The Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's allowance for loan losses or net deferred fee/costs. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the Acquired Loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Premises and equipment: The land and buildings acquired were recorded at fair value as determined by current appraisals by independent third parties and tax assessments at the Effective Date.

Other real estate owned: OREO was recorded at fair value based on an existing purchase contract, less estimated selling costs.

Bank owned life insurance: The carrying amount of bank owned life insurance was used as a reasonable estimate of fair value.

Right of use assets and lease liabilities: Lease liabilities were measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the Company at the Effective Date. Right-of-use assets were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms.

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $9.7 million or 1.3% of non-maturity deposits.

Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $191 thousand premium and is being amortized into income over a period of thirty-six months.

Short-term borrowings: The fair value of borrowings was determined by comparison to current interest rates for similar borrowings. The resulting fair value adjustment to short-term borrowings is a $473 thousand premium which will be amortized into interest expense over the remaining life of the debt on a

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

straight-line basis. (Note that such borrowings were repaid in the third quarter of 2021, and therefore, the premium was fully amortized during 2021.)

Junior subordinated debt: The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate. The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $790 thousand discount and is being accreted to interest expense over the remaining life of the debt on a straight-line basis.

The revenue and earnings amounts specific to Fauquier since the Effective Date that are included in the consolidated results for 2021 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the Effective Date.

No merger or merger-related expenses were incurred in 2022. Merger and merger-related expenses were $7.4 million ($5.5 million after taxes) for 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments, severance and stay-put bonuses and legal and consulting expenses, which have been expensed as incurred.

The following amounts were accreted to income during 2022: $2.3 million increase to interest income (accretable yield from purchased performing loans), and $46 thousand reduction to interest expense related to the time deposit fair value discount. During 2022, the Company incurred $1.7 million in amortization expense related to the core deposit intangible and $46 thousand in amortization expense related to the junior subordinated debt.

Note 3 – Securities

The amortized cost and fair values of securities available for sale as of December 31, 2022 and December 31, 2021 are as follows:


December 31, 2022	Amortized		Gross Unrealized		Gross Unrealized			Fair
(Dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	245,583	$	-	$	(3,113	)	$	242,470
U.S. Government agencies		35,282		-		(6,528	)		28,755
Mortgage-backed securities/CMOs		194,964		-		(27,888	)		167,076
Corporate bonds		19,581		-		(852	)		18,729
Municipal bonds		104,831		-		(23,675	)		81,156
Total Securities Available for Sale	$	600,241	$	—	$	(62,056	)	$	538,186


December 31, 2021	Amortized		Gross Unrealized		Gross Unrealized			Fair
(Dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	32,424	$	24	$	(867	)	$	31,581
Mortgage-backed securities/CMOs		172,975		248		(2,259	)		170,964
Municipal bonds		101,136		1,162		(1,026	)		101,272
Total Securities Available for Sale	$	306,535	$	1,434	$	(4,152	)	$	303,817

Marketable equity securities consist of nominal investments made by the Company in equity positions of various community banks and bank holding companies and are reported in other assets at fair value on the Consolidated Balance Sheets. Unrealized gains and losses are recorded in the Consolidated Statements of Income.

There were no unrestricted securities classified as held to maturity as of December 31, 2022 or December 31, 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted securities are securities with limited marketability and consist of stock in the FRB, FHLB, CBBFC and an investment in an SBA loan fund. These restricted securities, totaling $5.1 million and $5.0 million as of December 31, 2022 and December 31, 2021, respectively, are carried at cost.

During the years ended December 31, 2022 and December 31, 2021, there were no sales of securities.

Securities pledged to secure deposits and for other purposes and to facilitate borrowing from the FRB, had carrying values of $5.1 million at December 31, 2022 and $12.7 million at December 31, 2021.

Year-end securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, were as follows:


December 31, 2022
(Dollars in thousands)	Less than 12 Months					12 Months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury Securities	$	242,470	$	(3,113	)	$	-	$	-		$	242,470	$	(3,113	)
U.S. Government agencies		4,285		(620	)		24,218		(5,908	)		28,503		(6,528	)
Mortgage-baked/CMOs		55,396		(6,010	)		111,689		(21,878	)		167,085		(27,888	)
Corporate bonds		18,729		(852	)		-		-			18,729		(852	)
Municipal bonds		44,117		(8,001	)		35,964		(15,674	)		80,081		(23,675	)
	$	364,997	$	(18,596	)	$	171,871	$	(43,460	)	$	536,868	$	(62,056	)


December 31, 2021
(Dollars in thousands)	Less than 12 Months					12 Months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)
Mortgage-backed/CMOs		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)
Municipal bonds		40,352		(722	)		10,409		(304	)		50,761		(1,026	)
	$	186,671	$	(2,797	)	$	40,821	$	(1,355	)	$	227,492	$	(4,152	)

As of December 31, 2022, there were $536.9 million, or 291 issues, of individual securities in a loss position. These securities had an unrealized loss of $62.1 million and consisted of 14 Treasury securities, 19 Agency securities, 120 mortgage-backed/CMOs, 127 municipal bonds, and 11 corporate securities.

The Company’s securities portfolio is primarily made up of fixed rate bonds, whose prices move inversely with interest rates. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality and does not intend to sell or believe it will be required to sell any of the securities before recovery of the amortized cost basis. Accordingly, as of December 31, 2022, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of AFS debt securities at December 31, 2022 are presented below based upon contractual maturities, by major investment categories. Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.


(Dollars in thousands)	Amortized Cost		Fair Value
U.S. Treasury securities
One year or less	$	192,843	$	191,180
After one year to five years		52,740		51,290
	$	245,583	$	242,470
U.S. Government agencies
After one to five years	$	900	$	808
After five years to ten years		30,382		25,060
Ten years or more		4,000		2,887
	$	35,282	$	28,755
Mortgage-backed securities/CMOs
One year or less	$	1,515	$	1,485
After one year to five years	$	9,553	$	8,987
After five years to ten years		3,096		2,779
Ten years or more		180,800		153,825
	$	194,964	$	167,076
Corporate bonds
After one year to five years	$	17,682	$	16,933
After five years to ten years		1,899		1,796
	$	19,581	$	18,729
Municipal bonds
After one year to five years	$	2,472	$	2,367
After five years to ten years		17,665		16,151
Ten years or more		84,694		62,638
	$	104,831	$	81,156

Total Debt Securities Available for Sale	$	600,241	$	538,186

Note 4 – Loans

The composition of the loan portfolio by major loan classification appears below. Note that all loan balances are presented net of credit and other fair value discounts, when applicable.


(Dollars in thousands)	December 31,			December 31,
	2022			2021
Commercial	$	71,139		$	96,696
Real estate construction and land		37,541			79,331
1-4 family residential mortgages		323,185			358,148
Commercial mortgages		459,125			473,632
Consumer		45,425			53,404
Total loans	$	936,415		$	1,061,211
Less: Allowance for loan losses		(5,552	)		(5,984	)
Net loans	$	930,863		$	1,055,227

The balances in the table above include unamortized premiums and net deferred loan costs and fees. Unamortized premiums on loans purchased were $1.4 million and $1.1 million as of December 31, 2022 and December 31, 2021, respectively. Net deferred loan fees totaled $755 thousand and $865 thousand as of December 31, 2022 and December 31, 2021, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial loans reported above include (i) organic loans originated by the Bank’s commercial lenders, (ii) PPP loans through the SBA as discussed above, (iii) the government guaranteed portion of loans which the Company purchased that are 100% guaranteed by either the United States Department of Agriculture (USDA) or the SBA; and (iv) syndicated loans, also referred to as shared national credits, purchased from national lending correspondents. The government guaranteed loans and the shared national credits are typically purchased at a premium. In the event of early prepayment, the Bank may need to write off any unamortized premium.

Real estate construction and land loans consist primarily of loans for the purchase or refinance of unimproved lots or raw land. Additionally, the Company finances the construction of real estate projects typically where the permanent mortgage will remain with the Company.

1-4 family residential mortgages include consumer purpose 1-4 family residential properties and home equity loans, as well as investor-owned residential real estate. The Company typically originates residential mortgages with the intention of retaining in its portfolio adjustable-rate mortgages and shorter-term, fixed-rate loans. Currently, the Company only originates investor-owned residential mortgage loans.

In addition, residential mortgages includes packages of 1-4 family residential mortgages that have been purchased, with each purchased loan individually underwritten by the Company prior to the closing of the sale. The balance in these purchased loan packages totaled approximately $8.3 million and $10.6 million as of December 31, 2022 and December 31, 2021, respectively.

