UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934

For the
      fiscal year ended December 31, 2013
    
    Commission
      File Number: 000-55117


VIRGINIA NATIONAL BANKSHARES
CORPORATION

(Exact name of registrant as specified
in its charter)

|Virginia                                    |  | 46-2331578                  
|------------------------------------------- |  | ----------------------------
|(State or other jurisdiction of             |  | (I.R.S.
      Employer      
|incorporation or organization)              |  | Identification
      Number)
|                                            |  |                             
|404 People Place, Charlottesville, Virginia |  | 22911                       
|(Address of principal executive offices)    |  | (Zip
    Code)              

(434) 817-8621(Registrants telephone number, including area code)

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

**Common Stock,
      $2.50 par value**
    
    **OTC Markets
      Groups OTCQB Marketplace**(Title of class)
    
    (Name of exchange on which
      registered)


Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.Yes   _     NoX

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes   _    
NoX

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.YesXNo   _

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).**Yes****XNo _**

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[  ]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|Large
      accelerated filer    o | Accelerated
      filer    o | Non-accelerated
      filer    o | Smaller
      reporting company    x
|---------------------------------- | ---------------------------- | -------------------------------- | ------------------------------------

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes   _     NoX

On June 30, 2013, the aggregate market
value of the common equity held by non-affiliates of the registrant was
$36,952,024.

The registrant has one class of
common stock, of which2,690,320 shares were outstanding as of close of business
March 14, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are
hereby incorporated into Part I and Part III of this Form 10-K by reference: the
Proxy Statement for the Annual Meeting of Shareholders to be held on May 21,
2014.

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|           |  | **INDEX**                                                          |     
|---------- |  | ------------------------------------------------------------------ | ----
|           |  |                                                                    | Page
|           |  | Part I                                                             |     
|Item 1     |  | Business                                                           | 3   
|           |  |                                                                    |     
|Item
1A    |  | Risk
      Factors                                                 | 14  
|           |  |                                                                    |     
|Item
1B    |  | Unresolved Staff
      Comments                                    | 14  
|           |  |                                                                    |     
|Item 2     |  | Properties                                                         | 14  
|           |  |                                                                    |     
|Item 3     |  | Legal
      Proceedings                                            | 15  
|           |  |                                                                    |     
|Item 4     |  | Mine Safety
      Disclosures                                      | 15  
|           |  |                                                                    |     
|           |  | Part II                                                            |     
|Item 5     |  | Market for
      Registrants Common Equity, Related Stockholder   | 16  
|           |  | Matters and Issuer Purchases of
      Equity Securities            |     
|           |  |                                                                    |     
|Item 6     |  | Selected
      Financial Data                                      | 16  
|           |  |                                                                    |     
|Item 7     |  | Managements
      Discussion and Analysis of Consolidated         | 16  
|           |  | Financial Condition and Results of Operations                      |     
|           | 
|Item
7A    |  | Quantitative and
      Qualitative Disclosures About Market Risk   | 38  
|           |  |                                                                    |     
|Item 8     |  | Consolidated
      Financial Statements and Supplementary Data     | 39  
|           |  |                                                                    |     
|Item 9     |  | Changes In and
      Disagreements with Accountants                | 82  
|           |  | on Accounting and Financial
      Disclosure                       |     
|           |  |                                                                    |     
|Item
9A    |  | Controls and
      Procedures                                      | 82  
|           |  |                                                                    |     
|Item
9B    |  | Other
      Information                                            | 83  
|           |  |                                                                    |     
|           |  | Part III                                                           |     
|Item
10    |  | Directors,
      Executive Officers and Corporate Governance       | 83  
|           |  |                                                                    |     
|Item
11    |  | Executive
      Compensation                                       | 83  
|           |  |                                                                    |     
|Item
12    |  | Security
      Ownership of Certain Beneficial Owners and          | 83  
|           |  | Management and Related
      Stockholder Matters                   |     
|           | 
|Item
13    |  | Certain
      Relationships and Related Transactions, and Director | 83  
|           |  | Independence                                                       |     
|           |  |                                                                    |     
|Item
14    |  | Principal
      Accounting Fees and Services                       | 84  
|           |  |                                                                    |     
|           |  | Part IV                                                            |     
|Item
15    |  | Exhibits and
      Financial Statement Schedules                   | 84  
|           |  |                                                                    |     
|Signatures |  | 85                                                                 |     

2

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FORWARD-LOOKING STATEMENTS AND
FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or
incorporated by reference in this annual report on Form 10-K, including but not
limited to, statements concerning future results of operations or financial
position, borrowing capacity and future liquidity, future investment results,
future credit exposure, future loan losses and plans and objectives for future
operations, change in laws and regulations applicable to the Company and the
Bank, adequacy of funding sources, actuarial expected benefit payment, valuation
of foreclosed assets, regulatory requirements, economic environment and other
statements contained herein regarding matters that are not historical facts, are
forward-looking statements as defined in the Securities Exchange Act of 1934.
These statements are not historical facts but instead are subject to numerous
assumptions, risks and uncertainties, and represent only our belief regarding
future events, many of which, by their nature, are inherently uncertain and
outside our control. Any forward-looking statements the Company may make speak
only as of the date on which such statements are made. Our actual results and
financial position may differ materially from the anticipated results and
financial condition indicated in or implied by these forward-looking statements,
and the Company makes no commitment to update or revise forward-looking
statements in order to reflect new information or subsequent events or changes
in expectations.

Factors that could cause our
actual results to differ materially from those in the forward-looking statements
include, but are not limited to, the following: inflation, interest rates,
market and monetary fluctuations; geopolitical developments including acts of
war and terrorism and their impact on economic conditions; the effects of, and
changes in, trade, monetary and fiscal policies and laws, including interest
rate policies of the Federal Reserve Board; changes, particularly declines, in
general economic conditions and in the local economies in which the Company
operates; the financial condition of the Companys borrowers; competitive
pressures on loan and deposit pricing and demand; changes in technology and
their impact on the marketing of new products and services and the acceptance of
these products and services by new and existing customers; the willingness of
customers to substitute competitors products and services for the Companys
products and services; the impact of changes in financial services laws and
regulations (including laws concerning taxes, banking, securities and
insurance); changes in accounting principles, policies and guidelines; other
risks and uncertainties described from time to time in press releases and other
public filings; and the Companys performance in managing the risks involved in
any of the foregoing. The foregoing list of important factors is not exclusive,
and the Company will not update any forward-looking statement, whether written
or oral, that may be made from time to time.

Part I

Item 1.
BUSINESS.

General

Virginia National Bankshares
Corporation (the Company) was incorporated under the laws of the Commonwealth
of Virginia on February 21, 2013 at the direction of the Board of Directors of
Virginia National Bank (the Bank) for the purpose of acquiring all of the
outstanding shares of the Bank and becoming the holding company of the Bank. On
June 19, 2013, the shareholders of the Bank approved the Reorganization
Agreement and Plan of Share Exchange, dated March 6, 2013, whereby the Bank
would reorganize into a holding company structure (the
Reorganization).

On December 16, 2013, when the
Reorganization became effective, the Bank became a wholly-owned subsidiary of
the Company, and each share of the Banks common stock was exchanged for one
share of the Companys common stock. The Company is regulated under the Bank
Holding Company Act of 1956, as amended (BHC Act), and is subject to
inspection, examination and supervision by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board). The Company is also under the
jurisdiction of the Securities and Exchange Commission (SEC) and is subject to
the disclosure and regulatory requirements of the Securities Exchange Act of
1934, as amended, (the Exchange Act) as administered by the SEC. Virginia
National Bankshares Corporation is headquartered at 404 People Place,
Charlottesville, Virginia.

3

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Virginia National Bank, the
principal operating subsidiary of the Company, was organized in 1998 under
federal law as a national banking association to engage in a general commercial
and retail banking business. The Bank received its charter from the Office of
the Comptroller of the Currency (the OCC) and commenced operations on July 29,
1998. The Bank is headquartered in Charlottesville, Virginia. The Banks
deposits are insured up to the maximum amount provided by the Federal Deposit
Insurance Act by the Federal Deposit Insurance Corporation (FDIC). The Bank is
subject to the supervision, examination and regulation of the OCC.

The Bank serves the Virginia
communities in and around the City of Charlottesville, Albemarle County, Orange
County and the City of Winchester. The Bank offers a full range of banking and
related financial services, including checking accounts, NOW accounts, money
market deposit accounts, certificates of deposit, individual retirement accounts
and other depository services. The Bank actively solicits such accounts from
individuals, businesses, associations and other organizations within its trade
area. The Bank also offers short-to-long term commercial, real estate and
consumer loans. The Bank is committed to being a reliable and consistent source
of credit, with loans that are priced based upon an overall banking
relationship, easy access to the Banks local decision makers who possess strong
local market knowledge, local delivery, fast response, and continuity in the
banking relationship. Other services offered by the Bank include automated
teller machines (ATMs), Internet banking, safe deposit boxes, merchant card
services, cash management services and direct deposit of payroll and federal
recurring payments. In addition, the Bank is affiliated with Visa®
which is accepted worldwide and offers debit cards to consumer and business
customers.

Since July 29, 1998, the Bank has
conducted business from its full-service main banking office located at 222 East
Main Street in Charlottesville, Virginia. On March 15, 1999, a full-service
banking office was opened at 1580 Seminole Trail in Charlottesville, Virginia.
On December 21, 1999, a full-service banking office was opened at 1900 Arlington
Boulevard in Charlottesville, Virginia. On November 8, 2000, a full-service
banking office was opened at 102 East Main Street in Orange, Virginia. On
January 28, 2002, a full-service banking office was opened at 186 North Loudoun
Street, Winchester, Virginia. On December 29, 2003, a full-service banking
office was opened at 3119 Valley Avenue, #102, Winchester, Virginia. On April
28, 2008, a full-service banking office was opened at 404 People Place,
Charlottesville, Virginia. Additionally, the multi-story office building at 404
People Place serves as the Companys corporate headquarters and the Banks
Operations Center.

In October 2012, the Bank started
offering annuity, insurance and brokerage services to the public at its banking
offices, under the title of VNB Investment Strategies. The Bank entered into an
agreement with LPL Financial LLC, which provides broker/dealer and advisory
services through registered representatives. The goal of the program is to offer
customers additional opportunities to access additional financial products and
services beyond the traditional banking products.

Investment and trust services are
offered through the Banks wholly-owned subsidiary, VNBTrust, National
Association (VNBTrust). VNBTrust employs a value-based, event-driven
investment strategy. The strategy includes investing in a wide variety of
securities and financial instruments in the public markets, utilizing securities
exchanges, over-the-counter and privately negotiated transactions. Investment
trades include common and preferred stock, corporate bonds, bank loans and other
debt securities, convertible securities, Exchange Traded Funds (EFTs),
options, warrants and cash equivalents.

Prior to July 18, 2013, VNBTrust was the sole owner of an operating subsidiary, Swift Run Capital Management, LLC (SRCM), formerly known as VNB Investment Management Company, LLC, a Delaware limited liability corporation. SRCM operates as the general partner of Swift Run Capital L.P. (Fund), a hedge fund. On July 18, 2013 (the Closing Date), VNBTrust completed the sale of all of the membership interests of SRCM to SRCM Holdings LLC (SRCM Holdings) pursuant to a purchase and sale agreement dated June 27, 2013 among SRCM Holdings, VNBTrust, SRCM and the Bank (the Sale Agreement).  The Fund managed by SRCM represented less than 7 percent of the total assets managed by VNBTrust and SRCM at the date of the sale. Additional details on this transaction are available in Note 1, in the notes to the consolidated financial statements, contained in Item 8.

4

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On January 1, 2014, VNBTrust began
doing business under the trade name of VNB Wealth Management. While the trade
name is new, clients will continue to receive community-based trust and
investment services. VNB Wealth Management employs an integrated approach to
financial planning and investment management which is designed to provide
clients with a comprehensive wealth management solution. More information on VNB
Wealth Management is available atwww.vnbwealth.com.

Market Area

The population in the market area
served by the Company continues to grow. According to the U.S. Census Bureau,
the combined populations of the City of Charlottesville and Albemarle County
stood at 142,445 persons as of April 1, 2010, an increase of approximately 14.6
percent between April 1, 2000 and April 1, 2010. The Virginia State Demographer
projects the two municipalities to grow 13.2 percent to a population of 161,278
by 2020. Charlottesville and Albemarle County support a diverse, well-rounded
economy. Stability in the local economy stems from the significant number of
persons employed by a wide variety of employers including the University of
Virginia, large medical and research facilities such as Martha Jefferson and UVA
Health Services, insurance and technology industries, large number of national
retail chains and Federal government-based facilities.

The combined populations of the
City of Winchester and Frederick County increased approximately 26.2 percent
between April 1, 2000 and April 1, 2010, to a population of 104,508 persons in
2010. The combined population is expected to be 125,159 by 2020, an increase of
19.8 percent.

Orange County had a population of
approximately 33,481 persons as of 2010. Between April 1, 2000 and April 1,
2010, its population grew 29.4 percent.

The total market area served by
the Company grew 20.4 percent between 2000 and 2010, as compared to 13.0 percent
for the state as a whole. Over the next decade, Virginia is expected to have
only a 10.1 percent growth, where the Companys current market is expected to be
15.6 percent higher by 2020 than reported by the 2010 Census.

Competition

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

In addition to competing with
other commercial banks within and outside its primary service areas, the Company
competes with other financial institutions engaged in the business of making
loans or accepting deposits, such as credit unions, insurance companies, small
loan companies, finance companies, mortgage companies, certain governmental
agencies and other enterprises. Competition for funds from securities brokers
and mutual funds for money market accounts is strong. Additional competition for
deposits comes from government and private issues of debt obligations and other
investment alternatives for depositors such as money market funds.

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

Supervision and Regulation

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

5

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Regulatory Reform  The
Dodd-Frank Act

On July 21, 2010, President Obama
signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act). The Dodd-Frank Act significantly restructures the
financial regulatory regime in the United States and has a broad impact on the
financial services industry as a result of the significant regulatory and
compliance changes required under the act. While significant rulemaking under
the Dodd-Frank Act has occurred, certain of the acts provisions require
additional rulemaking by the federal bank regulatory agencies, a process which
will take years to fully implement. The Company believes that short- and
long-term compliance costs for the Company will be greater because of the
Dodd-Frank Act. A summary of certain provisions of the Dodd-Frank Act is set
forth below:

- Increased Capital
  Standards. The federal banking
  agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank
  holding companies. See The Bank  Capital Requirements  Basel III Capital Requirements below. Among other
  things, the Dodd-Frank Act provides for
  new capital standards that eliminate the treatment of trust preferred
  securities as Tier 1 capital. Existing
  trust preferred securities are grandfathered for banking entities with less
  than $15 billion of assets. The Company
  has no trust preferred securities.
- Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000
  deposit insurance limit for insured
  deposits. Amendments to the Federal Deposit Insurance Act also revise the
  assessment base against which an insured
  depository institutions deposit insurance premiums paid to the Deposit
  Insurance Fund (the DIF) will be calculated.
  Under the amendments, the assessment base is no longer the institutions deposit base, but rather its average
  consolidated total assets less its average tangible equity during the assessment period. Additionally, the
  Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum
  from 1.15% to 1.35% of the estimated
  amount of total insured deposits and eliminating the requirement that the FDIC
  pay dividends to depository institutions
  when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act
  also provides that, effective one year
  after the date of enactment, depository institutions may pay interest
  on demand deposits.
- Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on
  a depository institutions credit exposure
  to one borrower. Current banking law limits a depository institutions
  ability to extend credit to one person (or
  group of related persons) in an amount exceeding certain
  thresholds.
- The Consumer Financial Protection Bureau
  (the CFPB). The Dodd-Frank Act
  creates the CFPB within the Federal
  Reserve Bank. The CFPB is charged with establishing rules and regulations
  under certain federal consumer protection
  laws with respect to the conduct of providers of certain consumer
  financial products and
  services.
- Compensation Practices. The Dodd-Frank Act provides that the appropriate
  federal regulators must establish
  standards prohibiting as an unsafe and unsound practice any compensation plan
  of a bank holding company or bank that
  provides an insider or other employee with excessive compensation or
  could lead to a material financial loss to such
  firm. In June 2010, prior to the Dodd-Frank Act, the federal bank regulatory agencies promulgated the Interagency
  Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics
  for measuring the impact of activities to
  achieve incentive compensation with the related risk to the financial
  institution of such behavior.

Although a significant number of
the rules and regulations mandated by the Dodd-Frank Act have been finalized,
certain of the acts requirements have yet to be implemented. Given the
uncertainty associated with the manner in which the provisions of the Dodd-Frank
Act will be implemented by the federal bank regulatory agencies in the future,
the full extent of the impact such requirements will have on the operations of
the Company and the Bank is unclear. The changes resulting from the Dodd-Frank
Act may affect the profitability of business activities, require changes to
certain business practices, impose more stringent regulatory requirements or
otherwise adversely affect the business and financial condition of the Company
and the Bank. These changes may also require the Company to invest significant
management attention and resources to evaluate and make necessary changes to
comply with new statutory and regulatory requirements.

The Company

General. As a bank holding company registered under the BHC Act,
the Company is subject to supervision, regulation, and examination by the
Federal Reserve. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision,
regulation, and examination by the Virginia State Corporation Commission (the
SCC).

6

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

Banking Acquisitions;
Changes in Control. The BHC Act
requires, among other things, the prior approval of the Federal Reserve in any
case where a bank holding company proposes to (i) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
or bank holding company (unless it already owns a majority of such voting
shares), (ii) acquire all or substantially all of the assets of another bank or
bank holding company, or (iii) merge or consolidate with any other bank holding
company. In determining whether to approve a proposed bank acquisition, the
Federal Reserve will consider, among other factors, the effect of the
acquisition on competition, the public benefits expected to be received from the
acquisition, the projected capital ratios and levels on a post-acquisition
basis, and the acquiring institutions performance under the Community
Reinvestment Act of 1977 and its compliance with fair housing and other consumer
protection laws.

Subject to certain exceptions, the
BHC Act and the Change in Bank Control Act, together with the applicable
regulations, require Federal Reserve approval (or, depending on the
circumstances, no notice of disapproval) prior to any person or companys
acquiring control of a bank or bank holding company. A conclusive presumption
of control exists if an individual or company acquires the power, directly or
indirectly, to direct the management or policies of an insured depository
institution or to vote 25% or more of any class of voting securities of any
insured depository institution. A rebuttable presumption of control exists if a
person or company acquires 10% or more but less than 25% of any class of voting
securities of an insured depository institution and either the institution has
registered its securities with the SEC under Section 12 of the Exchange Act or
no other person will own a greater percentage of that class of voting securities
immediately after the acquisition. The Companys common stock is registered
under Section 12 of the Exchange Act.

In addition, Virginia law requires
the prior approval of the SCC for (i) any Virginia bank or Virginia bank holding
company to acquire more than 5% of the voting shares of a Virginia bank or any
holding company that controls a Virginia bank, or (ii) the acquisition by a
Virginia bank holding company of a bank or its holding company domiciled outside
Virginia.

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

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

7

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Under the Federal Deposit
Insurance Act (FDIA), the federal bank regulatory agencies have adopted
guidelines prescribing safety and soundness standards. These guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risk and exposures specified in the
guidelines.

Capital
Requirements. The Federal Reserve
imposes certain capital requirements on bank holding companies under the BHC
Act, including a minimum leverage ratio and a minimum ratio of qualifying
capital to risk-weighted assets. These requirements are described below under
The Bank  Capital Requirements.

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

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

The Bank

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

Capital
Requirements:

Current Capital
Requirements. The OCC and the other
federal banking agencies have issued risk-based and leverage capital guidelines
applicable to U.S. banking organizations. In addition, those regulatory agencies
may from time to time require that a banking organization maintain capital above
the minimum levels because of its financial condition or actual or anticipated
growth. Under the current risk-based capital requirements of the Federal Reserve
and the OCC, the Company and the Bank are required to maintain a minimum ratio
of total capital (which is defined as core capital and supplementary capital
less certain specified deductions from total capital such as reciprocal holdings
of depository institution capital instruments and equity investments) to
risk-weighted assets of at least 8.0%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet
activities, recourse obligations, residual interests and direct credit
substitutes, are multiplied by a risk-weight factor assigned by the capital
regulation based on the risks believed inherent in the type of asset. At least
half of the total capital is required to be Tier 1 capital, which consists
principally of common and certain qualifying preferred shareholders equity
(including grandfathered trust preferred securities), less certain intangibles
and other adjustments. The remainder (Tier 2 capital) consists of cumulative
preferred stock, long-term perpetual preferred stock, a limited amount of
subordinated and other qualifying debt (including certain hybrid capital
instruments), and a limited amount of the general loan loss allowance. The Tier
1 and total capital to risk-weighted asset ratios of the Company were 17.03% and
18.00%, respectively, as of December 31, 2013, thus exceeding the minimum requirements. The Tier 1
and total capital to risk-weighted asset ratios of the Bank were 14.65% and
15.62%, respectively, as of December 31, 2013, also exceeding the minimum
requirements.

8

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Each of the federal bank
regulatory agencies also has established a minimum leverage capital ratio of
Tier 1 capital to average adjusted assets (Tier 1 leverage ratio). The
guidelines provide for a minimum Tier 1 leverage ratio of 3.0% for bank holding
companies and banking organizations that have the highest supervisory rating.
All other banking organizations are required to maintain a minimum Tier 1
leverage ratio of 4% unless a different minimum is specified by an appropriate
regulatory authority. In addition, for a depository institution to be considered
well capitalized under the regulatory framework for prompt corrective action,
its Tier 1 leverage ratio must be at least 5.0%. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
The Federal Reserve and the OCC have not advised the Company or the Bank of any
specific minimum leverage ratio applicable to either entity. As of December 31,
2013, the Tier 1 leverage ratio of the Company and the Bank were 11.86% and
10.20%, respectively, well above the minimum requirements. Basel III Capital
Requirements. In June 2012, the
federal bank regulatory agencies issued a series of proposed rules that would
revise and strengthen its risk-based and leverage capital requirements and its
method for calculating risk-weighted assets. The rules were proposed to
implement the Basel III regulatory capital reforms from the Basel Committee on
Banking Supervision and certain provisions of the Dodd-Frank Act. In July 2013,
the federal bank regulatory agencies approved certain revisions to the proposals
and finalized new capital requirements for banking organizations. Effective January 1, 2015, the
final rules require the Company and the Bank to comply with the following new
minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of
risk-weighted assets; (ii) a Tier 1 capital ratio of 6% of risk-weighted assets
(increased from the current requirement of 4%); (iii) a total capital ratio of
8% of risk-weighted assets (unchanged from current requirement); and (iv) a
leverage ratio of 4% of total assets. These are the initial capital
requirements, which will be phased in over a four-year period. When fully phased
in on January 1, 2019, the rules will require the Company and the Bank to
maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of
at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the
4.5% common equity Tier 1 ratio as that buffer is phased in, effectively
resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of
at least 7% upon full implementation); (ii) a minimum ratio of Tier 1 capital to
risk-weighted assets of at least 6.0%, plus the capital conservation buffer
(which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in,
effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation); (iii) a minimum ratio of total capital to risk-weighted assets
of at least 8.0%, plus the capital conservation buffer (which is added to the
8.0% total capital ratio as that buffer is phased in, effectively resulting in a
minimum total capital ratio of 10.5% upon full implementation); and (iv) a
minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to
average assets. The capital conservation buffer
requirement will be phased in beginning January 1, 2016, at 0.625% of
risk-weighted assets, increasing each year until fully implemented at 2.5% on
January 1, 2019. The capital conservation buffer is designed to absorb losses
during periods of economic stress. Banking institutions with a ratio of common
equity Tier 1 to risk-weighted assets above the minimum but below the
conservation buffer will face constraints on dividends, equity repurchases, and
compensation based on the amount of the shortfall. With respect to the Bank, the
rules also revised the prompt corrective action regulations pursuant to
Section 38 of the FDIA by (i) introducing a common equity Tier 1 capital ratio
requirement at each level (other than critically undercapitalized), with the
required ratio being 6.5% for well-capitalized status; (ii) increasing the
minimum Tier 1 capital ratio requirement for each category, with the minimum
ratio for well-capitalized status being 8.0% (as compared to the current 6.0%);
and (iii) eliminating the current provision that provides that a bank with a
composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and
still be well-capitalized. The new capital requirements also
include changes in the risk weights of assets to better reflect credit risk and
other risk exposures. These include a 150% risk weight (up from 100%) for
certain high volatility commercial real estate acquisition, development and
construction loans and nonresidential mortgage loans that are 90 days past due
or otherwise on nonaccrual status, a 20% (up from 0%) credit conversion factor
for the unused portion of a commitment with an original maturity of one year or
less that is not unconditionally cancellable, a 250% risk weight (up from 100%)
for mortgage servicing rights and deferred tax assets that are not deducted from
capital, and increased risk-weights (from 0% to up to 600%) for equity
exposures.


9

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Based
on managements understanding and interpretation of the new capital rules, it
believes that, as of December 31, 2013, the Company and the Bank would meet all
capital adequacy requirements under such rules on a fully phased-in basis as if
such requirements were in effect as of such date.

Deposit
Insurance.The deposits of the Bank are insured up to applicable
limits by the Deposit Insurance Fund (DIF) of the FDIC and are subject to
deposit insurance assessments to maintain the DIF. On April 1, 2011, the deposit
insurance assessment base changed from total deposits to average total assets
minus average tangible equity, pursuant to a rule issued by the FDIC as required
by the Dodd-Frank Act.

The Federal Deposit Insurance Act
(the FDIA), as amended by the Federal Deposit Insurance Reform Act and the
Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves
to estimated insured deposits of at least 1.35%. The FDIC utilizes a risk-based
assessment system that imposes insurance premiums based upon a risk matrix that
takes into account a banks capital level and supervisory rating. On February
27, 2009, the FDIC introduced three possible adjustments to an institutions
initial base assessment rate: (i) a decrease of up to five basis points for
long-term unsecured debt, including senior unsecured debt (other than debt
guaranteed under the Temporary Liquidity Guarantee Program) and subordinated
debt and, for small institutions, a portion of Tier 1 capital; (ii) an increase
not to exceed 50% of an institutions assessment rate before the increase for
secured liabilities in excess of 25% of domestic deposits; and (iii) for
non-Risk Category I institutions, an increase not to exceed 10 basis points for
brokered deposits in excess of 10% of domestic deposits. In 2013 and 2012, the
Company expensed only the base assessment rate for well capitalized
institutions, which totaled $220 thousand and $297 thousand, respectively, in
regular deposit insurance assessments.

On May 22, 2009, the FDIC issued a
final rule that levied a special assessment applicable to all insured depository
institutions totaling 5 basis points of each institutions total assets less
Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic
deposits. The special assessment was part of the FDICs efforts to rebuild the
DIF. Deposit insurance expense during 2009 for the Company included an
additional $184 thousand related to the special assessment.

