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 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:
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Allowance for credit losses - The Company establishes the ACL through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the ACL for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL. The ACL represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the ACL is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Various national economic variables are utilized in the development of the ACL, including the national unemployment rate and national gross domestic product. In addition, management’s estimate of expected credit losses is based on the remaining life of certain consumer loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the ACL. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the ACL, the Company considers a range of possible assumptions and outcomes related to the various factors identified above. The level of the ACL is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.
Non-GAAP Presentations
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 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% 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
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sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) balances of intangible assets, including goodwill, that vary significantly between institutions and (2) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to, or more important than, 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:
(Dollars in thousands, except per share data)
Reconcilement of Non-GAAP Measures: Year Ended December 31
Fully taxable-equivalent measures
Fully taxable-equivalent adjustment 342 347
Net interest income (FTE) 1 (non-GAAP) $ 51,851 $ 46,723
Efficiency ratio 2 (GAAP) 58.0 % 62.4 %
Impact of FTE adjustment -0.4 % -0.4 %
Efficiency ratio (FTE) 3 (non-GAAP) 57.6 % 62.0 %
Net interest margin (GAAP) 3.38 % 3.08 %
Fully tax-equivalent adjustment 0.02 % 0.02 %
Net interest margin (FTE) 1 (non-GAAP) 3.40 % 3.10 %
Other financial measures
Book value per share (GAAP) $ 34.15 $ 29.85
Impact of intangible assets (1.94 ) (2.15 )
Tangible book value per share (non-GAAP) $ 32.21 $ 27.70
1 FTE calculations use a Federal income tax rate of 21%.
2 The efficiency ratio, GAAP basis, is computed by dividing noninterest expense by the sum of net interest income and noninterest income.
3 The efficiency ratio, FTE, is computed by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income.
Results of Operations
Consolidated Return on Assets and Equity and Other Key Ratios
The ratio of net income to average total assets and average shareholders' equity and certain other ratios for the years indicated are as follows:
Return on average assets 1.19 % 1.06 %
Average equity to average assets 10.60 % 9.80 %
Cash dividend payout ratio 39.48 % 41.80 %
Efficiency ratio (FTE) (non-GAAP) 57.60 % 62.00 %
Net income for the year ended December 31, 2025 was $19.3 million, or $3.55 per diluted share, a 13.5% increase compared to $17.0 million, or $3.15 per diluted share for the year ended December 31, 2024. This increase was the result of a $5.1 million increase in net interest income and a $1.5 million decrease in noninterest income, offset by a $282.0 thousand decrease in noninterest expense. Each component of such year-over-year changes are described in more detail below.
The efficiency ratio (FTE) (non-GAAP) was 57.6% for the year ended December 31, 2025, compared to 62.0% for the same period of 2024, increasing due to the fluctuations in net interest income, noninterest income and noninterest expense noted above.
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The Company had two reportable segments during the 2025 period: the Bank and VNB Trust and Estate Services and three in the 2024 period: the Bank, VNB Trust and Estate Services and Masonry Capital.
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Bank - The Bank’s commercial banking activities involve making loans, taking deposits and offering related services to individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related revenue, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for this segment.
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VNB Trust and Estate Services - This segment offers corporate trustee services, trust and estate administration, IRA administration and custody services and offers in-house investment management 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 affiliated and third-party managers.
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Masonry Capital (Masonry) - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven 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. Note that the membership interests in this business line were sold to an officer of Masonry effective April 1, 2024. Subsequent to the date of sale, the Company will receive an annual revenue-share amount for a period of six years. No expenses have been or will be incurred by the Company related to Masonry subsequent to April 1, 2024.
The Bank segment earned net income of $19.6 million in 2025, a $2.3 million increase compared to the $17.2 million netted in 2024. VNB Trust and Estate Services realized a net loss of $306 thousand in 2025, compared to a net loss of $275 thousand in 2024. Masonry Capital realized a net loss of $2 thousand in 2024.
Details of the changes in the various components of net income are further discussed below.
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Net Interest Income
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 89.4% of the total revenue in 2025. Net interest margin (FTE) (non-GAAP) 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) (non-GAAP) and net interest margin (FTE) (non-GAAP).
The following table details the average balance sheet, including an analysis of net interest income (FTE) (non-GAAP) for earning assets and interest bearing liabilities, for the years ended December 31, 2025, 2024, and 2023.
Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE) (non-GAAP)
Interest Average Interest Average Interest Average
ASSETS
Interest earning assets:
Securities
Loans:
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits:
Non-interest bearing liabilities:
Interest expense as a percentage of average earning assets 1.69 % 1.96 % 1.43 %
Net interest margin (FTE) 3 (non-GAAP) 3.40 % 3.10 % 3.36 %
(1)
Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.