Commercial mortgages are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Consumer loans are generally small loans spread across many borrowers and are underwritten after determining the ability of the consumer borrower to repay their obligations as agreed. Consumer loans may be secured or unsecured and are comprised of revolving lines, installment loans and other consumer loans. Included in consumer loans are private student loan packages that were purchased beginning in 2015. As of December 31, 2022, the balance in these purchased student loan packages totaled approximately $25.2 million compared to $30.7 million at December 31, 2021. Deposit account overdrafts are included in the consumer loan balances and totaled $180 thousand and $205 thousand at December 31, 2022 and December 31, 2021, respectively.

Acquired Loans. Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The table above includes a net fair value mark of $11.2 million and $12.2 million on the purchased impaired loans and $4.7 million and $6.2 million on the purchased performing loans as of December 31, 2022 and December 31, 2021, respectively, on the Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The outstanding principal balance and the carrying amount at December 31, 2022 and 2021 on these Acquired Loans were as follows:


(Dollars in thousands)	December 31, 2022
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	43,250	$	290,604	$	333,854
Carrying amount:
Commercial	$	630	$	12,606	$	13,236
Real estate construction and land		1,461		8,530		9,991
1-4 family residential mortgages		9,076		164,280		173,356
Commercial mortgages		20,828		99,206		120,034
Consumer		72		1,277		1,349
Total acquired loans	$	32,067	$	285,899	$	317,966




(Dollars in thousands)	December 31, 2021
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	76,608	$	372,172	$	448,780
Carrying amount:
Commercial	$	994	$	28,065	$	29,059
Real estate construction and land		18,576		14,297		32,873
1-4 family residential mortgages		16,020		194,708		210,728
Commercial mortgages		28,675		126,638		155,313
Consumer		118		2,224		2,342
Total acquired loans	$	64,383	$	365,932	$	430,315

The following table presents a summary of the changes in the accretable yield of loans classified as purchased credit impaired:


(Dollars in thousands)	Twelve Months Ended
	December 31, 2022
Accretable yield, beginning of period	$	13,742
Additions		—
Accretion		(3,393	)
Reclassification from nonaccretable difference		9,022
Other changes, net		(3,503	)
Accretable yield, end of period	$	15,868

Loan origination/risk management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approves lending policies on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Independent loan review on a portion of the loan portfolio is performed by an independent loan review firm that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit and Compliance Committee of the Board. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Concentrations of credit. Most of the Company’s lending activity occurs within the Commonwealth of Virginia, predominantly in the Company’s primary markets and surrounding areas. The majority of the Company’s loan portfolio consists of commercial real estate loans. The Company manages this risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations to any one business or industry.

Related party loans. In the ordinary course of business, the Company has granted loans to certain directors, principal officers and their affiliates (collectively referred to as “related party loans”). Activity in related party loans during 2022 and 2021 is presented in the following table.


(Dollars in thousands)	2022			2021
Balance outstanding at beginning of year	$	16,592		$	19,070
Principal additions		613			4,527
Principal reductions		(1,672	)		(7,005	)
Balance outstanding at end of year	$	15,533		$	16,592

Past due, non-accrual and charged-off 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. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company’s collateral position. Regulatory provisions generally require a loan to be placed 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.

Loans are charged off when 120 days past due. Smaller, unsecured consumer loans, including the student loan portfolio, are typically charged-off when management judges such loans to be uncollectible or the borrowers file for bankruptcy; these loans are generally not placed in non-accrual status prior to charge-off. The Company has contracted with a third party to proactively manage the collections of past due student loans; this third party has extensive experience and specializes in this type of asset management.

Non-accrual loans are shown below by class:


(Dollars in thousands)	December 31, 2022		December 31, 2021
1-4 family residential mortgages	$	673	$	495
Total nonaccrual loans	$	673	$	495

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables show the aging of past due loans as of December 31, 2022 and December 31, 2021.


Past Due Aging as of December 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Accruing
(Dollars in thousands)
Commercial	$	-	$	24	$	-	$	24	$	630	$	70,485	$	71,139	$	-
Real estate construction and land		287		-		75		362		1,461		35,718		37,541		-
1-4 family residential mortgages		1,176		191		598		1,965		9,076		312,144		323,185		-
Commercial mortgages		330		-		646		976		20,828		437,321		459,125		646
Consumer loans		315		41		59		415		72		44,938		45,425		59
Total Loans	$	2,108	$	256	$	1,378	$	3,742	$	32,067	$	900,606	$	936,415	$	705


Past Due Aging as of December 31, 2021	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Accruing
(Dollars in thousands)
Commercial	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718
Real estate construction and land		873		1,283		-		2,156		18,576		58,599		79,331		-
1-4 family residential mortgages		1,508		100		495		2,103		16,020		340,025		358,148		-
Commercial mortgages		-		-		-		-		28,675		444,957		473,632		-
Consumer loans		345		196		83		624		118		52,662		53,404		83
Total Loans	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801

Impaired loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on an individual loan basis. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net of the impairment, using either the present value of estimated future cash flows at the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Regulatory guidelines require the Company to re-evaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis.

The following tables provide a breakdown by class of the loans classified as impaired loans as of December 31, 2022 and December 31, 2021. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for the twelve months ended December 31, 2022 and December 31, 2021. Interest income recognized is for the years ended December 31, 2022 and December 31, 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)
December 31, 2022	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
1-4 family residential mortgages	$	583	$	615	$	-	$	625	$	32
Total impaired loans without a valuation allowance		583		615		-		625		32

Impaired loans with a valuation allowance:
Consumer		700		700		23		784		49
Total impaired loans with a valuation allowance		700		700		23		784		49
Total impaired loans	$	1,283	$	1,315	$	23	$	1,409	$	81


(Dollars in thousands)
December 31, 2021
Impaired loans without a valuation allowance:
Real estate construction and land	$	-	$	37	$	-	$	2	$	-
1-4 family residential mortgages		594		600		-		269		24
Total impaired loans without a valuation allowance		594		637		-		271		24

Impaired loans with a valuation allowance:
Consumer		935		935		6		974		54
Total impaired loans with a valuation allowance		935		935		6		974		54
Total impaired loans	$	1,529	$	1,572	$	6	$	1,245	$	78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled debt restructurings are also considered impaired loans. TDRs occur when the Bank agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

Based on regulatory guidance on Student Lending, the Company classified 46 of its student loans purchased as TDRs for a total of $700 thousand as of December 31, 2022. The Company classified 58 of its student loans purchased as TDRs for a total of $935 thousand as of December 31, 2021. These borrowers, who should have been in repayment, requested and were granted payment extensions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the termination of the surety bond on July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in non-accrual status, which are considered to be nonperforming.


Troubled debt restructurings	December 31, 2022				December 31, 2021
(Dollars in thousands)	No. of Loans		Recorded Investment		No. of Loans		Recorded Investment
Performing TDRs
1-4 family residential mortgages		1	$	88		1	$	99
Consumer		46		700		58		935
Total performing TDRs		47	$	788		59	$	1,034

Nonperforming TDRs
1-4 family residential mortgages		1	$	495		1	$	495
Total nonperforming TDRs		1	$	495		1	$	495
Total TDRs		48	$	1,283		60	$	1,529

A summary of loans shown above that were modified as TDRs during the years ended December 31, 2022 and December 31, 2021 is shown below by class. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported. The Post-Modification Recorded Balance reflects any interest or fees from the original loan which may have been added to the principal balance on the new note as a condition of the TDR. Additionally, the Post-Modification Recorded Balance is reported below at the period end balances, inclusive of all partial principal pay downs and principal charge-offs since the modification date.


	During year ended						During year ended
(Dollars in thousands)	December 31, 2022						December 31, 2021
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Consumer loans		-	$	—	$	—		12	$	145	$	145
Total loans modified during the period		-	$	—	$	—		12	$	145	$	145

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2022, there no loans modified as TDRs that subsequently defaulted which had been modified as TDRs during the twelve months prior to default. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2021 and were modified as a TDR during the twelve months prior to default. These student loans had balances of $56 thousand prior to being charged off.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either December 31, 2022 or December 31, 2021.

Note 5 – Allowance for Loan Losses

A summary of the transactions in the allowance for loan losses for the years ended December 31, 2022 and 2021 appears below:


(Dollars in thousands)	2022			2021
Balance, beginning of period	$	5,984		$	5,455
Loans charged off		(1,255	)		(835	)
Recoveries		717			350
Net charge-offs		(538	)		(485	)
Provision for loan losses		106			1,014
Balance, December 31	$	5,552		$	5,984

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

For purposes of determining the allowance for loan losses on the outstanding loans that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes, based on the associated risks within these classes. Note that under the acquisition method of accounting (ASC 805), the allowance for loan losses recorded in the books of Fauquier was not carried over into the books of the Company. However, subsequent decreases to the expected cash flows of PCI loans or deterioration of purchased performing loans in a future period may result in a provision for loan losses resulting in an increase to the ALLL.