On November 12, 2009, the FDIC
issued a rule that required all insured depository institutions, with limited
exceptions, to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011, and 2012. In the fourth
quarter of 2009, the Company paid $1.939 million in prepaid risk-based
assessments, most of which has been expensed in the appropriate periods through
December 31, 2012. The balance of the prepayment was approximately $629 thousand
on December 31, 2012 and was included in other assets in the accompanying
consolidated balance sheet. On June 28, 2013, $582 thousand was refunded to the
Company from the FDIC. Beginning September 30, 2013, payments are being assessed
and charged to financial institutions on a quarterly basis, rather than being
applied against the prepaid balance.

In addition, all FDIC insured
institutions are required to pay assessments to the FDIC at an annual rate of
approximately one basis point of insured deposits to fund interest payments on
bonds issued by the Financing Corporation, an agency of the federal government
established to recapitalize the predecessor to the Savings Association Insurance
Fund. These assessments will continue until the Financing Corporation bonds
mature in 2017 through 2019. In both 2013 and 2012, the Company paid a FICO
assessment of $28 thousand.

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

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

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

Immediately upon becoming
undercapitalized, a depository institution becomes subject to the provisions
of Section 38 of the FDIA, which: (i) restrict payment of capital distributions
and management fees; (ii) require that the appropriate federal banking agency
monitor the condition of the institution and its efforts to restore its capital;
(iii) require submission of a capital restoration plan; (iv) restrict the growth
of the institutions assets; and (v) require prior approval of certain expansion
proposals. The appropriate federal banking agency for an undercapitalized
institution also may take any number of discretionary supervisory actions if the
agency determines that any of these actions is necessary to resolve the problems
of the institution at the least possible long-term cost to the DIF, subject in
certain cases to specified procedures. These discretionary supervisory actions
include: (i) requiring the institution to raise additional capital; (ii)
restricting transactions with affiliates; (iii) requiring divestiture of the
institution or the sale of the institution to a willing purchaser; and (iv) any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions. The
Bank meets the definition of being well capitalized as of December 31, 2013.

As described above in The Bank 
Capital Requirements  Basel III Capital Requirements, the new capital
requirement rules issued by the OCC incorporate new requirements into the prompt
corrective action framework.

Community Reinvestment
Act.The Bank is subject to the requirements of the Community
Reinvestment Act of 1977 (the CRA). The CRA imposes on financial institutions
an affirmative and ongoing obligation to meet the credit needs of the local
communities they serve, including low and moderate income neighborhoods. The CRA
requires the appropriate federal banking agency, in connection with its
examination of a bank, to assess the banks record in meeting such credit needs.
Furthermore, such assessment is also required of banks that have applied, among
other things, to merge or consolidate with or acquire the assets or assume the
liabilities of an insured depository institution, or to open or relocate a
branch. In the case of a bank holding company applying for approval to acquire a
bank or another bank holding company, the record of each subsidiary bank of the
applicant bank holding company is subject to assessment in considering the
application. Under the CRA, institutions are assigned a rating of outstanding,
satisfactory, needs to improve, or substantial non-compliance. The Bank
currently has a satisfactory CRA rating.

Privacy
Legislation.Several recent laws, including the Right to Financial
Privacy Act, and related regulations issued by the federal bank regulatory
agencies, provide new protections against the transfer and use of customer
information by financial institutions. A financial institution must provide to
its customers information regarding its policies and procedures with respect to
the handling of customers personal information. Each institution must conduct
an internal risk assessment of its ability to protect customer information.
These privacy provisions generally prohibit a financial institution from
providing a customers personal financial information to unaffiliated parties
without prior notice and approval from the customer.

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USA Patriot Act of
2001.In October 2001, the USA Patriot Act of 2001 (Patriot
Act) was enacted in response to the September 11, 2001 terrorist attacks in New
York, Pennsylvania, and Northern Virginia. The Patriot Act is intended to
strengthen U.S. law enforcement and the intelligence communities abilities to
work cohesively to combat terrorism. The continuing impact on financial
institutions of the Patriot Act and related regulations and policies is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws, and imposes various regulations,
including standards for verifying customer identification at account opening,
and rules to promote cooperation among financial institutions, regulators and
law enforcement entities to identify persons who may be involved in terrorism or
money laundering.

Volcker
Rule. The Dodd-Frank Act prohibits
insured depository institutions and their holding companies from engaging in
proprietary trading except in limited circumstances, and prohibits them from
owning equity interests in excess of 3% of Tier 1 capital in private equity and
hedge funds (known as the Volcker Rule). On December 10, 2013, the federal
bank regulatory agencies adopted final rules implementing the Volcker Rule.
These final rules prohibit banking entities from (i) engaging in short-term
proprietary trading for their own accounts, and (ii) having certain ownership
interests in and relationships with hedge funds or private equity funds. The
final rules are intended to provide greater clarity with respect to both the
extent of those primary prohibitions and of the related exemptions and
exclusions. The final rules also require each regulated entity to establish an
internal compliance program that is consistent with the extent to which it
engages in activities covered by the Volcker Rule, which must include (for the
largest entities) making regular reports about those activities to regulators.
Although the final rules provide some tiering of compliance and reporting
obligations based on size, the fundamental prohibitions of the Volcker Rule
apply to banking entities of any size, including the Company and the Bank. The
final rules are effective April 1, 2014, but the conformance period has been
extended from its statutory end date of July 21, 2014 until July 21, 2015. The
Company has evaluated the implications of the final rules on its investments and
does not expect any material financial implications.

Under the final rules implementing
the Volcker Rule, banking entities would have been prohibited from owning
certain collateralized debt obligations (CDOs) backed by trust preferred
securities (TruPS) as of July 21, 2015, which could have forced banking
entities to recognize unrealized market losses based on the inability to hold
any such investments to maturity. However, on January 14, 2014, the federal bank
regulatory agencies issued an interim rule, effective April 1, 2014, exempting
TruPS CDOs from the Volcker Rule if (i) the CDO was established prior to May 19,
2010, (ii) the banking entity reasonably believes that the offering proceeds of
the CDO were used to invest primarily in TruPS issued by banks with less than
$15 billion in assets, and (iii) the banking entity acquired the CDO on or
before December 10, 2013. The Company currently does not have any impermissible
holdings of TruPS CDOs under the interim rule, and therefore, will not be
required to divest of any such investments or change the accounting treatment.
However, regulators are soliciting comments to the Interim Rule, and this
exemption could change prior to its effective date.

Ability-to-Repay and
Qualified Mortgage Rule.Pursuant to the Dodd-Frank Act,
the CFPB issued a final rule on January 10, 2013 (effective on January 10,
2014), amending Regulation Z as implemented by the Truth in Lending Act,
requiring mortgage lenders to make a reasonable and good faith determination
based on verified and documented information that a consumer applying for a
mortgage loan has a reasonable ability to repay the loan according to its terms.
Mortgage lenders are required to determine consumers ability to repay in one of
two ways. The first alternative requires the mortgage lender to consider the
following eight underwriting factors when making the credit decision: (i)
current or reasonably expected income or assets; (ii) current employment status;
(iii) the monthly payment on the covered transaction; (iv) the monthly payment
on any simultaneous loan; (v) the monthly payment for mortgage-related
obligations; (vi) current debt obligations, alimony, and child support; (vii)
the monthly debt-to-income ratio or residual income; and (viii) credit history.
Alternatively, the mortgage lender can originate qualified mortgages, which
are entitled to a presumption that the creditor making the loan satisfied the
ability-to-repay requirements. In general, a qualified mortgage is a mortgage
loan without negative amortization, interest-only payments, balloon payments, or
terms exceeding 30 years. In addition, to be a qualified mortgage the points and
fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified
mortgages that are higher-priced (e.g. subprime loans) garner a rebuttable
presumption of compliance with the ability-to-repay rules, while qualified
mortgages that are not higher-priced (e.g. prime loans) are given a safe
harbor of compliance. A small creditor exemption from the qualified mortgage
rules applies to financial institutions that meet the following requirements:
(i) have assets below $2 billion (adjustable annually by CFPB); (ii) creditor
originated no more than 500 first-lien, closed-end residential mortgages subject
to the ability-to-repay requirements in the preceding calendar year; and (iii)
creditor holds the qualified mortgage loan in its portfolio after origination.
As a small creditor, the Company is generally exempt from the qualified
mortgage rules. The Company does comply with applicable Truth in Lending
requirements.

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Consumer Laws and
Regulations. The Bank is also
subject to certain consumer laws and regulations issued thereunder that are
designed to protect consumers in transactions with banks. These laws include the
Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer
Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act,
Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act, the Fair Housing
Act, and the Servicemembers Civil Relief Act, among others. The laws and related
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions transact business with customers. The Bank must
comply with the applicable provisions of these consumer protection laws and
regulations as part of its ongoing customer relations.

Incentive
Compensation. In June 2010, the
federal bank regulatory agencies issued comprehensive final guidance on
incentive compensation policies intended to ensure that the incentive
compensation policies of financial institutions do not undermine the safety and
soundness of such institutions by encouraging excessive risk-taking. The
Interagency Guidance on Sound Incentive Compensation Policies, which covers all
employees that have the ability to materially affect the risk profile of
financial institutions, either individually or as part of a group, is based upon
the key principles that a financial institutions incentive compensation
arrangements should (i) provide incentives that do not encourage risk-taking
beyond the institutions ability to effectively identify and manage risks, (ii)
be compatible with effective internal controls and risk management, and (iii) be
supported by strong corporate governance, including active and effective
oversight by the financial institutions board of directors.

The Federal Reserve and the OCC
will review, as part of the regular, risk-focused examination process, the
incentive compensation arrangements of financial institutions, such as the
Company and the Bank, that are not large, complex banking organizations. These
reviews will be tailored to each financial institution based on the scope and
complexity of the institutions activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be
included in reports of examination. Deficiencies will be incorporated into the
institutions supervisory ratings, which can affect the institutions ability to
make acquisitions and take other actions. Enforcement actions may be taken
against a financial institution if its incentive compensation arrangements, or
related risk-management control or governance processes, pose a risk to the
institutions safety and soundness and the financial institution is not taking
prompt and effective measures to correct the deficiencies. At December 31, 2013,
the Company and the Bank have not been made aware of any instances of
non-compliance with the final guidance.

Effect of Governmental
Monetary Policies

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

Reporting Obligations under
Securities Laws

The Company is subject to the
periodic reporting requirements of the Exchange Act, including the filing of
annual, quarterly and other reports with the SEC. As an Exchange Act reporting
company, the Company is directly affected by the Sarbanes-Oxley Act of 2002 and
regulations promulgated thereunder by the SEC, which are aimed at improving
corporate governance and reporting procedures. The Company is complying with the
rules and regulations implemented pursuant to the Sarbanes-Oxley Act and intends
to comply with any applicable SEC rules and regulations implemented in the
future.

Employees

At December 31, 2013, the Company
had 102 full time equivalent employees. None of its employees is represented by
any collective bargaining unit. The Company considers relations with its
employees to be good.

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The Company has purchased Bank
Owned Life Insurance (BOLI) policies on executives and key personnel of the
Company. BOLI is a bank-eligible asset designed to recover costs of providing
pre- and post-retirement benefits and/or to finance general employee benefit
expenses. Under BOLI policies, the executives and other key personnel are the
insured, and the Company is the owner and beneficiary of the policies. The
insured has no claim to the insurance policy or to the policys cash value.
Under separate split dollar agreements, a portion of any death benefit may be
paid to the beneficiaries of the insured employees, subject to the terms and
restrictions of the split dollar endorsement agreement between the officer and
the Company.

Availability of Information

Prior to the Reorganization, the
Bank filed its periodic and annual reports with the OCC. Beginning with the
Reorganization on December 16, 2013, the Company files annual, quarterly, and
other reports under the Exchange Act with the SEC. The Companys filings are
available through the SECs website atwww.sec.gov. In addition, our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, plus any amendments to these reports, are available, free of
charge, at www.vnb.com in the Investor Relations section. These reports are
available as soon as reasonably practical after they are filed with the SEC. The
information on the Banks Internet website is not incorporated into this Annual
Report on Form 10-K or any other filing the Company makes with the SEC.

Item 1A. RISK
FACTORS.

Not required

Item 1B. UNRESOLVED STAFF
COMMENTS.

None

Item 2.
PROPERTIES.

The Company and its subsidiaries
currently occupy seven full-service banking facilities in Charlottesville,
Winchester, and Albemarle and Orange Counties. The Companys main office and a
full-service banking facility are located at 404 People Place, Charlottesville,
Virginia. Full-service banking facilities are also located at 222 East Main
Street, Charlottesville, Virginia; 1580 Seminole Trail, Charlottesville,
Virginia; 1900 Arlington Boulevard, Charlottesville, Virginia; 102 East Main
Street, Orange, Virginia; 186 North Loudoun Street, Winchester, Virginia; and
3119 Valley Avenue, #102, Winchester, Virginia. In addition, an administrative
office was opened in 2013 at 402 South Main Street, Culpeper,
Virginia.

The property located at 1580
Seminole Trail, Charlottesville, VA was leased in 1998 from Sunny Hill Land
Trust (an entity in which Hunter Craig, a director of the Bank, holds a
beneficial interest) for a term of five years with six five-year renewal
options. In 2008, the Bank exercised the second five-year renewal option.
Monthly rent for this space was a fair market rate as verified by an independent
third-party appraisal. In the first quarter of 2012, the Bank purchased the
property from Sunny Hill Land Trust, thus terminating the lease.

As of December 31, 2013, all of
the other full-service banking locations were leased as described further below.

VNBTrust leases space at 310 4th Street, NE, Suite 102, Charlottesville, Virginia. As of January 1, 2014, this property was subleased to SRMC Holdings LLC, as part of the Sale Agreement described in Note 1 of the notes to the consolidated financial statements contained in Item 8. Trust services are now offered in offices at 404 People Place, Charlottesville, Virginia.

Lease terms for the
above-mentioned properties are as follows:

404 People Place,
Charlottesville, VA:

This
property is located just east of the Charlottesville city limits on Pantops
Mountain, and fronts on Route 250 East. The building was constructed by the Bank
on a pad site leased in 2005 from Pantops Park, LLC for a term of twenty years,
with seven five-year renewal options. William D. Dittmar, Jr., a director of the
Bank, is the sole managing member of Pantops Park, LLC. Monthly rent for this
space is a fair market rate as verified by an independent third-party appraisal.
A five-story building, consisting of approximately 43,000 square feet, was
completed in early 2008, and the Bank opened this full-service office in April,
2008. Additionally, the office building serves as the corporate headquarters for
the Company and the Banks Operations Center.

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222 East Main Street,
Charlottesville, VA:

This
property was originally leased from Williams Pentagram Corporation in 1998. The
Bank entered into a new five-year lease in May, 2013 which provides for four
more five-year renewal options.

1900 Arlington Boulevard,
Charlottesville, VA:

This
property was leased in 1998 from Paul and Jean Holdren for a term of twenty
years with seven five-year renewal options. The Arlington Boulevard site has
additional space not occupied by the banking facility. This space has been
leased to tenants.

102 East Main Street, Orange,
VA:

This
property was leased in 2000 from The Bryant Foundation for a term of three years
with three five-year renewal options. The Bank has exercised the third five-year
renewal option. The Bank entered into a new five-year lease in January, 2011 for
additional space on the second floor, where the Bank houses its disaster
recovery site and some other operational office space. This lease has three
two-year renewal options.

186 North Loudoun Street,
Winchester, VA:

This
property was originally leased in 2001 from Shenandoah University for a term of
ten years with two five-year renewal options. In 2011, the Bank and Shenandoah
University entered a new lease for this property for a term of five years with
one five-year renewal term.

3119 Valley Avenue, #102,
Winchester, VA:

This
property is located in the Creekside Station Shopping Center. It was leased in
2003 from Joleen, L.C. for a term of ten years expiring January 31, 2014, with
two five-year renewal options. In August, 2013, the lease was amended effective
February 1, 2014 to extend the lease until January 31, 2019 with reduced payment
terms.

310 4thStreet, N.E., Suite 102, Charlottesville, VA (VNBTrust, N.A.):

This
property was leased by VNBTrust in 2006 from Court Square, L.L.C. for a term of
five years, with two five-year renewal options. The lease was amended effective
December 20, 2010 to extend the lease until July 31, 2016 and to provide for an
additional five-year renewal term with reduced payment terms. As of January 1,
2014, this property was subleased to SRCM Holdings, LLC for the remaining
current lease term until July 31, 2016.

Item 3. LEGAL
PROCEEDINGS.

In the ordinary course of its
operations, the Companys subsidiaries are parties to various legal proceedings.
Based on the information presently available, management believes that the
ultimate outcome of such proceedings will not have an adverse effect on the
business or financial condition of the Company and its subsidiaries.

Item 4. MINE SAFETY
DISCLOSURES.

Not applicable

15

---



Part II

|**Item
      5.** | MARKET FOR
      REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF
      EQUITY SECURITIES.
|----------------- | ------------------------------------------------------------------------------------------------------------------------

Virginia National Bankshares
Corporations Common Stock is quoted on the OTC Markets Groups OTCQB tier
(OTCQB) under the symbol VABK. As of December 31, 2013, the Company had issued
and outstanding 2,690,320 shares of Common Stock. These shares were held by
approximately 556 shareholders of record and others who held shares at brokerage
firms.

Prior to the second quarter of
2013, the Company had not paid a cash dividend. On June 18, 2013, the Board of
Directors declared a quarterly cash dividend of $0.05 per share, payable on July
19, 2013 to shareholders of record as of July 8, 2013. Subsequently, quarterly
dividends of $0.05 per share were declared as of September 19, 2013 and December
17, 2013. The payment of dividends is at the discretion of the Companys Board
of Directors and is subject to various federal and state regulatory limitations.
As a bank holding company, the ability to pay dividends is dependent upon the
overall performance and capital requirements of the subsidiary Bank.

For the years ended December 31,
2013 and December 31, 2012, the data in the table below represents the high bid
and low bid quotations that occurred for the periods shown as reported by the
OTCQB. These over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Additionally, the table shows the dividends
declared per quarter in 2013 and 2012.

|                    |  | Bid Quotations |   | Dividends Declared
|------------------- |  | -------------- | - | ------------------
|                    |  | 2013           |   | 2012              
|                    |  | High           |   | Low               
|First
      Quarter |  |                | $ | 15.85             
|Second Quarter      |  |                | $ | 16.75             
|Third
      Quarter |  |                | $ | 17.10             
|Fourth Quarter      |  |                | $ | 18.25             
|Total               |  |                |   |                   

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

Item 6. SELECTED FINANCIAL
DATA.

Not required.

|**Item 7.** | MANAGEMENTS
      DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
|----------- | ---------------------------------------------------------------------------------------------------------------

The following discussion provides
information about the major components of the results of consolidated 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.

Application of Critical
Accounting Policies and Critical Accounting Critical Estimates

The accounting and reporting
policies followed by the Company conform, in all material respects, to
accounting principles generally accepted in the United States (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.

16

---



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:

- Allowance for loan lossesis a reserve established through a
  provision for loan losses charged to expense, which represents managements
  best estimate of probable losses that have been incurred within the existing
  portfolio of loans. The allowance, in the judgment of management, is necessary
  to reserve for estimated loan losses and risks inherent in the loan portfolio.
  Accounting policies related to the allowance for loan losses are considered to
  be critical, as these policies involve considerable subjective judgment and
  estimation by management. The Companys allowance for loan loss methodology
  includes allowance allocations calculated in accordance with Accounting
  Standards Codification (ASC) Topic 310, Receivables and allowance
  allocations calculated in accordance with ASC Topic 450, Contingencies. The
  level of the allowance reflects managements continuing evaluation of industry
  concentrations, specific credit risks, loan loss experience, current loan
  portfolio quality, present economic, political and regulatory conditions and
  unidentified losses inherent in the current loan portfolio, as well as trends
  in the foregoing. Portions of the allowance may be allocated for specific
  credits; however, the entire allowance is available for any credit that, in
  managements judgment, should be charged off. While management utilizes its
  best judgment and information available, the ultimate adequacy of the
  allowance is dependent upon a variety of factors beyond the Companys control,
  including the performance of the Companys loan portfolio, the economy,
  changes in interest rates and the view of the regulatory authorities toward
  loan classifications. See the section captioned Allowance for Loan Losses
  elsewhere in this discussion and Note 3  Loans and Note 4  Allowance for
  Loan Loss in the notes to consolidated financial statements, included in Item
  8. Financial Statements and Supplementary Data, elsewhere in this report for
  further details of the risk factors considered by management in estimating the
  necessary level of the allowance for loan losses.
- Impaired loansare loans so designated when, based on
  current information and events, it is probable the Company will be unable to
  collect all amounts due in accordance with the original contractual terms of
  the loan agreement, including scheduled principal and interest payments. If a
  loan is impaired, a specific valuation allowance is allocated, if necessary,
  so that the loan is reported net, at the present value of estimated future
  cash flows using the loans existing rate or at the fair value of collateral
  if repayment is expected solely from the collateral. Any fair value
  adjustments are recorded in the period incurred as provision for loan losses
  on the Consolidated Statements of Income. Additional information on impaired
  loans, which includes both Troubled Debt Restructurings (TDRs) and
  non-accrual loans, is included in Note 3  Loans and Note 4  Allowance for
  Loan Loss in the notes to consolidated financial statements.
- Fair value measurementsare used by the Company to record fair
  value adjustments to certain assets and liabilities and to determine fair
  value disclosures. The Companys valuation methodologies may produce a fair
  value calculation that may not be indicative of net realized value or
  reflective of future fair values. While management believes the Companys
  valuation methodologies are appropriate and consistent with other market
  participants, the use of different methodologies or assumptions to determine
  the fair value of certain financial instruments could result in a different
  estimate of fair value at the reporting date. Additional discussion of
  valuation methodologies is presented in Note 14  Fair Value Measurements of
  the Companys consolidated financial statements.
- Securities Available for Saleare carried at fair value in
  accordance with ASC 320, Investments  Debt and Equity Securities. The
  Companys unrestricted securities are classified as available for sale,
  meaning that the Company intends to hold these securities for an indefinite
  period of time but not necessarily to maturity. Any decision to sell a
  security classified as available for sale 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. 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. See the section captioned Securities later in this
  discussion and Note 1  Summary of Significant Accounting Policies and Note 2
   Securities in the notes to consolidated financial
statements.

17

---



- Other-than-temporary
  impairment of securitiesaccounting
  policies require a periodic review by management to determine if the decline
  in the fair value of any security appears to be other-than-temporary. Factors
  considered in determining whether the decline is other-than-temporary include,
  but are not limited to: the length of time and the extent to which fair value
  has been below cost; the financial condition and near-term prospects of the
  issuer; and the Companys intent to sell. See Note 1  Summary of Significant
  Accounting Policies and Note 2  Securities, in the notes to consolidated
  financial statements, for further details on the accounting policies for
  other-than-temporary impairment of securities and the methodology used by
  management to make this evaluation.
- Other real estate owned
  (OREO)are assets acquired through,
  or in lieu of, loan foreclosures and are held for sale. Initially the OREO is
  recorded at fair value less cost to sell at the date of foreclosure,
  establishing a new cost basis. Subsequent to foreclosure, valuations are
  periodically performed by management, and the assets are carried at the lower
  of carrying amount or fair value less cost to sell. More information regarding
  the valuation methods used as well as the accounting for OREO is presented in
  Note 5  Other Real Estate Owned and Note 14  Fair Value Measurements of the
  Companys consolidated financial statements.
- Income taxaccounting policies have the objective to recognize
  the amount of taxes payable or refundable for the current year and deferred
  tax assets and liabilities for future tax consequences of events that have
  been recognized in an entitys financial statements or tax returns. Judgment
  is required in assessing the future tax consequences of events that have been
  recognized in the Companys consolidated financial statements or tax returns.
  Fluctuations in the actual outcome of these future tax consequences could
  impact the Companys consolidated financial condition or results of
  operations. Additional discussion on the accounting for income taxes is
  presented in Note 1  Summary of Significant Accounting Policies and in Note 8
   Income Taxes of the Companys consolidated financial statements.

Non-GAAP Presentations

The Company, in referring to its
net income, is referring to income computed under GAAP. Managements Discussion
and Analysis of Financial Condition and Results of Operations also refers to
various calculations that are non-GAAP presentations. They include:

- Fully taxable-equivalent
  (FTE) adjustmentsare the result of
  increasing income from tax-free investments by an amount equal to the taxes
  that would be paid if the income were fully taxable based on a 34% Federal
  income tax rate, thus making tax-exempt yields comparable to taxable asset
  yields.
- Efficiency
  ratiois computed as a percentage of
  non-interest expense divided by the sum of net interest income (on an FTE
  basis) and non-interest income. This is a financial measure which may provide
  important information concerning the Companys operational efficiency.
  Comparison of the Companys efficiency ratio with those of other companies may
  not be possible because other companies may calculate the efficiency ratio
  differently.

18

---



Results of Operations

The Company reported net income
totaled $6.896 million, or $2.56 diluted per common share, in 2013 compared to
$5.481 million, or $2.04 diluted per common share in 2012. Net income increased
$1.415 million for 2013 compared to 2012. The increase was primarily the result
of a $5.814 million increase in non-interest income that was offset by an
increase of $2.385 million in non-interest expense, a decrease of $1.174 million
in net interest income, and an increase in provision for loan losses and
provision for income taxes of $239 thousand and $601 thousand, respectively.

Virginia National Bankshares
Corporation has two reportable segments, the commercial bank and VNBTrust.
Commercial banking involves making loans and generating deposits from
individuals and businesses. Loan fee income, service charges from deposit
accounts, and other non-interest-related fees such as automatic teller machine
fees and safe deposit box fees generate additional income for the commercial
bank. VNBTrust services include investment management, trust account
administration, and estate planning. VNBTrust receives fees on both a fixed
basis and a performance basis for providing of these services.

The commercial bank earned net
income of $2.049 million in 2013, $111 thousand more than the $1.938 million
earned in 2012. VNBTrust earned net income of $4.847 million in 2013, compared
to net income of $3.543 million in 2012, an increase of $1.304
million.

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

Consolidated Return on Equity
and Assets

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

|                                       |  | 2013   |  | 2012   |  | 2011  
|-------------------------------------- |  | ------ |  | ------ |  | ------
|Return on average
    assets           |  | 1.40%  |  | 1.11%  |  | 0.51% 
|Return on average equity               |  | 12.70% |  | 10.90% |  | 4.95% 
|Average equity to average
      assets |  | 11.04% |  | 10.21% |  | 10.21%
|Cash dividend payout ratio             |  | 5.86%  |  | 0.00%  |  | 0.00% 

One of the ratios the Company examines in its evaluation of net income is the efficiency ratio, which measures the cost to produce one dollar of revenue. A lower ratio, computed by dividing non-interest expense by the sum of net interest income (on an FTE basis) and non-interest income, is an indicator of increased efficiency. The efficiency ratio for 2013 was positively impacted as a result of a revenue increase of $4.732 million as compared to 2012 and despite an increase in non-interest expense of $2.385 million in 2013 over 2012. The increases in revenue and expense in 2013 from 2012 was primarily attributable to VNBTrust's performance fee revenue and VNBTrust's incentive compensation expense. Similarly, the efficiency ratio for 2012 improved from 2011 as a result of an increase in revenue of $6.542 million that came namely from VNBTrust's performance fee revenue. Non-interest expense for 2012 was $2.277 million greater than 2011 due in part to OREO valuation write downs and an increase in VNBTrusts incentive compensation that was associated with the higher performance fee revenue.