(2)
Interest rate spread is the average yield earned on earning assets less the average rate paid on interest bearing liabilities.
(3)
Net interest margin (FTE) is net interest income (FTE) expressed as a percentage of average earning assets.
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The purpose of the volume and rate analysis below is to describe the impact on the net interest income (FTE) (non-GAAP) 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.
Volume and Rate Analysis
2025 compared to 2024
Change due to: Increase/
(Dollars in thousands) Volume Rate (Decrease)
Assets:
Loans:
Other interest bearing deposits (3 ) (29 ) (32 )
Liabilities and Shareholders' equity:
Interest bearing deposits:
Interest checking $ (2 ) - $ (2 )
Total interest bearing deposits (471 ) (3,466 ) (3,937 )
Federal funds purchased 4 (5 ) (1 )
Junior subordinated debt 5 (50 ) (45 )
Total interest bearing liabilities (281 ) (3,533 ) (3,814 )
2024 compared to 2023
Change due to: Increase/
(Dollars in thousands) Volume Rate (Decrease)
Assets:
Loans:
Other interest bearing deposits: (170 ) (125 ) (295 )
Liabilities and Shareholders' equity:
Interest bearing deposits:
Interest checking $ (54 ) (20 ) $ (74 )
Junior subordinated debt 4 29 33
For 2025, net interest income (FTE) (non-GAAP) of $51.9 million was recognized, an increase of $5.1 million over 2024. Net interest income (FTE) (non-GAAP) for 2024 totaled $46.7 million, a $2.6 million decrease over the 2023 total of $49.3 million. Average earning assets increased $19.2 million or 1.3% in 2025 compared to 2024 and increased $37.8 million or 2.6% in 2024 compared to 2023. The increase in the average balance of loans in the real estate and commercial categories was the primary driver of the increase in interest income from 2024 to 2025, whereas the 2023 to 2024 change in interest
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income was primarily driven by interest rate changes. The average balance for loans as a percentage of earnings assets for 2025 was 80.9%, compared to 77.5% and 66.8% in 2024 and 2023, respectively.
The 2025 net interest margin (FTE) (non-GAAP) improved 30 bps to 3.40% from 3.10% in 2024. The 2024 net interest margin (FTE) (non-GAAP) declined 26 bps from 3.36% in 2023. The tax-equivalent yield on average earning assets for 2025 of 5.09% was 2 bps higher than the 2024 yield of 5.07%. The 2024 tax-equivalent yield on average earning assets was 28 bps higher than the comparable 2023 yield of 4.79%. Loan yields for 2025 were 5.65%, declining 6 bps from the loan yield of 5.71% for 2024. Average loans for 2025 of $1.2 billion were $66.5 million higher than the 2024 average of $1.2 billion.
The decrease in rates paid on deposits in 2025 compared to 2024 positively impacted net interest income. Interest expense as a percentage of average earning assets decreased to 169 bps for 2025. 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 compared to peers 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.
AverageBalance % of TotalDeposits AverageBalance % of TotalDeposits
Provision for Credit Losses
The level of the ACL 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 ACL is contained later in this section under allowance for credit losses, in addition to Note 1 – Summary of Significant Accounting Policies and Note 5 – Allowance for Credit 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 2025, the Company recorded a provision for credit losses of $137 thousand, which includes a $75 thousand provision for unfunded commitments,compared to a net recovery of provision expense of $600 thousand,which included a $118 thousand provision for unfunded commitments, in 2024. The 2025 individual differences in the balances of various pools as well as changing loss rates have resulted in only nominal changes to the overall ACL ratio. The proportionate increase in government-guaranteed loans over the respective periods is also a main driver holding the ACL as a percentage of total loans fairly steady year-over-year. The decrease in 2024 is primarily the of the impact of declining expected loss rates on most of the pools of loans within the CECL segmentation.
The ACL as a percentage of total loans was 0.67% at December 31, 2025 compared to 0.68% at December 31, 2024.
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The following is a summary of the changes in the ACL for the years ended December 31, 2025 and 2024:
Allowance for credit losses, January 1 $ 8,455 $ 8,395
Provision for (recovery of) credit losses 62 (718 )
Allowance for credit losses, December 31 $ 8,270 $ 8,455
Noninterest Income
The major components of noninterest income are detailed below. Year-to-year variances are shown for each noninterest income category.
(Dollars in thousands) For the year ended December 31 Variance
Noninterest income:
Gain on early redemption of debt - 904 (904 ) -100.0 %
Losses on sales of AFS, net - (4 ) 4 -100.0 %
Noninterest income of $6.1 million for the year ended December 31, 2025 decreased $1.5 million over the prior year, as a result of the following:
Wealth management fees decreased $258 thousand. These fees vary based on the total assets under management portfolio and market changes. Debit/credit card and ATM fees decreased $531 thousand due to decreased debit card usage. Additionally, in 2024 there was a $904 thousand gain on the early redemption of debt but this did not reoccur in 2025.