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan classes except for the following:

•

Student loans purchased (excluding Acquired Student Loans) - On June 27, 2018, the Company was notified that ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds for the student loan pools, was placed into liquidation due to insolvency. As such, the historical charge-off rate on this portfolio is determined by using the Company’s own losses/charge-offs since July 1, 2018 together with prior insurance claim history. For reporting periods prior to June 30, 2018, the Company did not charge off student loans as the insurance covered the past due loans, but the Company did apply qualitative factors to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.

•

Commercial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the USDA.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, an independent loan review of a portion of the Company’s loan portfolio is performed periodically.

Loans that trend upward toward more positive risk ratings generally have a lower risk factor associated. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Risk Ratings and Historical Loss Factor Assigned

Excellent

A 0% historical loss factor is applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk. The Company has never experienced a loss within this category.

Good

A 0% historical loss factor is applied, as these loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve is applied to these loans. The Company has never experienced a loss within this category.

Pass

A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory - modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average – average risk loans where the borrower has reasonable debt service capacity

Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

Special Mention

These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and are evaluated on an individual basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit at December 31, 2022 and 2021. There were no loans rated “Doubtful” as of either period.


December 31, 2022	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
(Dollars in thousands)
Commercial	$	30,121	$	16,058	$	22,853	$	992	$	122	$	993	$	71,139
Real estate construction and land		-		-		35,258		342		532		1,409		37,541
1-4 family residential mortgages		-		-		308,041		7,935		5,431		1,778		323,185
Commercial mortgages		-		-		408,513		34,828		3,872		11,912		459,125
Consumer		461		17,544		26,326		977		22		95		45,425
Total Loans	$	30,582	$	33,602	$	800,991	$	45,074	$	9,979	$	16,187	$	936,415


December 31, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
(Dollars in thousands)
Commercial	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696
Real estate construction and land		-		-		51,098	7360			2,849		18,024		79,331
1-4 family residential mortgages		-		2,030		334,300		5,013		1,520		15,285		358,148
Commercial mortgages		-		-		382,108		61,563		8,530		21,431		473,632
Consumer		524		18,535		32,821		1,225		179		120		53,404
Total Loans	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211

In addition to the historical factors, the adequacy of the Company’s allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

Changes in national and local economic conditions, including the condition of various market segments;

Changes in the value of underlying collateral;

Changes in volume of classified assets, measured as a percentage of capital;

Changes in volume of delinquent loans;

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

Changes in lending policies and procedures, including underwriting standards;

Changes in the experience, ability and depth of lending management and staff; and

Changes in the level of policy exceptions.

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of the various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the market and history of the Company’s loan losses.

During these evaluations, particular characteristics associated with a segment of the loan portfolio are also considered. These characteristics are detailed below:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•

Commercial loans not secured by real estate carry risks associated with the successful operation of a business, and the repayments of these loans depend on the profitability and cash flows of the business. Additional risk relates to the value of collateral where depreciation occurs and the valuation is less precise.

•

Commercial loans purchased from the syndicated loan market generally represent shared national credits, which are participations in loans or loan commitments that are shared by three or more banks. Included in the Company’s shared national credit portfolio are purchased participations and assignments in leveraged lending transactions. Leveraged lending transactions are generally used to support a merger- or acquisition-related transaction, to back a recapitalization of a company's balance sheet or to refinance debt. When considering a participation in the leveraged lending market, the Company participates only in first lien senior secured term loans. To further minimize risk, the Company has developed policies to limit overall credit exposure to the syndicated market as a whole, as well as limits by industry and borrower.

•

Loans secured by commercial real estate also carry risks associated with the success of the business and the ability to generate a positive cash flow sufficient to service debts. Real estate security diminishes risks only to the extent that a market exists for the subject collateral.

•

Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral, such as automobiles which may depreciate more rapidly than other assets. In addition, these loans may be unsecured. Consumer loans are more likely than real estate loans to be immediately affected in an adverse manner by job loss, divorce, illness or personal bankruptcy. Consumer loans are further segmented into consumer revolving lines, all other consumer loans and student loans purchased.

•

Real estate secured construction loans carry risks that a project will not be completed as scheduled and budgeted and that the value of the collateral may, at any point, be less than the principal amount of the loan. Additional risks may occur if the general contractor, who may not be a loan customer, is unable to finish the project as planned due to financial pressures unrelated to the project.

•

Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral. In addition, for investor-owned residential real estate, the repayment may be volatile as leases are generally shorter term in nature.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired totaling $1.3 million at December 31, 2022, there was $23 thousand in valuation allowance on these loans after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the customer.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Loan Losses Rollforward by Portfolio Segment

As of and for the year ended December 31, 2022


(Dollars in thousands)	Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages			Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		(600	)		-			-			(655	)		(1,255	)
Recoveries		519			9			11			178			717
Provision for (recovery of) loan losses		23			(187	)		(51	)		321			106
Ending Balance	$	194		$	221		$	4,438		$	699		$	5,552

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	23		$	23
Collectively evaluated for impairment		194			221			4,438			676			5,529
Acquired loans - purchased credit impaired		-			-			-			-			-

Loans:
Individually evaluated for impairment	$	-		$	-		$	583		$	700		$	1,283
Collectively evaluated for impairment		70,509			36,080			751,823			44,653			903,065
Acquired loans - purchased credit impaired		630			1,461			29,904			72			32,067
Ending Balance	$	71,139		$	37,541		$	782,310		$	45,425		$	936,415

As of and for the year ended December 31, 2021


(Dollars in thousands)	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs		(147	)		-		-		(688	)		(835	)
Recoveries		191			12		6		141			350
Provision for (recovery of) loan losses		(1	)		227		575		213			1,014
Ending Balance	$	252		$	399	$	4,478	$	855		$	5,984

Ending Balance:
Individually evaluated for impairment	$	-		$	-	$	-	$	6		$	6
Collectively evaluated for impairment		252			399		4,478		849			5,978
Acquired loans - purchased credit impaired		-			-		-		-			-

Loans:
Individually evaluated for impairment	$	-		$	-	$	594	$	935		$	1,529
Collectively evaluated for impairment		95,702			60,755		786,491		52,351			995,299
Acquired loans - purchased credit impaired		994			18,576		44,695		118			64,383
Ending Balance	$	96,696		$	79,331	$	831,780	$	53,404		$	1,061,211

Note 15 – Capital Requirements

The Bank is 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 the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. However, in August 2018, the Federal Reserve Board issued an interim final rule, which was effective August 30, 2018, that expanded its small bank holding company policy statement (the “SBHC Policy Statement”) to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules (subsidiary depository institutions of qualifying bank holding companies are still subject to capital requirements). The Company currently has less than $3 billion in total consolidated assets and would likely qualify under the revised SBHC Policy Statement. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules.

With respect to the Bank, the PCA regulations, to be “well capitalized” under the revised regulations, a bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

The Bank’s capital ratios remained well above the levels designated by bank regulators as “well capitalized” at December 31, 2022 and 2021. There are no conditions or events since that management believes have changed the institution’s category.

On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the CBLR framework, as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

have met the well-capitalized ratio requirements under the PCA regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was available for banks to use in their March 31, 2020 Call Report and going forward. The Bank decided not to opt into the CBLR framework.

The Bank calculates its regulatory capital under the Basel III regulatory capital framework. The table below summarizes the Bank’s regulatory capital and related ratios for the periods presented:


December 31, 2022											Minimum
(Dollars in thousands)											To Be Well Capitalized
						Minimum Capital					Under Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital
(To Risk Weighted Assets)
Bank	$	174,151		17.38	%	$	80,148		8.00	%	$	100,184		10.00	%

Common Equity Tier 1 Capital
(To Risk Weighted Assets)
Bank	$	168,539		16.82	%	$	45,083		4.50	%	$	65,120		6.50	%

Tier 1 Capital
(To Risk Weighted Assets)
Bank	$	168,539		16.82	%	$	60,111		6.00	%	$	80,148		8.00	%

Tier 1 Capital
(To Average Assets)
Bank	$	168,539		9.62	%	$	70,078		4.00	%	$	87,598		5.00	%


December 31, 2021											Minimum
(Dollars in thousands)											To Be Well Capitalized
						Minimum Capital					Under Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital
(To Risk Weighted Assets)
Bank	$	155,092		14.72	%	$	84,312		8.00	%	$	105,390		10.00	%

Common Equity Tier 1 Capital
(To Risk Weighted Assets)
Bank	$	149,078		14.15	%	$	47,425		4.50	%	$	68,503		6.50	%

Tier 1 Capital
(To Risk Weighted Assets)
Bank	$	149,078		14.15	%	$	63,234		6.00	%	$	84,312		8.00	%

Tier 1 Capital
(To Average Assets)
Bank	$	149,078		7.69	%	$	77,549		4.00	%	$	96,936		5.00	%

Note 17 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topic of FASB ASC 825, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 - Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interest rate swaps are classified as Level 2. Additional information on interest rate swaps is presented in Note 23 – Derivative Instruments and Hedging Activities.