The efficiency ratio for the years ended December 31, 2013, 2012, and 2011 is shown below.

|                       |  | 2013  |  | 2012  |  | 2011 
|---------------------- |  | ----- |  | ----- |  | -----
|Efficiency
      Ratio |  | 67.9% |  | 70.9% |  | 82.0%

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. Net interest income represented
45.0% of total revenue in 2013.Net interest margin 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 and net interest margin.

19

---



During 2013, net interest income,
on a tax equivalent basis, was $14.601 million compared to $15.683 million in
2012. The $1.082 million decline in tax-equivalent net interest income year to
year was mainly attributed to interest margin compression during this period of
historically low interest rates. The net interest margin, which is net interest
income expressed as a percentage of average earning assets, declined 21 basis
points to 3.21% for the year ended December 31, 2013 from 3.42% reported for
2012. Further, the decrease in the net interest margin for 2012 was 31 basis
points from the 3.73% net interest margin reported for the year ended December
31, 2011.

Total interest income, on a tax
equivalent basis, aggregated $15.598 million for 2013, down $1.366 million from
2012, primarily as a result of a decline in loan interest income of $1.722
million. The decline in total interest income from loan income was partially
offset by an increase of $389 thousand in tax equivalent interest income from
the investment portfolio when comparing 2013 to 2012. In comparing 2012 to 2011,
total interest income, on a tax equivalent basis, declined $884 thousand to
$16.964 million in 2012 from $17.848 million in 2011. The tax-equivalent yield
on interest-earning assets was 3.43% for 2013, compared to 3.70% for 2012 and
4.14% for 2011.

The $1.722 million decrease in
interest income earned on the loan portfolio for 2013, from $14.720 million in
2012, was mainly attributable to rate adjustments and lower rates on new loans.
The yield on the loan portfolio decreased to 4.43% for 2013 from 4.99% for 2012,
resulting in a decrease of $1.567 million in loan income. The remaining $155
thousand decline in interest earned on loans for 2013 was due to a slight
decrease in average loan balances to $293.5 million in 2013, fairly level with
the average balance of $294.8 million for 2012.

The decline in interest income
earned on the loan portfolio during 2013 was a continuation of the rate
compression experienced over the past few years during this period of
historically low rates and intense competition for loans. Loan interest income
had decreased $1.061 million for 2012 from $15.781 million in 2011. The yield on
the loan portfolio decreased 44 basis points in 2012 from 5.43% for
2011.

Although earning assets averaged
$4.153 million less in 2013 than in 2012, the change in the mix of earning
assets contributed positively to the change in net interest income. The major
volume changes occurred with the average balances in low yielding federal funds
sold declining $24.650 million year over year, offset by the Companys
securities portfolio averaging $21.357 million more in 2013 versus 2012. The
increase in the securities portfolio balances was the result of managements
efforts to deploy excess funds in overnight federal funds sold, which earned on
average 0.22% during 2013, by investing in securities which earned on average
1.99%.

Interest earned on the securities
portfolio, on a tax-equivalent basis, increased to $2.513 million for 2013 from
$2.124 million in 2012 and $2.019 million in 2011. Average securities balances
increased to $126.157 million (27.7% of average earning assets) for 2013 from
$104.800 million (22.8% of average earning assets) and $89.227 million (20.7% of
average earning assets) in 2012 and 2011, respectively. The average yield on
investment securities declined only 4 basis points from 2.03% in the
corresponding 2012 period. In 2011, the average yield on the investment
portfolio was 2.26%, or 23 basis points higher than in 2012. The continuing low
rate environment continues to impact the overall portfolio yield.

Managements asset/liability
strategy for the investment portfolio, starting in 2012, was to diversify the
investment portfolio by adding mortgage-backed securities and bank-qualified
municipal bonds. The average duration of the investment portfolio continues to
be relatively short. Adding mortgage-backed securities has resulted in providing
a consistent stream of cash flow that can be diverted to loan growth or
re-invested in higher yielding securities when interest rates rise.

Total interest expense decreased
by $284 thousand for 2013 to $997 thousand from $1.281 million for 2012, mainly
due to a decline in the rates paid for interest-bearing liabilities from 0.43%
for 2012 to 0.32% for 2013. The decrease in interest expense was partially a
result of lower time deposit rates and a change in the mix of deposit balances.
Time deposit rates averaged 0.59% in 2013, or 18 basis points lower than the
0.77% paid in 2012. In total, the average balance of interest-bearing
liabilities increased $7.687 million. Average time deposit balances decreased
$8.016 million in 2013, while average balances on interest checking accounts,
daily overnight repurchase agreements,
and money market accounts increased $10.056 million, $4.968 million, and $679
thousand, respectively.

20

---



Total interest expense decreased
by $492 thousand for 2012 from $1.773 million for 2011. Further, rates paid for
interest-bearing liabilities declined from 0.59% for 2011 to 0.43% for 2012.
Over these same periods, time deposit rates averaged 30 basis points lower than
the 1.07% paid in 2011. Average time deposit balances decreased $9.498 million
in 2012 compared to 2011, while average interest checking and money market
account balances increased $5.260 million and $2.710 million, respectively, for
a net decline in the average balance of interest-bearing deposit accounts of
$1.528 million.

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. Below is a
table illustrating the average balances of these accounts as a percentage of
total deposit account balances.

|**Non-interest and low-cost deposit account
      analysis**
|------------------------------------------------------------
|                                                            
|(dollars in
      thousands)                                
|                                                            
|                                                            
|Non-interest demand deposits                                
|Interest
      checking accounts                            
|Money market deposit accounts                               
|Total non-interest and
    low-                             
|cost deposit accounts                                       
|                                                            
|Total deposit account balances                              

21

---



Consolidated Average Balance
Sheet And Analysis of Net Interest Income

|                                               |  | Year Ended December 31,
    2013 |         | Year Ended December 31,
    2012 |  | Year Ended December 31,
    2011
|---------------------------------------------- |  | -------------------------------- | ------- | -------------------------------- |  | --------------------------------
|                                               |  | Average                          |         | Interest                         |  | Average                         
|(dollars in thousands)                         |  | Balance                          |         | Income                           |  | Yield/                          
|                                               |  |                                  |         |                                  |  | Expense                         
|ASSETS                                         |  |                                  |         |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Interest Earning
      Assets:                 |  |                                  |         |                                  |  |                                 
|Securities                                     |  |                                  |         |                                  |  |                                 
|Taxable
      Securities                       |  | $                                | 106,842 |                                  |  | $                               
|Tax
      Exempt Securities(1)                 |  |                                  | 19,315  |                                  |  |                                 
|Total
      Securities(1)                      |  |                                  | 126,157 |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Loans:                                         |  |                                  |         |                                  |  |                                 
|Real
      estate                              |  |                                  | 230,320 |                                  |  |                                 
|Commercial                                     |  |                                  | 50,382  |                                  |  |                                 
|Consumer                                       |  |                                  | 12,769  |                                  |  |                                 
|Total
      Loans                              |  |                                  | 293,471 |                                  |  |                                 
|Fed
      Funds Sold                           |  |                                  | 33,770  |                                  |  |                                 
|Other
      Interest Bearing Deposits          |  |                                  | 1,250   |                                  |  |                                 
|                                              
|Total Earning
      Assets                     |  |                                  | 454,648 |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Less: Allowance for
      Loan Losses          |  |                                  | (3,439  | )                                |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Total
      Non-Earning Assets                 |  |                                  | 40,728  |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Total
      Assets                             |  | $                                | 491,937 |                                  |  |                                 
|                                              
|LIABILITIES AND SHAREHOLDERS' EQUITY           |  |                                  |         |                                  |  |                                 
|                                              
|Interest Bearing
      Liabilities:            |  |                                  |         |                                  |  |                                 
|Interest
      Bearing Deposits:               |  |                                  |         |                                  |  |                                 
|Interest
      Checking                        |  | $                                | 77,954  |                                  |  | $                               
|Money
      Market Deposits                    |  |                                  | 94,369  |                                  |  |                                 
|Time
      Deposits                            |  |                                  | 128,816 |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Total
      Interest-Bearing Deposits          |  |                                  | 301,139 |                                  |  |                                 
|                                              
|Securities Sold Under
      Agreement          |  |                                  |         |                                  |  |                                 
|to
      Repurchase                            |  |                                  | 7,941   |                                  |  |                                 
|                                              
|Total
      Interest-Bearing Liabilities       |  |                                  | 309,080 |                                  |  |                                 
|                                              
|Non-Interest-Bearing Liabilities:              |  |                                  |         |                                  |  |                                 
|Demand
      deposits                          |  |                                  | 127,480 |                                  |  |                                 
|Other
      liabilities                        |  |                                  | 1,067   |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Total
      Liabilities                        |  |                                  | 437,627 |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Shareholders'
      Equity                     |  |                                  | 54,310  |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Total
      Liabilities & Shareholders' Equity |  | $                                | 491,937 |                                  |  |                                 
|                                              
|Net Interest
      Income (Tax Equivalent)     |  |                                  |         |                                  |  | $                               
|                                               |  |                                  |         |                                  |  |                                 
|Interest Rate
      Spread(2)                  |  |                                  |         |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Interest Expense
      as a Percentage         |  |                                  |         |                                  |  |                                 
|of
      Average Earning Assets                |  |                                  |         |                                  |  |                                 
|                                               |  |                                  |         |                                  |  |                                 
|Net Interest
      Margin(3)                   |  |                                  |         |                                  |  |                                 

|(1) |  | Tax-exempt income for investment securities has been
      adjusted to a tax-equivalent basis, resulting in an increase in interest
      income of $152 thousand for 2013 and $60 thousand for 2012. A Federal
      income tax rate of 34% was used.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest spread is the average yield earned on earning
      assets less the average rate paid on interest-bearing
    liabilities.                                                                                                                   
|   
|(3) |  | Net interest margin is net interest income expressed as
      a percentage of average earning assets.                                                                                                                                                 

22

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Volume and Rate
Analysis

The following table describes the
impact on the net interest income of the Company resulting from changes in
average balances and average 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.

2013 compared to
2012(dollars in thousands)

|                                            |  | Change due to: |      | Increase/
|------------------------------------------- |  | -------------- | ---- | ---------
|                                            |  | Volume         |      | Rate     
|Assets:                                     |  |                |      |          
|Securities                                  |  | $              | 426  |          
|Loans:                                      |  |                |      |          
|Real
      estate                           |  |                | (439 | )        
|Commercial                                  |  |                | 292  |          
|Consumer                                    |  |                | (8   | )        
|Total loans                                 |  |                | (155 | )        
|Federal funds sold                          |  |                | (52  | )        
|Other interest bearing
    deposits         |  |                | 5    |          
|Total earning assets                        |  | $              | 224  |          
|Liabilities and
      Shareholders' equity: |  |                |      |          
|Interest-bearing deposits:                  |  |                |      |          
|Interest
      checking                     |  | $              | 5    |          
|Money
      market                          |  |                | 1    |          
|Time
      deposits                         |  |                | (58  | )        
|Total interest-bearing
    deposits         |  |                | (52  | )        
|Short-term borrowings                       |  |                | 10   |          
|Total interest-bearing
      liabilities    |  |                | (42  | )        
|Change in net interest
    income           |  | $              | 266  |          
|                                           
|2012 compared
      to 2011                
|(dollars in
      thousands)               
|                                            |  | Change due to: |      | Increase/
|                                            |  | Volume         |      | Rate     
|Assets:                                     |  |                |      |          
|Securities                                  |  | $              | 330  |          
|Loans:                                      |  |                |      |          
|Real
      estate                           |  |                | (83  | )        
|Commercial                                  |  |                | 203  |          
|Consumer                                    |  |                | 43   |          
|Total loans                                 |  |                | 163  |          
|Federal funds sold                          |  |                | 7    |          
|Other interest bearing
    deposits         |  |                | 8    |          
|Total earning assets                        |  | $              | 508  |          
|Liabilities and
      Shareholders' equity: |  |                |      |          
|Interest-bearing deposits:                  |  |                |      |          
|Interest
      checking                     |  | $              | 2    |          
|Money
      market                          |  |                | 5    |          
|Time
      deposits                         |  |                | (96  | )        
|Total interest-bearing
    deposits         |  |                | (89  | )        
|Short-term borrowings                       |  |                | 1    |          
|Total interest-bearing
      liabilities    |  |                | (88  | )        
|Change in net interest
    income           |  | $              | 596  |          

23

---



Provision for Loan Losses

The level of the allowance
reflects changes in the size of the portfolio or in any of its components as
well as managements continuing evaluation of industry concentrations, specific
credit risks, loan loss experience, current loan portfolio quality and economic,
political and regulatory conditions. Portions of the allowance may be allocated
for specific credits; however, the entire allowance is available for any credit
that, in managements judgment, should be charged off. While management utilizes
its best judgment and information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors beyond the Companys control,
including the performance of the Companys loan portfolio, the economy, changes
in interest rates and the view of the regulatory authorities toward loan
classifications. Additional information concerning managements methodology in
determining the adequacy of the allowance for loan losses is contained in Note 1
and Note 4 of the notes to consolidated financial statements, found in Item
8.

Based on managements continuing
evaluation of the loan portfolio in 2013, the Company recorded a provision for
loan losses of $160 thousand, compared to 2012 when the Company recorded a net
recovery of loan loss provision of $79 thousand. The net increase in loan
balances of $16.045 million as of December 31, 2013 from December 31, 2012 was
the major factor influencing the $239 thousand variance in the provision for
loan loss between 2013 and 2012. As of December 31, 2013, the allowance for loan
losses was $3.360 million, an increase of $93 thousand from $3.267 million at
December 31, 2012. In 2011, the provision for loan loss totaled $535 thousand,
and the allowance for loan loss ended that year at $3.741 million.

Factors
positively affecting the provision for the years 2013 and 2012 compared to 2011
included an improved economic climate, an overall improvement in asset quality,
and a lower level of net charge-offs. These factors resulted in the Companys
allowance to total loans outstanding ratio to be 1.12% at December 31, 2013,
compared to the 1.15% reported at December 31, 2012 and the 1.28% at December
31, 2011.

There were $161 thousand in loan
balances charged off during 2013, with a total of $94 thousand in recoveries of
previously charged-off balances. This resulted in net charge-offs of $67
thousand during 2013 and compares favorably to the net charge-offs of $395
thousand and $524 thousand reported for 2012 and 2011, respectively. The ratio
of net charge-offs to average loans remained strong at 0.02% for 2013 compared
to 0.13% for 2012 and 0.18% for 2011. See the section captioned Allowance for
Loan Losses elsewhere in this discussion and Note 3  Loans in the notes to
consolidated financial statements, included in Item 8. Financial Statements and
Supplementary Data, elsewhere in this report for further details of the risk
factors considered by management in estimating the necessary level of the
allowance for loan losses.

Non-Interest
Income

Non-interest income increased to
$17.854 million for 2013 from $12.040 million in 2012. The increase of $5.814
million principally resulted from fee revenues from VNBTrust, which were up
$5.252 million in 2013 as compared to 2012.Non-interest income, exclusive of trust
fees, totaled $2.873 million in 2013, an increase of $562 thousand as compared
to $2.311 million in 2012.

24

---



The major components of
non-interest income are detailed below. Year-to-year variances are shown for
VNBTrust income and for other non-interest income categories.

|                                                              |  | Years ended
      December 31, |        |      |   |         
|------------------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | --------
|(dollars in
      thousands)                                  |  | 2013                           |        | 2012 |   | Variance
|VNBTrust:                                                     |  |                                |        |      |   |         
|Performance fees                                              |  | $                              | 12,267 |      | $ | 7,215   
|Management
      fees                                         |  |                                | 2,714  |      |   | 2,514   
|Total Trust Income                                            |  |                                | 14,981 |      |   | 9,729   
|                                                             
|Non-interest
      income, excluding trust income:            |  |                                |        |      |   |         
|Customer service fees                                         |  |                                | 921    |      |   | 982     
|Debit/credit card
      and ATM fees                          |  |                                | 729    |      |   | 726     
|Earnings/increase in value of
      bank owned life insurance |  |                                | 445    |      |   | 280     
|Gains (losses) on
      sales of assets                       |  |                                | 304    |      |   | (21     
|Gains on sales of
      securities                            |  |                                | 50     |      |   | 133     
|Other                                                         |  |                                | 424    |      |   | 211     
|Total non-interest income, excluding
      trust income       |  |                                | 2,873  |      |   | 2,311   
|                                                             
|Total                                                         |  | $                              | 17,854 |      | $ | 12,040  

VNBTrust Non-Interest
Incomeis primarily derived from two forms of fee income: performance fees and fixed fees. Performance fees are based on the year-over-year increase in value (both realized and unrealized gains) in assets under management, while fixed fees are set as a percent of assets under management without regards to investment returns. VNBTrust recorded $12.267 million in performance fee income in 2013 as compared to $7.215 million in 2012, an increase of 70.0%. The significant increase in performance fees in 2013 as compared to 2012 bears some correlation to the over 30% returns generated in the U.S. equity markets during 2013. VNBTrust recorded fixed fee income of $2.714 million in 2013, which is an increase of $200 thousand when compared to the $2.514 million reported in 2012. In accordance with pre-established agreements, VNBTrust staff was compensated based on the level of fees earned. There is a correlated increase in salaries and benefits expense for 2013 and 2012 that is discussed below under non-interest expense.

Gain on Sale of Assetsincreased $325 thousand in the year-over-year comparison. The $304 thousand gain for 2013 was the result of the sale of Swift Run Capital Management Company, LLC to SRCM Holdings, LLC in the amount of $302 thousand and an associated gain on sale from furniture and equipment acquired by SRCM Holdings, LLC that resulted in a gain of $2 thousand. Additional details on this transaction are found in Note 1, of the notes to the consolidated financial statements, under Item 8.

Earnings/Increase in the Value
of Bank Owned Life Insurance (BOLI)were
higher in 2013 by $165 thousand. In 2013, the policies increased in value by
$445 thousand as compared to $280 thousand during the prior year. In November
2012, additional policies of approximately $5.001 million were purchased which
accounted for the increased earnings for 2013. The value of BOLI at December 31,
2013 and December 31, 2012 was $12.595 million and $12.150 million,
respectively.

Other Non-Interest
Incomeincreased $213 thousand in 2013,
primarily as a result of income from brokerage services of $110 thousand in
2013. In the fourth quarter of 2012, the Company started offering annuity,
insurance and brokerage services under the trade name of VNB Investment
Strategies under a networking arrangement with LPL Financial LLC.

Non-Interest Expense

In September 2012, the Board of
Directors of the Bank approved a new multi-year strategic plan. The plan is
aimed at making certain changes to the Banks business model, while maintaining
the Banks customer first culture. The plans goals are aimed at addressing
the changing banking landscape due to new regulatory requirements that are
costly to implement and maintain; and also limited income from traditional
revenue sources.

The plans goals are to reduce
operating expenses in a number of ways including: eliminating vacant positions,
services that were no longer relevant, and programs that were not likely to
achieve a desired profitability level. Most of the changes indicated in the plan
became effective in 2013; however, there are a number of other cost reductions
and new non-interest income opportunities that are slated to be deployed over
time.

25

---



Although total non-interest expense for
the year ended December 31, 2013 was $22.035 million, and is an increase of
$2.385 million from the $19.650 million reported for the year ended December 31,
2012, the increase was primarily due to an increase of $3.395 million in
VNBTrust incentive compensation, associated with the higher performance fee
revenue discussed above. Non-interest expense, excluding the VNBTrust incentive
compensation cost, was $16.491 million for 2013 and ended the year $1.010
million lower than the $17.501 million recorded in 2012 as non-interest
expense.

The major components of non-interest
expense are detailed below for the years ended December 31, 2013 and December
31, 2012. The personnel expenses related to the VNBTrust incentive compensation
have been separated from the remaining non-interest expense categories to allow
a more meaningful year-to-year comparison.

|                                                                       | Years ended December 31, |        |      |   |         
|---------------------------------------------------------------------- | ------------------------ | ------ | ---- | - | --------
|(dollars in thousands)                                                 | 2013                     |        | 2012 |   | Variance
|Non-interest expense, excluding VNBTrust incentive
      compensation: |                          |        |      |   |         
|Salaries and
      employee benefits                                   | $                        | 8,202  |      | $ | 8,813   
|Net occupancy                                                          |                          | 2,104  |      |   | 2,113   
|Equipment                                                              |                          | 686    |      |   | 907     
|ATM, debit and credit card                                             |                          | 297    |      |   | 327     
|Data
      processing                                                  |                          | 949    |      |   | 879     
|FDIC deposit insurance assessment                                      |                          | 248    |      |   | 325     
|Marketing,
      advertising and promotion                             |                          | 721    |      |   | 700     
|OREO write downs                                                       |                          | 178    |      |   | 845     
|Other OREO
      expenses                                              |                          | 107    |      |   | 63      
|Professional fees                                                      |                          | 744    |      |   | 562     
|Other                                                                  |                          | 2,255  |      |   | 1,967   
|Total non-interest expense, excluding incentive
    compensation       | $                        | 16,491 |      | $ | 17,501  
|                                                                      
|Non-Interest Expense for VNBTrust Incentive
    Compensation:          |                          |        |      |   |         
|Incentive
      compensation-related expense                           |                          | 5,544  |      |   | 2,149   
|                                                                      
|Total Non-Interest Expense                                             | $                        | 22,035 |      | $ | 19,650  

Total Salaries and Employee
Benefitswere higher in 2013, by $2.784
million compared to 2012. The primary reason was an increase of $3.395 million
in the total booked as VNBTrust incentive compensation as discussed previously.
Incentive compensation expenses of $5.544 million were recorded for 2013,
compared to $2.149 million recorded for 2012. Higher incentive compensation
costs, calculated in accordance with pre-established formulas, were related to
the increased performance fee revenue for VNBTrust. Excluding the VNBTrust
incentive compensation cost for both years, personnel expense was $8.202 million
for 2013 or $611 thousand lower when compared to $8.813 million for 2012. The
decline in salaries and employee benefits is directly related to the Banks
multi-year financial strategic plan.

Net Occupancy and Equipment
Expenseswere reduced by $230 thousand in
2013 to $2.790 million, from $3.020 million in 2012. The declines in
depreciation cost of $153 thousand and equipment maintenance costs of $75
thousand were the primary reason for the decrease in these expenses.

FDIC Deposit Insurance
Assessmentsdecreased $77 thousand in 2013 to
$248 thousand as compared to $325 thousand for 2012. A decline in both the
assessment base and the assessment rate in 2013 positively influenced the
amounts paid to the FDIC. Please see Deposit Insurance in the Supervision and
Regulation section earlier in this report, under Item 1. Business; Supervision
and Regulation; the Bank.

OREO Write Downs and
Expensesdecreased by $623 thousand during
2013 as compared to 2012. The decline was associated primarily with a lower
level of OREO valuation write-downs in 2013 compared to 2012. In 2012, OREO
write downs totaled $845 thousand; however, $178 thousand was recognized as
write downs in 2013. Other OREO expenses increased by $44 thousand in 2013, as
additional building repairs and maintenance were needed on OREO properties to
make them marketable.

26

---



Professional Fees and Other
Expensesincreased by $470 thousand primarily
as a result of the legal and consulting fees associated with the formation of
the bank holding company and changes to the new wealth management model in
2013.

Provision for Income
Taxes

For 2013, the Company provided $3.212
million for Federal income taxes, resulting in an effective income tax rate of
31.8%. In 2012, the Company provided $2.611 million for Federal income taxes,
resulting in an effective income tax rate of 32.3%. The effective income tax
rates differed from the U.S. statutory rate of 34% during the comparable periods
primarily due to the effect of tax-exempt income from municipal bonds and life
insurance policies. The lower effective tax rate during 2013 was partly related
to an increase in the relative proportion of tax-exempt income as the Company
purchased additional tax-exempt municipal securities and it had the full-year
effect of additional life insurance purchased in the fourth quarter of 2012.
Please see Note 8 in the notes to consolidated financial statements, contained
in Item 8, for a discussion regarding net deferred tax.

BALANCE SHEET
ANALYSIS

Securities

The investment securities portfolio has
a primary role in the management of the Companys liquidity requirements,
interest rate sensitivity and in generating substantial interest income.
Investment securities play a key role in diversifying the Companys balance
sheet. In addition, investment securities are pledged as collateral for public
fund deposits and for commercial customers utilizing the Banks overnight
repurchase program. Changes in deposit and other funding balances and in loan
production will impact the overall level of the investment portfolio.

As of December 31, 2013, the Companys
investment portfolio totaled $134.672 million, of which obligations of U.S.
government corporations and government-sponsored enterprises amounted to
$103.347 million which is approximately 77.7% of the total. The investment
portfolio as of December 31, 2012 totaled $118.573 million. The year over year
growth of 13.6% was primarily a result of managements focus on maximizing the
earning capacity of the Companys excess liquidity by moving funds from
overnight federal funds and into investment securities.

In accordance with ASC 320,
Investments - Debt and Equity Securities, the Company has categorized its
unrestricted securities portfolio as Available for Sale (AFS). 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 securities were investment grade or better as of December 31, 2013.
Given the generally high credit quality of the portfolio, management expects to
realize all of its investment upon market recovery or the maturity of such
instruments and thus believes that any impairment in value is
interest-rate-related and therefore temporary. AFS securities included gross
unrealized gains of $904 thousand and gross unrealized losses of $3.073 million
as of December 31, 2013.

During the third quarter of 2013, the
Company reclassified its held to maturity (HTM) securities asAFS. Management determined that
it no longer had the positive intent to hold the securities classified as HTM
for an indefinite period of time because of managements desire to have more
flexibility in managing the investment portfolio. As of June 30, 2013, the
Company had three corporate and municipal securities designated as HTM recorded
at an amortized cost of $2.699 million. The fair value of these securities was
$2.733 million, reflecting an unrealized gross gain of $34 thousand. The
unrealized gross gain of $34 thousand, net of income taxes, was recorded as
other comprehensive income at the time of the transfer. As a result of this
transfer, there were no securities classified as held to maturity as of December
31, 2013. As of December 31, 2012, the HTM portfolio totaled $5.991 million and
consisted of corporate and municipal bonds.

For the year ended December 31, 2013,
proceeds from the sales of securities amounted to $16.854 million and realized
gains on these securities were $50 thousand. For the year ended December 31,
2012, proceeds from the sales of securities amounted to $10.307 million and
realized gains on these securities were $133 thousand.

