UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30,~~March 31, ~~2021~~2022


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

For the transition period from ___________ to ___________

Commission File Number: 001-40305

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 No.)
404 People Place
Charlottesville, Virginia	22911
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

VABK

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒☐ No ☐

As of ~~November 8, 2021,~~May 10, 2022, the registrant had ~~5,308,335~~5,326,271 shares of common stock, $2.50 par value per share, outstanding.

VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS


Part I. Financial Information
Item 1 Financial Statements		Page 34
Consolidated Balance Sheets (unaudited)		Page 34
Consolidated Statements of Income (unaudited)		Page 45
Consolidated Statements of Comprehensive ~~Income~~Loss (unaudited)		Page 56
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 67
Consolidated Statements of Cash Flows (unaudited)		Page 78
Notes to Consolidated Financial Statements (unaudited)		Page 89

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 3635
Application of Critical Accounting Policies and Estimates		Page 3937
Financial Condition		Page 4037
Results of Operations		Page 4744

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 5548

Item 4 Controls and Procedures		Page 5549

Part II. Other Information
Item 1 Legal Proceedings		Page 5549
Item 1A Risk Factors		Page 5549
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 5549
Item 3 Defaults Upon Senior Securities		Page 5549
Item 4 Mine Safety Disclosures		Page 5549
Item 5 Other Information		Page 5549
Item 6 Exhibits		Page 5650

Signatures		Page 5751

Glossary of Acronyms and Defined Terms


2005 Plan	-	2005 Stock Incentive Plan
2014 Plan	-	2014 Stock Incentive Plan
ACL	-	Allowance for credit losses
Acquired Loans	-	Loans acquired from Fauquier
AFS	-	Available for sale
ALLL	-	Allowance for loan and lease losses
ASC	-	Accounting Standards Codification
ASU	-	Accounting Standards Update
the Bank	-	Virginia National Bank
bps	-	Basis points
CDARS™	-	Certificates of Deposit Account Registry Service
CECL	-	Current expected credit losses
CMO	-	Collateralized mortgage obligation
the Company	-	Virginia National Bankshares Corporation and its subsidiaries
COVID-19	-	Novel coronavirus disease
EBA	-	Excess Balance Account
Effective Date	-	April 1, 2021
EPS	-	Earnings per share or net income per share
Exchange Act	-	Securities Exchange Act of 1934, as amended
Fauquier	-	Fauquier Bankshares, Inc. and its subsidiaries
FASB	-	Financial Accounting Standards Board
Federal Reserve	-	Board of Governors of the Federal Reserve System
Federal Reserve Bank or FRB	-	Federal Reserve Bank of Richmond
FHLB	-	Federal Home Loan Bank of Atlanta
Form 10-K	-	Annual Report on Form 10-K for the year ended December 31, 2021
FTE	-	Fully taxable equivalent
GAAP or U.S. GAAP	-	Accounting principles generally accepted in the United States
ICS®	-	Insured Cash Sweep®
LIBOR	-	London Interbank Offering Rate
Masonry Capital	-	Masonry Capital Management, LLC
Merger	-	Mergers of Fauquier Bankshares, Inc. and The Fauquier Bank with and into the Company and the Bank, respectively
Merger Agreement	-	Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger
NPA	-	Nonperforming assets
OCC	-	Office of the Comptroller of the Currency
OREO	-	Other real estate owned
OTTI	-	Other than temporary impairment
PCA	-	Prompt Corrective Action
PCI	-	Purchased credit impaired
PII	-	Personally identifiable information
the Plans	-	2005 Stock Incentive Plan and 2014 Stock Incentive Plan
PPP	-	Paycheck Protection Program
Reliamax Surety	-	Reliamax Surety Company
ROAA	-	Return on Average Assets
ROAE	-	Return on Average Equity
SAB	-	Staff Accounting Bulletin
SBA	-	Small Business Administration
SEC	-	U.S. Securities and Exchange Commission
Securities Act	-	Securities Act of 1933, as amended
Sturman Wealth	-	Sturman Wealth Advisors
TDR	-	Troubled debt restructuring
TFB	-	The Fauquier Bank
VNBTrust	-	VNBTrust, National Association