The following tables present the balances measured at fair value on a recurring basis:


			Fair Value Measurements at December 31, 2022 Using:
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury securities	$	242,470	$	-	$	242,470	$	-
U.S. Government agencies		28,755		-		28,755		-
Mortgage-backed securities/CMOs		167,076		-		167,076		-
Corporate bonds		18,729		-		18,729		-
Municipal bonds		81,156		-		81,156		-
Total securities available for sale	$	538,186	$	-	$	538,186	$	-

Interest rate swaps		506		-		506		-
Total assets at fair value	$	538,692	$	-	$	538,692	$	-


			Fair Value Measurements at December 31, 2021 Using:
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	31,581	$	-	$	31,581	$	-
Mortgage-backed securities/CMOs		170,964		-		170,964		-
Municipal bonds		101,272		-		101,272		-
Total securities available for sale	$	303,817	$	-	$	303,817	$	-

Liabilities:
Interest rate swaps	$	641		-	$	641		-
Total liabilities at fair value	$	641	$	-	$	641	$	-

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or writedowns of individual assets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other real estate owned

Other real estate owned is measured at fair value less costs to sell, based on an existing contract (Level 3). OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. The Company had no OREO as of December 31, 2022 and had one property valued at $611 thousand as of December 31, 2021.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant (Level 2) or the net book value on the applicable business’ financial statements if not considered significant (Level 3). Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses in the Consolidated Statements of Income. The Company had $1.3 million and $1.5 million in impaired loans as of December 31, 2022 and December 31, 2021, respectively. All impaired loans were measured based on expected cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.

There were no assets to report that were measured at fair value on a nonrecurring basis as of December 31, 2022. OREO of $611 thousand was reported as of December 31, 2021 and measured on a nonrecurring basis.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying values and estimated fair values of the Company’s financial instruments are as follows:


			Fair Value Measurements at December 31, 2022 Using:
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	40,136	$	40,136	$	-	$	-	$	40,136
Available for sale securities		538,186		-		538,186		-		538,186
Restricted securities		5,137		-		5,137		-		5,137
Loans, net		930,863		-		-		890,929		890,929
Assets held for sale		965		-		965		-		965
Bank owned life insurance		38,552		-		38,552		-		38,552
Accrued interest receivable		4,879		-		2,265		2,614		4,879
Interest rate swap		506		-		506		-		506

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,363,232	$	-	$	1,363,232	$	-	$	1,363,232
Certificates of deposit		115,106		-		109,260		-		109,260
Junior subordinated debt		3,413		-		3,413		-		3,413
Accrued interest payable		157		-		157		-		157

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			Fair Value Measurements at December 31, 2021 Using:
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	508,840	$	508,840	$	-	$	-	$	508,840
Available for sale securities		303,817		-		303,817		-		303,817
Restricted securities		4,950		-		4,950		-		4,950
Loans, net		1,055,227		-		-		1,059,650		1,059,650
Bank owned life insurance		31,234		-		31,234		-		31,234
Accrued interest receivable		3,778		-		1,252		2,526		3,778

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125
Certificates of deposit		162,045		-		161,850		-		161,850
Junior subordinated debt		3,367		-		3,367		-		3,367
Accrued interest payable		174		-		174		-		174
Interest rate swaps		641		-		641		-		641

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 19 – Stock Incentive Plans

At the Annual Shareholders Meeting on June 23, 2022, shareholders approved the Virginia National Bankshares Corporation 2022 Stock Incentive Plan. The 2022 Plan made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan made available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2022 Plan and the 2014 Plan provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. No new grants can be issued under the 2005 Plan as this plan has expired.

For the 2022 Plan, the option price for any stock options cannot be less that the fair value of the Company’s stock on the grant date. In addition, 95% of the common stock authorized for issuance must have a vesting or exercise schedule of at least one year. For the 2014 Plan and the 2005 Plan, the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted and nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of December 31, 2022. Share data and exercise price range per share have been adjusted to reflect prior stock dividends. Although the 2005 Plan has expired and no new grants will be issued under this plan, there were shares issued before the plan expired which are still outstanding as shown below.


	2022 Plan		2014 Plan			2005 Plan
Aggregate shares issuable		150,000		275,625			253,575
Options issued, net of forfeited and expired options		-		(170,106	)		(59,870	)
Unrestricted stock issued		-		(11,635	)		-
Restricted stock grants issued		-		(75,853	)		-
Cancelled due to Plan expiration		-		-			(193,705	)
Remaining available for grant		150,000		18,031			-

Stock grants issued and outstanding:
Total vested and unvested shares		-		87,488			-
Fully vested shares		-		35,824			-

Option grants issued and outstanding:
Total vested and unvested shares		-		166,901			1,379
Fully vested shares		-		91,148			1,379

Exercise price range		-	$23.75 to $42.62			$	13.69

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements for 2022 and prior years include stock options, unrestricted stock and restricted stock. All stock-based payments to employees are required to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable vesting period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

Changes in the stock options outstanding related to all of the Plans are summarized below.


	December 31, 2022
(Dollars in thousands except weighted average data)	Number of Options			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at January 1, 2022		169,280		$	33.89		$	962
Issued		-			-
Exercised		(1,000	)		(23.75	)
Expired		-			-
Outstanding at December 31, 2022		168,280		$	33.95		$	830
Options exercisable at December 31, 2022		92,527		$	36.20		$	340

For the 1,000 options exercised during the year ended December 31, 2022, there was no intrinsic value for options exercised.

For the years ended December 31, 2022 and 2021, the Company recognized $167 thousand and $145 thousand, respectively, in compensation expense for stock options. As of December 31, 2022, there was $262 thousand in unrecognized compensation expense for stock options remaining to be recognized in future reporting periods through 2026. The fair value of any option grant is estimated at the grant date using the Black-Scholes pricing model.

There were no stock option grants issued during the year ended December 31, 2022. There were stock option grants of 23,600 shares issued during the year ended December 31, 2021, and the fair value on each option granted was estimated based on the assumptions noted in the following table:


	For the year ended
	December 31, 2021
Expected volatility1		25.16	%
Expected dividends2		3.00	%
Expected term (in years)3	5.5 - 6.3
Risk-free rate4		1.19	%

1 Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

2 Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

3 Based on the average of the contractual life and vesting period for the respective option.

4 Based upon an interpolated US Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary information pertaining to options outstanding at December 31, 2022, as adjusted for Stock Dividends, is as follows:


	Options Outstanding					Options Exercisable
Exercise Price	Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$13.69 to $20.00		1,379	0.1 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		65,000	7.5 Years	24.65			25,400		24.67
$30.01 to $40.00		44,420	7.6 Years	36.97			19,772		37.65
$40.01 to $42.62		57,481	5.4 Years	42.62			45,977		42.62
Total		168,280	6.8 Years	$	33.95		92,528	$	36.20

Stock Grants

Restricted stock grants – During 2022, 28,536 shares of restricted stock were granted to employees and non-employee directors, vesting over a four- or five-year period. During 2021, 21,749 shares of restricted stock were granted. In 2022 and 2021, restricted stock grants resulted in an associated expense of $520 thousand and $376 thousand, respectively. As of December 31, 2022, there was $1.3 million in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2027.


	December 31, 2022
(Dollars in thousands except weighted average data)	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2022		37,011		$	28.96	$	1,367
Issued		28,536			34.70		1,046
Vested		(13,283	)		29.07		(498	)
Forfeited		(600	)		33.74		(22	)
Nonvested at December 31, 2022		51,664		$	32.05	$	1,894

The weighted average period over which nonvested restricted stock grants are expected to be recognized is 1.7 years.

Note 24 – Segment Reporting

Virginia National Bankshares Corporation has four reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

The four reportable segments are:

•

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

•

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offered wealth management and investment advisory services. Revenue for this segment was generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions. The Bank sold this business line effective December 19, 2022.

•

VNB Trust and Estate Services – VNB Trust and Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees which are derived from Assets Under Management. Investment management services currently are offered through in-house and third-party managers. In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust and Estate Services. More information on royalty income and the related sale can be found under Note 1 - Summary of Significant Accounting Policies.

•

Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

investment strategy. Revenue for this segment is generated from management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the non-bank segments. For both the years ended December 31, 2022 and 2021, management fees of $100 thousand were charged to the non-bank segments and eliminated in consolidated totals.

Segment information for the years ended December 31, 2022 and 2021 is shown in the following tables. Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker. Note also that the Bank sold the Sturman Wealth Advisors business line effective December 19, 2022.