27

---



Securities Held to Maturity and
Available for Sale(dollars in thousands)

|Carrying Value of
      Securities       | As of December
  31,
|---------------------------------------- | --------------------
|                                         | 2013                
|Securities
      Available for Sale      |                     
|Fair Value:                              |                     
|U.S.
      Government-Sponsored Agencies | $                   
|Mortgage-Backed
      Securities/CMOs    |                     
|Municipal
      Bonds                    |                     
|Corporate Bonds                          |                     
|Asset-Backed
      Securities            |                     
|                                         | $                   
|                                        
|Securities
      Held to Maturity        |                     
|Amortized Cost:                          |                     
|Municipal
      Bonds                    | $                   
|U.S. Government-Sponsored
      Agencies |                     
|Corporate
      Bonds and Notes          |                     
|                                         | $                   
|                                        
|Restricted
      Securities              |                     
|Cost:                                    |                     
|Federal
      Reserve Bank Stock         | $                   
|Federal Home Loan Bank
    Stock         |                     
|                                         | $                   

All mortgage-backed securities included
in the tables above were issued by U.S. government agencies and corporations. At
December 31, 2013, the securities issued by political subdivisions or agencies
(municipal bonds) were highly rated, with 86% of the municipal bonds having AA
or higher ratings. Approximately 83% of the municipal bonds are general
obligation bonds with issuers that are geographically diverse.

The Company does not hold any
derivative instruments. The Company held no issues that exceeded 10% of
Shareholders' Equity at December 31, 2013.

The Companys holdings of restricted
securities totaled $1.645 million at December 31, 2013 and $1.729 million at
December 31, 2012 and consisted of Federal Reserve Bank of Richmond and Federal
Home Loan Bank of Atlanta stock. The Bank is required to purchase these stocks
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 put back stock held in these banks,
as determined by their respective calculations. The stock is recorded at
cost.

28

---



The table shown below details the
amortized cost and fair value of available for sale securities at December 31,
2013 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 34%.

Maturity Distribution and Average
Yields

(dollars in thousands)

|Projected Maturities of Securities at December 31,
      2013
|-------------------------------------------------------------
|                                                             
|                                                             
|U.S. Government-Sponsored Agencies:                          
|One year or less                                             
|After one year to five years                                 
|After five years to ten years                                
|After ten years                                              
|                                                             
|Mortgage-Backed Securities/CMOs                              
|After five years to ten years                                
|After ten years                                              
|                                                             
|Asset-Backed Securities                                      
|After five years to ten years                                
|After ten years                                              
|                                                             
|Corporate Bonds                                              
|After one year to five years                                 
|After five years to ten years                                
|                                                             
|Municipal Securities                                         
|One year or less                                             
|After one year to five years                                 
|After five years to ten years                                
|After ten years                                              
|                                                             
|                                                             
|Total Available for Sale Securities                          

29

---



Loan Portfolio

A management objective is to maintain
the quality of the loan portfolio. The Company seeks to achieve this objective
by maintaining rigorous underwriting standards coupled with regular evaluation
of the creditworthiness of and the designation of lending limits for each
borrower. The portfolio strategies include 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 is
Charlottesville, Albemarle County, Orange County, Winchester, Frederick County
and adjacent counties.

The Companys loan portfolio totaled
$300.034 million as of December 31, 2013 or 58.5% of total assets. Loan balances
increased $15.174 million, or 5.3% from the balance of $284.860 million as of
December 31, 2012.

Based on underwriting standards, loans
and leases 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 commercial and industrial
loan portfolio totaled $48.060 million and represented approximately 16.0% of
all loans as of December 31, 2013. Loans in this category are typically made to
individuals and small and medium-sized businesses. Loans for construction and
land development totaled $18.461 million and represented 6.2% of all loans as of
December 31, 2013, which is an increase of $4.268 million from December 31,
2012. Loans to consumers, included revolving credit and other fixed payment
loans totaled $13.6 million as of December 31, 2013 or 4.5% of all
loans.

The Companys real estate loan
portfolio realized the largest year over year increase of $6.567 million from
the balance as of December 31, 2012 to $219.909 million as of December 31, 2013.
This category represented approximately 73.3% of all loans, and these loans are
secured by mortgages on real property located principally in Virginia. Of this
amount, approximately $83.912 million represented loans on residential
properties. Commercial real estate loans totaled $135.997 million as of December
31, 2013. Sources of repayment are from the borrowers operating profits, cash
flows and liquidation of pledged collateral.

Loan Portfolio

(dollars in thousands)

|                                      |  | As of December 31,
|------------------------------------- |  | ------------------
|                                      |  | 2013              
|Commercial loans                      |  | $                 
|Real estate
      construction        |  |                   
|Real estate mortgage:                 |  |                   
|Residential                           |  |                   
|Commercial                            |  |                   
|Home equity
      loans               |  |                   
|Total
      real estate mortgage      |  |                   
|Consumer                              |  |                   
|Total loans                           |  |                   
|Less: Allowance
      for loan losses |  |                   
|Net loans                             |  | $                 

30

---



Maturities and Sensitivities of
Loans to Changes in Interest Rates.The
following table presents the maturity distribution of the Companys loans at
December 31, 2013. 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
prime rate or U.S. Treasury bond indices.

|(dollars in
      thousands)             |  | As of December 31,
  2013
|---------------------------------------- |  | -------------------------
|                                         |  |                          
|                                         |  | Due in One               
|                                         |  | Year or Less             
|Commercial loans                         |  | $                        
|Real estate
      construction           |  |                          
|Real estate mortgage:                    |  |                          
|Residential                              |  |                          
|Commercial                               |  |                          
|Home equity loans                        |  |                          
|Consumer and other                       |  |                          
|Total                                    |  | $                        
|                                        
|Loans with fixed interest rates          |  | $                        
|Loans with
      floating interest rates |  |                          
|Total                                    |  | $                        

Loan Asset Quality

Intrinsic to the lending process is the
possibility of loss. In times of economic slowdown, the risk of loss inherent in
the Companys loan portfolio may increase. 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.

The Company places a loan 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.

|Non-Accrual Loans                                 |  |                    |     |      |   |       |  |   |    
|------------------------------------------------- |  | ------------------ | --- | ---- | - | ----- |  | - | ---
|                                                  |  | As of December 31,
|(dollars in
      thousands)                      |  | 2013               |     | 2012 |   | 2011 
|Total                                             |  | $                  | 367 |      | $ | 1,403 |  | $ | 403
|Number of
      Loans                             |  | 5                  |     | 7    |   | 4    
|                                                  |  |                    |     |      |   |      
|Loans Past Due 90 Days or More and Still Accruing |  |                    |     |     
|                                                  |  | As of December 31,
|(dollars in
      thousands)                      |  | 2013               |     | 2012 |   | 2011 
|Total                                             |  | $                  | 178 |      | $ | 35    |  | $ | 388
|Number of
      Loans                             |  | 2                  |     | 1    |   | 2    

At December 31, 2013, the Company had five loans
with balances of $367 thousand classified as non-accrual. This compares
favorably to December 31, 2012, when the Company had seven loans with balances
of $1.403 million classified as non-accrual. This decrease was primarily due to
the addition of one non-accrual loan in the fourth quarter of 2012, which was
being carried for $804 thousand as of December 31, 2012. During the second
quarter of 2013, the property securing this loan was foreclosed upon, and the
Company was carrying this $804 thousand as OREO as of December 31, 2013. See
Note 3  Loans in the accompanying notes to consolidated financial statements
included in Item 8 for further details regarding the Companys loan asset
quality measurements.

31

---



Allowance for Loan Losses

The Company is committed to
determining, on an ongoing basis, the adequacy of its allowance for loan losses.
The Company applies historical loss rates to various pools of loans. Thereafter,
the adequacy of the allowance is evaluated through reference to the following
qualitative factors: national and local economic trends; underlying collateral
values; loan delinquency status and trends; loan risk classifications; industry
concentrations; lending policies; experience, ability and depth of lending
staff; and levels of policy exceptions.

At December 31, 2013, the allowance was
$3.360 million and represented 1.12% of outstanding loans. The allowance for
loan losses at December 31, 2012, was $3.267 million and represented 1.15% of
outstanding loans. The purpose of the allowance is to provide for potential
losses inherent in the loan portfolio. Since risks to the loan portfolio include
general economic trends as well as conditions affecting individual borrowers,
the allowance is an estimate.

Activity for the allowance for loan
losses is provided in the following table.

Summary of the Allowance for Loan
Losses

(dollars in thousands)

|                                        |  | 2013 |       | 2012 |  | 2011 |       | 2010 |  | 2009
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----
|Balance, beginning of period            |  | $    | 3,267 |      |  | $    | 3,741 |      |  | $   
|                                       
|Loans charged off                       |  |      |       |      |  |      |       |      |  |     
|Real estate                             |  |      | 139   |      |  |      | 458   |      |  |     
|Commercial                              |  |      | 22    |      |  |      | 132   |      |  |     
|Consumer                                |  |      | -     |      |  |      | 18    |      |  |     
|Total                                   |  |      | 161   |      |  |      | 608   |      |  |     
|                                       
|Recoveries                              |  |      |       |      |  |      |       |      |  |     
|Real estate                             |  |      | 48    |      |  |      | 176   |      |  |     
|Commercial                              |  |      | 22    |      |  |      | 7     |      |  |     
|Consumer                                |  |      | 24    |      |  |      | 30    |      |  |     
|                                       
|Total                                   |  |      | 94    |      |  |      | 213   |      |  |     
|                                       
|Provision for (recovery of) loan losses |  |      | 160   |      |  |      | (79   | )    |  |     
|                                       
|Balance, December 31                    |  | $    | 3,360 |      |  | $    | 3,267 |      |  | $   
|                                       
|Net charge-offs to average loans        |  |      | 0.02  | %    |  |      | 0.13  | %    |  |     
|                                       
|Allowance for loan losses as a          |  |      |       |      |  |      |       |      |  |     
|percentage of period-end total loans    |  |      | 1.12  | %    |  |      | 1.15  | %    |  |     

Please refer to Note 4  Allowance for
Loan Losses in the accompanying notes to consolidated financial statements for
additional details into management's approach and methodology in estimating the
allowance for loan losses.

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

32

---



Allocation of the Allowance for Loan Losses

(dollars in thousands)

|                               | December 31, 2013
|------------------------------ | -----------------
|                               |                  
|                               | Allowance        
|Commercial
      loans         | $                
|Real estate
      construction |                  
|Real estate
      mortgage     |                  
|Consumer                       |                  
|Unallocated                    |                  
|Total                          | $                

|                         | December 31, 2012
|------------------------ | -----------------
|                         |                  
|                         | Allowance        
|Commercial loans         | $                
|Real estate
construction |                  
|Real estate mortgage     |                  
|Consumer                 |                  
|Unallocated              |                  
|Total                    | $                

|                         | December 31, 2011
|------------------------ | -----------------
|                         |                  
|                         | Allowance        
|Commercial loans         | $                
|Real estate
construction |                  
|Real estate mortgage     |                  
|Consumer                 |                  
|Unallocated              |                  
|Total                    | $                

|                               | December 31, 2010
|------------------------------ | -----------------
|                               |                  
|                               | Allowance        
|Commercial
      loans         | $                
|Real estate
      construction |                  
|Real estate
      mortgage     |                  
|Consumer                       |                  
|Total                          | $                

|                               | December 31, 2009
|------------------------------ | -----------------
|                               |                  
|                               | Allowance        
|Commercial
      loans         | $                
|Real estate
      construction |                  
|Real estate
      mortgage     |                  
|Consumer                       |                  
|Total                          | $                

33

---



Deposits

Depository accounts represent the
Companys primary source of funds 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,
professionals and small businesses in the Charlottesville/Albemarle area, the
Orange County area, and the Winchester area.

Depository accounts held by the Company
as of December 31, 2013, totaled $430.460 million, a decrease of $14.962 million
or 3.4% as compared to the December 31, 2012 total of $445.422 million. The
decline in deposit balances was anticipated by management as an indication that
customers are moving back into the investment markets or are continuing to
deleverage themselves. These situations are considered normal transactional
activity for the Companys diverse customer base.

At December 31, 2013, the balances of
non-interest bearing demand deposits were 32.7% of total deposits, increasing to
$140.911 million from $131.559 million, or 29.5% of total deposits at December
31, 2012. Interest-bearing transaction and money market accounts totaled
$165.387 million and $183.720 million at December 31, 2013 and December 31,
2012, 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 71.2% of total deposit account balances at December 31,
2013 and compares favorably to the 70.8% of total deposit account balances at
December 31, 2012.

Certificates of deposit and other time
deposit balances decreased 4.6% to $124.162 million at December 31, 2013 from
the balance of $130.143 million at December 31, 2012. Included in this deposit
total were brokered deposits totaling $25.0 million and $28.7 million at
December 31, 2013 and 2012, respectively, which were reciprocal relationships
under the Certificate of Deposit Account Registry Service (CDARS), whereby
depositors can obtain FDIC insurance on deposits up to $50 million.

Deposits

|Average Balances and Rates
      Paid         |  |                               |         |            |        |         |  |         |         |         |      |         |  |   |         |  |      |   | 
|--------------------------------------------- |  | ----------------------------- | ------- | ---------- | ------ | ------- |  | ------- | ------- | ------- | ---- | ------- |  | - | ------- |  | ---- | - | 
|                                              |  | Years Ended December
      31
|(dollars in thousands)                        |  | 2013                          |         | 2012       |        | 2011   
|                                              |  | Average                       |         | Average    |        | Average |  | Average |         | Average |      | Average
|                                              |  | Balance                       |         | Rate       |        | Balance |  | Rate    |         | Balance |      | Rate   
|Non-interest-bearing demand deposits          |  | $                             | 127,480 |            |        |         |  | $       | 139,741 |         |      |         |  | $ | 111,649 |  |      |  
|Interest-bearing deposits:                    |  |                               |         |            |        |         |  |         |         |         |      |         |  |   |         |  |      |  
|Interest checking                             |  |                               | 77,954  |            | 0.05   | %       |  |         | 67,898  |         | 0.05 | %       |  |   | 62,638  |  | 0.05 | %
|Money market deposits                         |  |                               | 94,369  |            | 0.19   | %       |  |         | 93,690  |         | 0.21 | %       |  |   | 90,980  |  | 0.18 | %
|Time deposits                                 |  |                               | 128,816 |            | 0.59   | %       |  |         | 136,832 |         | 0.77 | %       |  |   | 146,330 |  | 1.07 | %
|Total
      interest-bearing deposits         |  | $                             | 301,139 |            | 0.33   | %       |  | $       | 298,420 |         | 0.43 | %       |  | $ | 299,948 |  | 0.59 | %
|Total deposits                                |  | $                             | 428,619 |            |        |         |  | $       | 438,161 |         |      |         |  | $ | 411,597 |  |      |  
|                                             
|Maturities of CD's of $100,000 and
      Over |  |                               |         |            |        |         |  |         |         |         |      |         |  |   |         |  |      |   | 
|(dollars in thousands)                        |  | December 31,
      2013       |         |            |        |         |  |         |         |         |      |         |  |  
|                                              |  | Amount                        |         | Percentage |        |         |  |         |         |         |      |         |  |   |         | 
|Three months or less                          |  | $                             | 65,627  |            | 72.86  | %       |  |         |         |         |      |         |  |   |         |  |      |  
|Over
      three months to six months         |  |                               | 11,308  |            | 12.55  | %       |  |         |         |         |      |         |  |   |         |  |      |  
|Over six months to one year                   |  |                               | 7,480   |            | 8.31   | %       |  |         |         |         |      |         |  |   |         |  |      |  
|Over
      one year                           |  |                               | 5,655   |            | 6.28   | %       |  |         |         |         |      |         |  |   |         |  |      |  
|Totals                                        |  | $                             | 90,070  |            | 100.00 | %       |  |         |         |         |      |         |  |   |         |  |      |  

34

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Securities Sold Under
Agreements to Repurchase

The Company offers commercial
customers the opportunity to invest excess deposit balances into overnight
repurchase agreements. Under the agreements to repurchase, invested funds are
fully collateralized by Federal government or agency bonds that are pledged on
behalf of customers utilizing this product.

|(dollars in thousands)                                |  | 2013 |        | 2012 |  | 2011
|----------------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Period-end
      balance                              |  | $    | 16,297 |      |  | $   
|Maximum amount at any month-end
      during the year |  | $    | 16,297 |      |  | $   
|Annual average
      balance outstanding              |  | $    | 7,941  |      |  | $   
|Annual average interest rate
      paid               |  |      | 0.21   | %    |  |     

ASSET/LIABILITY MANAGEMENT

The Companys primary earnings
source is its net interest income; therefore, the Company devotes significant
time and has invested in 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 management, which are reviewed and approved by the Banks
Asset/Liability Committee. 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. 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. The Company utilizes the gap
analysis to complement its income simulations modeling, primarily focusing on
the longer-term structure of the balance sheet. The Companys balance sheet
structure is primarily short-term in nature with a substantial portion of assets
and liabilities repricing or maturing within one year.

The Company utilizes income
simulation models to complement its traditional gap analysis. While the
Asset/Liability Committee 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.

35

---



Also, as market conditions vary
from those assumed in the sensitivity analysis, 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, the sensitivity analysis does not
reflect actions that the Asset/Liability Committee might take in responding to
or anticipating changes in interest rates.

Interest Sensitivity Analysis

As of December 31,
2013

(dollars in thousands)

|                                                 |  | Within  |         | 90 to
    365 |  | 1 to
4 |        | Over    |  | Nonrate   |         |       | 
|------------------------------------------------ |  | ------- | ------- | ------------- |  | ------ | ------ | ------- |  | --------- | ------- | ----- | 
|                                                 |  | 90 days |         | days          |  | years  |        | 4 years |  | Sensitive |         | Total
|Assets                                           |  |         |         |               |  |        |        |         |  |           |         |       | 
|Loans                                            |  | $       | 114,606 |               |  | $      | 54,719 |         |  | $         | 98,752  |       | 
|Investment securities                            |  |         | 22,291  |               |  |        | 16,785 |         |  |           | 47,600  |       | 
|Interest bearing deposits                        |  |         | -       |               |  |        | -      |         |  |           | 1,250   |       | 
|Federal funds sold                               |  |         | 27,201  |               |  |        | -      |         |  |           | -       |       | 
|Non-interest-earning assets and allowance        |  |         |         |               |  |        |        |         |  |           |         |       | 
|for loan losses                                  |  |         | -       |               |  |        | -      |         |  |           | -       |       | 
|Total
      assets                               |  | $       | 164,098 |               |  | $      | 71,504 |         |  | $         | 147,602 |       | 
|                                                
|Liabilities and Shareholders' Equity             |  |         |         |               |  |        |        |         |  |           |         |       | 
|Interest checking                                |  | $       | 2,852   |               |  | $      | 8,559  |         |  | $         | 34,236  |       | 
|Money market deposits                            |  |         | 7,047   |               |  |        | 21,138 |         |  |           | 56,370  |       | 
|Time deposits                                    |  |         | 86,343  |               |  |        | 26,315 |         |  |           | 10,576  |       | 
|Repurchase agreements                            |  |         | 16,297  |               |  |        | -      |         |  |           | -       |       | 
|Non-interest bearing liabilities and             |  |         |         |               |  |        |        |         |  |           |         |       | 
|shareholders' equity                             |  |         | -       |               |  |        | -      |         |  |           | -       |       | 
|Total
      liabilities and shareholders' equity |  | $       | 112,539 |               |  | $      | 56,012 |         |  | $         | 101,182 |       | 
|                                                
|Period gap                                       |  | $       | 51,559  |               |  | $      | 15,492 |         |  | $         | 46,420  |       | 
|Cumulative gap                                   |  | $       | 51,559  |               |  | $      | 67,051 |         |  | $         | 113,471 |       | 
|Ratio of cumulative gap
    to                   |  |         |         |               |  |        |        |         |  |           |         |       | 
|cumulative earning assets                        |  |         | 31.42   | %             |  |        | 28.46  | %       |  |           | 29.61   | %     | 

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 a relatively flat yield curve could continue to affect
adversely the Companys results in 2014.

36

---



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 annually by the
Board of Directors. The policy sets limits on 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 and steadily increasing 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 three major regional
correspondent banks, access to advances from the Federal Home Loan Bank of
Atlanta and access to the discount window at the Federal Reserve Bank of
Richmond.

Borrowing Lines

As of December 31, 2013

(dollars in
thousands)

|Correspondent
      Banks               | $ | 31,000
|--------------------------------------- | - | ------
|Federal Home Loan Bank of
      Atlanta |   | 33,300
|Total Available                         | $ | 64,300

As of December 31, 2013, there were
no outstanding balances for any borrowing lines.

Any excess funds are sold on a
daily basis in the federal funds market. The Company maintained an average of
$33.770 million outstanding in federal funds sold during 2013. On December 31,
2013, the Company sold $27.201 million in the overnight federal funds market.
The Company intends to maintain sufficient liquidity at all times to meet its
funding commitments.

Capital

The Company is subject to
risk-based capital regulations which quantitatively measure capital against
risk-weighted assets, including certain off-balance-sheet items. These
regulations define the elements of the Tier 1 and Tier 2 components of total
capital and currently establish minimum ratios of 4% for Tier 1 capital and 8%
for Total capital for capital adequacy purposes. Supplementing these regulations
is a leverage requirement. This requirement establishes a minimum leverage ratio
(at least 3% or 4%, depending upon an institutions regulatory status), which is
calculated by dividing Tier 1 capital by adjusted quarterly average assets
(after deducting goodwill). Information regarding the Companys risk-based
capital at December 31, 2013 and December 31, 2012 is presented in Note 12 
Capital Requirements of the notes to consolidated financial statements,
contained in Item 7.

The banking regulatory agencies
have encouraged banking organizations, including healthy, well-run banking
organizations, to operate with capital ratios substantially in excess of the
stated ratios required to maintain well capitalized status. This is a result
of, among other things, current economic conditions, the global financial crisis
and increased formal capital requirements for banking organizations. In light of
the foregoing, the Company expects to maintain capital ratios substantially in
excess of these ratios due to the new Basel III capital regulations.

37

---



The elements currently comprising
Tier 1 capital and Tier 2 capital, the minimum Tier 1 capital and Total capital
ratios and the minimum leverage ratio may in the future be subject to change, as
discussed in greater detail under the caption Supervision and Regulation,
found earlier in this report under Item 1. Business.

Impact of Inflation and
Changing Prices

The Companys financial statements
included herein have been prepared in accordance with GAAP, which require the
Company to measure financial position and operating results primarily in terms
of historical dollars. Changes in the relative value of money due to inflation
or recession are generally not considered. The primary effect of inflation on
the operations of the Company is reflected in increased operating costs. In
managements opinion, changes in interest rates affect the financial condition
of a financial institution to a far greater degree than do changes in the
inflation rate.

While 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. Interest rates are
highly sensitive to many factors that are beyond the control of the Company,
including changes in the expected rate of inflation, the influence of general
and local economic conditions, and the monetary and fiscal policies of the
United States government, its agencies and various other governmental regulatory
authorities, among other things, as further discussed under the caption
Asset/Liability Management, found earlier in this section.

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 10 of the notes to consolidated financial statements, found
in Item 8.

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 20 years with renewal
options.

Following is a schedule of future
minimum rental payments under non-cancelable operating leases that have initial
or remaining terms in excess of one year as of December 31, 2013:

|(dollars in
      thousands)      |  | 1 year or less |     | 1-3 years |   | 3-5 years |  | After 5 years |       | Total
|--------------------------------- |  | -------------- | --- | --------- | - | --------- |  | ------------- | ----- | -----
|Operating lease
      obligations |  | $              | 951 |           | $ | 1,770     |  | $             | 1,324 |      

Item 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting
company.

38

---



Item 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Virginia National Bankshares Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Bank is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virginia National Bankshares Corporation and subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.