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	September 30, 2021			December 31, 2020*			March 31, 2022			December 31, 2021 *
ASSETS	(Unaudited)						Unaudited
Cash and due from banks	$	18,919		$	8,116		$	16,539		$	20,345
Interest-bearing deposits in other banks		254,194			—			311,546			336,032
Federal funds sold		152,417			26,579			152,523			152,463
Securities:
Available for sale, at fair value		277,046			174,086			341,361			303,817
Restricted securities, at cost		2,610			3,010			5,137			4,950
Total securities		279,656			177,096			346,498			308,767
Loans		1,112,450			609,406
Loans, net of deferred fees and costs								1,006,962			1,061,211
Allowance for loan losses		(5,623	)		(5,455	)		(5,834	)		(5,984	)
Loans, net		1,106,827			603,951			1,001,128			1,055,227
Premises and equipment, net		25,239			5,238			24,680			25,093
Bank owned life insurance		31,033			16,849			36,987			31,234
Goodwill		8,898			372			8,140			8,140
Core deposit intangible, net		7,855			—			7,832			8,271
Other intangible assets, net		290			341			257			274
Other real estate, net		611			—
Other real estate owned, net								611			611
Right of use asset, net		7,970			3,527			7,744			7,583
Accrued interest receivable and other assets		17,916			6,341			20,722			18,144
Total assets	$	1,911,825		$	848,410		$	1,935,207		$	1,972,184
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	504,696		$	209,772		$	523,189		$	522,281
Interest-bearing		424,642			148,910			451,339			446,314
Money market and savings deposit accounts		642,788			272,980			644,418			665,530
Certificates of deposit and other time deposits		165,057			99,102			155,402			162,045
Total deposits		1,737,183			730,764			1,774,348			1,796,170
Advances from the FHLB		—			30,000
Junior subordinated debt		3,356			—
Junior subordinated debt, net								3,379			3,367
Lease liability		7,463			3,589			7,295			7,108
Accrued interest payable and other liabilities		3,913			1,459			4,166			3,552
Total liabilities		1,751,915			765,812			1,789,188			1,810,197

Commitments and contingent liabilities
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, 0 shares outstanding		—			—
Common stock, $2.50 par value, 10,000,000 shares authorized; 5,307,235 shares issued and outstanding as of September 30, 2021 (includes 35,911 nonvested), and 2,714,273 shares issued and outstanding as of December 31, 2020 (includes 25,268 nonvested)		13,178			6,722
Preferred stock, $2.50 par value								-			-
Common stock, $2.50 par value								13,190			13,178
Capital surplus		104,446			32,457			104,706			104,584
Retained earnings		42,746			41,959			49,764			46,436
Accumulated other comprehensive income (loss)		(460	)		1,460
Accumulated other comprehensive loss								(21,641	)		(2,211	)
Total shareholders' equity		159,910			82,598			146,019			161,987
Total liabilities and shareholders' equity	$	1,911,825		$	848,410		$	1,935,207		$	1,972,184
Common shares outstanding								5,326,271			5,308,335
Common shares authorized								10,000,000			10,000,000
Preferred shares outstanding								0			0
Preferred shares authorized								2,000,000			2,000,000

* Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

For the three months ended

For the nine months ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Interest and dividend income:

Loans, including fees

$
12,957

$
6,175

$
31,904

$
18,202

Federal funds sold

45

3

78

98

Other interest-bearing accounts

55

-

94

-

Investment securities:

Taxable

742

412

2,006

1,150

Tax exempt

280

159

729

326

Dividends

55

22

121

70

Total interest and dividend income

14,134

6,771

34,932

19,846

Interest expense:

Demand and savings deposits

673

383

1,598

1,468

Certificates and other time deposits

282

306

886

1,166

Borrowings

(325
)

35

(181
)

35

Total interest expense

630

724

2,303

2,669

Net interest income

13,504

6,047

32,629

17,177

Provision for loan losses

267

224

477

1,367

Net interest income after provision for loan losses

13,237

5,823

32,152

15,810

Noninterest income:

Wealth management fees

744

263

2,053

801

Advisory and brokerage income

358

175

908

516

Deposit account fees

396

162

982

484

Debit/credit card and ATM fees

808

144

1,561

435

Earnings/increase in value of bank owned life insurance

201

111

507

327

Gains on sales of securities

-

91

-

734

Loan swap fee income

24

344

59

977

Other

947

135

1,367

446

Total noninterest income

3,478

1,425

7,437

4,720

Noninterest expense:

Salaries and employee benefits

4,562

2,322

11,705

7,004

Net occupancy

1,039

501

2,643

1,405

Equipment

205

134

661

401

ATM, debt and credit card

212

46

589

140

Bank franchise tax

320

161

922

487

Computer software

361

159

744

435

Data processing

1,114

302

2,397

968

FDIC deposit insurance assessment

349

61

594

89

Marketing, advertising and promotion

337

55

706

334

Merger and merger related expenses

1,935

549

8,087

549

Professional fees

186

-

873

376

Core deposit intangible amortization

417

-

845

-

Other

1,787

645

2,832

1,694

Total noninterest expense

12,824

4,935

33,598

13,882

Income before income taxes

3,891

2,313

5,991

6,648

Provision for income taxes

753

443

1,201

1,286

Net income

$
3,138

$
1,870

$
4,790

$
5,362

Net income per common share, basic

$
0.59

$
0.69

$
1.08

$
1.98

Net income per common share, diluted

$
0.59

$
0.69

$
1.07

$
1.98

~~See Notes to Consolidated Financial Statements~~

~~VIRGINIA NATIONAL BANKSHARES CORPORATION~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~(Dollars in thousands)~~

~~(Unaudited)~~

For the three months ended

For the nine months ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Net income

$
3,138

$
1,870

$
4,790

$
5,362

Other comprehensive income (loss):

Unrealized gains (losses) on securities, net of tax of ($94) and ($488) for the three and nine months ended September 30, 2021; and net of tax of $81 and $484 for the three and nine months ended September 30, 2020, respectively

(352
)

309

(1,836
)

1,823

Reclassification adjustment for realized gains on sales of securities, net of tax of ($0) and ($0) for the three and nine months ended September 30, 2021; and net of tax of ($18) and ($154) for the three and nine months ended September 30, 2020, respectively

—

(73
)

—

(580
)
Unrealized gains (losses) on interest rate swaps, net of tax of $7 and ($22) for the three and nine months ended September 30, 2021; and net of tax of $0 and $0 for the three and nine months ended September 30, 2020, respectively

27

—

(84
)

—

Total other comprehensive income (loss)

(325
)

237

(1,920
)

1,243

Total comprehensive income

$
2,813

$
2,107

$
2,870

$
6,605


	For the three months ended
	March 31, 2022		March 31, 2021
Interest and dividend income:
Loans, including fees	$	10,769	$	5,938
Federal funds sold		61		12
Other interest-bearing deposits		136		-
Investment securities:
Taxable		1,012		507
Tax exempt		304		176
Dividends		62		34
Total interest and dividend income		12,344		6,667

Interest expense:
Demand and savings deposits		676		377
Certificates and other time deposits		195		280
Borrowings		48		36
Total interest expense		919		693
Net interest income		11,425		5,974
Provision for loan losses		148		351
Net interest income after provision for loan losses		11,277		5,623

Noninterest income:
Wealth management fees		557		329
Advisory and brokerage income		216		191
Deposit account fees		465		160
Debit/credit card and ATM fees		707		154
Bank owned life insurance income		211		107
Resolution of commercial dispute		2,400		-
Other		231		98
Total noninterest income		4,787		1,039

Noninterest expense:
Salaries and employee benefits		4,731		2,402
Net occupancy		1,197		495
Equipment		283		116
Bank franchise tax		304		173
Computer software		263		167
Data processing		738		289
FDIC deposit insurance assessment		226		63
Marketing, advertising and promotion		267		137
Merger and merger-related expenses		-		278
Plastics expense		139		42
Professional fees		337		177
Core deposit intangible amortization		439		-
Other		1,171		442
Total noninterest expense		10,095		4,781

Income before income taxes		5,969		1,881
Provision for income taxes		1,045		376
Net income	$	4,924	$	1,505
Net income per common share, basic	$	0.93	$	0.55
Net income per common share, diluted	$	0.92	$	0.55
Weighted average common shares outstanding, basic		5,311,983		2,719,840
Weighted average common shares outstanding, diluted		5,343,564		2,727,448

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands)

(Unaudited)