2022 (Dollars in thousands)	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital		Consolidated
Net interest income	$	53,547	$	-	$	-	$	-	$	53,547
Provision for loan losses		106		-		-		-		106
Noninterest income		7,936		770		3,937		1,018		13,661
Noninterest expense		35,097		615		1,957		887		38,556
Income before income taxes		26,280		155		1,980		131		28,546
Provision for income taxes		4,631		33		416		28		5,108
Net income	$	21,649	$	122	$	1,564	$	103	$	23,438



2021 (Dollars in thousands)	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital		Consolidated
Net interest income	$	44,988	$	-	$	-	$	-	$	44,988
Provision for loan losses		1,014		-		-		-		1,014
Noninterest income		5,704		1,213		1,969		1,579		10,465
Noninterest expense		39,164		725		1,764		869		42,522
Income before income taxes		10,514		488		205		710		11,917
Provision for income taxes		1,550		104		43		149		1,846
Net income (loss)	$	8,964	$	384	$	162	$	561	$	10,071

Note 25 – Condensed Parent Company Financial Statements

Condensed financial statements pertaining only to the Parent Company are presented below. The investment in subsidiary is accounted for using the equity method of accounting.

Cash dividend payments authorized by the Bank’s Board of Directors were paid to the Parent Company in 2022 and 2021, totaling $7.5 million and $7.6 million, respectively.

The payment of dividends by the Bank is restricted by various regulatory limitations. Banking regulations also prohibit extensions of credit to the parent company unless appropriately secured by assets. For more detail on dividends, see Note 16 – Dividend Restrictions.

Condensed Parent Company Only


BALANCE SHEETS
(Dollars in thousands)	December 31, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	1,807	$	1,417
Investment securities		63		64
Investments in subsidiaries		134,068		163,712
Other assets		941		603
Total assets	$	136,879	$	165,796

LIABILITIES & SHAREHOLDERS' EQUITY
Junior subordinated debt	$	3,413	$	3,367
Other liabilities		50		442
Stockholders' equity		133,416		161,987
Total liabilities and stockholders' equity	$	136,879	$	165,796


STATEMENTS OF INCOME
(Dollars in thousands)	For the years ended
	December 31, 2022			December 31, 2021

Dividends from subsidiary	$	7,500		$	7,600
Net interest expense		(190	)		(148	)
Noninterest expense		1,418			2,325
Income before income taxes	$	5,892		$	5,127
Income tax (benefit)		(313	)		(353	)
Income before equity in undistributed earnings of subsidiaries	$	6,205		$	5,480
Equity in undistributed earnings of subsidiaries		17,233			4,591
Net income	$	23,438		$	10,071

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Parent Company Only (Continued)


STATEMENTS OF CASH FLOWS
(Dollars in thousands)	For the years ended
	December 31, 2022			December 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	23,438		$	10,071
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(17,233	)		(4,591	)
Net accretion of certain acquisition-related adjustments		46			33
Amortization		55			-
Deferred tax expense		298			28
Stock option & restricted stock grant expense		687			521
Increase in other assets		(140	)		(365	)
Increase (decrease) in other liabilities		(392	)		411
Net cash provided by operating activities	$	6,759		$	6,108

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised		23			30
Cash paid in lieu for fractional shares at acquisition		-			(4	)
Dividends paid		(6,392	)		(6,408	)
Net cash used in financing activities	$	(6,369	)	$	(6,382	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		390			(274	)

CASH AND CASH EQUIVALENTS
Beginning of period		1,417			1,691
End of period	$	1,807		$	1,417

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Evaluation of Disclosure Controls and Procedures. The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. 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.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. This assessment was based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14, 2013. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the internal control over financial reporting was effective based on those criteria.

Changes in Internal Control over Financial Reporting. There was no change in the internal control over financial reporting that occurred during the fourth quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting. This annual report does not include an attestation report of the Company’s independent registered public accounting firm, Yount, Hyde & Barbour, P.C., (U.S. PCAOB Auditor Firm I.D.: 613), regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Information is incorporated by reference to the information that appears under the headings “Proposal 1 – Election of Directors,” “Related Person Transactions and Other Information,” “Executive Compensation – Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” and “Information about the Board of Directors and Board Committees” contained in the Company’s Definitive Proxy Statement to be used in connection with the Company’s 2023 Annual Meeting of Shareholders (“Definitive Proxy Statement”).

Information is incorporated by reference to the information that appears under the headings “Executive Compensation – Executive Officers” and “Information about the Board of Directors and Board Committees – Compensation of Directors” contained in of the Company’s Definitive Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Other than as set forth below, this information is incorporated by reference from Note 19, “Stock Incentive Plans,” in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data of this Form 10-K and from the “Beneficial Ownership of Company Common Stock” section of the Company’s Definitive Proxy Statement.

The following table summarizes information, as of December 31, 2022, relating to the Company’s Stock Incentive Plans:

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

This information is incorporated by reference from the “Information about the Board of Directors and Board Committees” and “Related Person Transactions and Other Information” sections of the Company’s Definitive Proxy Statement. For further information, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data in this Form 10-K.

This information is incorporated by reference from the “Independent Auditors” section of the Company’s Definitive Proxy Statement.

The following consolidated financial statements and reports of independent registered public accountants of the Company are in Part II, Item 8. Financial Statements and Supplementary Data:

All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated statements or notes thereto.

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.

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 on March 29, 2023.


Virginia	46-2331578
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
404 People Place Charlottesville, VA	22911
(Address of principal executive offices)	(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	VABK	The Nasdaq Capital Market


2005 Plan	-	2005 Stock Incentive Plan
2014 Plan	-	2014 Stock Incentive Plan
2022 Plan	-	2022 Stock Incentive Plan
ACH	-	Automated Clearing House
ACL	-	Allowance for credit losses
Acquired Loans	-	Loans acquired from Fauquier
AFS	-	Available for sale
ALCO	-	Asset Liability Committee
ALLL	-	Allowance for loan and lease losses
ASC	-	Accounting Standards Codification
ASC 326	-	ASU 2016-13, Financial Instruments and Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASC 350	-	ASC 350, Goodwill and Other Intangible Assets
ASC 718	-	ASC 718, Compensation - Stock Compensation
ASC 820	-	ASC 820, Fair Value Measurements and Disclosures
ASU	-	Accounting Standards Update
ATM	-	Automated teller machine
the Bank	-	Virginia National Bank
BHCA	-	Bank Holding Company Act of 1956
BOLI	-	Bank-owned life insurance
bps	-	Basis points
CAA	-	Consolidated Appropriations Act, 2021
CARES Act	-	Coronavirus Aid, Relief, and Economic Security Act
CAMELS	-	International rating system bank supervisory authorities use to rate financial institutions
CBLR	-	Community Bank Leverage Ratio
CDARS™	-	Certificates of Deposit Account Registry Service
CECL	-	Current expected credit losses
CET1	-	Common equity tier 1
CFPB	-	Consumer Financial Protection Bureau
Code	-	Internal Revenue Code of 1986, as amended
the Company	-	Virginia National Bankshares Corporation and its subsidiaries
COVID-19	-	Novel coronavirus disease
CRA	-	Community Reinvestment Act of 1977
DEI	-	Diversity, Equity, and Inclusion
DIF	-	Deposit Insurance Fund
Dodd-Frank Act	-	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Effective Date	-	April 1, 2021C
EGRRCPA	-	Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
EPS	-	Earnings per common share
Exchange Act	-	Securities Exchange Act of 1934, as amended
Fauquier	-	Fauquier Bankshares, Inc. and its subsidiaries
FASB	-	Financial Accounting Standards Board
FDIA	-	Federal Deposit Insurance Act
FDIC	-	Federal Deposit Insurance Corporation
FDICIA	-	Federal Deposit Insurance Corporation Improvement Act
Federal Reserve	-	Board of Governors of the Federal Reserve System
Federal Reserve Act	-	Federal Reserve Act of 1913, as amended
Federal Reserve Bank or FRB	-	Federal Reserve Bank of Richmond
FHLB	-	Federal Home Loan Bank of Atlanta
FOMC	-	Federal Reserve Board’s Federal Open Market Committee
Form 10-K	-	Annual Report on Form 10-K for the year ended December 31, 2021
FTE	-	Fully taxable equivalent
GAAP or U.S. GAAP	-	Accounting principles generally accepted in the United States


									Dividends Declared
	2022				2021				2022		2021
	High		Low		High		Low
First Quarter	$	40.00	$	34.00	$	31.05	$	27.00	$	0.30	$	0.30
Second Quarter	$	35.53	$	27.05	$	39.18	$	30.35	$	0.30	$	0.30
Third Quarter	$	34.50	$	29.85	$	39.74	$	33.71	$	0.30	$	0.30
Fourth Quarter	$	36.93	$	29.30	$	38.00	$	33.51	$	0.30	$	0.30
Total									$	1.20	$	1.20


(Dollars in thousands, except per share data)
Reconcilement of Non-GAAP Measures:	Year Ended December 31
	2022			2021
Performance measures
Return on average assets		1.30	%		0.61	%
Impact of merger expenses 1		0.00	%		0.33	%
Operating return on average assets 1 (non-GAAP)		1.30	%		0.94	%