Winchester, Virginia
March 27, 2014

39

---



VIRGINIA NATIONAL BANKSHARES
CORPORATION (FORMERLY VIRGINIA NATIONAL BANK AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except
share data)

|                                                         |  | December 31, 2013 |         | December 31, 2012
|-------------------------------------------------------- |  | ----------------- | ------- | -----------------
|ASSETS                                                   |  |                   |         |                  
|Cash and due
      from banks                            |  | $                 | 12,871  |                  
|Federal funds sold                                       |  |                   | 27,201  |                  
|Securities:                                              |  |                   |         |                  
|Available
      for sale, at fair value                  |  |                   | 133,027 |                  
|Held to
      maturity, at amortized cost                |  |                   |         |                  
|(Fair value
      - $6,060 in 2012)                      |  |                   | -       |                  
|Restricted
      securities, at cost                     |  |                   | 1,645   |                  
|Total securities                                         |  |                   | 134,672 |                  
|Total loans                                              |  |                   | 300,034 |                  
|Allowance for
      loan losses                          |  |                   | (3,360  | )                
|Total loans, net                                         |  |                   | 296,674 |                  
|Premises and
      equipment, net                        |  |                   | 9,824   |                  
|Other real estate owned, net of valuation allowance      |  |                   | 2,372   |                  
|Bank owned life
      insurance                          |  |                   | 12,595  |                  
|Accrued interest receivable and other assets             |  |                   | 16,785  |                  
|Total assets                                             |  | $                 | 512,994 |                  
|LIABILITIES AND SHAREHOLDERS' EQUITY                     |  |                   |         |                  
|Liabilities:                                             |  |                   |         |                  
|Demand deposits:                                         |  |                   |         |                  
|Noninterest-bearing                                      |  | $                 | 140,911 |                  
|Interest-bearing                                         |  |                   | 80,832  |                  
|Money market deposit accounts                            |  |                   | 84,555  |                  
|Certificates of deposit and other time
      deposits    |  |                   | 124,162 |                  
|Total deposits                                           |  |                   | 430,460 |                  
|Securities sold under agreements to
      repurchase     |  |                   | 16,297  |                  
|Accrued interest payable and other
      liabilities     |  |                   | 8,281   |                  
|Total liabilities                                        |  |                   | 455,038 |                  
|Shareholders'
      equity:                              |  |                   |         |                  
|Preferred stock, $2.50 par value, 2,000,000              |  |                   |         |                  
|shares authorized, no shares
      outstanding           |  |                   | -       |                  
|Common stock,
      $2.50 par value, 10,000,000          |  |                   |         |                  
|shares authorized; 2,690,320 and 2,690,220
      shares  |  |                   |         |                  
|issued and outstanding in 2013 and 2012
      (including |  |                   |         |                  
|288 and 575 non-vested shares at December
      31,      |  |                   |         |                  
|2013 and December 31, 2012,
      respectively)          |  |                   | 6,725   |                  
|Capital surplus                                          |  |                   | 27,915  |                  
|Retained
      earnings                                  |  |                   | 24,747  |                  
|Accumulated other comprehensive (loss) income            |  |                   | (1,431  | )                
|Total shareholders' equity                               |  |                   | 57,956  |                  
|Total liabilities and shareholders' equity               |  | $                 | 512,994 |                  

See Notes to Consolidated Financial
Statements

40

---



VIRGINIA NATIONAL BANKSHARES
CORPORATION (FORMERLY VIRGINIA NATIONAL BANK AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except
per share data)

|                                                              | For
      the years ended
|------------------------------------------------------------- | -------------------------
|                                                              | December 31, 2013        
|Interest and
      dividend income:                           |                          
|Loans,
      including fees                                   | $                        
|Federal funds
sold                                            |                          
|Investment securities:                                        |                          
|Taxable                                                       |                          
|Tax exempt                                                    |                          
|Dividends                                                     |                          
|Other                                                         |                          
|Total interest and dividend income                            |                          
|                                                             
|Interest
      expense:                                       |                          
|Demand
      and savings deposits                             |                          
|Certificates and other time
      deposits                    |                          
|Federal
      funds purchased and                             |                          
|securities sold under agreements to repurchase                |                          
|Total interest expense                                        |                          
|Net interest income                                           |                          
|Provision for (recovery of ) loan losses                      |                          
|Net interest income after provision for (recovery of)         |                          
|loan losses                                                   |                          
|                                                             
|Noninterest
      income:                                     |                          
|Trust
      income                                            |                          
|Customer service
    fees                                     |                          
|Debit/credit card and ATM fees                                |                          
|Earnings/increase in value
      of bank owned life insurance |                          
|Gains
      (losses) on sales of assets                       |                          
|Gains on sales of
      securities                            |                          
|Other                                                         |                          
|Total noninterest income                                      |                          
|                                                             
|Noninterest
      expense:                                    |                          
|Salaries and employee benefits                                |                          
|Net occupancy                                                 |                          
|Equipment                                                     |                          
|Other                                                         |                          
|Total noninterest expense                                     |                          
|Income before income taxes                                    |                          
|Provision for income taxes                                    |                          
|Net income                                                    | $                        
|                                                             
|Net income per share, basic                                   | $                        
|Net income per share, diluted                                 | $                        

See Notes to the Consolidated
Financial Statements

41

---



VIRGINIA NATIONAL BANKSHARES
CORPORATION (FORMERLY VIRGINIA NATIONAL BANK AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in
thousands)

|                                        |  | For
      the years ended
|--------------------------------------- |  | -------------------------
|                                        |  | December 31, 2013        
|Net
    income                          |  | $                        
|Other comprehensive income
      (loss) |  |                          
|Unrealized losses on
      securities,  |  |                          
|net of tax of ($1,326) and ($247) for   |  |                          
|the years ended December 31,            |  |                          
|2013 and December 31, 2012              |  |                          
|Adjustment to unrealized income on      |  |                          
|securities due to the transfer of       |  |                          
|held-to-maturity securities to          |  |                          
|available-for-sale, net of tax of $12   |  |                          
|for year ended December 31, 2013        |  |                          
|Reclassification
      adjustment       |  |                          
|net of tax of ($17) and ($45) for the   |  |                          
|years ended December 31, 2013           |  |                          
|and December 31, 2012                   |  |                          
|Total other comprehensive
      loss    |  |                          
|Total comprehensive income              |  | $                        

See Notes to Consolidated Financial
Statements

42

---



VIRGINIA NATIONAL BANKSHARES
CORPORATION (FORMERLY VIRGINIA NATIONAL BANK AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(dollars in
thousands)

|                                      |  |        |       |         |   |          |   |               |   |        |   |  | Accumulated |        |   |  |  
|------------------------------------- |  | ------ | ----- | ------- | - | -------- | - | ------------- | - | ------ | - |  | ----------- | ------ | - |  | -
|                                      |  |        |       |         |   |          |   |               |   |        |   |  | Other       |        |   |  |  
|                                      |  | Common |       | Capital |   | Retained |   | Comprehensive |   |        |   | 
|                                      |  | Stock  |       | Surplus |   | Earnings |   | Income (Loss) |   | Total 
|Balance, December 31, 2011            |  | $      | 6,723 |         | $ | 27,705   |   |               | $ | 12,773 |   |  | $           | 1,720  |   |  | $
|Equity adjustment for
      vested    |  |        |       |         |   |          |   |               |   |        |   |  |             |        |   |  |  
|stock
      grants                    |  |        | 1     |         |   | (1       | ) |               |   | -      |   |  |             | -      |   |  |  
|Stock
      option/grant expense      |  |        | -     |         |   | 105      |   |               |   | -      |   |  |             | -      |   |  |  
|Net income                            |  |        | -     |         |   | -        |   |               |   | 5,481  |   |  |             | -      |   |  |  
|Other
      comprehensive loss        |  |        | -     |         |   | -        |   |               |   | -      |   |  |             | (568   | ) |  |  
|Balance, December 31, 2012            |  | $      | 6,724 |         | $ | 27,809   |   |               | $ | 18,254 |   |  | $           | 1,152  |   |  | $
|                                     
|Balance, December 31, 2012            |  | $      | 6,724 |         | $ | 27,809   |   |               | $ | 18,254 |   |  | $           | 1,152  |   |  | $
|Equity adjustment for
      stock     |  |        |       |         |   |          |   |               |   |        |   |  |             |        |   |  |  
|options
      exercised               |  |        | -     |         |   | 1        |   |               |   | -      |   |  |             | -      |   |  |  
|Equity
      adjustment for vested    |  |        |       |         |   |          |   |               |   |        |   |  |             |        |   |  |  
|stock grants                          |  |        | 1     |         |   | (1       | ) |               |   | -      |   |  |             | -      |   |  |  
|Stock option/grant
    expense        |  |        | -     |         |   | 106      |   |               |   | -      |   |  |             | -      |   |  |  
|Cash dividend
      ($0.15 per share) |  |        | -     |         |   | -        |   |               |   | (403   | ) |  |             | -      |   |  |  
|Net income                            |  |        | -     |         |   | -        |   |               |   | 6,896  |   |  |             | -      |   |  |  
|Other
      comprehensive loss        |  |        | -     |         |   | -        |   |               |   | -      |   |  |             | (2,583 | ) |  |  
|Balance, December 31, 2013            |  | $      | 6,725 |         | $ | 27,915   |   |               | $ | 24,747 |   |  | ($          | 1,431  | ) |  | $

See Notes to Consolidated Financial
Statements

43

---



VIRGINIA NATIONAL BANKSHARES
CORPORATION(FORMERLY VIRGINIA NATIONAL BANK AND SUBSIDIARY)CONSOLIDATED
STATEMENTS OF CASH FLOWS

(dollars in
thousands)

|                                                                                        | For the years ended
|--------------------------------------------------------------------------------------- | -------------------
|                                                                                        | December 31, 2013  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |                    
|Net income                                                                              | $                  
|Adjustments to reconcile net
      income to net cash provided by operating activities: |                    
|Provision for (recovery of) loan losses                                                 |                    
|Net amortization and accretion of securities                                            |                    
|Gains on sales of securities                                                            |                    
|Earnings/increase in value of bank owned life insurance                                 |                    
|Depreciation and amortization                                                           |                    
|Net (gain) loss on sale of assets                                                       |                    
|Deferred tax benefit                                                                    |                    
|Stock option/stock grant expense                                                        |                    
|Writedown of other real estate owned                                                    |                    
|Gain on sale of other real estate owned                                                 |                    
|Increase in accrued interest receivable and other assets                                |                    
|Increase in accrued interest payable and other liabilities                              |                    
|Net cash provided by operating activities                                               |                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |                    
|Purchases of held to maturity
      securities                                          |                    
|Purchases of available for
      sale securities                                        |                    
|Net decrease (increase) in
      restricted investments                                 |                    
|Proceeds from maturities,
      calls and principal payments of                         |                    
|held to maturity securities                                                             |                    
|Proceeds from maturities,
      calls and principal payments of                         |                    
|available for sale securities                                                           |                    
|Proceeds from sale of held to
      maturity securities                                 |                    
|Proceeds from sale of
      available for sale securities                               |                    
|Net (increase) decrease in
      loans                                                  |                    
|Purchase of bank owned life
      insurance                                             |                    
|Proceeds from sale of other
      real estate owned                                     |                    
|Proceeds from sale of bank
      premises and equipment                                 |                    
|Purchase of bank premises and
      equipment                                           |                    
|Net cash used in investing activities                                                   |                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |                    
|Net (decrease) increase in
      demand deposits, NOW accounts,                         |                    
|and money market accounts                                                               |                    
|Net decrease in certificates
      of deposit and other time deposits                   |                    
|Net increase in securities
      sold under agreements to repurchase                    |                    
|Net equity adjustment for
      stock options exercised                                 |                    
|Cash dividends                                                                          |                    
|Net cash (used in) provided by financing activities                                     |                    
|NET (DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS                              | $                  
|CASH AND CASH EQUIVALENTS:                                                              |                    
|Beginning of period                                                                     | $                  
|End of period                                                                           | $                  
|                                                                                       
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                       |                    
|Cash payments for:                                                                      |                    
|Interest                                                                                | $                  
|Taxes                                                                                   | $                  
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
      ACTIVITIES               |                    
|Unrealized loss on available
      for sale securities                                  | $                  
|Transfer of held-to-maturity
      securities to available-for-sale                     | $                  
|Transfer of loans to
      foreclosed assets                                            | $                  

See Notes to Consolidated Financial
Statements

44

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1Summary of
Significant Accounting Policies:

Organization

Virginia National Bankshares
Corporation (the Company) is a bank holding company incorporated under the
laws of the Commonwealth of Virginia. On June 19, 2013, the shareholders of
Virginia National Bank (the Bank) approved a Reorganization Agreement and Plan
of Share Exchange (Reorganization) whereby the Bank would reorganize into a
holding company structure. The Plan of Share Exchange called for each
outstanding share of Bank common stock to be automatically converted into and
exchanged for one share of the Company common stock, and the common shareholders
of the Bank would become the common shareholders of the Company on the effective
date of the Reorganization. The Company is authorized to issue 10,000,000 shares
of common stock with a par value of $2.50 per share. Additionally, the Company
is authorized to issue 2,000,000 shares of preferred stock at a par value $2.50
per share. There is currently no preferred stock outstanding. There are no plans
currently nor does the Board of Directors of the Company anticipate any need in
the foreseeable future to issue shares of preferred stock.

On December 16, 2013, the
Reorganization became effective, and the Bank became a wholly-owned subsidiary
of the Company. The holding company is regulated under the Bank Holding Company
Act of 1956, as amended (BHC Act) and is subject to inspection, examination,
and supervision by the Federal Reserve Board.

Virginia National Bank 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 headquartered
in Charlottesville, Virginia and serves the Virginia communities in and around
the City of Charlottesville, Albemarle County, Orange County and the City of
Winchester. The Bank continues to be subject to the supervision, examination and
regulation of the Office of the Comptroller of the Currency (OCC) following
the Reorganization.

On May 1, 2007, the OCC granted
conditional approval to the Banks application to establish a new national trust
bank with the title VNBTrust, National Association (VNBTrust). VNBTrust
operates as a wholly-owned subsidiary of the Bank. Additionally, the OCC
approved the Banks application for VNBTrust to create a wholly owned operating
subsidiary, VNB Investment Management Company, LLC, a Delaware limited liability
corporation. In January, 2010, VNB Investment Management Company changed its
name to Swift Run Capital Management, LLC (SRCM). SRCM serves as the general
partner of Swift Run Capital, L.P. (the Fund), a private investment fund.

On July 18, 2013 (the Closing
Date), VNBTrust completed the sale of all of the membership interests of SRCM
to SRCM Holdings LLC (SRCM Holdings) pursuant to a purchase and sale agreement
dated June 27, 2013 among SRCM Holdings, VNBTrust, SRCM and the Bank (the Sale
Agreement). The Fund represented less than 7 percent of the total assets
managed by VNBTrust and its subsidiary on the Closing Date. Under the terms of
the Sale Agreement, SRCM Holdings agreed to pay VNBTrust, quarterly during the
ten-year period beginning January 1, 2014 and ending December 31, 2023 (the
Term), (a) ongoing acquisition royalty payments equal to (i) 20% of the
management and performance fee revenue received by SRCM from limited partners of
the Fund as of the Closing Date and (ii) 20% of the management and performance
fee revenue received by SRCM from VNBTrust clients that opened accounts with
SRCM within 30 days of the Closing Date, and (b) ongoing referral payments equal
to 20% of the management and performance fee revenue received by SRCM from
clients referred by the Company and its affiliates to SRCM during the Term. The
Company recognized $302,000 as gain from the sale of SRCM in 2013, which amount
included an estimate of the present value of the portion of the acquisition
royalty payments to be received from management fees during the Term.

Summary of Significant
Accounting Policies

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, the Bank, and VNBTrust. All significant
intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses,
deferred tax assets, valuation of other real estate owned, and fair value
measurements.

45

---



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, and federal funds
sold.

Securities Sold Under
Agreements to Repurchase The Company
sells certain securities under agreements to repurchase. The agreements are
treated as collateralized financing transactions and the obligations to
repurchase securities sold are reflected as a liability in the accompanying
consolidated balance sheets. The dollar amount of the securities underlying the
agreements remain in the asset accounts.

Securities Unrestricted investments are to be classified in two
categories as described below.

- Securities Held to Maturity Securities classified as held to
  maturity are those debt and equity 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.
  During the third quarter of 2013, the Company reclassified held to maturity
  securities as available for sale. Management determined that it no longer had
  the positive intent to hold the securities classified as held to maturity for
  an indefinite period of time because of Managements desire to have more
  flexibility in managing the investment portfolio.
- Securities Available for Sale Securities classified as available for
  sale are those debt and equity 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 available
  for sale 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. Securities available for sale are carried at fair value.
  Unrealized gains or losses are reported as a separate component of other
  comprehensive income. Realized gains or losses, determined on the basis of the
  cost of specific securities sold, are included in earnings.

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

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

Restricted Securities
As members of the Federal Reserve Bank
of Richmond (FRB) and the Federal Home Loan Bank of Atlanta (FHLB), the Bank
is required to maintain certain minimum investments in the common stock of the
FRB and the FHLB, which are carried at cost. Required levels of investments are
based upon the Banks capital and a percentage of qualifying assets.

Loans Loans are reported at the principal balance outstanding
net of unearned discounts and of the allowance for loan losses. Interest income
on loans is reported on the level-yield method and includes amortization of
deferred loan fees and costs over the loan term. Further information regarding
the Companys accounting policies related to past due loans, non-accrual loans,
impaired loans and troubled-debt restructurings is presented in Note 3 - Loans.

Allowance for Loan Losses The allowance for loan losses is a
reserve established through a provision for loan losses charged to expense,
which represents managements best estimate of probable losses that have been
incurred within the existing loan portfolio. The allowance, in the judgment of
management, is necessary to reserve for estimated
loan losses inherent in the loan portfolio. The allowance for loan losses
includes allowance allocations calculated in accordance with Financial
Accounting Standards Board (FASB) ASC Topic 310, Receivables and allowance
allocations calculated in accordance with ASC Topic 450, Contingencies.
Further information regarding the Companys policies and methodology used to
estimate the allowance for loan losses is presented in Note 4  Allowance for
Loan Losses.

46

---



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.

Other Real Estate Owned Assets acquired through, or in lieu of,
loan foreclosures are held for sale and are initially recorded at fair value
less cost to sell at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management,
and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses for foreclosed assets. More information
regarding other real estate owned is presented in Note 5  Other Real Estate
Owned.

Bank Owned Life Insurance The Company has purchased life insurance
on certain key employees. These policies are recorded at their cash surrender
value on the Consolidated Balance Sheet. 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 14  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 restricted stock. Stock-based compensation is estimated at the date
of grant, using the Black-Scholes option valuation model for determining fair
value. The model employs the following assumptions:

- 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 is required to
estimate forfeitures when recognizing compensation expense and that this
estimate of forfeitures be 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 17  Stock Incentive Plans.

47

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Earnings Per Common Share Basic earnings per share represent
income available to common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings 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 to outstanding stock options and are determined
using the treasury stock method. Additional information on earnings per share
are presented in Note 18  Earnings 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 available for sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Further information on the Companys other
comprehensive income is presented in Note 19  Other 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 upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying consolidated balance sheets along
with any associated interest and penalties that would be payable to the taxing
authorities upon examination.

Interest and penalties associated
with unrecognized tax benefits are classified as additional income taxes in the
statements of income. Further information on the Companys accounting policies
for income taxes is presented in Note 8  Income Taxes.

VNBTrust Securities and other property held by VNBTrust in a fiduciary or agency capacity are not assets of the Bank and are not included in the accompanying consolidated financial statements.

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

Subsequent Events
In preparing these financial
statements, the Company has evaluated events and transactions for potential
recognition or disclosure through the date the financial statements were issued.

Adoption of New Accounting
Standards

In December 2011, the FASB issued
Accounting Standards Update (ASU) 2011-11, Balance Sheet (Topic 210) 
Disclosures about Offsetting Assets and Liabilities. This ASU requires entities
to disclose both gross information and net information about both instruments
and transactions eligible for offset in the balance sheet and instruments and
transactions subject to an agreement similar to a master netting arrangement. An
entity is required to apply the amendments for annual reporting periods
beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods
presented. The adoption of the new guidance did not have a material impact on
the Company's consolidated financial statements.

48

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

In January 2013, the FASB issued
ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures
about Offsetting Assets and Liabilities. The amendments in this ASU clarify the
scope for derivatives accounted for in accordance with Topic 815, Derivatives
and Hedging, including bifurcated embedded derivatives, repurchase agreements
and reverse repurchase agreements and securities borrowing and securities
lending transactions that are either offset or subject to netting arrangements.
An entity is required to apply the amendments for fiscal years, and interim
periods within those years, beginning on or after January1, 2013. The adoption of the new guidance did not have a
material impact on the Company's consolidated financial statements.

In February 2013, the FASB issued
ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. The amendments in
this ASU require an entity to present (either on the face of the statement where
net income is presented or in the notes) the effects on the line items of net
income of significant amounts reclassified out of accumulated other
comprehensive income. In addition, the amendments require a cross-reference to
other disclosures currently required for other reclassification items to be
reclassified directly to net income in their entirety in the same reporting
period. Companies should apply these amendments for fiscal years, and interim
periods within those years, beginning on or after December 15, 2012. The Company
has included the required disclosures from ASU 2013-02 in the consolidated
financial statements.

In July 2013, the FASB issued ASU
2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds
Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate
for Hedge Accounting Purposes. The amendments in this ASU permit the Fed Funds
Effective Swap Rate (also referred to as the Overnight Index Swap Rate) to be
used as a U.S. benchmark interest rate for hedge accounting purposes under Topic
815, in addition to interest rates on direct Treasury obligations of the U.S.
government and the London Interbank Offered Rate. The amendments also remove the
restriction on using different benchmark rates for similar hedges. The
amendments apply to all entities that elect to apply hedge accounting of the
benchmark interest rate under Topic 815. The amendments are effective
prospectively for qualifying new or redesignated hedging relationships entered
into on or after July 17, 2013. The adoption of the new guidance did not have a
material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU
2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists. The amendments in this ASU provide guidance on the
financial statement presentation of an unrecognized tax benefit when a net
operating loss carryforward, similar tax loss, or tax credit carryforward
exists. An unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward, except as follows. To the extent a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle
any additional income taxes that would result from the disallowance of a tax
position or the tax law of the applicable jurisdiction does not require the
entity to use, and the entity does not intend to use, the deferred tax asset for
such purpose, the unrecognized tax benefit should be presented in the financial
statements as a liability and should not be combined with deferred tax assets.
The amendments in this ASU are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2013. Early adoption is
permitted. The amendments should be applied prospectively to all unrecognized
tax benefits that exist at the effective date. Retrospective application is
permitted. The adoption of the new guidance did not have a material impact on
the Company's consolidated financial statements.

Newly Issued Not Yet Effective
Standards

In January 2014, the FASB issued
ASU 2014-01, InvestmentsEquity Method and Joint Ventures (Topic 323):
Accounting for Investments in Qualified Affordable Housing Projects (a consensus
of the FASB Emerging Issues Task Force). The amendments in this ASU permit
reporting entities to make an accounting policy election to account for their
investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met. Under the proportional
amortization method, an entity amortizes the initial cost of the investment in
proportion to the tax credits and other tax benefits received and recognizes the
net investment performance in the income statement as a component of income tax
expense (benefit). The amendments in this ASU
should be applied retrospectively to all periods presented. A reporting entity
that uses the effective yield method to account for its investments in qualified
affordable housing projects before the date of adoption may continue to apply
the effective yield method for those preexisting investments. The amendments in
this ASU are effective for public business entities for annual periods and
interim reporting periods within those annual periods, beginning after December
15, 2014. Early adoption is permitted. The Company is currently assessing the
impact that ASU 2014-01 will have on its consolidated financial
statements.

49

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

In January 2014, the FASB issued
ASU 2014-04, ReceivablesTroubled Debt Restructurings by Creditors (Subtopic
310-40): Reclassification of Residential Real Estate Collateralized Consumer
Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task
Force). The amendments in this ASU clarify that an in-substance repossession or
foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer
mortgage loan, upon either (1) the creditor obtaining legal title to the
residential real estate property upon completion of a foreclosure or (2) the
borrower conveying all interest in the residential real estate property to the
creditor to satisfy that loan through completion of a deed in lieu of
foreclosure or through a similar legal agreement. Additionally, the amendments
require interim and annual disclosure of both (1) the amount of foreclosed
residential real estate property held by the creditor and (2) the recorded
investment in consumer mortgage loans collateralized by residential real estate
property that are in the process of foreclosure according to local requirements
of the applicable jurisdiction. The amendments in this ASU are effective for
public business entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2014. The Company is currently
assessing the impact that ASU 2014-04 will have on its consolidated financial
statements.

50

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 2Securities

The amortized cost and fair values
of securities available for sale as of December 31, 2013 are as
follows:

|                                      |        | Amortized |         | Gross Unrealized |   | Gross Unrealized |        | Fair 
|------------------------------------- | ------ | --------- | ------- | ---------------- | - | ---------------- | ------ | -----
|(dollars in
      thousands)          |        | Cost      |         | Gains            |   | (Losses)         |        | Value
|U.S. Government
      agencies        |        | $         | 43,268  |                  | $ | 828              |        | $    
|Corporate bonds                       |        |           | 9,066   |                  |   | 37               |        |      
|Asset-backed
      securities         |        |           | 2,151   |                  |   | -                |        |      
|Mortgage-backed
      securities/CMOs | 56,815 |           |         | 34               |   |                  | (1,252 | )    
|Municipal
      bonds                 |        |           | 23,896  |                  |   | 5                |        |      
|                                      |        | $         | 135,196 |                  | $ | 904              |        | $    

The amortized cost and fair values
of securities available for sale as of December 31, 2012 are as
follows:

|                                      |        | Amortized |         | Gross Unrealized |   | Gross Unrealized |      | Fair 
|------------------------------------- | ------ | --------- | ------- | ---------------- | - | ---------------- | ---- | -----
|(dollars in
      thousands)          |        | Cost      |         | Gains            |   | (Losses)         |      | Value
|U.S. Government
      agencies        |        | $         | 61,664  |                  | $ | 1,842            |      | $    
|Corporate bonds                       |        |           | 4,037   |                  |   | -                |      |      
|Asset-backed
      securities         |        |           | 1,151   |                  |   | -                |      |      
|Mortgage-backed
      securities/CMOs | 25,260 |           |         | 43               |   |                  | (137 | )    
|Municipal
      bonds                 |        |           | 16,996  |                  |   | 87               |      |      
|                                      |        | $         | 109,108 |                  | $ | 1,972            |      | $    

The amortized cost and fair values
of securities held to maturity as of December 31, 2012 are as follows:



|                       |  | Amortized |       | Gross Unrealized |   | Gross Unrealized |  | Fair 
|---------------------- |  | --------- | ----- | ---------------- | - | ---------------- |  | -----
|(dollars in thousands) |  | Cost      |       | Gains            |   | (Losses)         |  | Value
|Corporate bonds        |  | $         | 4,024 |                  | $ | 50               |  | $    
|Municipal
      bonds  |  |           | 1,967 |                  |   | 19               |  |      
|                       |  | $         | 5,991 |                  | $ | 69               |  | $    

Restricted securities are
securities with limited marketability and consist of stock in the FRB and FHLB
totaling $1,645,000 as of December 31, 2013 and $1,729,000 as of December 31,
2012. These restricted securities are carried at cost.

For the year ended December 31,
2013, proceeds from the sales of securities amounted to $16,854,000 and gross
net realized gains on these securities were $50,000. For the year ended December
31, 2012, proceeds from the sales of securities amounted to $10,307,000 and
gross net realized gains on these securities were $133,000.

During the third quarter of 2013,
the Company reclassified held to maturity securities as available for sale.
Management determined that it no longer had the positive intent to hold the
securities classified as held to maturity for an indefinite period of time
because of managements desire to have more flexibility in managing the
investment portfolio. As of June 30, 2013, the Company had three corporate and
municipal securities designated as held to maturity recorded at an amortized
cost of $2,699,000. The fair value of these securities was $2,733,000,
reflecting an unrealized gross gain of $34,000. The unrealized gross gain of
$34,000, net of taxes, was recorded as other comprehensive income at the time of
the transfer. As a result of this transfer, there were no securities classified
as held to maturity as of December 31, 2013.

51

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Securities pledged to secure
deposits, and for other purposes required by law, had carrying values of
$17,547,000 at December 31, 2013 and $7,307,000 at December 31, 2012. The
increase in the amount of pledged securities during 2013 resulted from increased
customer participation in the overnight repurchase agreement program.