Noninterest Expense
The major components of noninterest expense are detailed below. Year-over-year variances are shown for each noninterest expense category.
(Dollars in thousands) For the year ended December 31 Variance
Noninterest expense:
Marketing, advertising and promotion 761 730 31 4.2 %
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Noninterest expense of $33.4 million for the year ended December 31, 2025 decreased $282 thousand from the prior year. This decrease was predominantly due to $666 thousand less in data processing expenses resulting from contract negotiations with the Company's core provider. Normal, recurring increases in salaries and employee benefits in the form of merit increases and benefit costs were offset by a reduction in headcount during 2025. At December 31, 2025, the Company had 144 full-time equivalent employees compared to 146 at December 31, 2024.
Core deposit intangible amortization expense is a result of the Merger and amounted to $1.1 million in 2025 and $1.3 million in 2024.
Provision for Income Taxes
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 2025, the Company provided $4.8 million for Federal income taxes, resulting in an effective income tax rate of 20.0%. In 2024, the Company provided $3.9 million for Federal income taxes, resulting in an effective income tax rate of 18.8%. The effective income tax rates for 2025 and 2024 were lower than the U.S. statutory rate of 21% due to the effect of tax-exempt income from municipal bonds and tax-exempt interest from 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.
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BALANCE SHEET ANALYSIS
Securities
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, 2025, the Company’s investment portfolio totaled $254.2 million, with obligations of U.S. government corporations and government-sponsored enterprises amounting to $154.8 million,or approximately 61% of the total. The Company’s investment portfolio totaled $269.7 million as of December 31, 2024.
During the year ended December 31, 2025, the Company did not sell any securities. During the year ended December 31, 2024, $49.8 million of securities were sold incurring a pre-tax loss of $4 thousand. These sales were part of strategic decisioning to reinvest proceeds into higher yielding assets. 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, 2025. Management has evaluated whether the decline in fair value is the result of credit losses and has determined that no credit loss provision is required as of December 31, 2025 related to the AFS portfolio. AFS securities included gross unrealized losses of $38.9 million as of December 31, 2025.
Amount Percent Amount Percent
U.S. Treasury securities $ - 0 % $ 1,493 1 %
All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations. At December 31, 2025, the securities issued by political subdivisions or agencies were highly rated with 98% 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, 2025.The Company’s holdings of restricted securities totaled $6.2 million at December 31, 2025 and 2024, 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.
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The table shown below details the amortized cost and fair value of AFS securities at December 31, 2025 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.
Maturity Distribution and Average Yields
Contractual Maturities of Debt Securities at December 31, 2025
U.S. Government-sponsored agencies:
MBS/CMOs
Corporate bonds
Municipal bonds
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%.
As stated, the preceding table reflects the distribution of the contractual maturities of the investment portfolio at December 31, 2025. 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, 2025, the weighted average maturity of the fixed rate MBS sector was 14.7 years, and the projected average life for this group of securities is 5.4 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 $26.4 million for 2026, $32.6 million for 2027, and $23.3 million for 2028, based upon rates remaining at current levels. This represents approximately 33% of the investment portfolio’s AFS balance at December 31, 2025 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.
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Loan Portfolio
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, and the Richmond metropolitan area, as well as other areas in Virginia, Maryland, West Virginia and the District of Columbia.
The Company’s loan portfolio totaled $1.2 billion as of December 31, 2025 or 75.0% of total assets. Loan balances increased $1.6 million, or 0.1%, from the balance of $1.2 billion as of December 31, 2024. 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:
(Dollars in thousands) As of December 31,
Real estate mortgage:
Less: Allowance for credit losses (8,270 ) (8,455 )
At December 31, 2025, the loan-to-deposit ratio stood at 86.4%, compared to 86.8% at December 31, 2024.
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 increased by $1.9 million to a balance of $946.0 million at December 31, 2025 from $944.1 million at December 31, 2024. This category comprises 76.4% of all loans, and these loans are secured by mortgages on real property located principally in the Company's market area. Of this amount, approximately $297.6 million represented loans on 1-4 family residential properties. Commercial real estate loans totaled $613.4 million as of December 31, 2025. 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 $35.0 million as of December 31, 2025.
Of the $613.4 million of commercial mortgages held on the balance sheet as of December 31, 2025, $333.7 million consists of non-owner occupied commercial real estate, $127.8 million of multifamily, and $151.9 million of owner occupied CRE. No CRE loans were over 90 days past due as of December 31, 2025.