Return on average equity		16.61	%		7.17	%
Impact of merger expenses 1		0.00	%		3.91	%
Operating return on average equity 1 (non-GAAP)		16.61	%		11.08	%

Net income	$	23,438		$	10,071
Impact of merger expenses 1		-			5,495
Net income, excluding merger expenses 1 (non-GAAP)	$	23,438		$	15,566

Net income per share, diluted	$	4.38		$	2.14
Impact of merger expenses 1		-			1.17
Net income per share, excluding merger expenses 1 (non-GAAP)	$	4.38		$	3.32

Fully taxable-equivalent measures
Net interest income	$	53,547		$	44,988
Fully taxable-equivalent adjustment		316			271
Net interest income (FTE) 2	$	53,863		$	45,259

Efficiency ratio 3		57.4	%		76.7	%
Impact of FTE adjustment		-0.3	%		-0.4	%
Efficiency ratio (FTE) 4		57.1	%		76.3	%

Net interest margin		3.19	%		2.92	%
Fully tax-equivalent adjustment		0.02	%		0.02	%
Net interest margin (FTE) 2		3.21	%		2.94	%

Other financial measures
ALLL to total loans		0.59	%		0.56	%
Impact of acquired loans and fair value mark		0.31	%		0.39	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.90	%		0.95	%

ALLL to total loans		0.59	%		0.56	%
Fair value mark to total loans		1.70	%		1.74	%
ALLL + fair value mark to total loans (non-GAAP)		2.29	%		2.30	%

Book value per share	$	25.00		$	30.50
Impact of intangible assets		(1.23	)		(3.14	)
Tangible book value per share (non-GAAP)	$	23.76		$	27.36


☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐


	INDEX
		Page

	Part I

Item 1	Business	7

Item 1A	Risk Factors	18

Item 1B	Unresolved Staff Comments	29

Item 2	Properties	29

Item 3	Legal Proceedings	29

Item 4	Mine Safety Disclosures	29

	Part II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30

Item 6	[Reserved]	30

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 7A	Quantitative and Qualitative Disclosures About Market Risk	54

Item 8	Financial Statements and Supplementary Data	55

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	108

Item 9A	Controls and Procedures	108

Item 9B	Other Information	108

Item 9C	Disclosure Regarding Foreign Jurisdictions That Prevent Inspections	108

	Part III

Item 10	Directors, Executive Officers and Corporate Governance	109

Item 11	Executive Compensation	109

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	109

Item 13	Certain Relationships and Related Party Transactions and Director Independence	109

Item 14	Principal Accountant Fees and Services	109

	Part IV

Item 15	Exhibits, Financial Statement Schedules	110

Item 16	Form 10-K Summary	111

Signatures		112


ICS®	-	Insured Cash Sweep®
LIBOR	-	London Interbank Offering Rate
Masonry Capital	-	Masonry Capital Management, LLC
MBS	-	Mortgage-Backed Securities
Merger	-	Mergers of Fauquier Bankshares, Inc. and The Fauquier Bank with and into the Company and the Bank, respectively
Merger Agreement	-	Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger
Nasdaq	-	The Nasdaq Stock Market, LLC
NOW	-	Negotiable order of withdrawal
NPA	-	Nonperforming assets
OCC	-	Office of the Comptroller of the Currency
OFAC	-	Office of Foreign Assets Control
OREO	-	Other real estate owned
OTTI	-	Other than temporary impairment
PCA	-	Prompt Corrective Action
PCI	-	Purchased credit impaired
PII	-	Personally identifiable information
PPP	-	Paycheck Protection Program
Reorganization	-	Reorganization Agreement and Plan of Share Exchange dated March 6, 2013 between the Bank and the Company
SBA	-	Small Business Administration
SCC	-	Virginia State Corporation Commission
SEC	-	U.S. Securities and Exchange Commission
Securities Act	-	Securities Act of 1933, as amended
SOFR	-	Secured Overnight Funding Rate
Sturman Wealth	-	Sturman Wealth Advisors
TDR	-	Troubled debt restructuring
TFB	-	The Fauquier Bank
Topic 606	-	ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”
VNBTrust	-	VNBTrust, National Association


	2022								2021									2020
				Interest		Average						Interest			Average						Interest		Average
(Dollars in thousands)	Average Balance			Income Expense		Yield/ Cost			Average Balance			Income Expense			Yield/ Cost			Average Balance			Income Expense		Yield/ Cost
ASSETS
Interest earning assets:
Securities
Taxable securities	$	373,680		$	8,696		2.33	%	$	198,450		$	2,980			1.50	%	$	101,199		$	1,706		1.69	%
Tax exempt securities 1		65,861			1,582		2.40	%		53,716			1,292			2.41	%		20,195			601		2.98	%
Total securities 1		439,541			10,278		2.34	%		252,166			4,272			1.69	%		121,394			2,307		1.90	%
Loans:
Real estate		847,238			38,011		4.49	%		808,707			35,303			4.37	%		404,391			16,680		4.12	%
Commercial		81,410			3,583		4.40	%		145,462			5,731			3.94	%		132,282			5,115		3.87	%
Consumer		49,619			2,637		5.31	%		63,039			2,865			4.54	%		64,181			3,150		4.91	%
Total Loans		978,267			44,231		4.52	%		1,017,208			43,899			4.32	%		600,854			24,945		4.15	%
Fed funds sold		100,033			1,088		1.09	%		109,104			139			0.13	%		34,130			104		0.30	%
Other interest-bearing deposits		161,260			1,467		0.91	%		160,960			233			0.14	%		-			-	-
Total earning assets		1,679,101			57,064		3.40	%		1,539,438			48,543			3.15	%		756,378			27,356		3.62	%
Less: Allowance for loan losses		(5,702	)							(5,297	)								(4,886	)
Total non-earning assets		124,525								115,193									46,186
Total assets	$	1,797,924							$	1,649,334								$	797,678

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits:
Interest checking	$	409,504		$	230		0.06	%	$	355,419		$	261			0.07	%	$	132,465		$	120		0.09	%
Money market and savings deposits		563,374			2,097		0.37	%		529,027			2,047			0.39	%		261,370			1,704		0.65	%
Time deposits		144,564			657		0.45	%		152,211			1,108			0.73	%		100,846			1,454		1.44	%
Total interest-bearing deposits		1,117,442			2,984		0.27	%		1,036,657			3,416			0.33	%		494,681			3,278		0.66	%

Borrowings		-			-		-			23,700			(280	)		-1.18	%		15,419			73		0.47	%
Junior subordinated debt		3,389			200		5.90	%		2,565			148			5.77	%		-			-		-
Total interest-bearing liabilities		1,120,831			3,184		0.28	%		1,062,922			3,284			0.31	%		510,100			3,351		0.66	%
Non-interest-bearing liabilities:
Demand deposits		526,389								434,989									203,143
Other liabilities		9,581								10,875									4,697
Total liabilities		1,656,801								1,508,786									717,940
Shareholders' equity		141,123								140,548									79,738
Total liabilities & shareholders' equity	$	1,797,924							$	1,649,334								$	797,678
Net interest income (FTE)				$	53,880							$	45,259								$	24,005
Interest rate spread 2							3.12	%								2.84	%							2.96	%
Cost of funds							0.19	%								0.22	%							0.47	%
Interest expense as a percentage of average earning assets							0.19	%								0.21	%							0.44	%
Net interest margin (FTE) 3							3.21	%								2.94	%							3.17	%


	Change due to:						Increase/
(Dollars in thousands)	Volume			Rate			(Decrease)
Assets:
Securities	$	3,815		$	2,191		$	6,006
Loans:
Real estate		1,833			875			2,708
Commercial		(2,780	)		632			(2,148	)
Consumer		(669	)		441			(228	)
Total loans		(1,616	)		1,948			332
Federal funds sold		(13	)		962			949
Other interest-bearing deposits		(21	)		1,255			1,234
Total earning assets	$	2,165		$	6,356		$	8,521
Liabilities and Shareholders' equity:
Interest-bearing deposits:
Interest checking	$	36			(67	)	$	(31	)
Money market and savings		130			(80	)		50
Time deposits		(53	)		(398	)		(451	)
Total interest-bearing deposits		113			(545	)		(432	)
Short term borrowings		280			-			280
Junior subordinated debt		14			38			52
Total interest-bearing liabilities		407			(507	)		(100	)
Change in net interest income	$	1,758		$	6,863		$	8,621