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

|2013                           |  |                     |        |                   |   |            |   |            |   |            |  |            |      |   |  |   |        |  |   |        |  
|------------------------------ |  | ------------------- | ------ | ----------------- | - | ---------- | - | ---------- | - | ---------- |  | ---------- | ---- | - |  | - | ------ |  | - | ------ | -
|(dollars in
      thousands)   |  | Less than 12 Months |        | 12 Months or more |   | Total     
|                               |  | Estimated           |        | Unrealized        |   | Estimated  |   | Unrealized |   | Estimated  |  | Unrealized
|                               |  | Fair Value          |        | (Losses)          |   | Fair Value |   | (Losses)   |   | Fair Value |  | (Losses)  
|U.S. Government
      agencies |  | $                   | 2,889  |                   | $ | (39        | ) |            | $ | 948        |  | $          | (52  | ) |  | $ | 3,837  |  | $ | (91    | )
|Corporate bonds                |  |                     | 5,016  |                   |   | (50        | ) |            |   | -          |  |            | -    |   |  |   | 5,016  |  |   | (50    | )
|Asset-backed
      securities  |  |                     | 960    |                   |   | (36        | ) |            |   | 1,140      |  |            | (15  | ) |  |   | 2,100  |  |   | (51    | )
|Mortgage-backed/CMOs           |  |                     | 39,061 |                   |   | (1,079     | ) |            |   | 8,609      |  |            | (173 | ) |  |   | 47,670 |  |   | (1,252 | )
|Municipal
      bonds          |  |                     | 18,433 |                   |   | (1,451     | ) |            |   | 2,280      |  |            | (178 | ) |  |   | 20,713 |  |   | (1,629 | )
|                               |  | $                   | 66,359 |                   | $ | (2,655     | ) |            | $ | 12,977     |  | $          | (418 | ) |  | $ | 79,336 |  | $ | (3,073 | )
|                              
|2012                           |  |                     |        |                   |   |            |   |            |   |            |  |            |      |   |  |   |        |  |   |        |  
|(dollars in
      thousands)   |  | Less than 12 Months |        | 12 Months or More |   | Total     
|                               |  | Estimated           |        | Unrealized        |   | Estimated  |   | Unrealized |   | Estimated  |  | Unrealized
|                               |  | Fair Value          |        | (Losses)          |   | Fair Value |   | (Losses)   |   | Fair Value |  | (Losses)  
|U.S. Government
      agencies |  | $                   | 991    |                   | $ | (9         | ) |            | $ | -          |  | $          | -    |   |  | $ | 991    |  | $ | (9     | )
|Corporate bonds                |  |                     | 4,023  |                   |   | (14        | ) |            |   | -          |  |            | -    |   |  |   | 4,023  |  |   | (14    | )
|Asset-backed
      securities  |  |                     | 1,144  |                   |   | (7         | ) |            |   | -          |  |            | -    |   |  |   | 1,144  |  |   | (7     | )
|Mortgage-backed/CMOs           |  |                     | 19,740 |                   |   | (137       | ) |            |   | -          |  |            | -    |   |  |   | 19,740 |  |   | (137   | )
|Municipal
      bonds          |  |                     | 5,806  |                   |   | (60        | ) |            |   | -          |  |            | -    |   |  |   | 5,806  |  |   | (60    | )
|                               |  | $                   | 31,704 |                   | $ | (227       | ) |            | $ | -          |  | $          | -    |   |  | $ | 31,704 |  | $ | (227   | )

As of December 31, 2013,
management does not have the intent to sell any of the securities classified as
available for sale in the table above and believes that it is more likely than
not that the Company will not have to sell any such securities before a recovery
of cost. The Companys securities portfolio is primarily made up of fixed rate
bonds, whose prices move inversely with interest rates. Any unrealized losses
are largely due to increases in market interest rates over the yields available
at the time the underlying securities were purchased. The fair value is expected
to recover as the bonds approach their maturity date or repricing date or if
market yields for such investments decline. At the end of any accounting period,
the portfolio may have both unrealized gains and losses. Management does not
believe any of the securities in an unrealized loss position are impaired due to
credit quality. Accordingly, as of December 31, 2013, management believes the
impairments detailed in the table above are temporary, and no impairment loss
has been realized in the Companys consolidated income statement.

52

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The amortized cost and fair value
of available for sale securities at December 31, 2013 are presented below based
upon contractual maturities, by major investment categories. Expected maturities
may differ from contractual maturities because issuers have the right to call or
prepay obligations.

|(dollars in thousands)                    |  | Amortized Cost |         | Fair Value
|----------------------------------------- |  | -------------- | ------- | ----------
|U.S. Government
      agencies            |  |                |         |           
|One
      year or less                    |  | $              | 15,065  |           
|After one year to five
      years        |  |                | 22,052  |           
|After
      five years to ten years       |  |                | 5,151   |           
|After ten years                           |  |                | 1,000   |           
|                                          |  | $              | 43,268  |           
|Corporate
      bonds                     |  |                |         |           
|After
      one year to five years        |  | $              | 7,066   |           
|After five years to ten
      years       |  |                | 2,000   |           
|                                          |  | $              | 9,066   |           
|Asset-backed
      securities             |  |                |         |           
|After
      five years to ten years       |  | $              | 996     |           
|Ten years or more                         |  |                | 1,155   |           
|                                          |  | $              | 2,151   |           
|Mortgage-backed
      securities/CMOs     |  |                |         |           
|After
      five years to ten years       |  | $              | 13,294  |           
|Ten years or more                         |  |                | 43,521  |           
|                                          |  | $              | 56,815  |           
|Municipal
      bonds                     |  |                |         |           
|One
      year or less                    |  | $              | 995     |           
|After one year to five
      years        |  |                | 1,113   |           
|After
      five years to ten years       |  |                | 5,407   |           
|Ten years or more                         |  |                | 16,381  |           
|                                          |  | $              | 23,896  |           
|Total Securities
      Available for Sale |  | $              | 135,196 |           

53

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 3  Loans

The composition of the loan
portfolio by loan classification at December 31, 2013 and 2012 appears
below.

|                                    |  | December 31           
|----------------------------------- |  | ----------------------
|                                    |  | 2013                  
|                                    |  | (dollars in thousands)
|Commercial & industrial
      loans |  | $                     
|Real estate construction and land   |  |                       
|Residential construction            |  |                       
|Other construction and
      land   |  |                       
|Total construction and land         |  |                       
|Real estate mortgage:               |  |                       
|1-4
      family                    |  |                       
|Home equity loans                   |  |                       
|Multifamily mortgages               |  |                       
|Commercial owner
      occupied     |  |                       
|Commercial nonowner occupied        |  |                       
|Total real estate mortgage          |  |                       
|Consumer                            |  |                       
|Consumer revolving
      credit     |  |                       
|Consumer all other credit           |  |                       
|Total consumer loans                |  |                       
|Total loans                         |  |                       
|Less: Allowance for loan losses     |  |                       
|Net loans                           |  | $                     

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

Commercial and industrial
loansare underwritten after evaluating
and understanding the borrowers ability to operate profitably and prudently
expand its business. The Companys management examines current and projected
cash flows to determine the ability of the borrower to repay their obligations
as agreed. Commercial and industrial loans are primarily made based on the
identified cash flows of the borrower and secondarily on the underlying
collateral provided by the borrower. The cash flows of borrowers, however, may
not be as expected and the collateral securing these loans may fluctuate in
value. Most commercial and industrial loans are secured by the assets being
financed or other business assets such as accounts receivable or inventory and
may incorporate personal guaranties; however, some short-term loans may be made
on an unsecured basis. In the case of loans secured by accounts receivable, the
availability of funds for the repayment of these loans may be substantially
dependent on the ability of the borrower to collect amounts due from its
customers.

54

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Real estate
loansare subject to underwriting
standards and processes similar to commercial and industrial loans, in addition
to those of real estate loans. These loans are viewed primarily as cash flow
loans and secondarily as loans secured by real estate. Commercial real estate
lending typically involves higher loan principal amounts and the repayment of
these loans is generally largely dependent on the successful operation of the
property securing the loan or the business conducted on the property securing
the loan. Commercial real estate loans may be more adversely affected by
conditions in the real estate markets or in the general economy. Management monitors and evaluates
commercial real estate loans based on collateral, geography and risk grade
criteria. As a general rule, the Company avoids financing single-purpose
projects unless other underwriting factors are present to help mitigate risk. At
December 31, 2013, commercial real estate loans, including multifamily
mortgages, totaled $136.0 million or 61.8% of the Companys outstanding balances
of real estate loans. In addition, management tracks the level of owner-occupied
commercial real estate loans versus non-owner occupied loans. Of the $113.4
million in commercial real estate loans outstanding at December 31, 2013, $58.8
million or 43.2% were owner-occupied properties.

Residential mortgagesfor 1-to-4 family properties and home
equity loans have underwriting standards that are heavily influenced by
statutory requirements, which include, but are not limited to, documentation
requirements, limits on maximum loan-to-value percentages, and collection
remedies. The Company typically originates shorter-term fixed-rate loans and
adjustable-rate mortgages. At December 31, 2013, residential and home equity
loans outstanding totaled $83.9 million or 38.2% of real estate mortgage
loans.

Overdrafts.Deposit account overdrafts reported as loans totaled
$51,000 and $213,000 at December 31, 2013 and 2012, respectively.

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

Concentrations of
Credit.Most of the Companys lending
activity occurs within the Commonwealth of Virginia, primarily in the regions of
surrounding markets. The majority of the Companys loan portfolio consists of
commercial and industrial and commercial real estate loans. As of December 31,
2013, there were no concentrations of loans related to any single industry in
excess of 20% of total loans.

Related Party
Loans.In the ordinary course of
business, the Company has granted loans to certain directors, executive officers
and their affiliates (collectively referred to as related parties). These
loans were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other unaffiliated persons and do not involve more than normal risk of
collectability.

Activity in related party loans
during 2013 is presented in the following table.

|                                               |  | (dollars in
      thousands)
|---------------------------------------------- |  | ----------------------------
|Balance
      outstanding at December 31, 2012 |  | $                           
|Principal additions                            |  |                             
|Principal
      reductions                     |  |                             
|Balance outstanding at December
      31, 2013 |  | $                           

55

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Past Due and Non-Accrual
Loans. Loans are considered past due if
the required principal and interest payments have not been received as of the
date such payments were due. Loans are placed on non-accrual status when, in
managements opinion, the borrower may be unable to meet payment obligations as
they become due, as well as when required by regulatory provisions. In
determining whether or not a borrower may be unable to meet payment obligations
for each class of loans, the Company considers the borrowers debt service
capacity through the analysis of current financial information, if available,
and/or current information with regards to the Companys collateral position.
Regulatory provisions would typically require the placement of a loan on
non-accrual status if (i) principal or interest has been in default for a period
of 90 days or more unless the loan is both well secured and in the process of
collection or (ii) full payment of principal and interest is not expected. Loans
may be placed on non-accrual status regardless of whether or not such loans are
considered past due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income on non-accrual loans is recognized only to
the extent that cash payments are received in excess of principal due. A loan
may be returned to accrual status when all the principal and interest amounts
contractually due are brought current and future principal and interest amounts
contractually due are reasonably assured, which is typically evidenced by a
sustained period (at least six months) of repayment performance by the
borrower.

The following tables show the
aging of past due loans as of December 31, 2013 and December 31, 2012. Also
included are loans that are 90 or more days past due but still accruing, because
they are well secured and in the process of collection. As of December 31, 2013,
the Company had two such credits for a balance of $178,000. As of December 31,
2012, the Company had one loan for a balance of $35,000 that was 90 days or more
past due but still accruing.

|Past Due Aging as of               |  |           |     |           |   |                    |  |            |     |         |   |       |       |          |                 |  |                  |         |  | **90 Days**
|---------------------------------- |  | --------- | --- | --------- | - | ------------------ |  | ---------- | --- | ------- | - | ----- | ----- | -------- | --------------- |  | ---------------- | ------- |  | -----------
|December 31, 2013                  |  | **30-59** |     | **60-89** |   | **90 Days
    or** |  |            |     |         |   |       |       |          |                 |  | **Past
    Due**
|(dollars in thousands)             |  | Days Past |     | Days Past |   | More Past          |  | Total Past |     |         |   |       | Total |          | and
      Still
|                                   |  | Due       |     | Due       |   | Due                |  | Due        |     | Current |   | Loans |       | Accruing
|Commercial
      loans             |  | $         | 123 |           | $ | 35                 |  | $          | -   |         | $ | 158   |       | $        | 47,902          |  | $                | 48,060  |  | $          
|Real estate
    construction       |  |           |     |           |   |                    |  |            |     |         |   |       |       |          |                 |  |                  |         |  |            
|Residential construction           |  |           | -   |           |   | -                  |  |            | -   |         |   | -     |       |          | 794             |  |                  | 794     |  |            
|Other
      construction and land  |  |           | 34  |           |   | -                  |  |            | 29  |         |   | 63    |       |          | 17,604          |  |                  | 17,667  |  |            
|Real estate
      mortgages        |  |           |     |           |   |                    |  |            |     |         |   |       |       |          |                 |  |                  |         |  |            
|1-4 family
      mortgages         |  |           | 60  |           |   | 26                 |  |            | 149 |         |   | 235   |       |          | 54,065          |  |                  | 54,300  |  |            
|Home equity
      lines of credit  |  |           | -   |           |   | -                  |  |            | -   |         |   | -     |       |          | 29,612          |  |                  | 29,612  |  |            
|Multifamily
      mortgages        |  |           | -   |           |   | -                  |  |            | -   |         |   | -     |       |          | 22,560          |  |                  | 22,560  |  |            
|Commercial owner occupied          |  |           | -   |           |   | -                  |  |            | -   |         |   | -     |       |          | 58,802          |  |                  | 58,802  |  |            
|Commercial
      nonowner occupied |  |           | -   |           |   | 139                |  |            | 91  |         |   | 230   |       |          | 54,405          |  |                  | 54,635  |  |            
|Consumer
      loans               |  |           |     |           |   |                    |  |            |     |         |   |       |       |          |                 |  |                  |         |  |            
|Consumer
      revolving credit    |  |           | -   |           |   | -                  |  |            | -   |         |   | -     |       |          | 2,254           |  |                  | 2,254   |  |            
|Consumer all
      other credit    |  |           | 93  |           |   | 30                 |  |            | -   |         |   | 123   |       |          | 11,227          |  |                  | 11,350  |  |            
|Total Loans                        |  | $         | 310 |           | $ | 230                |  | $          | 269 |         | $ | 809   |       | $        | 299,225         |  | $                | 300,034 |  | $          

56

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

|Past Due Aging as
    of           |  |                 |     |                 |   |                      |  |                  |     |         |   |       |       |          |                 |  |                    |         |  | **90
      Days**
|---------------------------------- |  | --------------- | --- | --------------- | - | -------------------- |  | ---------------- | --- | ------- | - | ----- | ----- | -------- | --------------- |  | ------------------ | ------- |  | -----------------
|December 31,
2012                  |  | **30-59**       |     | **60-89**       |   | **90 Days
      or** |  |                  |     |         |   |       |       |          |                 |  | **Past
      Due**
|(dollars in
      thousands)       |  | Days
      Past |     | Days
      Past |   | More
      Past      |  | Total
      Past |     |         |   |       | Total |          | and
      Still
|                                   |  | Due             |     | Due             |   | Due                  |  | Due              |     | Current |   | Loans |       | Accruing
|Commercial
      loans             |  | $               | -   |                 | $ | 74                   |  | $                | -   |         | $ | 74    |       | $        | 45,296          |  | $                  | 45,370  |  | $                
|Real estate
construction           |  |                 |     |                 |   |                      |  |                  |     |         |   |       |       |          |                 |  |                    |         |  |                  
|Residential
      construction     |  |                 | -   |                 |   | -                    |  |                  | -   |         |   | -     |       |          | -               |  |                    | -       |  |                  
|Other construction and
      land  |  |                 | 38  |                 |   | -                    |  |                  | -   |         |   | 38    |       |          | 14,155          |  |                    | 14,193  |  |                  
|Real estate
      mortgages        |  |                 |     |                 |   |                      |  |                  |     |         |   |       |       |          |                 |  |                    |         |  |                  
|1-4 family
      mortgages         |  |                 | 181 |                 |   | -                    |  |                  | -   |         |   | 181   |       |          | 56,639          |  |                    | 56,820  |  |                  
|Home equity lines of
      credit  |  |                 | -   |                 |   | -                    |  |                  | 35  |         |   | 35    |       |          | 31,398          |  |                    | 31,433  |  |                  
|Multifamily
      mortgages        |  |                 | -   |                 |   | -                    |  |                  | -   |         |   | -     |       |          | 23,033          |  |                    | 23,033  |  |                  
|Commercial owner
      occupied    |  |                 | -   |                 |   | -                    |  |                  | 961 |         |   | 961   |       |          | 56,526          |  |                    | 57,487  |  |                  
|Commercial nonowner
      occupied |  |                 | -   |                 |   | -                    |  |                  | -   |         |   | -     |       |          | 44,569          |  |                    | 44,569  |  |                  
|Consumer
      loans               |  |                 |     |                 |   |                      |  |                  |     |         |   |       |       |          |                 |  |                    |         |  |                  
|Consumer revolving
      credit    |  |                 | -   |                 |   | -                    |  |                  | -   |         |   | -     |       |          | 1,938           |  |                    | 1,938   |  |                  
|Consumer all other
      credit    |  |                 | 9   |                 |   | -                    |  |                  | -   |         |   | 9     |       |          | 10,008          |  |                    | 10,017  |  |                  
|Total Loans                        |  | $               | 228 |                 | $ | 74                   |  | $                | 996 |         | $ | 1,298 |       | $        | 283,562         |  | $                  | 284,860 |  | $                

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

Regulatory guidelines require the
Company to reevaluate the fair value of collateral supporting impaired
collateral dependent loans on at least an annual basis. While the Companys
policy is to comply with the regulatory guidelines, the Companys general
practice is to reevaluate the fair value of collateral supporting impaired
collateral dependent loans on a quarterly basis.

The following tables provide a
breakdown by class of the loans classified as impaired loans as of December 31,
2013 and December 31, 2012. These loans are reported at their recorded
investment, which is the carrying amount of the loan as reflected on the
Companys balance sheet, net of charge-offs and other amounts applied to reduce
the net book balance. Average recorded investment in impaired loans is computed
using an average of month-end balances for these loans for the twelve months
ended December 31, 2013 and December 31, 2012. Interest income recognized is for
the years ended December 31, 2013 and December 31, 2012.

|December 31, 2013                                   |  |                        |       |           | Unpaid |            |  |            |   | Average    |   | Interest
|--------------------------------------------------- |  | ---------------------- | ----- | --------- | ------ | ---------- |  | ---------- | - | ---------- | - | --------
|                                                    |  | Recorded               |       | Principal |        | Associated |  | Recorded   |   | Income    
|                                                    |  | Investment             |       | Balance   |        | Allowance  |  | Investment |   | Recognized
|                                                    |  | (dollars in thousands)
|Impaired loans without a valuation
      allowance: |  |                        |       |           |        |            |  |            |   |            |   |         
|Other real
      estate construction and land       |  | $                      | 77    |           | $      | 110        |  | $          | - |            | $ | 81      
|1-4 family
      residential mortgages              |  |                        | 285   |           |        | 380        |  |            | - |            |   | 293     
|Commercial
      owner occupied real estate         |  |                        | 1,144 |           |        | 1,144      |  |            | - |            |   | 1,414   
|Commercial
      owner non-occupied real estate     |  |                        | 230   |           |        | 274        |  |            | - |            |   | 202     
|Impaired loans
      with a valuation allowance     |  |                        | -     |           |        | -          |  |            | - |            |   | -       
|Total impaired loans                                |  | $                      | 1,736 |           | $      | 1,908      |  | $          | - |            | $ | 1,990   

57

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

|December 31, 2012                                   |  |                              |       |           | Unpaid |            |  |            |   | Average    |   | Interest
|--------------------------------------------------- |  | ---------------------------- | ----- | --------- | ------ | ---------- |  | ---------- | - | ---------- | - | --------
|                                                    |  | Recorded                     |       | Principal |        | Associated |  | Recorded   |   | Income    
|                                                    |  | Investment                   |       | Balance   |        | Allowance  |  | Investment |   | Recognized
|                                                    |  | (dollars in
      thousands)
|Impaired loans without a
      valuation allowance: |  |                              |       |           |        |            |  |            |   |            |   |         
|Other
      real estate construction and land       |  | $                            | 194   |           | $      | 229        |  | $          | - |            | $ | 337     
|1-4
      family residential mortgages              |  |                              | 294   |           |        | 341        |  |            | - |            |   | 195     
|Commercial owner occupied real estate               |  |                              | 2,328 |           |        | 2,671      |  |            | - |            |   | 915     
|Impaired loans with a valuation
      allowance     |  |                              | -     |           |        | -          |  |            | - |            |   | -       
|Total impaired loans                                |  | $                            | 2,816 |           | $      | 3,241      |  | $          | - |            | $ | 1,447   

Non-accrual loans are shown below
by class:

|                                              |  | December 31, 2013            |     | December 31, 2012
|--------------------------------------------- |  | ---------------------------- | --- | -----------------
|                                              |  | (dollars in
      thousands)
|Other real estate
      construction and land |  | $                            | 77  |                  
|1-4
      family residential mortgages        |  |                              | 60  |                  
|Commercial owner occupied
      real estate   |  |                              | 230 |                  
|Total nonaccrual loans                        |  | $                            | 367 |                  

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

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

|                                       |  | December 31, 2013 |  | December 31, 2012
|-------------------------------------- |  | ----------------- |  | -----------------
|(dollars in thousands)                 |  | No.
      of      |  | Recorded         
|                                       |  | Loans             |  | Investment       
|Performing
      TDRs                  |  |                   |  |                  
|1-4 family residential
      mortgages |  | 1                 |  | $                
|Commercial owner occupied real estate  |  | 1                 |  |                  
|Total performing TDRs                  |  | 2                 |  | $                
|                                      
|Nonperforming
      TDRs               |  |                   |  |                  
|1-4 family residential
      mortgages |  | -                 |  | $                
|Commercial owner occupied real estate  |  | -                 |  |                  
|Total nonperforming
    TDRs           |  | -                 |  | $                
|                                      
|Total
    TDRs                         |  | 2                 |  | $                

A summary of loans that were
modified as TDRs during the years ended December 31, 2013 and 2012 is shown
below by class. The Post-Modification Recorded Balance reflects any interest or
fees from the original loan which may have been added to the principal balance
on the new note as a condition of the TDR. Additionally, the Post-Modification
Recorded Balance is reported below at the period end balances, inclusive of all
partial principal pay downs and principal
charge-offs since the modification date. Loans modified as TDRs that were fully
paid down, charged-off, or foreclosed upon by period end are not
reported.

58

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                            |  | During year ended       |  | During year
ended      
|------------------------------------------- |  | ----------------------- |  | -----------------------
|Loans modified at below market
      rates  |  | December 31,
      2013 |  | December 31,
      2012
|(dollars in thousands)                      |  |                         |  | Pre-                   
|                                            |  |                         |  | Modification           
|                                            |  | Number                  |  | Recorded               
|                                            |  | of
      Loans          |  | Balance                
|1-4 family
      residential mortgages      |  | -                       |  | $                      
|Commercial owner occupied
      real estate |  | -                       |  |                        
|Total loans modified during the period      |  | -                       |  | $                      

The following tables present, by
class of loans, information related to loans modified as TDRs that subsequently
defaulted during the years ended December 31, 2013 and 2012 and were modified as
TDRs during the twelve months prior to default:

|                                       |  | For
      year ended |  | For
      year ended
|-------------------------------------- |  | -------------------- |  | --------------------
|(dollars in
      thousands)           |  | December 31, 2013    |  | December 31, 2012   
|                                       |  | No.
      of         |  | Recorded            
|                                       |  | Loans                |  | Investment          
|1-4 family residential
      mortgages |  | 1                    |  | $                   
|Commercial owner occupied real estate  |  | 1                    |  |                     
|Total                                  |  | 2                    |  | $                   

Note 4  Allowance for Loan
Losses

A summary of the transactions in
the allowance for loan losses for the years ended December 31, 2013 and 2012
appears below:

|                                              |  | **2013**                     |       | 2012
|--------------------------------------------- |  | ---------------------------- | ----- | ----
|                                              |  | (dollars in
      thousands)
|Balance,
      beginning of period            |  | $                            | 3,267 |     
|Loans charged off                             |  |                              | (161  | )   
|Recoveries                                    |  |                              | 94    |     
|Net
      charge-offs                         |  |                              | (67   | )   
|Provision for
      (recovery of) loan losses |  |                              | 160   |     
|Balance, December 31                          |  | $                            | 3,360 |     

59

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Management has an established
methodology to determine the adequacy of the allowance for loan losses that
assesses the risks and losses inherent in the loan portfolio. For purposes of
determining the allowance for loan losses, the Company has segmented certain
loans in the portfolio by product type. Within these segments, the Company has
sub-segmented its portfolio by classes, based on the associated risks within
these classes.

LOAN
      CLASSES BY SEGMENTSCommercial loan segment:Commercial and industrial
      loansReal estate
      construction and land loan segment:Residential construction loansOther construction and
      land loansReal estate
      mortgage loan segment:1-4 family mortgagesHome equity lines of
      creditMultifamily mortgagesCommercial owner occupied
      real estateCommercial non-owner occupied real estateConsumer
      loan segment:Consumer revolving
      creditConsumer all other
      credit


Based upon the internal risk
ratings assigned to each credit, a historical loss factor is assigned to the
principal balances for each loan class. The historical loss factor is calculated
by averaging the actual loan losses, for each loan class, from the previous
twelve quarters.

The Companys internal
creditworthiness grading system is based on experiences with similarly graded
loans. Category ratings are reviewed quarterly by experienced senior lenders
based on each borrowers situation. Additionally, internal and external
monitoring and review of credits are conducted on an annual basis.

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

60

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Risk Ratings And Historical
Loss Factor Applied

Excellent


0%
applied, as these loans are secured by cash and represent a minimal risk. The
Company has never experienced a loss for this category.


Good


0%
applied, as these loans are secured by marketable securities within margin and
represent a low risk. The Company has never experienced a loss for this
category.


Pass


Historical loss factor for loans rated pass is applied to current
balances of like-rated loans, pooled by class. Loans with the following risk
ratings are pooled by class and considered together as pass:


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

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

Marginal acceptable risk loans
where the borrower has an acceptable financial statement but is
leveraged

Watch acceptable risk loans
which require more attention than normal servicing

Special Mention


These potential problem loans are currently protected but are
potentially weak. Historical loss factor for loans rated special mention is
applied to current balances of like-rated loans pooled by class.