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The following table details the Company's levels of non-owner occupied commercial real estate as of December 31, 2025 and 2024, and along with the average loan size and % of risk ratings for each category:
Total Non-Owner Occupied CRE $ 333,694
Total Non-Owner Occupied CRE $ 309,757
As of December 31, 2025, the Company’s commercial and industrial loan portfolio totaled $265.4 million, a $7.7 million increase from the $257.7 million balance at year-end 2024. This category, representing approximately 21.4% of all loans, includes loans made to individuals and small to medium-sized businesses, as well as loans purchased in the government guaranteed market. As of December 31, 2025 and December 31, 2024, the portfolio of government guaranteed loans, included in the commercial loan balance, was $227.5 million and $218.3 million, respectively.
Consumer loans, comprised of student loans purchased, revolving credit, and other fixed payment loans, totaled $26.2 million as of December 31, 2025 or 2.1% of all loans. Consumer loans ended 2025 with balances $8.1 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, 2025. 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.
Maturities and Sensitivities of Loans to Changes in Interest Rates
(Dollars in thousands) As of December 31, 2025
Fixed Rate:
Variable Rate:
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Total loans at December 31, 2025 and 2024 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 allowance for loan loss. The following table presents the outstanding principal balance and the carrying amount of purchased loans as of December 31, 2025 and 2024:
(Dollars in thousands) December 31, 2025
Carrying amount:
Real estate construction and land 48 389 437
(Dollars in thousands) December 31, 2024
Carrying amount:
Loan Asset Quality
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, 2025 and 2024, the Company had loans classified as non-accrual with balances of $2.2 million and $2.3 million, respectively. The non-accrual balance as of December 31, 2025 consists of fourteen loans to twelve borrowers and 100% of such balance is secured by real estate.
Loans 90 days or more past due and still accruing interest amounted to $7.0 million as of December 31, 2025, compared to $754 thousand as of December 31, 2024. The 2025 balance includes seven loans totaling $6.6 million which are 100% government-guaranteed, one loan for $391 thousand fully secured by residential real estate, and three student loans totaling $86 thousand. No CRE loans were 90 days or more past due as of December 31, 2025.
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Allowance for Credit Losses
The relationship of the ACL to total loans and nonaccrual loans appears below:
Allowance for credit losses $ 8,270 $ 8,455
Nonaccrual loans to total loans 0.18 % 0.18 %
ACL to total loans 0.67 % 0.68 %
See Note 4 – Loans and Note 5 – Allowance for Credit 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.
Activity for the ACL is provided in the following table:
As of and for the year ended December 31, 2025
Allowance for Credit Losses:
As of and for the year ended December 31, 2024
Allowance for Credit Losses:
As of December 31, 2025, the ACL was $8.3 million, a decrease of $185 thousand from $8.4 million at December 31, 2024, due to individual differences in the balances of various pools as well as changing loss rates. Management’s estimates for the ACL resulted in nominal changes to the Company’s ACL to total loans outstanding ratio of 0.67% at December 31, 2025, compared to 0.68% at December 31, 2024. The government-guaranteed loans do not require an ACL as they are 100% guaranteed.
During 2025, there were $453 thousand in loan balances charged off, with a total of $206 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of negative $247 thousand. During 2024, there were $759
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thousand in loan balances charged off, with a total of $1.5 million in recoveries of previously charged-off balances, resulting in net charge-offs of $778 thousand. The ratio of net charge-offs to average loans was 0.02% and -0.07% (net recovery) for 2025 and 2024, respectively.
The table below provides an allocation of year-end ACL 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.
Allocation of the Allowance for Credit Losses
Real estate construction and land 930 2.83 %
Real estate construction and land 737 2.99 %
Deposits
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, 2025, totaled $1.4 billion, an increase of $8.2 million or 0.6% compared to the December 31, 2024 balance.
At December 31, 2025, the balances of non-interest bearing demand deposits were $362.3 million or 25.3% of total deposits, a 3.1% decrease from $374.1 million at December 31, 2024. Interest bearing transaction and money market accounts totaled $778.1 million at December 31, 2025, an increase of $37.1 million compared to $741.0 million at December 31, 2024. 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, 2025, the reciprocal ICS® balances included in demand deposit and money market accounts were $60.8 million and $139.6 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 79.7% of total deposit account balances at December 31, 2025 compared to 78.3% of total deposit account balances at December 31, 2024.
Certificates of deposit and other time deposit balances decreased $17.1 million to $291.3 million at December 31, 2025 from the balance of $308.4 million at December 31, 2024. Included in this deposit total were reciprocal relationships under CDARSTM, whereby depositors can obtain FDIC insurance on deposits up to $50 million. These reciprocal CDARSTM deposits totaled $5.8 million and $4.9 million at December 31, 2025 and 2024, respectively.
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Deposits
Average Balances and Rates Paid
Years Ended December 31
Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate
Interest bearing deposits:
As of December 31, 2025 and 2024, the estimated amounts of total uninsured deposits were $392.0 million and $389.6 million, respectively.