(Dollars in thousands)	For the year ended December 31				Variance
	2022		2021		$			%
Noninterest income:
Trust and estate services fees	$	1,423	$	1,929	$	(506	)		-26.2	%
Performance fees		265		822		(557	)		-67.8	%
Investment management income		752		757		(5	)		-0.7	%
Advisory and brokerage income		770		1,154		(384	)		-33.3	%
Royalty income		115		40		75			187.5	%
Deposit account fees		1,799		1,459		340			23.3	%
Debit/credit card and ATM fees		2,794		2,070		724			35.0	%
Bank owned life insurance income		963		708		255			36.0	%
Resolution of commercial dispute		2,400		-		2,400			-
Gain on sale of business line		404		-		404			-
Gains (losses) on sale of assets, net		1,043		-		1,043			-
Other		933		1,526		(593	)		-38.9	%
Total noninterest income	$	13,661	$	10,465	$	3,196			30.5	%


Contractual Maturities of Debt Securities at December 31, 2022

(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield (FTE)			% of Debt Securities
U.S. treasury securities
One year or less	$	192,843	$	191,180		2.63	%
After one year to five years		52,740		51,290		2.72	%
	$	245,583	$	242,470		2.65	%		40.9	%
U.S. government-sponsored agencies:
After one to five years	$	900	$	808		2.00	%
After five years to ten years		30,382		25,060		1.53	%
Ten years or more		4,000		2,887		1.79	%
	$	35,282	$	28,755		1.57	%		5.9	%
Mortgage-backed securities/CMOs
One year or less	$	1,515	$	1,485		0.35	%
After one year to five years		9,553		8,987		1.28	%
After five years to ten years		3,096		2,779		1.64	%
Ten years or more		180,800		153,825		1.97	%
	$	194,964	$	167,076		1.91	%		32.5	%
Corporate bonds
After one year to five years	$	17,682	$	16,933		3.37	%
After five to ten years		1,899		1,796		3.31	%
	$	19,581	$	18,729		3.36	%		3.3	%
Municipal bonds
After one to five years	$	2,472	$	2,367		3.48	%
After five to ten years		17,665		16,151		1.63	%
Ten years or more		84,694		62,638		2.47	%
	$	104,831	$	81,156		2.33	%		17.4	%

Total Debt Securities Available for Sale	$	600,241	$	538,186		2.37	%		100.0	%


(Dollars in thousands)	As of December 31,
	2022			2021
Commercial loans	$	71,139		$	96,696
Real estate mortgage:
Construction and land		37,541			79,331
1-4 family residential mortgages		323,185			358,148
Commercial		459,125			473,632
Total real estate mortgage	$	819,851		$	911,111
Consumer		45,425			53,404
Total loans	$	936,415		$	1,061,211
Less: Allowance for loan losses		(5,552	)		(5,984	)
Net loans	$	930,863		$	1,055,227


(Dollars in thousands)	December 31,		December 31,		Variance
	2022		2021		$			%
Noninterest expense:
Salaries and employee benefits	$	17,260	$	16,129	$	1,131			7.0	%
Net occupancy		4,526		3,575		951			26.6	%
Equipment		897		966		(69	)		-7.1	%
Bank franchise tax		1,216		1,136		80			7.0	%
Computer software		1,136		1,020		116			11.4	%
Data processing		2,727		2,793		(66	)		-2.4	%
FDIC deposit insurance assessment		511		858		(347	)		-40.4	%
Marketing, advertising and promotion		1,224		922		302			32.8	%
Merger and merger-related expenses		-		7,423		(7,423	)		-100.0	%
Plastics expense		394		978		(584	)		-59.7	%
Professional fees		1,357		1,117		240			21.5	%
Core deposit intangible amortization		1,684		1,389		295		--
Impairment on assets held for sale		242		-		242			0.0	%
Other		5,382		4,216		1,166			27.7	%
Total noninterest expense	$	38,556	$	42,522	$	(3,966	)		-9.3	%


(Dollars in thousands)	As of December 31, 2022
	One Year or Less		After One to Five Years		After Five to 15 Years		After 15 Years		Total
Fixed Rate:
Commercial loans	$	5,254	$	15,610	$	4,769	$	26	$	25,659
Real estate construction and land		4,106		9,173		5,657		-		18,936
1-4 family residential mortgages		5,150		16,277		96,243		63,477		181,147
Commercial mortgages		20,785		126,007		44,826		-		191,618
Consumer		3,570		11,288		798		248		15,904
Total fixed rate loans	$	38,865	$	178,355	$	152,293	$	63,751	$	433,264
Variable Rate:
Commercial loans	$	22,193	$	19,650	$	3,637	$	-	$	45,480
Real estate construction and land		3,613		8,807		6,185		-		18,605
1-4 family residential mortgages		43,517		93,403		5,118		-		142,038
Commercial mortgages		101,730		148,806		16,971		-		267,507
Consumer		29,521		-		-		-		29,521
Total variable rate loans	$	200,574	$	270,666	$	31,911	$	-	$	503,151
Total loans	$	239,439	$	449,021	$	184,204	$	63,751	$	936,415


(Dollars in thousands)
	Amount		Percentage
Three months or less	$	18,657		64.49	%
Over three months to six months		3,373		11.66	%
Over six months to one year		1,395		4.82	%
Over one year		5,505		19.03	%
Totals	$	28,930		100.00	%


	Within			90 to 365			One to Four			Over			Non Rate
	90 Days			Days			Years			Four Years			Sensitive			Total
Assets
Loans	$	218,098		$	104,438		$	453,756		$	173,673		$	(13,550	)	$	936,415
Investment securities		57,122			187,914			146,348			213,930			(61,991	)		543,323
Federal funds sold		45			-			-			-			-			45
Interest-bearing deposits in other banks		19,098			-			-			-			-			19,098
Non-interest-earning assets and allowance for loan losses		-			-			-			-			123,972			123,972
Total assets	$	294,363		$	292,352		$	600,104		$	387,603		$	48,431		$	1,622,853
Liabilities and Shareholders' Equity
Interest checking	$	10,000		$	29,998		$	119,995		$	239,990		$	-		$	399,983
Money market and savings deposits		14,208			99,449			113,656			240,287			-			467,600
Time deposits		5,331			86,458			21,898			1,409			10			115,106
Junior subordinated debt		-			3,413			-			-			-			3,413
Non-interest bearing liabilities and shareholders' equity		-			-			-			-			636,751			636,751
Total liabilities and shareholders' equity	$	29,539		$	219,318		$	255,549		$	481,686		$	636,761		$	1,622,853
Period gap	$	264,824		$	73,034		$	344,555		$	(94,083	)	N/A			$	588,330
Cumulative gap	$	264,824		$	337,858		$	682,413		$	588,330		N/A			$	588,330
Ratio of cumulative gap to cumulative earning assets		89.97	%		57.58	%		57.50	%		37.37	%


	December 31, 2022
(Dollars in thousands)	Allowance		Percentage of loans in each category to total loans
Commercial loans	$	194		7.60	%
Real estate construction and land		221		4.01	%
Real estate mortgages		4,438		83.54	%
Consumer		699		4.85	%
Total	$	5,552		100.00	%


Average Balances and Rates Paid
(Dollars in thousands)	Years Ended December 31
	2022					2021
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
Non-interest-bearing demand deposits	$	526,389				$	434,989
Interest-bearing deposits:
Interest checking		409,504		0.06	%		355,419		0.07	%
Money market and savings deposits		563,374		0.37	%		529,027		0.39	%
Time deposits		144,564		0.45	%		152,211		0.73	%
Total interest-bearing deposits	$	1,117,442		0.27	%	$	1,036,657		0.33	%
Total deposits	$	1,643,831				$	1,471,646


(Dollars in thousands)	Change in Net Interest Income
Change in Yield Curve	Percentage			Amount
+400 bps		15.42	%	$	15,451
+300 bps		14.97	%		15,002
+200 bps		10.34	%		10,363
+100 bps		5.35	%		5,365
Base case		0.00	%		-
-100 bps		-2.85	%		(2,853	)
-200 bps		-5.86	%		(5,870	)


Correspondent Banks	$	117,000
Federal Home Loan Bank of Atlanta		39,120
Total Available	$	156,120


(Dollars in thousands)	1 year or less		1-3 years		3-5 years		After 5 years		Total
Operating lease obligations	$	1,567	$	2,387	$	1,398	$	1,141	$	6,493


	For the years ended December 31,
	2022		2021
Interest and dividend income:
Loans, including fees	$	44,231	$	43,899
Federal funds sold		1,088		139
Other interest-bearing deposits		1,467		233
Investment securities:
Taxable		8,416		2,810
Tax exempt		1,249		1,021
Dividends		280		170
Total interest and dividend income		56,731		48,272
Interest and dividend income:
Demand and savings deposits		2,327		2,308
Certificates and other time deposits		657		1,108
Borrowings		200		(132	)
Total interest expense		3,184		3,284
Net interest income		53,547		44,988
Provision for loan losses		106		1,014
Net interest income after provision for loan losses		53,441		43,974