Substandard


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


Doubtful


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


61

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The following represents the loan
portfolio designated by the internal risk ratings assigned to each credit as of
December 31, 2013:

|                                  |  |           |       |      |   |        |  |         |         |          | Special |          | Sub- |       |       |  |   |   | 
|--------------------------------- |  | --------- | ----- | ---- | - | ------ |  | ------- | ------- | -------- | ------- | -------- | ---- | ----- | ----- |  | - | - | 
|Internal Risk
      Rating Grades |  | Excellent |       | Good |   | Pass   |  | Mention |         | standard |         | Doubtful |      | TOTAL
|(dollars in
      thousands)      |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Commercial loans                  |  | $         | 4,056 |      | $ | 19,464 |  | $       | 24,015  |          | $       | 5        |      | $     | 520   |  | $ | - | 
|Real estate
      construction    |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Residential construction          |  |           | -     |      |   | -      |  |         | 794     |          |         | -        |      |       | -     |  |   | - | 
|Other construction and land       |  |           | -     |      |   | -      |  |         | 17,031  |          |         | 530      |      |       | 106   |  |   | - | 
|Real estate mortgages             |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|1-4 family mortgages              |  |           | -     |      |   | 1,934  |  |         | 50,945  |          |         | 593      |      |       | 828   |  |   | - | 
|Home equity lines of credit       |  |           | -     |      |   | -      |  |         | 29,367  |          |         | -        |      |       | 245   |  |   | - | 
|Multifamily mortgages             |  |           | -     |      |   | -      |  |         | 22,560  |          |         | -        |      |       | -     |  |   | - | 
|Commercial owner occupied         |  |           | -     |      |   | -      |  |         | 56,668  |          |         | -        |      |       | 2,134 |  |   | - | 
|Commercial nonowner occupied      |  |           | -     |      |   | -      |  |         | 51,884  |          |         | 567      |      |       | 2,184 |  |   | - | 
|Consumer loans                    |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Consumer revolving credit         |  |           | -     |      |   | 1,926  |  |         | 319     |          |         | -        |      |       | 9     |  |   | - | 
|Consumer all other credit         |  |           | 371   |      |   | 8,772  |  |         | 2,153   |          |         | -        |      |       | 54    |  |   | - | 
|Total
      Loans                 |  | $         | 4,427 |      | $ | 32,096 |  | $       | 255,736 |          | $       | 1,695    |      | $     | 6,080 |  | $ | - | 

The following represents the loan
portfolio designated by the internal risk ratings assigned to each credit as of
December 31, 2012:

|                                  |  |           |       |      |   |        |  |         |         |          | Special |          | Sub- |       |       |  |   |   | 
|--------------------------------- |  | --------- | ----- | ---- | - | ------ |  | ------- | ------- | -------- | ------- | -------- | ---- | ----- | ----- |  | - | - | 
|Internal Risk
      Rating Grades |  | Excellent |       | Good |   | Pass   |  | Mention |         | standard |         | Doubtful |      | TOTAL
|(dollars in
      thousands)      |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Commercial loans                  |  | $         | 3,868 |      | $ | 17,422 |  | $       | 23,424  |          | $       | 260      |      | $     | 396   |  | $ | - | 
|Real estate
      construction    |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Residential construction          |  |           | -     |      |   | -      |  |         | -       |          |         | -        |      |       | -     |  |   | - | 
|Other construction and land       |  |           | -     |      |   | -      |  |         | 13,016  |          |         | 549      |      |       | 628   |  |   | - | 
|Real estate mortgages             |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|1-4 family mortgages              |  |           | -     |      |   | 1,958  |  |         | 52,502  |          |         | 1,063    |      |       | 1,297 |  |   | - | 
|Home equity lines of credit       |  |           | -     |      |   | -      |  |         | 31,168  |          |         | -        |      |       | 265   |  |   | - | 
|Multifamily mortgages             |  |           | -     |      |   | -      |  |         | 23,033  |          |         | -        |      |       | -     |  |   | - | 
|Commercial owner occupied         |  |           | -     |      |   | -      |  |         | 54,132  |          |         | -        |      |       | 3,355 |  |   | - | 
|Commercial nonowner occupied      |  |           | -     |      |   | -      |  |         | 41,350  |          |         | 710      |      |       | 2,509 |  |   | - | 
|Consumer loans                    |  |           |       |      |   |        |  |         |         |          |         |          |      |       |       |  |   |   | 
|Consumer revolving credit         |  |           | -     |      |   | 1,146  |  |         | 783     |          |         | -        |      |       | 9     |  |   | - | 
|Consumer all other credit         |  |           | 234   |      |   | 6,685  |  |         | 3,043   |          |         | -        |      |       | 55    |  |   | - | 
|Total
      Loans                 |  | $         | 4,102 |      | $ | 27,211 |  | $       | 242,451 |          | $       | 2,582    |      | $     | 8,514 |  | $ | - | 

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

|1) | Changes in national and
      local economic conditions, including the condition of various market
      segments   
|-- | --------------------------------------------------------------------------------------------------------------------
|2) | Changes in the value of
      underlying collateral                                                                 
|3) | Changes in volume of
      classified assets, measured as a percentage of capital                                   
|4) | Changes in volume of
      delinquent loans                                                                         
|5) | The existence and effect of
      any concentrations of credit and changes in the level of such
      concentrations
|6) | Changes in lending policies
      and procedures, including underwriting standards                                  
|7) | Changes in the experience,
      ability and depth of lending management and staff                                  
|8) | Changes in the level of
      policy exceptions                                                                     

62

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

It has been the Companys
experience that the first four factors drive losses to a much greater extent
than the last four factors; therefore, the first four factors are weighted more
heavily. Although the markets served by the Company remain stronger than the
national economy as a whole, management continues to pay close attention on a
case-by-case basis for any yet unforeseen potential ripple effects of the
housing downturn and the related financial market fallout.

Like the historical factors,
qualitative factors are not assessed against loans rated excellent or rated
good, since these are fully collateralized by cash or readily marketable
securities.

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

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

- Commercial loans not secured by real estate
  carry risks associated with the successful operation of a business, and the
  repayments of these loans depend on the profitability and cash flows of the
  business. Additional risk relates to the value of collateral where
  depreciation occurs and the valuation is less precise.
- Loans secured by commercial real estate also
  carry risks associated with the success of the business and the ability to
  generate a positive cash flow sufficient to service debts. Real estate
  security diminishes risks only to the extent that a market exists for the
  subject collateral.
- Consumer loans carry risks associated with
  the continued creditworthiness of the borrower and the value of the
  collateral, such as automobiles which may depreciate more rapidly than other
  assets. In addition, these loans may be unsecured. Consumer loans are more
  likely than real estate loans to be immediately affected in an adverse manner
  by job loss, divorce, illness or personal bankruptcy. Consumer loans are
  further segmented into consumer revolving lines and all other consumer
  loans.
- Real estate secured construction loans carry
  risks that a project will not be completed as scheduled and budgeted and that
  the value of the collateral may, at any point, be less than the principal
  amount of the loan. Additional risks may occur if the general contractor, who
  may not be a loan customer, is unable to finish the project as planned due to
  financial pressures unrelated to the project.
- Residential real estate loans carry risks
  associated with the continued creditworthiness of the borrower and changes in
  the value of the collateral.

Impaired loans are individually
evaluated and, if deemed appropriate, a specific allocation is made for these
loans. In reviewing the seven loans in the amount of $1,736,000 classified as
impaired loans at December 31, 2013, there was no valuation allowance on any of
these loans after consideration was given for each borrowing as to the fair
value of the collateral on the loan or the present value of expected future cash
flows from the customer.

63

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

|Allowance for Credit Losses Rollforward by Portfolio
      Segment
|------------------------------------------------------------------
|For the year ended December 31, 2013                              
|(dollars in
      thousands)                                      
|                                                                  
|Allowance for Credit Losses:                                      
|Balance as of
      January 1, 2013                               
|Charge-offs                                                       
|Recoveries                                                        
|                                                                  
|Provision for (recovery of) loan losses                           
|Ending
      Balance                                              
|                                                                  
|Ending Balance:                                                   
|Individually
      evaluated for impairment                       
|Collectively evaluated for impairment                             
|                                                                  
|Financing Receivables:                                            
|Ending Balance:                                                   
|Individually evaluated for impairment                             
|Collectively
      evaluated for impairment                       
|                                                                  

|Allowance for Credit Losses Rollforward by Portfolio
      Segment
|------------------------------------------------------------------
|For the year ended December 31, 2012                              
|(dollars in
      thousands)                                      
|                                                                  
|Allowance for Credit Losses:                                      
|Balance as of
      January 1, 2012                               
|Charge-offs                                                       
|Recoveries                                                        
|                                                                  
|Provision for (recovery of) loan losses                           
|Ending
      Balance                                              
|                                                                  
|Ending Balance:                                                   
|Individually
      evaluated for impairment                       
|Collectively evaluated for impairment                             
|                                                                  
|Financing Receivables:                                            
|Ending
      Balance:                                             
|Individually evaluated for impairment                             
|Collectively
      evaluated for impairment                       
|                                                                  

64

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 5  Other Real Estate
Owned (OREO)

At December 31, 2013, OREO was
$2,372,000 and was comprised of a residential property, a commercial
condominium, and a residential lot located in Virginia. At December 31, 2012,
OREO was carried at $1,746,000.

Changes in the balance for OREO
are as follows:

|(dollars in thousands)                                 |  | December 31, 2013 |       | December 31, 2012
|------------------------------------------------------ |  | ----------------- | ----- | -----------------
|Balance at beginning of year, gross                    |  | $                 | 2,329 |                  
|Transfer from
      loans                              |  |                   | 804   |                  
|Previously recognized impairment losses on disposition |  |                   | -     |                  
|Gain on sale of
      property                         |  |                   | -     |                  
|Sales proceeds                                         |  |                   | -     |                  
|Balance at end
      of year, gross                    |  | $                 | 3,133 |                  
|                                                      
|Less: valuation allowance                              |  |                   | (761  | )                
|Balance at end
      of year, net                      |  | $                 | 2,372 |                  

Changes in the valuation allowance
for OREO are as follows:

|(dollars in thousands)       |  | December 31, 2013 |     | December 31, 2012
|---------------------------- |  | ----------------- | --- | -----------------
|Balance at beginning of year |  | $                 | 583 |                  
|Valuation
      allowance    |  |                   | 178 |                  
|Charge-offs                  |  |                   | -   |                  
|Recoveries                   |  |                   | -   |                  
|Balance at end of year       |  | $                 | 761 |                  

Expenses applicable to OREO, other
than the valuation allowance, were $107,000 for the year ended December 31, 2013
and $63,000 for the year ended December 31, 2012.

Note 6Premises
and Equipment

Premises and equipment are
summarized as follows:

|(dollars in thousands)                    |  | December 31, 2013 |        | December 31, 2012
|----------------------------------------- |  | ----------------- | ------ | -----------------
|Leasehold improvements                    |  | $                 | 15,439 |                  
|Land                                      |  |                   | 1,207  |                  
|Construction and fixed assets in progress |  |                   | 3      |                  
|Furniture and
      equipment             |  |                   | 5,368  |                  
|Computer software                         |  |                   | 1,848  |                  
|                                          |  | $                 | 23,865 |                  
|Less: accumulated depreciation            |  |                   |        |                  
|and amortization                          |  |                   | 14,041 |                  
|                                          |  | $                 | 9,824  |                  

Depreciation and amortization
expense amounted to $1,274,000 in 2013 and $1,441,000 in 2012.

65

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 7  Deposits

The aggregate amount of time
deposits with a minimum balance of $100,000 was $90,070,000 at December 31, 2013
and $93,218,000 at December 31, 2012.

Brokered deposits totaled
$25,045,000 and $28,705,000 at December 31, 2013 and 2012, respectively. These
brokered deposits represent reciprocal relationships established under the
Certificate of Deposit Account Registry Service (CDARS), whereby depositors can
obtain FDIC insurance on deposits up to at least $50 million or more.

At December 31, 2013, the
scheduled maturities of time deposits are as follows:

|     | (dollars in thousands)
|---- | ----------------------
|2014 | $                     
|2015 |                       
|2016 |                       
|2017 |                       
|2018 |                       
|     | $                     

Note 8  Income Taxes

The Company files tax returns in
the U.S. federal jurisdiction. With few exceptions, the Company is no longer
subject to U.S. federal tax examinations by tax authorities for years prior to
2010.

The Commonwealth of Virginia
assesses a Bank Franchise Tax on banks instead of a state income tax. The Bank
Franchise Tax expense is reported in non-interest expense and the taxs
calculation is unrelated to taxable income.

For the tax year 2013, the Company
and the Bank will file separate federal income tax returns. The Company plans to
file consolidated federal income tax returns beginning in 2014 and for the
foreseeable future. The tax provision and liability shown below reflects the tax
position of the Bank subsidiary only.

66

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Net deferred tax assets consist of
the following components as of December 31, 2013 and December 31, 2012:

|                                                    |  | 2013 |       | 2012
|--------------------------------------------------- |  | ---- | ----- | ----
|(dollars in thousands)                              |  |      |       |     
|Deferred tax assets:                                |  |      |       |     
|Allowance for loan losses                           |  | $    | 1,025 |     
|Non-accrual loan interest                           |  |      | 7     |     
|Stock option/grant expense                          |  |      | 337   |     
|Start-up expenses                                   |  |      | 1     |     
|Home equity closing costs                           |  |      | 63    |     
|Deferred OREO expense                               |  |      | 315   |     
|Deferred compensation
    expense                   |  |      | 12    |     
|Deferred loan fees                                  |  |      | -     |     
|Securities available for sale
      unrealized loss |  |      | 737   |     
|Depreciation                                        |  |      | 585   |     
|                                                    |  | $    | 3,082 |     
|                                                    |  |      |       |     
|Deferred tax liabilities:                           |  |      |       |     
|Securities available for sale
      unrealized gain |  | $    | -     |     
|Deferred loan costs                                 |  |      | 17    |     
|Investment from subsidiary
      income             |  |      | -     |     
|                                                    |  |      | 17    |     
|                                                   
|Net deferred tax assets                             |  | $    | 3,065 |     

The provision for income taxes
charged to operations for years ended December 31, 2013 and 2012 consists of the
following:

|(dollars in thousands)     |  | 2013 |       | 2012
|-------------------------- |  | ---- | ----- | ----
|Current tax expense        |  | $    | 3,504 |     
|Deferred tax
      benefit |  |      | (292  | )   
|Provision for income taxes |  | $    | 3,212 |     

The income tax provision differs
from the amount of income tax determined by applying the U.S. federal income tax
rate to pretax income for the years ended December 31, 2013 and 2012 due to the
following:

|(dollars in thousands)                     |  | 2013 |       | 2012
|------------------------------------------ |  | ---- | ----- | ----
|Federal statutory rate                     |  |      | 34    | %   
|Computed
      statutory tax expense       |  | $    | 3,501 |     
|Increase (decrease) in tax resulting from: |  |      |       |     
|Tax-exempt interest income                 |  |      | (169  | )   
|Tax-exempt income from Bank                |  |      |       |     
|Owned
      Life Insurance (BOLI)          |  |      | (151  | )   
|Stock option expense                       |  |      | 14    |     
|Social dues                                |  |      | 5     |     
|Other                                      |  |      | 12    |     
|Provision for
      income taxes           |  | $    | 3,212 |     

67

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 9  Commitments and
Contingent Liabilities

In the normal course of business,
there are various outstanding commitments and contingent liabilities, which are
not reflected in the accompanying consolidated financial statements. The Company
does not anticipate any material loss as a result of these transactions.

As a member of the Federal Reserve
System, the Company is required to maintain certain average clearing balances.
Those balances include amounts on deposit with the Federal Reserve. For the
final weekly reporting period in the years ended December 31, 2013 and December
31, 2012, the amounts of daily average required balances were $0 and $495,000,
respectively.

At December 31, 2013, the Company
had leased certain of its banking and operations offices under operating lease
agreements on terms ranging from 1 to 20 years with renewal options. Rent
expense charged to operations under operating lease agreements totaled
$1,010,000 in 2013 and $1,035,000 in 2012.

The following is a schedule of
future minimum rental payments required under non-cancelable operating leases
that have initial or remaining terms in excess of one year as of December 31,
2013:

|           |  | (dollars in thousands)
|---------- |  | ----------------------
|2014       |  | $                     
|2015       |  |                       
|2016       |  |                       
|2017       |  |                       
|2018       |  |                       
|Thereafter |  |                       
|           |  | $                     

Note 10  Financial Instruments
With Off-Balance Sheet Risk and Credit Risk

The Company is a 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. In addition to the amounts shown below, the Company has
extended commitment letters at December 31, 2013 in the amount of $12,364,000 to
various borrowers. At December 31, 2012, commitment letters totaled $8,344,000.
Commitment letters are done in the normal course of business and typically
expire after 120 days. All of these off-balance-sheet instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.

The Companys exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.

The totals for financial
instruments whose contract amount represents credit risk are shown below as of
December 31, 2013 and December 31, 2012.

|                         |  | Notional Amount        
|------------------------ |  | -----------------------
|(dollars in thousands)   |  | December 31,
      2013
|Unfunded lines-of-credit |  | $                      
|Letters of
      credit  |  |                        
|Total                    |  | $                      

68

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral, if deemed necessary by the Company
upon extension of credit, is based on managements credit evaluation of the
counterparty. Collateral normally consists of real property.

Standby letters of credit are
conditional commitments by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions.

The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Company holds real estate and bank deposits as
collateral supporting those commitments for which collateral is deemed
necessary.

The Company has approximately
$1,557,000 in deposits in other financial institutions in excess of amounts
insured by the FDIC at December 31, 2013.

Note 11  Related Party
Transactions

In 2013, the Company and its
subsidiary had business dealings with companies owned by directors of the
Company. Payments made to these companies in 2013 include rental expenditures of
$443,000 (including reimbursements for taxes, insurance, and other expenses),
paid to an entity owned by a director of the Company. For another property owned
by an entity in which a different director has a beneficial interest, the
Company had a ground lease. In February of 2012, the Company purchased this real
estate for $1,200,000, and the approximate dollar value of the interest of the
director individually and his immediate family members, without regard to the
amount of profit or loss, was $200,000 and $400,000, respectively. Monthly rent
for both properties was at a fair market rate as verified by an independent
third-party appraisal.

Note 12  Capital Requirements

The Company (on a consolidated
basis) and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Companys and the Banks consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.

Quantitative measures established
by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 2013 and 2012, that the Company and the
Bank met all capital adequacy requirements to which they are subject.

The Banks capital ratios remain
above the levels designated by bank regulators as well capitalized at December
31, 2013. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institutions category.

69

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The Companys and the Banks
actual capital amounts and ratios as of December 31, 2013, are presented in the
following table:

|                          |  |        |        |             |       |                         |  |                 |        |                         |      |       |  | Minimum               
|------------------------- |  | ------ | ------ | ----------- | ----- | ----------------------- |  | --------------- | ------ | ----------------------- | ---- | ----- |  | ----------------------
|                          |  |        |        |             |       |                         |  |                 |        |                         |      |       |  | To Be Well Capitalized
|                          |  |        |        |             |       |                         |  | Minimum Capital |        | Under Prompt
Corrective
|(dollars in thousands)    |  | Actual |        | Requirement |       | Action
      Provisions
|                          |  | Amount |        | Ratio       |       | Amount                  |  | Ratio           |        | Amount                  |      | Ratio
|Total Capital             |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Risk Weighted Assets) |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|Consolidated              |  | $      | 62,747 |             | 18.00 | %                       |  | $               | 27,889 |                         | 8.00 | %     |  |                       
|Bank                      |  | $      | 54,434 |             | 15.62 | %                       |  | $               | 27,886 |                         | 8.00 | %     |  | $                     
|                         
|Tier 1 Capital            |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Risk Weighted Assets) |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|Consolidated              |  | $      | 59,387 |             | 17.03 | %                       |  | $               | 13,945 |                         | 4.00 | %     |  |                       
|Bank                      |  | $      | 51,074 |             | 14.65 | %                       |  | $               | 13,943 |                         | 4.00 | %     |  | $                     
|                         
|Tier 1 Capital            |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Average Assets)       |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|Consolidated              |  | $      | 59,387 |             | 11.86 | %                       |  | $               | 20,026 |                         | 4.00 | %     |  |                       
|Bank                      |  | $      | 51,074 |             | 10.20 | %                       |  | $               | 20,026 |                         | 4.00 | %     |  | $                     

The Banks actual capital amounts
and ratios as of December 31, 2012, are presented in the following table:

|                                |  |        |        |             |       |                         |  |                 |        |                         |      |       |  | Minimum               
|------------------------------- |  | ------ | ------ | ----------- | ----- | ----------------------- |  | --------------- | ------ | ----------------------- | ---- | ----- |  | ----------------------
|                                |  |        |        |             |       |                         |  |                 |        |                         |      |       |  | To Be Well Capitalized
|                                |  |        |        |             |       |                         |  | Minimum Capital |        | Under Prompt Corrective
|(dollars in
      thousands)    |  | Actual |        | Requirement |       | Action
      Provisions
|                                |  | Amount |        | Ratio       |       | Amount                  |  | Ratio           |        | Amount                  |      | Ratio
|Total
    Capital               |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Risk Weighted Assets)       |  | $      | 56,054 |             | 16.21 | %                       |  | $               | 27,658 |                         | 8.00 | %     |  | $                     
|Tier 1 Capital                  |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Risk
      Weighted Assets) |  | $      | 52,787 |             | 15.27 | %                       |  | $               | 13,829 |                         | 4.00 | %     |  | $                     
|Tier 1
    Capital              |  |        |        |             |       |                         |  |                 |        |                         |      |       |  |                       
|(To Average Assets)             |  | $      | 52,787 |             | 10.87 | %                       |  | $               | 19,432 |                         | 4.00 | %     |  | $                     

Note 13  Dividend Restrictions

The primary source of funds for
the dividends paid by the Company to shareholders is dividends received from the
Bank. Federal regulations limit the amount of dividends which the Bank can pay
to the Company without obtaining prior approval. The amount of cash dividends
that the Bank may pay is limited to current year earnings plus retained net
profits for the two preceding years. In addition, dividends paid by the Bank
would be prohibited if the effect thereof would cause the Banks capital to be
reduced below applicable minimum capital requirements. Notwithstanding the
regulatory limitations on cash dividends, the Banks Board of Directors approved
a cash dividend payment policy that, once combined with any previous cash
dividends paid within the last 12 months, the total of which will not exceed 50%
of the Banks after-tax earnings, excluding any extraordinary items, for the
preceding 12-months. If the previous 3 quarterly dividends are not within the
preceding 12 months, then only the amounts of dividends paid in the previous 12
months, plus the proposed dividend, in total will not exceed 60% of the Banks
after-tax earnings.

At December 31, 2013, the maximum
amount of retained earnings available to the Bank for cash dividends to the
Company was $5,815,000.

70

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 14  Fair Value
Measurements

Determination of Fair Value

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

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

Fair Value Hierarchy

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

| | Level 1
       | Valuation is
      based on quoted prices in active markets for identical assets and
      liabilities.                                                                                                                                                                                                                                                                                         
| | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                 |                                                                                                                                                                                                                                                                                                                                                                                                 
| | Level 2        | Valuation is based on
      observable inputs including quoted prices in active markets for similar
      assets and liabilities, quoted prices for identical or similar assets and
      liabilities in less active markets, and model-based valuation techniques
      for which significant assumptions can be derived primarily from or
      corroborated by observable data in the market.
| |                 |                                                                                                                                                                                                                                                                                                                                                                                                 
| | Level 3        | Valuation is based on
      model-based techniques that use one or more significant inputs or
      assumptions that are unobservable in the market                                                                                                                                                                                                                                             

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

Securities Available For Sale

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

71

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The following table presents the
balances measured at fair value on a recurring basis as of December 31,
2013:

|                                          |  |                     |         |                    | Fair
      Value Measurements at December 31, 2013 Using:
|----------------------------------------- |  | ------------------- | ------- | ------------------ | ---------------------------------------------------------
|(dollars in
      thousands)              |  |                     |         |                    | Quoted Prices in                                         
|                                          |  | Balance as
      of |         | Active Markets for |                                                          
|                                          |  | December
      31,  |         | Identical Assets   |                                                          
|Description                               |  | 2013                |         | (Level 1)          |                                                          
|Assets:                                   |  |                     |         |                    |                                                          
|U.S. Government
      agencies            |  | $                   | 44,005  |                    | $                                                        
|Corporate bonds                           |  |                     | 9,053   |                    |                                                          
|Asset-backed
      securities             |  |                     | 2,100   |                    |                                                          
|Mortgage-backed
      securities/CMOs     |  |                     | 55,597  |                    |                                                          
|Municipal
      bonds                     |  |                     | 22,272  |                    |                                                          
|Total securities available for
      sale |  | $                   | 133,027 |                    | $                                                        

The following table presents the
balances measured at fair value on a recurring basis as of December 31,
2012:

|                                          |  |                     |         |                    | Fair
      Value Measurements at December 31, 2012 Using:
|----------------------------------------- |  | ------------------- | ------- | ------------------ | ---------------------------------------------------------
|(dollars in
      thousands)              |  |                     |         |                    | Quoted Prices in                                         
|                                          |  | Balance as
      of |         | Active Markets for |                                                          
|                                          |  | December
      31,  |         | Identical Assets   |                                                          
|Description                               |  | 2012                |         | (Level 1)          |                                                          
|Assets:                                   |  |                     |         |                    |                                                          
|U.S. Government
      agencies            |  | $                   | 63,497  |                    | $                                                        
|Corporate bonds                           |  |                     | 4,023   |                    |                                                          
|Asset-backed
      securities             |  |                     | 1,144   |                    |                                                          
|Mortgage-backed
      securities/CMOs     |  |                     | 25,166  |                    |                                                          
|Municipal
      bonds                     |  |                     | 17,023  |                    |                                                          
|Total securities available for
      sale |  | $                   | 110,853 |                    | $                                                        

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

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

Other Real Estate Owned

Other real estate owned is
measured at fair value less cost to sell, based on an appraisal conducted by an
independent, licensed appraiser outside of the Company. If the collateral value
is significantly adjusted due to differences in the comparable properties, or is
discounted by the Company because of marketability, then the fair value is
considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any
initial fair value adjustment is charged against the Allowance for Loan Losses.
Subsequent fair value adjustments are recorded in the period incurred and
included in other noninterest expense on the Consolidated Statements of Income.

72

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Impaired Loans

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

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

Impaired loans allocated to the Allowance for Loan Losses are measured at
fair value on a nonrecurring basis. Any fair value adjustments are recorded in
the period incurred as provision for loan losses in the Consolidated Statements
of Income. The Company had $1,736,000 and $2,816,000 in impaired loans as of
December 31, 2013 and December 31, 2012, respectively. None of these impaired
loans required a valuation allowance after consideration was given for each
borrowing as to the fair value of the collateral on the loan or the present
value of expected future cash flows from the customer.

The following table presents the
Companys assets that were measured at fair value on a nonrecurring basis as of
December 31, 2013:

|                        |  |               |       |                    | Fair Value Measurements at December
      31, 2013 Using:
|----------------------- |  | ------------- | ----- | ------------------ | ---------------------------------------------------------
|(dollars in thousands)  |  |               |       |                    |                                                          
|                        |  |               |       |                    | Quoted Prices in                                         
|                        |  | Balance as of |       | Active Markets for |                                                          
|                        |  | December 31,  |       | Identical Assets   |                                                          
|Description             |  | 2013          |       | (Level 1)          |                                                          
|Assets:                 |  |               |       |                    |                                                          
|Other Real Estate Owned |  | $             | 2,372 |                    | $                                                        

The following table presents the
Companys assets that were measured at fair value on a nonrecurring basis as of
December 31, 2012:

|                        |  |               |       |                    | Fair Value Measurements at December
      31, 2012 Using:
|----------------------- |  | ------------- | ----- | ------------------ | ---------------------------------------------------------
|(dollars in thousands)  |  |               |       |                    |                                                          
|                        |  |               |       |                    | Quoted Prices in                                         
|                        |  | Balance as of |       | Active Markets for |                                                          
|                        |  | December 31,  |       | Identical Assets   |                                                          
|Description             |  | 2012          |       | (Level 1)          |                                                          
|Assets:                 |  |               |       |                    |                                                          
|Other Real Estate Owned |  | $             | 1,746 |                    | $                                                        

For the assets measured at fair
value on a nonrecurring basis as of December 31, 2013, the following table
displays quantitative information about Level 3 Fair Value Measurements:

|(dollars in
      thousands)  |  |            |       |                     |                          |                     |                                          |         |         
|----------------------------- |  | ---------- | ----- | ------------------- | ------------------------ | ------------------- | ---------------------------------------- | ------- | --------
|                              |  |            |       |                     |                          |                     |                                          |         | Weighted
|Description                   |  | Fair Value |       | Valuation Technique |                          | Unobservable Inputs |                                          | Average
|Assets:                       |  |            |       |                     |                          |                     |                                          |         |         
|Other Real
      Estate Owned |  | $          | 2,372 |                     | Market
      comparables |                     | Discount applied to market comparables * |         | 6%      

|* | A discount percentage is
      applied based on age of independent appraisals, current market conditions,
      and experience within the local
market.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

73

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The following methods and
assumptions were used by the Company in estimating the fair value disclosures
for financial instruments:

Cash
and Short-Term Investments

For
those short-term instruments, including cash, due from banks and federal funds
sold, the carrying amount is a reasonable estimate of fair value.