Maturities of time deposits in excess of FDIC insurance limits as of December 31, 2025 were as follows:
(Dollars in thousands) Amount Percentage
Over three months to six months 29,327 30.3 %
Over six months to one year 17,877 18.5 %
Borrowings
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. As of December 31, 2025 and 2024, the Company had $20.0 million in outstanding advances from the FHLB.
Additional borrowing arrangements maintained by the Bank include formal federal funds lines with five correspondent banks. The Company had no federal funds purchased as of December 31, 2025 compared to $236 thousand at December 31, 2024.
Borrowings consist of the following as of December 31, 2025 and 2024.
Federal funds purchased $ - $ 236
Maximum amount at any month-end during the year $ 51,000 $ 55,702
Annual average balance outstanding $ 40,573 $ 36,600
Annual average interest rate paid 4.65 % 4.70 %
Annual interest rate at end of period 3.84 % 4.82 %
Details on available borrowing lines can be found later under Liquidity in the Asset/Liability Management section.
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Junior Subordinated Debt
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, 2025, total capital securities were $3.6 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 CME Term SOFR plus a spread adjustment of 0.26% and is paid quarterly.
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.
ASSET/LIABILITY MANAGEMENT
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
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.
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Gap Interest Sensitivity Analysis
As of December 31, 2025
Within 90 to 365 One to Four Over Non Rate
(Dollars in thousands) 90 Days Days Years Four Years Sensitive Total
Assets
Interest bearing deposits in other banks 10,552 - - - - 10,552
Liabilities and Shareholders' Equity
Junior subordinated debt - 3,554 - - - 3,554
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.
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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.
(Dollars in thousands) Change in Net Interest Income
Change in Yield Curve Percentage Amount
Base case 0.00 % -
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 the current interest rate exposure is manageable and within the Company's current interest rate risk guidelines.
Liquidity
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. Access to borrowings at the discount window are dependent on the fair value of any securities pledged for advances. As of December 31, 2025, the Bank has pledged investment securities with an amortized cost of $4.0 million and a fair value of $3.3 million.
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Borrowing Lines
As of December 31, 2025
(Dollars in thousands)
Federal Home Loan Bank of Atlanta 121,592
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 $20.0 million outstanding in federal funds sold, and an average of $7.8 million at the Federal Reserve during 2025. On the liability side of the balance sheet, the Company maintained an average of $40.0 million in FHLB advances and $569 thousand in federal funds purchased during 2025. On December 31, 2025 the Company had a $20 million balance in FHLB advances and no balance outstanding in federal funds purchased. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.
Capital
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 19.36%, 19.36%, 20.19% and 12.36%, respectively, as of December 31, 2025, 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, 2025.
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 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, 2025 and December 31, 2024 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, 2025.
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Impact of Inflation and Changing Prices
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.
Off-Balance Sheet Arrangements
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.
Related Party Transactions
The Company and its subsidiaries have business dealings with companies owned by directors and beneficial shareholders of the Company. In 2025 and 2024, leasing/rental expenditures of $595 thousand and $562 thousandrespectively, (including reimbursements for taxes, insurance, and other expenses) were paid to an entity indirectly owned by a director of the Company.
Contractual Commitments
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. During the second quarter of 2025, the Company extended the ground lease associated with the Pantops headquarters for an additional five-year period.
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, 2025:
(Dollars in thousands) 1 year or less 1-3 years 3-5 years After 5 years Total
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting company.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Virginia National Bankshares Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Virginia National Bankshares Corporation and Subsidiaries (the Company) as of December 31, 2025 and 2024, 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 Company as of December 31, 2025 and 2024, 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.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with 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 Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
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.
Allowance for Credit Losses (ACL) – Loans Collectively Evaluated for Credit Losses
Description of the Matter
As discussed in Note 1 (Summary of Significant Accounting Policies), and Note 5 (Allowance for Credit Losses) to the financial statements, the allowance for credit losses on loans (ACL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms. Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions. The Company’s ACL related to collectively evaluated loans represented all of the total recorded ACL of $8.3 million as of December 31, 2025. The collectively evaluated ACL consists of quantitative and qualitative components.
Loans are segmented into pools based upon similar characteristics and risk profiles and based on the degree of correlation of how loans within each pool respond to various economic conditions. To determine the quantitative component of the ACL, the Company uses the discounted cash flow method to estimate expected credit losses for the identified loan pools
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other than student and Minute Lender loans, which use the remaining life method. The discounted cash flow method estimates the difference between the amortized cost of the loans and present value of expected cash flows. The remaining life method applied to the student and Minute Lender loans, determines a quantitative ACL by utilizing historical information to determine a quarterly expected loss rate and applying it to an expected remaining balance for each period to determine the expected loss for the segment.