	For the three months ended
	March 31, 2022			March 31, 2021
Net income	$	4,924		$	1,505
Other comprehensive income (loss):
Unrealized losses on securities, net of tax of ($5,228) for the three months ended March 31, 2022; and net of tax of ($900) for the three months ended March 31, 2021, respectively		(19,665	)		(3,387	)
Unrealized gains on interest rate swaps, net of tax of $62 for the three months ended March 31, 2022; and net of tax of $0 for the three months ended March 31, 2021, respectively		235			—
Total other comprehensive loss		(19,430	)		(3,387	)
Total comprehensive loss	$	(14,506	)	$	(1,882	)

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2022 AND 2021 ~~AND 2020~~

(Dollars in thousands, except per share data)

(Unaudited)


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2019	$	6,720	$	32,195		$	37,235		$	(43	)	$	76,107
Stock option expense		-		24			-			-			24
Restricted stock grant expense		-		15			-			-			15
Cash dividends declared ($0.30 per share)		-		-			(811	)		-			(811	)
Net income		-		-			1,404			-			1,404
Other comprehensive loss		-		-			-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234		$	37,828		$	(491	)	$	76,291
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		39			-			-			39
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			2,088			-			2,088
Other comprehensive income		-		-			-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307		$	39,102		$	963		$	79,092
Stock option expense		-		30			-			-			30
Restricted stock grant expense		-		42			-			-			42
Vested stock grants		2		(2	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,870			-			1,870
Other comprehensive income		-		-			-			237			237
Balance, September 30, 2020	$	6,722	$	32,377		$	40,158		$	1,200		$	80,457
															Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598		$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Exercise of stock options		1		14			-			-			15			1		14			-			-			15
Stock option expense		-		34			-			-			34			-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61			-		61			-			-			61
Vested stock grants		7		(7	)		-			-			-			7		(7	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)		-		-			(814	)		-			(814	)
Net income		-		-			1,505			-			1,505			-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			(3,387	)		(3,387	)		-		-			-			(3,387	)		(3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012		$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165
Vested stock grants		16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602

Balance, December 31, 2021															$	13,178	$	104,584		$	46,436		$	(2,211	)	$	161,987
Stock option expense		-		31			-			-			31			-		41			-			-			41
Restricted stock grant expense		-		57			-			-			57			-		93			-			-			93
Vested stock grants		2		(2	)		-			-			-			12		(12	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,593	)		-			(1,593	)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			3,138			-			3,138			-		-			4,924			-			4,924
Other comprehensive loss		-		-			-			(325	)		(325	)		-		-			-			(19,430	)		(19,430	)
Balance, September 30, 2021	$	13,178	$	104,446		$	42,746		$	(460	)	$	159,910
Balance, March 31, 2022															$	13,190	$	104,706		$	49,764		$	(21,641	)	$	146,019

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)


	For the nine months ended						For the three months ended
	September 30, 2021			September 30, 2020			March 31, 2022			March 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,790		$	5,362		$	4,924		$	1,505
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		477			1,367			148			351
Net accretion of certain acquisition-related adjustments		(2,474	)		-			(540	)		—
Amortization of intangible assets		896			74			456			17
Net amortization and accretion of securities		1,100			471			388			241
Net gains on sale of securities		-			(734	)
Net gains on sale of other assets		(65	)		-			(5	)		—
Earnings on bank owned life insurance		(507	)		(327	)		(211	)		(107	)
Deferred tax		25			-
Depreciation and other amortization		2,173			1,395			967			476
Stock option expense		96			88			41			34
Stock grant expense, restricted		283			96			93			61
Net change in:
Accrued interest receivable and other assets		(1,577	)		(1,117	)		2,749			611
Accrued interest payable and other liabilities		1,882			(19	)		376			(3	)
Net cash provided by operating activities		7,099			6,656			9,386			3,186