Interest bearing deposits

The
carrying amounts of interest bearing deposits maturing within ninety days
approximate their fair value.

Securities

Fair
values for securities, excluding restricted securities, are based on third party
vendor pricing models. The carrying value of restricted FRB and FHLB stock
approximates fair value based on the redemption provisions of each entity and is
therefore excluded from the following table.

Loan
Receivables

The
fair value of performing loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar remaining maturities. This calculation ignores loan fees and certain
factors affecting the interest rates charged on various loans such as the
borrowers creditworthiness and compensating balances and dissimilar types of
real estate held as collateral. The fair value of impaired loans is measured as
described within the Impaired Loans section of this note.

Bank
Owned Life Insurance

The
carrying amounts of Bank Owned Life Insurance approximate fair value.

Accrued Interest

The
carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

The
fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.

Short-Term Borrowings

The
carrying amounts of securities sold under agreements to repurchase approximate
fair value.

Off-Balance Sheet Financial Instruments

The
fair values of loan commitments and standby letters of credit are immaterial.
Therefore, they have not been included in the following table.

74

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The carrying values and estimated
fair values of the Companys financial instruments as of December 31, 2013 are
as follows:

|                                   |                |         |         | Fair Value Measurement at December 31,
      2013 using:
|---------------------------------- | -------------- | ------- | ------- | --------------------------------------------------------
|                                   |                |         |         | Quoted Prices                                           
|                                   |                |         |         | in
      Active                                         
|                                   |                |         |         | Markets for                                             
|(dollars in
      thousands)       |                |         |         | Identical Assets                                        
|                                   | Carrying value |         | Level 1 |                                                         
|Assets                             |                |         |         |                                                         
|Cash and cash
    equivalent       | $              | 40,072  |         | $                                                       
|Securities                         |                | 133,027 |         |                                                         
|Loans, net                         |                | 296,674 |         |                                                         
|Bank owned life
      insurance    |                | 12,595  |         |                                                         
|Accrued interest
      receivable  |                | 1,247   |         |                                                         
|Liabilities                        |                |         |         |                                                         
|Demand deposits and                | $              | 306,298 |         | $                                                       
|interest-bearing
      transaction |                |         |         |                                                         
|and money market
      accounts    |                |         |         |                                                         
|Certificates of
      deposit      |                | 124,162 |         |                                                         
|Securities sold under              |                | 16,297  |         |                                                         
|agreements to
      repurchase     |                |         |         |                                                         
|Accrued interest
      payable     |                | 125     |         |                                                         

The carrying values and estimated
fair values of the Companys financial instruments as of December 31, 2012 are
as follows:

|                                   |                |         |         | Fair Value Measurement at December 31,
      2012 using:
|---------------------------------- | -------------- | ------- | ------- | --------------------------------------------------------
|                                   |                |         |         | Quoted Prices                                           
|                                   |                |         |         | in
      Active                                         
|                                   |                |         |         | Markets for                                             
|(dollars in
      thousands)       |                |         |         | Identical Assets                                        
|                                   | Carrying value |         | Level 1 |                                                         
|Assets                             |                |         |         |                                                         
|Cash and cash
    equivalent       | $              | 71,778  |         | $                                                       
|Securities                         |                | 116,844 |         |                                                         
|Loans, net                         |                | 281,593 |         |                                                         
|Bank owned life
      insurance    |                | 12,150  |         |                                                         
|Accrued interest
      receivable  |                | 1,367   |         |                                                         
|Liabilities                        |                |         |         |                                                         
|Demand deposits and                | $              | 315,279 |         | $                                                       
|interest-bearing
      transaction |                |         |         |                                                         
|and money market
      accounts    |                |         |         |                                                         
|Certificates of
      deposit      |                | 130,143 |         |                                                         
|Securities sold under              |                | 4,000   |         |                                                         
|agreements to
      repurchase     |                |         |         |                                                         
|Accrued interest
      payable     |                | 154     |         |                                                         

75

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

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

Note 15  Other Expenses

The Company had the following
other expenses as of the dates indicated:

|(dollars in
      thousands)               | December
      31, 2013 | ****  | December
      31, 2012
|------------------------------------------ | ----------------------- | ----- | -----------------------
|ATM, debit and
      credit card expense   | $                       | 297   |                        
|Data processing
    expenses               |                         | 949   |                        
|FDIC deposit
      insurance assessment    |                         | 248   |                        
|Marketing, advertising and
      promotion |                         | 721   |                        
|Net OREO write
      downs and expenses    |                         | 285   |                        
|Professional fees                          |                         | 744   |                        
|Other                                      |                         | 2,255 |                        
|                                           | $                       | 5,499 |                        

Note 16  Employee Benefit
Plans

The Company has a 401(k) plan
available to all employees who are at least 18 years of age. Employees are able
to elect the amount to contribute, not to exceed a maximum amount as determined
by Internal Revenue Service regulation. In 2012, the Company matched 50% of
every dollar contributed by employees up to a maximum of 6% of annual
compensation. Effective January 1, 2013, the Bank matched 100% of the first 3%
of employee contributions and 50% for the next 2% of employee contributions.
Effective January 1, 2014, the company match will be 100% of the first 6% of
employee contributions.

Vesting refers to the rights of
ownership to the assets in the 401(k) accounts. Effective January 1, 2013,
matching contributions were fully vested immediately. Through December 31, 2012,
Company contributions to the plan were vested by the employees according to the
following schedule: 50% after two years of service, 75% after three years of
service and 100% after four years of service. Employee contributions to the plan
have always been 100% vested.

The Company contributed $277,000
to the plan in 2013 and $216,000 in 2012.

Note 17  Stock Incentive Plans

The Virginia National Bank 1998
Stock Incentive Plan (1998 Plan), 2003 Stock Incentive Plan (2003 Plan), and
2005 Stock Incentive Plan (2005 Plan) provide for granting of both incentive
and nonqualified stock options. The option price of incentive options will not
be less than the fair market value of the stock at the time an option is
granted. Nonqualified options may be granted at a price established by the Board
of Directors, including prices less than the fair market value on the date of
grant. Outstanding options generally expire in seven or ten years from the grant
date. Stock options generally vest by the fourth or fifth anniversary of the
date of the grant. No new grants can be issued under the 1998 Plan or the 2003
Plan as both plans have expired.

76

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

A summary of the shares issued and
available under each plan is shown below as of December 31, 2013:

|                                           | 1998 Plan(1)     |   | 2003 Plan(2) |                  | 2005 Plan(3)
|------------------------------------------ | ---------------- | - | ------------ | ---------------- | ------------
|Aggregate shares issuable                  | 430,100          |   |              | 128,369          |             
|Options issued,
      net of forfeited and |                  |   |              |                  |             
|expired
      options                      | (381,089         | ) |              | (127,240         | )           
|Cancelled due to Plan expiration           | (49,011          | ) |              | (1,129           | )           
|Remaining
      available for grant        | -                |   |              | -                |             
|                                          
|Grants issued and outstanding:             |                  |   |              |                  |             
|Total vested and unvested
      shares     | 7,216            |   |              | 52,850           |             
|Fully vested shares                        | 7,216            |   |              | 46,071           |             
|                                          
|Exercise price range                       | $18.61 to $23.30 |   |              | $15.65 to $24.78 |             

|(1) |  | At the Annual Meeting of
      Shareholders of Virginia National Bank, held on May 17, 1999, shareholders
      approved the 1998 Plan. No new grants can be issued under this plan, since
      the plan is expired.                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | At the Annual Meeting of
      Shareholders of Virginia National Bank, held on May 21, 2003, shareholders
      approved the 2003 Plan. No new grants can be issued under this plan, since
      the plan is expired.                                                                                                                                     
|   
|(3) |  | At the Annual Meeting of
      Shareholders of Virginia National Bank, held on May 16, 2005, shareholders
      approved the Virginia National Bank 2005 Stock Incentive Plan, and the
      Amended and Restated 2005 Stock Incentive Plan (as amended, 2005 Plan)
      was approved by shareholders at the annual meeting held on May 15,
      2006.

The Company accounts for all of
its stock incentive plans under recognition and measurement accounting
principles which require that the compensation cost relating to stock-based
payment transactions be recognized in financial statements. Stock-based
compensation arrangements include stock options and restricted stock. All
stock-based payments to employees are required to be valued using a fair value
method on the date of grant and expensed based on that fair value over the
applicable vesting period. For the years ended December 31, 2013 and December
31, 2012, the Company recognized $106,000 and $105,000, respectively, in
compensation expense for stock options and restricted stock grants. As of
December 31, 2013, there was $110,000 in unamortized compensation expense
remaining to be recognized in future reporting periods through 2017.

Stock Options

Changes in the stock options
outstanding related to the 1998 Plan, the 2003 Plan and the 2005 Plan are
summarized as follows:

|                                                    | December 31, 2013
|--------------------------------------------------- | -----------------
|(dollars in thousands, except
      per share data) |                  
|                                                    | Number of Options
|Outstanding at
      January 1, 2013                | 232,421          
|Granted                                             | 5,000            
|Exercised                                           | (100             
|Forfeited                                           | (10,897          
|Outstanding at
      December 31, 2013              | 226,424          
|                                                   
|Options
      exercisable at December 31, 2013      | 211,338          

The total intrinsic value of
options exercised during the year ended December 31, 2013 was less than $1,000,
as only 100 shares were exercised in the period.

77

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

The fair value of any grant is
estimated at the grant date using the Black-Scholes pricing model. There were no
stock option grants issued for the year ended December 31, 2012. During the
first quarter of 2013, there was a stock option grant of 5,000 shares. No other
stock option grant has been issued during the year ended December 31, 2013. The fair value
on the grant issued in 2013 was estimated based on the assumptions noted in the
following table:

|                                | For the year
      ended
|------------------------------- | ------------------------
|                                | December 31, 2013       
|Expected
      volatility1      | 60.10% - 60.15          
|Expected
      dividends2       | 0.00                    
|Expected term
      (in years)3 | 4.0                     
|Risk-free
      rate4           | 0.67                    

|**1** | Based on the
      historical volatility of the Banks stock price over the expected life of
      the options.                                                                                                                                                      
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**2** | At the time of
      the grant in the first quarter of 2013, no dividend rate was estimated
      based on the Bank's history of not paying a cash dividend. Subsequently,
      the Bank began paying a quarterly cash dividend in the second quarter of
      2013.
|**3** | Based on the
      vesting period for the respective option.                                                                                                                                                                                                         
|**4** | Based upon an
      interpolated U.S. Treasury yield curve interest rate that corresponds to
      the contractual life of the option, in effect at the time of the
      grant.                                                                                     

Summary information pertaining to
options outstanding at December 31, 2013 is as follows:

|                      |  |                     |  | Weighted-Average |  | Weighted         |       |                     |         | Weighted-       
|--------------------- |  | ------------------- |  | ---------------- |  | ---------------- | ----- | ------------------- | ------- | ----------------
|                      |  |                     |  | Remaining        |  | Average Exercise |       |                     |         | Average Exercise
|Exercise
    Price    |  | Options Outstanding |  | Contractual Life |  | Price            |       | Options Exercisable |         | Price           
|$11.74 to
      20.00 |  | 50,304              |  | 5.4 Years        |  | $                | 17.32 |                     | 35,218  |                 
|$20.01 to
      30.00 |  | 86,880              |  | 3.3
    Years    |  |                  | 24.40 |                     | 86,880  |                 
|$30.01 to
      36.74 |  | 89,240              |  | 2.5 Years        |  |                  | 33.34 |                     | 89,240  |                 
|Total                 |  | 226,424             |  | 3.4
    Years    |  | $                | 26.35 |                     | 211,338 |                 

Restricted Stock

Changes in the restricted stock
activity as of December 31, 2013 are summarized as follows:

|                                                    | December 31, 2013
|--------------------------------------------------- | -----------------
|(dollars in thousands, except
      per share data) |                  
|                                                    | Number
    of    
|                                                    | Shares           
|Outstanding at
      January 1, 2013                | 575              
|Issued                                              | -                
|Vested                                              | 287              
|Non-vested at December 31,
      2013               | 288              

No restricted stock grants were
awarded during 2013 or 2012.

78

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 18  Earnings Per Share

The following shows the weighted
average number of shares used in computing earnings per share and the effect on
weighted average number of shares of diluted potential common stock for the
years ended December 31, 2013 and December 31, 2012. Potential dilutive common
stock has no effect on income available to common shareholders.

|                                                  | December 31, 2013 |       | December 31, 2012
|------------------------------------------------- | ----------------- | ----- | -----------------
|(dollars in thousands, except per share
    data) |                   |       |                  
|                                                  |                   |       |                  
|                                                  | Net Income        |       | Shares           
|Basic earnings per
    share                      | $                 | 6,896 |                  
|Effect of dilutive stock options                  |                   |       |                  
|Diluted earnings per
    share                    | $                 | 6,896 |                  

In 2013, stock options
representing 220,199 average shares were not included in the calculation of
earnings per share, as their effect would have been antidilutive. Stock options
representing 232,421 average shares were similarly not included in 2012.

Note 19  Other Comprehensive
Income

A component of the Companys other
comprehensive income, in addition to net income from operations, is the
recognition of the unrealized gains and losses on AFS securities, net of income
taxes. Reclassifications of unrealized gains and losses on AFS securities are
reported in the income statement as Gain on sale of securities with the
corresponding income tax effect reflected as a component of income tax expense.
Amounts reclassified out of accumulated other comprehensive income (loss) are
presented below for the years ended December 31, 2013 and December 31, 2012:

|(dollars in thousands)                     | December
      31, |     | December
      31,
|------------------------------------------ | ------------------ | --- | ------------------
|                                           | 2013               |     | 2012              
|Available-for-sale securities              |                    |     |                   
|Realized gains on sale
      of securities | $                  | 50  |                   
|Tax effect                                 |                    | (17 | )                 
|Realized gains, net of
    tax             | $                  | 33  |                   

Note 20  Segment Reporting

Virginia National Bankshares
Corporation has two reportable segments, the Bank and VNBTrust.

Commercial banking involves making
loans and generating deposits from individuals and businesses. Loan fee income,
service charges from deposit accounts, and other non-interest-related fees such
as automatic teller machine fees and safe deposit box fees generate additional
income for the Bank.

VNBTrust services include
investment management, trust account administration, and estate planning.
VNBTrust receives fees on both a fixed basis and a performance basis for
providing of these services.

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

79

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Segment information as of, and for
the years ended, December 31, 2013 and 2012, is shown in the following tables:

|                                              |  |      |         |          |  |        |        |  | Consolidated
|--------------------------------------------- |  | ---- | ------- | -------- |  | ------ | ------ |  | ------------
|2013                                          |  | Bank |         | VNBTrust |  | Totals
|(dollars in thousands)                        |  |      |         |          |  |        |        |  |             
|Net interest income                           |  | $    | 14,421  |          |  | $      | 28     |  | $           
|Provision for
      (recovery of) loan losses |  |      | 160     |          |  |        | -      |  |             
|Non-interest income                           |  |      | 2,571   |          |  |        | 15,283 |  |             
|Non-interest
      expense                    |  |      | 14,072  |          |  |        | 7,963  |  |             
|Income before income
    taxes                |  |      | 2,760   |          |  |        | 7,348  |  |             
|Provision for
      income taxes              |  |      | 711     |          |  |        | 2,501  |  |             
|Net income                                    |  | $    | 2,049   |          |  | $      | 4,847  |  | $           
|                                             
|Total assets                                  |  | $    | 490,564 |          |  | $      | 22,430 |  | $           
|                                             
|                                              |  |      |         |          |  |        |        |  | Consolidated
|2012                                          |  | Bank |         | VNBTrust |  | Totals
|(dollars in thousands)                        |  |      |         |          |  |        |        |  |             
|Net interest
      income                     |  | $    | 15,606  |          |  | $      | 17     |  | $           
|Provision for
      (recovery of) loan losses |  |      | (79     | )        |  |        | -      |  |             
|Non-interest
      income                     |  |      | 2,311   |          |  |        | 9,729  |  |             
|Non-interest
      expense                    |  |      | 15,261  |          |  |        | 4,389  |  |             
|Income before
      income taxes              |  |      | 2,735   |          |  |        | 5,357  |  |             
|Provision for
      income taxes              |  |      | 797     |          |  |        | 1,814  |  |             
|Net
    income                                |  | $    | 1,938   |          |  | $      | 3,543  |  | $           
|                                             
|Total
      assets                            |  | $    | 493,679 |          |  | $      | 13,927 |  | $           

Note 21 - Condensed Parent
Company Financial Statements

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

The Bank paid the Company a cash
dividend of $8.5 million on December 18, 2013, after the Reorganization became
effective, in order to capitalize the bank holding company. A quarterly cash
dividend payment of $135 thousand was authorized by the Banks Board of
Directors and paid to the Company on December 17, 2013. The payment of dividends
by the subsidiary is restricted by various regulatory limitations. Banking
regulations also prohibit extensions of credit to the parent company unless
appropriately secured by assets. For more detail on dividends, see Note 13 
Dividend Restrictions.

80

---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Condensed Parent Company
Only(dollars in
thousands)BALANCE SHEETDECEMBER 31, 2013

|ASSETS                                            |  |   |        |  
|------------------------------------------------- |  | - | ------ | -
|Cash
      and due from banks                     |  | $ | 8,436  |  
|Investments in
      subsidiary                   |  |   | 49,642 |  
|Other
      assets                                |  |   | 45     |  
|Total assets                                      |  | $ | 58,123 |  
|LIABILITIES & SHAREHOLDERS' EQUITY                |  |   |        |  
|Other liabilities                                 |  | $ | 167    |  
|Stockholders' equity                              |  |   | 57,956 |  
|Total liabilities and stockholders' equity        |  | $ | 58,123 |  
|                                                 
|STATEMENT OF INCOME                              
|FOR
      YEAR ENDED DECEMBER 31, 2013           
|                                                 
|Dividends from
      subsidiary                   |  | $ | 8,635  |  
|Noninterest expense                               |  |   | 187    |  
|Income before income
      taxes                  |  | $ | 8,448  |  
|Income
      taxes                                |  |   | -      |  
|Income before equity in
      undistributed       |  |   |        |  
|earnings of subsidiary                            |  | $ | 8,448  |  
|Deficit in undistributed
      earnings           |  |   |        |  
|of subsidiary                                     |  |   | (1,552 | )
|Net income                                        |  | $ | 6,896  |  
|                                                 
|STATEMENT OF CASH FLOWS                          
|FOR
      YEAR ENDED DECEMBER 31, 2013           
|                                                 
|CASH FLOWS FROM
      OPERATING ACTIVITIES        |  |   |        |  
|Net
      income                                  |  | $ | 6,896  |  
|Adjustments to reconcile
      net income to      |  |   |        |  
|net cash provided by operating activities:        |  |   |        |  
|Deficit in undistributed earnings                 |  |   |        |  
|of subsidiary                                     |  |   | 1,552  |  
|Increase in other assets                          |  |   | (45    | )
|Increase in other liabilities                     |  |   | 167    |  
|Net cash provided from
      operating activities |  | $ | 8,570  |  
|CASH FLOWS FROM INVESTING
      ACTIVITIES        |  |   |        |  
|Net cash provided from
      investing activities |  | $ | -      |  
|CASH FLOWS FROM FINANCING
      ACTIVITIES        |  |   |        |  
|Dividends paid                                    |  |   | (134   | )
|Net
      cash used in financing activities       |  | $ | (134   | )
|NET INCREASE IN
      CASH AND CASH EQUIVALENTS   |  |   | 8,436  |  
|CASH AND CASH
    EQUIVALENTS                     |  |   |        |  
|Beginning of
    period                           |  |   | -      |  
|End of
      period                               |  | $ | 8,436  |  

81

---



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

None

Item 9A. CONTROLS AND
PROCEDURES.

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

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

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

Managements Report on Internal
Control over Financial Reporting.Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.

Management conducted an evaluation
of the effectiveness of the Companys internal control over financial reporting
as of December 31, 2013. This assessment was based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 1992. On May 14, 2013, the
COSO issued a revised version of the Framework which will supersede the original
Framework at the end of 2014. The Company does not anticipate any change in
internal control effectiveness during transition to the new framework during
2014.

Based on their evaluation as of
the end of the period covered by this Annual Report on Form 10-K, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective at the reasonable assurance
level. This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
Companys registered public accounting firm pursuant to rules of the SEC that
permit the Company to provide only managements report in this annual report.

Changes in Internal Control
over Financial Reporting.There was no change in the internal control over
financial reporting that occurred during the quarter ended December 31, 2013
that has materially affected, or is reasonably likely to materially affect, the
internal control over financial reporting.

82

---



Item 9B. OTHER
INFORMATION.

None

Part III

Item 10. DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

Information is incorporated by
reference to the information that appears under the headings Proposal 1 
Election of Directors, Executive Compensation  Executive Officers, Section
16(a) Beneficial Ownership Reporting Compliance, Code of Ethics, Information
about the Board of Directors and Board Committees and Audit and Compliance
Committee Report contained in the Companys 2014 Definitive Proxy Statement
(Definitive Proxy Statement) to be filed by April 30, 2014.

Item 11. EXECUTIVE
COMPENSATION.

This information is incorporated
by reference from the Executive Compensation section of the Companys
Definitive Proxy Statement to be filed by April 30, 2014.

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

Other than as set forth below,
this information is incorporated by reference from Note 17, Stock Incentive
Plans, in the notes to consolidated financial statements contained in Item 8 of
this Form 10-K and from the Beneficial Ownership of Company Common Stock
section of the Companys Definitive Proxy Statement to be filed by April 30,
2014.

The following table summarizes
information, as of December 31, 2013, relating to the Companys 1998 Stock
Incentive Plan, 2003 Stock Incentive Plan and 2005 Stock Incentive Plan:

|                                   |  |                            |  |                           |  | Number of securities        
|---------------------------------- |  | -------------------------- |  | ------------------------- |  | ----------------------------
|                                   |  |                            |  |                           |  | remaining available for     
|                                   |  | Number of securities to be |  | Weighted-average exercise |  | future issuance under equity
|                                   |  | issued upon exercise of    |  | price of outstanding      |  | compensation plans          
|                                   |  | outstanding options,       |  | options, warrants and     |  | (excluding securities       
|                                   |  | warrants and rights        |  | rights                    |  | reflected in column (a))    
|                                   |  | (a)                        |  | (b)                       |  | (c)                         
|Equity compensation
    plans      |  |                            |  |                           |  |                             
|approved by security
      holders |  | 226,424                    |  | $26.35                    |  | 62,249                      
|Equity compensation plans not      |  |                            |  |                           |  |                             
|approved by security holders       |  | --                         |  | --                        |  | --                          
|Total                              |  | 226,424                    |  | $26.35                    |  | 62,249                      

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

This information is incorporated
by reference from the Information about the Board of Directors and Board
Committees and Transactions with Related Persons sections of the Companys
Definitive Proxy Statement to be filed by April 30, 2014. For further
information, see Note 11 of the notes to consolidated financial statements
contained in Item 8 in this Form 10-K.

83

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Item 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.

This information is incorporated
by reference from the Independent Auditors section of the Companys Definitive
Proxy Statement to be filed by April 30, 2014.

Part IV

Item 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.

(a) Exhibit Index:

|Exhibit
      Number |  | Description of
      Exhibit                                                                                                                                              | 
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|2.0                  |  | Reorganization Agreement and Plan of Share Exchange,
      dated as of March 6, 2013, between Virginia National Bank and Virginia
      National Bankshares Corporation a
|3.1                  |  | Articles of
      Incorporation of Virginia National Bankshares Corporation, as amended and
      restated b                                                             
|3.2                  |  | Bylaws of Virginia National Bankshares Corporation
      c                                                                                                               
|10.1                 |  | Virginia
      National Bank 1998 Stock Incentive Plan d                                                                                                                 
|10.2                 |  | Virginia National Bank 2003 Stock Incentive Plan
      e                                                                                                                 
|10.3                 |  | Virginia
      National Bank Amended and Restated 2005 Stock Incentive Plan
      f                                                                                      
|21.0                 |  | Subsidiaries of the Registrant
  g                                                                                                                                       
|31.1                 |  | 302 Certification of Principal Executive
      Officer                                                                                                                   
|31.2                 |  | 302
      Certification of Principal Financial Officer                                                                                                                   
|32.1                 |  | 906 Certification                                                                                                                                                        

|a, b, c |  | Incorporated herein by
      reference to Virginia National Bankshares Corporations Current Report on
      Form 8-K, filed with the Securities and Exchange Commission on December
      18, 2013.
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|d       |  | Incorporated herein by
      reference to Virginia National Banks Definitive Proxy Statement, filed
      with the Office of the Comptroller of the Currency on or around April 16,
      1999.    
|e       |  | Incorporated herein by
      reference to Virginia National Banks Definitive Proxy Statement, filed
      with the Office of the Comptroller of the Currency on April 24, 2003.                    
|f       |  | Incorporated herein by
      reference to Virginia National Banks Definitive Proxy Statement, filed
      with the Office of the Comptroller of the Currency on March 30, 2006.                    
|g       |  | Refer to Item 1, Business
      beginning on page 3 of this Form 10-K Report for a discussion of Virginia
      National Bankshares Corporations direct and indirect subsidiaries.                 

84

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SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto, duly authorized.

|                              |  | VIRGINIA NATIONAL BANKSHARES
    CORPORATION
|----------------------------- |  | --------------------------------------------
|                             
|                              |  | By                                          
|                              |  |                                             
|                              |  |                                             
|                              |  |                                             
|Date:    March
      27, 2014 |  |                                             

Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities on March 27,
2014.

|Signatures                     |  | Title                                                   
|------------------------------ |  | --------------------------------------------------------
|/s/ Ronald E. Baron            |  | Executive Vice President &
      Chief Financial Officer
|Ronald E. Baron                |  | (principal financial and
      accounting officer)      
|                              
|/s/ Steven W. Blaine           |  | Director                                                
|Steven W. Blaine               |  |                                                         
|                              
|/s/ Nancy L. Brody             |  | Director                                                
|Nancy L. Brody                 |  |                                                         
|                              
|/s/ John J. Davies, III        |  | Director                                                
|John J. Davies, III            |  |                                                         
|                              
|/s/ William D. Dittmar, Jr.    |  | Chairman of the
  Board                                 
|William D. Dittmar,
Jr.        |  |                                                         
|                              
|/s/ James T. Holland           |  | Director                                                
|James T. Holland               |  |                                                         
|                              
|/s/ William Bolling Izard, Jr. |  | Director                                                
|William Bolling Izard,
    Jr. |  |                                                         
|                              
|/s/ Glenn W. Rust              |  | President & Chief Executive
      Officer and Director  
|Glenn W. Rust                  |  | (principal executive
      officer)                     
|                              
|/s/ Gregory L. Wells           |  | Director                                                
|Gregory L. Wells               |  |                                                         

85

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