In addition to the quantitative component, the collectively evaluated ACL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. The qualitative factors considered by management include changes in lending policies and procedures; nature and volume of the portfolio; experience, depth and ability of lending personnel; trends in credit quality; quality of the loan review system; value of underlying collateral; volume and concentrations of credit; and the effects of other external factors. A qualitative factor for reasonable and supportable forecasts of economic conditions is also determined for those segments utilizing the remaining life method as it is not already incorporated into the quantitative component. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Management exercised significant judgment when assessing the qualitive factors in estimating the ACL for collectively evaluated loans. We identified the measurement of the ACL for collectively evaluated loans as a critical audit matter as auditing this estimate involved especially complex and subjective auditor judgment in evaluating and testing management’s assertions over an inherently complex estimation process that requires significant management judgment.
The primary audit procedures we performed to address this critical audit matter included:
•
Obtaining an understanding of the Company’s ACL methodology and internal controls related to collectively evaluated loans, including the process of:
•
The continued usage of the discounted cashflow method as the primary expected loss model, including assessment and reasonableness of loan pools, model validation, monitoring, and the completeness and accuracy of key data inputs and assumptions.
•
Qualitative factors, including sources of reasonable and supportable economic forecasts and other key inputs.
•
Governance and management review processes.
•
Substantively testing management’s process for measuring the ACL related to collectively evaluated loans including:
•
Testing the completeness and accuracy of the underlying internal data utilized to prepare the calculation.
•
Performing an analysis of the overall allowance for credit loss ratio compared to a relevant peer group.
•
Evaluating the relevance and reliability of the underlying external data utilized to prepare the calculation.
•
Testing mathematical accuracy, including the transfer, aggregation, and processing of data and the application of assumptions, used in the ACL calculation.
•
Developing an independent expectation for relevant qualitative factors, which included consideration of certain alternative assumptions as well as metrics for comparison to the Company’s qualitative allowance for credit losses to determine whether this information supported or contradicted the Company’s conclusions.
•
Evaluating the reasonableness of the significant judgements and assumptions utilized within the ACL calculation, including both quantitative and qualitative assessments.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’s auditor since 1998.
Roanoke, Virginia
March 27, 2026
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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
ASSETS
Interest bearing deposits in other banks 10,552 11,792
Federal funds sold 54,264 -
Securities:
Restricted securities, at cost 6,172 6,193
Allowance for credit losses (8,270 ) (8,455 )
Accrued interest receivable and other assets 13,842 14,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Certificates of deposit and other time deposits 291,299 308,443
Federal funds purchased - 236
Accrued interest payable and other liabilities 4,104 3,847
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value - -
Accumulated other comprehensive loss (30,668 ) (41,862 )
Preferred shares outstanding - -
See Notes to Consolidated Financial Statements
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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
For the years ended December 31,
Interest and dividend income:
Other interest bearing deposits 174 206
Investment securities:
Interest expense:
Federal funds purchased 28 29
Junior subordinated debt 301 346
Provision for (recovery of) credit losses 137 (600 )
Noninterest income:
Debit/credit card and ATM fees 1,383 1,914
Bank owned life insurance income 1,242 1,155
Gains on sale of assets, net 278 36
Gains on early redemption of debt - 904
Losses on sales of AFS, net - (4 )
Noninterest expense:
FDIC deposit insurance assessment 785 700
Marketing, advertising and promotion 761 730
Core deposit intangible amortization 1,110 1,301
Net income per common share, basic $ 3.57 $ 3.16
Net income per common share, diluted $ 3.55 $ 3.15
See Notes to the Consolidated Financial Statements
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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
For the years endedDecember 31,
Other comprehensive income (loss), net of tax:
Reclassification adjustment for realized losses on securities - 3
Total other comprehensive income (loss) 11,194 (1,818 )
See Notes to Consolidated Financial Statements
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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands, except per share data)
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Loss Total
Stock option expense - 131 - - 131
Restricted stock grant expense - 782 - - 782
Vested stock grants 56 (56 ) - - -
Shares repurchased (51 ) (508 ) - - (559 )
Cash dividends declared ($1.32 per share) - - (7,087 ) - (7,087 )
Impact of adoption of proportional amortization method - - (1,070 ) - (1,070 )
Adjustment for Masonry Capital distribution - - (83 ) - (83 )
Other comprehensive loss - - - (1,818 ) (1,818 )
Exercise of stock options 3 32 - - 35
Stock option expense - 125 - - 125
Restricted stock grant expense - 847 - - 847
Vested stock grants 61 (61 ) - - -
Cash dividends declared ($1.41 per share) - - (7,603 ) - (7,603 )
See Notes to Consolidated Financial Statements
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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Provision for (recovery of) credit losses 137 (600 )
Net accretion of certain acquisition-related adjustments (1,983 ) (2,567 )
Amortization of intangible assets 1,110 1,301
Net amortization of securities 805 526
Net losses on sale of AFS - 4
Net gain on early redemption of FHLB advances - (904 )
Net gains on sales of other assets (278 ) (36 )
Bank owned life insurance income (1,242 ) (1,155 )
Depreciation and other amortization 2,878 2,955
Deferred tax expense (benefit) 352 10
Restricted stock expense 847 838
Net change in:
Accrued interest receivable and other assets 676 (1,379 )
Accrued interest payable and other liabilities (1,354 ) (801 )
Net cash provided by operating activities 21,334 15,289
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in restricted investments 21 2,192
Net decrease (increase) in loans 176 (140,030 )
Proceeds from sale of premises and equipment 3,269 104
Purchase of bank premises and equipment, net (582 ) (733 )
Net cash provided by investing activities 31,796 15,754
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Federal funds purchased (236 ) (3,226 )
Net decrease in other borrowings - (45,906 )
Proceeds from stock options exercised 35 -
Repurchases of common stock - (559 )
Net cash provided by (used in) financing activities 381 (42,330 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 53,511 $ (11,287 )
CASH AND CASH EQUIVALENTS:
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Investment management services were offered through Masonry Capital Management, LLC, a registered investment adviser and wholly-owned subsidiary of the Company, prior to the sale of the business to an officer of the Company effective April 1, 2024.