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares		153,278			-
Net decrease (increase) in restricted investments		2,019			(1,753	)
Net (increase) decrease in restricted investments								(188	)		358
Purchases of available for sale securities		(36,127	)		(122,372	)		(69,252	)		(7,974	)
Proceeds from maturities, calls and principal payments of available for sale securities		22,876			34,821			6,428			4,443
Proceeds from sales of available for sale securities		—			62,184
Net decrease (increase) in loans		95,117			(97,644	)		54,484			(11,853	)
Proceeds from sale of loans		6,126			—
Cash payment for wealth management book of business		-			(50	)
Purchase of bank owned life insurance								(5,542	)		—
Proceeds from sale of premises and equipment		34			—			5			—
Purchase of bank premises and equipment		(1,055	)		(132	)		(154	)		(142	)
Net cash provided by (used in) investing activities		242,268			(124,946	)
Net cash used in investing activities								(14,219	)		(15,168	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and money market accounts		192,565			84,493
Net decrease in certificates of deposit and other time deposits		(3,728	)		(11,183	)
Net increase (decrease) in other borrowings		(42,582	)		40,000
Net (decrease) increase in demand deposits, interest checking accounts, and money market accounts								(15,179	)		71,654
Net (decrease) increase in certificates of deposit and other time deposits								(6,624	)		1,742
Proceeds from stock options exercised		30			-			-			15
Cash dividends paid		(4,817	)		(2,433	)		(1,596	)		(1,628	)
Net cash provided by financing activities		141,468			110,877
NET INCREASE IN CASH AND CASH EQUIVALENTS	$	390,835		$	(7,413	)
Net cash (used in) provided by financing activities								(23,399	)		71,783
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS							$	(28,232	)	$	59,801

CASH AND CASH EQUIVALENTS:
Beginning of period	$	34,695		$	19,085		$	508,840		$	34,695
End of period	$	425,530		$	11,672		$	480,608		$	94,496

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest	$	2,289		$	2,788		$	957		$	702
Cash payments for taxes	$	1,042		$	1,991

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized (losses) gains on available for sale securities	$	(2,324	)	$	1,573
Unrealized (losses) gains on interest rate swaps	$	(106	)	$	—
Unrealized losses on available for sale securities							$	(24,893	)	$	(4,287	)
Unrealized gains on interest rate swaps							$	297		$	—
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	—		$	711		$	541		$	—
Assets acquired in business combination	$	909,736		$	—
Liabilities assumed in business combination	$	840,226		$	—
Change in goodwill	$	8,526		$	—

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~September 30, 2021~~March 31, 2022

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”)~~ for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021.

Business Combination: On April 1, 2021, Virginia National Bankshares Corporation ~~(the “Company”)~~ completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations.

Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries Virginia National Bank ~~(the “Bank”)~~ and Masonry Capital Management, LLC, ~~(“Masonry Capital”),~~ a registered investment advisor. The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services and of TFB Trust and Investment Management. The Bank also offers, through its networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors and TFB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation: The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities 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,~~ALLL, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022.

Reclassifications: If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were ~~significant~~significant.

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. ~~Smaller reporting companies who file~~

The new standard will be effective for the Company beginning on January 1, 2023. Early adoption of the new standard is permitted. The amendments of Topic 326, upon adoption, will be applied on a modified retrospective basis, with the ~~U.S. Securities and Exchange Commission (“SEC”), such~~cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the ~~Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.~~period of adoption. The Company ~~is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed~~established a cross-functional steering committee ~~including some members~~in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of ~~senior management, to provide governance~~evaluating appropriate portfolio segmentation and ~~guidance over~~modeling methods under the ~~project plan.~~standard. The Company has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under Topic 326. The Company has also engaged a vendor to assist in modeling expected lifetime losses under Topic 326, and is ~~capturing~~continuing to develop and refine an approach to estimating the ~~additional loan data~~ACL. The adoption of Topic 326 may result in significant changes to the Company’s consolidated financial statements, which ~~is anticipated to be needed for this calculation. The extent~~may include changes in the level of the ~~change is indeterminable at this time as it~~ACL that will be ~~dependent upon portfolio composition~~considered adequate, a reduction in total equity and ~~credit quality at~~regulatory capital of the ~~adoption date, as well as economic conditions and forecasts at that time.~~Bank, differences in the timing of recognizing changes to

~~Upon~~the ACL and expanded disclosures about the ACL. The Company has not yet determined an estimate of the effect of these changes. The adoption of the ~~impact~~standard will also result in significant changes in the Company’s internal control over financial reporting related to the ~~allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.~~ACL.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ~~(“SAB”)~~ 119. SAB 119 updated portions of SEC interpretative guidance to align with ~~FASB Accounting Standards Codification (“ASC”)~~Topic 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