Noninterest income:
Wealth management fees		2,440		3,508
Advisory and brokerage income		770		1,154
Deposit account fees		1,799		1,459
Debit/credit card and ATM fees		2,794		2,070
Bank owned life insurance income		963		708
Resolution of commercial dispute		2,400		-
Gain on sale of business line		404		-
Gains on sale of assets, net		1,043		81
Other		1,048		1,485
Total noninterest income		13,661		10,465

Noninterest expense:
Salaries and employee benefits		17,260		16,129
Net occupancy		4,526		3,575
Equipment		897		966
Bank franchise tax		1,216		1,136
Computer software		1,136		1,020
Data processing		2,727		2,793
FDIC deposit insurance assessment		511		858
Marketing, advertising and promotion		1,224		922
Merger and merger-related expenses		-		7,423
Plastics expense		394		978
Professional fees		1,357		1,117
Core deposit intangible amortization		1,684		1,389
Impairment on assets held for sale		242		-
Other		5,382		4,216
Total noninterest expense		38,556		42,522

Income before income taxes		28,546		11,917
Provision for income taxes		5,108		1,846
Net income	$	23,438	$	10,071
Net income per common share, basic	$	4.40	$	2.16
Net income per common share, diluted	$	4.38	$	2.14


	For the years ended December 31,
	2022			2021
Net income	$	23,438		$	10,071
Other comprehensive income (loss)
Unrealized losses on securities, net of tax benefit of ($12,465) and ($959) for the years ended December 31, 2022 and 2021		(46,876	)		(3,607	)
Unrealized gains (losses) on interest rate swaps, net of tax (benefit) of $146 and ($17) for the years ended December 31, 2022 and 2021		549			(64	)
Reclassification of unrealized loss on swap		(86	)		-
Total other comprehensive loss		(46,413	)		(3,671	)
Total comprehensive income (loss)	$	(22,975	)	$	6,400


									Accumulated
									Other
	Common		Capital			Retained			Comprehensive
	Stock		Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608			-			-			78,036
Cash in lieu of fractional shares		-		(4	)		-			-			(4	)
Exercise of stock options		3		27			-			-			30
Stock option expense		-		145			-			-			145
Restricted stock grant expense		-		376			-			-			376
Vested stock grants		25		(25	)		-			-			-
Cash dividends declared ($1.20 per share)		-		-			(5,594	)		-			(5,594	)
Net income		-		-			10,071			-			10,071
Other comprehensive loss		-		-			-			(3,671	)		(3,671	)
Balance, December 31, 2021	$	13,178	$	104,584		$	46,436		$	(2,211	)	$	161,987
Exercise of stock options		2		21			-			-			23
Stock option expense		-		167			-			-			167
Restricted stock grant expense		-		520			-			-			520
Vested stock grants		34		(34	)		-			-			-
Cash dividends declared ($1.20 per share)		-		-			(6,392	)		-			(6,392	)
Net income		-		-			23,438			-			23,438
Other comprehensive loss		-		86			-			(46,413	)		(46,327	)
Balance, December 31, 2022	$	13,214	$	105,344		$	63,482		$	(48,624	)	$	133,416


(Dollars in thousands)	December 31, 2022
Twelve months ending December 31, 2023	$	1,567
Twelve months ending December 31, 2024		1,296
Twelve months ending December 31, 2025		1,091
Twelve months ending December 31, 2026		748
Twelve months ending December 31, 2027		650
Thereafter		1,141
Total undiscounted cash flows	$	6,493
Less: Discount		(320	)
Lease liability	$	6,173


(Dollars in thousands)	December 31, 2022					December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	9,660	$	(3,074	)	$	9,660	$	(1,389	)
Customer relationships intangible		-		-			773		(499	)
Total	$	9,660	$	(3,074	)	$	10,433	$	(1,888	)


	Core
	Deposit
(Dollars in thousands)	Intangible
2023		1,493
2024		1,301
2025		1,110
2026		918
2027		726
Thereafter		1,038
Total	$	6,586


(Dollars in thousands)
2023	$	91,799
2024		15,705
2025		3,857
2026		2,336
2027		1,409
	$	115,106


	Notional Amount
(Dollars in thousands)	December 31, 2022		December 31, 2021
Unfunded lines-of-credit	$	133,126	$	154,471
ACH		42,021		43,288
Letters of credit		9,053		11,200
Total	$	184,200	$	208,959


(Dollars in thousands)	Net Income		Weighted Average Shares		Per Share Amount
December 31, 2022
Basic net income per share	$	23,438		5,324,740	$	4.40
Effect of dilutive stock options		-		26,618		(0.02	)
Diluted net income per share	$	23,438		5,351,358	$	4.38

December 31, 2021
Basic net income per share	$	10,071		4,668,761	$	2.16
Effect of dilutive stock options		-		26,644		(0.02	)
Diluted net income per share	$	10,071		4,695,405	$	2.14


	December 31, 2022
(Dollars in thousands)	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	506		Junior subordinated debt	June 15, 2031

	December 31, 2021
(Dollars in thousands)	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(633	)	Junior subordinated debt	June 15, 2031
Interest rate swap - fair value	$	3,940	$	(8	)	Other Liabilities	February 12, 2022


	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	168,280	$33.95	168,031
Total	168,280	$33.95	168,031


Exhibit Number		Description of Exhibit

2.1		Agreement and Plan of Reorganization, dated as of September 30, 2020, between Virginia National Bankshares Corporation and Fauquier Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Virginia National Bankshares Corporation’s Form 8-K filed with the SEC on October 2, 2020).

3.1		Articles of Incorporation of Virginia National Bankshares Corporation, as amended and restated (incorporated by reference to Exhibit 3.1 to Virginia National Bankshares Corporation’s Pre-effective Amendment No. 1 to Form S-4 Registration Statement filed with the Securities and Exchange Commission on April 12, 2013).

3.2		Bylaws of Virginia National Bankshares Corporation, as amended (incorporated by reference to Exhibit 3.2 of Virginia National Bankshares Corporation’s Current Report on Form- 8-K filed with the Securities and Exchange Commission on April 1, 2021).

4.1		Description of Securities Registered under Section 12(b) of the Securities Exchange Act of 1934.

10.1		Virginia National Bank Amended and Restated 2005 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to Virginia National Bankshares Corporation’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 25, 2017. Virginia National Bankshares Corporation assumed this plan from Virginia National Bank on December 16, 2013 upon consummation of the reorganization under the agreement referenced as Exhibit 2.0).

10.2		Virginia National Bankshares Corporation 2014 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to Virginia National Bankshares Corporation’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 25, 2017).

10.3		Virginia National Bankshares Corporation 2022 Stock Incentive Plan .

10.4		Form of Amended and Restated Management Continuity Agreement executed September 28, 2020 between Virginia National Bankshares Corporation and each of Glenn W. Rust, Virginia R. Bayes, Tara Y. Harrison and Donna G. Shewmake (incorporated by reference to Exhibit 10.1 to Virginia National Bankshares Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2020).

21.0		Subsidiaries of the Registrant (refer to Item 1. Business of this Form 10-K Report for a discussion of Virginia National Bankshares Corporation’s direct and indirect subsidiaries).

23		Consent of Yount, Hyde and Barbour, P.C.

31.1		302 Certification of Principal Executive Officer

31.2		302 Certification of Principal Financial Officer

32.1		906 Certification

101.0 104		Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline eXtensible Business Reporting Language (Inline XBRL), (i) the Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021, (ii) the Consolidated Statements of Income for the years ended December 31, 2022 and December 31, 2021, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2022 and December 31, 2021, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for years ended December 31, 2022 and December 31, 2021, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2022 and December 31, 2021, and (vi) the Notes to Consolidated Financial Statements (furnished herewith), tagged as blocks of text and including detailed tags. Cover page interactive data file (embedded with the Inline XBRL document)


	VIRGINIA NATIONAL BANKSHARES CORPORATION

	/s/ Tara Y. Harrison
	Tara Y. Harrison
	Executive Vice President & Chief Financial Officer
Date: March 29, 2023


Signatures		Title

/s/ John B. Adams, Jr.		Director
John B. Adams, Jr.

/s/ Steven W. Blaine		Director
Steven W. Blaine
/s/ Kevin T. Carter		Director
Kevin T. Carter

/s/ Hunter E. Craig		Director
Hunter E. Craig

/s/ William D. Dittmar, Jr.		Chairman of the Board
William D. Dittmar, Jr.

/s/ Randolph D. Frostick		Director
Randolph D. Frostick

/s/ Tara Y. Harrison		Executive Vice President & Chief Financial Officer
Tara Y. Harrison		(principal financial and accounting officer)

/s/ Linda M. Houston		Director
Linda M. Houston

/s/ Jay B. Keyser		Director
Jay B. Keyser

/s/ Glenn W. Rust		President & Chief Executive Officer and Director
Glenn W. Rust		(principal executive officer)

/s/ Sterling T. Strange, III		Director
Sterling T. Strange, III

/s/ Gregory L. Wells		Director
Gregory L. Wells