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.
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.
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. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the ACL (including individually evaluated loans).
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Securities – Unrestricted investments are classified in two categories as described below.
•
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.
•
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.
For AFS securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2025 and 2024, there was no ACL related to the AFS securities portfolio.
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 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 ACL. Interest income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs over the loan term.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding ACL is also recorded. Any remaining non-credit discount or premium for such purchased loans with credit deterioration (or PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method. There is no ACL established for non-PCD loans as part of a business combination.
Further information regarding the Company’s accounting policies related to past due loans, non-accrual loans and individually evaluated loans is presented in Note 4 - Loans.
Allowance for credit losses – The ACL on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the ACL for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL.
The ACL represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the ACL is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans except for student loans and Minute Lender loans, which are evaluated using a remaining life methodology. The discounted cash flow approach used by the Company utilizes loan-level cash flow projections and pool-level assumptions. Further information regarding the Company’s policies and methodology used to estimate the ACL is presented in Note 5 – Allowance for Credit Losses.
Management’s estimate of the ACL on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include changes in lending policies and procedures and underwriting practices; changes in national, regional and local economic conditions; changes in the nature and volume of the portfolio and terms of loans; changes in the experience, depth and ability of credit and loan operations staff; changes in the volume and severity of past due, special mention and substandard loans; changes in the quality of the loan review system; changes in the value of underlying collateral for loans that are not collateral dependent; the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors such as competition, legal and regulatory requirements, on the level of estimated credit losses.
The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The ACL is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified ten portfolio segments and calculates the ACL for each using the methodology specified below (with the major classification noted in italics):
Discounted cash flow methodology:
1.
Commercial and industrial (Commercial)
2.
Construction (Real estate construction and land)
3.
Consumer (Consumer)
4.
Commercial real estate, non-owner occupied (Commercial mortgage)
5.
Commercial real estate, owner occupied (Commercial mortgage)
6.
Home equity and junior liens (1-4 family residential mortgage)
7.
Multifamily (Commercial mortgage)
8.
Residential first lien (1-4 family residential mortgage)
Remaining life methodology:
9.
Minute lender (Consumer/Commercial)
10.
Student loans (Consumer)
Additionally, the ACL calculation includes adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase reserve levels and include: adjustments for changes in lending policies and procedures and underwriting practices; changes in national, regional and local economic conditions; changes in the nature and volume of the portfolio and terms of loans; changes in the experience, depth and ability of credit and loan operations staff; changes in the volume and severity of past due, special mention and substandard loans; changes in the quality of the loan review system; changes in the value of underlying collateral for loans that are not collateral dependent; the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors such as competition, legal and regulatory requirements, on the level of estimated credit losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or in the case of loans for which repayment is expected substantially through the sale of collateral, the expected credit losses are based on the fair value of collateral at the reporting dated adjusted for selling costs as appropriate.
Allowance for Credit Losses – Reserve for Unfunded Commitments - The Company records an ACL for off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s Consolidated Statements of Income. The ACL for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in Accrued interest payable and other liabilities on the Company’s Consolidated Balance Sheets.
Accrued Interest Receivable–The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 inwhich 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.
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 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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the date of grant, using the Black-Scholes option valuation model for determining fair value. The model employs the following assumptions:
•
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;
•
Expected life (term of the option) - based on the average of the contractual life and vesting schedule for the respective option;
•
Expected volatility - based on the monthly historical volatility of the Company’s stock price over the expected life of the options;
•
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 (loss). Further information on the Company’s other comprehensive income (loss) is presented in the Consolidated Statements of Comprehensive Income.
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 uponexamination, 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% likely of being realized upon settlement
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company acquired as a result of the Merger certain limited partnership investments in affordable housing projects located in the Commonwealth of Virginia. During 2024, the Company adopted the proportional amortization method of accounting for all qualifying equity investments within these limited partnerships. These investments are included in other assets on the Consolidated Balance Sheets. These partnership investments generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. The investments are accounted for under the proportional amortization method, with the expense included within income tax provision on the Consolidated Statements of Income. All of the Company's tax credit investments are evaluated for impairment at the end of each reporting period.
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, 2025 and 2024, 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 in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying Consolidated Financial Statements.
Revenue Recognition – ASC Topic 606, "Revenue from Contracts with Customers", 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 to shareholders' equity and net income.
Recent Significant Accounting Pronouncements
In November 2024, the Financial Accounting Standards Board (FASB) issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” ASU 2024-03 requires public companies to disclose, in the notes to the financial statements, specified information about certain costs and expenses at each interim and annual reporting period. This includes disclosing amounts related to employee compensation, depreciation, and intangible asset amortization. In addition, public companies will need to provide qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. The FASB subsequently issued ASU 2025-01, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date”, which amends the effective date of ASU 2024-03 to clarify that all public business entities are required to adopt the guidance in ASU 2024-03 in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption of ASU 2024-03 is permitted. The Company does not expect the adoption of ASU 2024-03 to have a material impact on its consolidated financial statements.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Adoption of New Accounting Standards
On January 1, 2025, the Company adopted ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The amendments were applied retrospectively to all prior periods presented and did not have a material effect on the Company’s consolidated financial statements. Refer to Note 11 for more information.
On December 1, 2025, the Company adopted ASU 2025-08 "Financial Instruments—Credit Losses (Topic 326) Purchased Loans". The amendments in this ASU 2025-08 expand the population of acquired financial assets subject to the gross-up approach in Topic 326, with loans (excluding credit cards) acquired without credit deterioration and deemed "seasoned" to be considered purchased seasoned loans and accounted for using the gross-up approach at acquisition. Specifically, after an entity determines that a loan is a non-PCD asset based on its assessment of credit deterioration experienced since origination, the entity should apply the guidance described in the amendment to determine whether the loan is seasoned and therefore should be accounted for by grossing-up the loan, or increasing the amortized cost basis of the loan. This eliminates the day-one provision for credit losses for such loans with subsequent changes in the allowance for credit losses reported in earnings through the provision for credit losses All non-PCD loans (excluding credit cards) that are acquired in a business combination are deemed seasoned. Other non-PCD loans (excluding credit cards) are seasoned if they were purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans. The adoption of ASU 2025-08 is expected to affect the accounting for loans acquired in future acquisition activity, however, the Company made no purchases of loans during the year ended December 31, 2025.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Securities
The amortized cost and fair values of securities available for sale as of December 31, 2025 and December 31, 2024 are as follows:
December 31, 2025 Amortized Gross Unrealized Gross Unrealized Fair
(Dollars in thousands) Cost Gains (Losses) Value
December 31, 2024 Amortized Gross Unrealized Gross Unrealized Fair
(Dollars in thousands) Cost Gains (Losses) Value
U.S. Treasury securities $ 1,500 $ - $ (7 ) $ 1,493
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2025 or December 31, 2024.
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 $6.2 million as of December 31, 2025 and December 31, 2024 are carried at cost.
During the year ended December 31, 2025no securities were sold. During the year ended December 31, 2024, $39.6 million of securities were sold incurring pre-tax losses of $4 thousand. These sales were part of strategic decisioning to reinvest proceeds into higher yielding assets.
Securities pledged to secure deposits and for other purposes and to facilitate borrowing from the FRB, had carrying values of $23.3 million at December 31, 2025 and $21.9 million at December 31, 2024.
Year-end securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, were as follows:
(Dollars in thousands) Less than 12 Months 12 Months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(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 $ - $ - $ 1,493 $ (7 ) $ 1,493 $ (7 )
All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations. At December 31, 2025, the securities issued by political subdivisions or agencies were highly rated with 98% of the municipal bonds having A+ or higher ratings. Approximately 63% of the municipal bonds are general obligation bonds with issuers that are geographically diverse.
As of December 31, 2025, there were $236.7 million, or 256 issues, of individual securities in a loss position. These securities had an unrealized loss of $38.9 million and consisted of 19 Agency securities, 115 mortgage-backed/CMOs, 121 municipal bonds, and 1 corporate security.
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
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company hasthe intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2025 and 2024, there was no ACL related to the AFS securities portfolio.
The amortized cost and fair value of AFS debt securities at December 31, 2025 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