LIBOR and Other Reference Rates In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the ~~London Inter-bank Offered Rate (“LIBOR”)~~LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified all loans that are directly or indirectly impacted by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

~~Presentation of Financial Statements~~TDRs and Vintage Disclosures In ~~August 2021,~~March 2022, the FASB issued ASU ~~2021-06, “'Presentation of Financial Statements~~No. 2022-02, “Financial Instruments-Credit Losses (Topic ~~205)~~326), ~~Financial Services—Depository~~Troubled Debt Restructurings and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. ThisVintage Disclosures.” ASU ~~incorporates recent SEC rule changes into~~2022-02 addresses areas identified by the FASB ~~Codification, including SEC Final Rule Releases No. 33-10786, Amendments~~as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to ~~Financial Disclosures about Acquired~~disclose current-period gross write-offs for financing receivables and ~~Disposed Businesses,~~net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and ~~No. 33-10835, Update~~measurement of ~~Statistical Disclosures for Bank and Savings and Loan Registrants”. The~~TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective ~~upon addition~~for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the ~~FASB Codification.~~amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company ~~does not expect~~is currently assessing the ~~adoption of~~impact that ASU ~~2021-06 to~~2022-02 will have ~~a material impact~~ on its consolidated financial statements.

~~Recently Adopted Accounting Developments~~

~~CARES Act~~ In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and treatment of certain loan modifications related to the COVID-19 pandemic. The adoption of the CARES Act had no material impact on the Company’s consolidated financial statements. See further discussion of PPP loans and loan modifications in Notes 4 and 5 of the notes to the Consolidated Financial Statements.

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

910

Note 2. Business Combinations

On April 1, 2021 ~~(The “Effective Date”)~~, the Company completed the merger with Fauquier Bankshares, Inc. ~~(“Fauquier”)~~ with and into the Company, ~~(the “Merger”),~~ with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and ~~Fauquier (the “Merger Agreement”).~~Fauquier.

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

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

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

1011

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


	As Recorded					As Recorded
	by Fauquier		Fair Value			by Virginia National		As Recorded					As Recorded
	Bankshares, Inc.		Adjustment			Bankshares		by Fauquier		Fair Value			by Virginia National
								Bankshares, Inc.		Adjustment			Bankshares
Assets:
Cash and cash equivalents	$	153,282	$	-		$	153,282	$	153,282	$	-		$	153,282
Securities available for sale		93,133		-			93,133		93,133		-			93,133
Restricted securities									1,619		-			1,619
Loans, net		615,766		(13,123	)		602,643		615,766		(13,123	)		602,643
Premises and equipment		16,276		3,872			20,148		16,276		3,872			20,148
Other real estate owned		1,356		(745	)		611		1,356		(745	)		611
Bank-owned life insurance		13,677		-			13,677		13,677		-			13,677
Right-of-use assets		4,355		1,077			5,432		4,355		1,077			5,432
Core deposit intangible		-		8,700			8,700		-		9,660			9,660
Other assets		12,917		(807	)		12,110		11,298		(1,009	)		10,289
Total assets acquired	$	910,762	$	(1,026	)	$	909,736	$	910,762	$	(268	)	$	910,494

Liabilities:
Deposits		817,499		191			817,690		817,499		191			817,690
Short-term borrowings		12,582		473			13,055		12,582		473			13,055
Junior subordinated debt		4,124		(790	)		3,334		4,124		(790	)		3,334
Lease liability		4,440		352			4,792		4,440		352			4,792
Other liabilities		1,355		-			1,355		1,355		-			1,355
Total liabilities assumed	$	840,000	$	226		$	840,226	$	840,000	$	226		$	840,226
Net assets acquired						$	69,510						$	70,268
Total consideration paid							78,036							78,036
Goodwill						$	8,526						$	7,768

In connection with the Merger, the Company recorded approximately $~~8.5~~7.8 million of goodwill and $~~8.7~~9.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset ~~(“CDI”)~~ will be amortized over a period of seven years using the sum of years digits method.

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

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

Information about PCI ~~loans~~ acquired ~~from Fauquier~~loans as of April 1, 2021 is as follows (dollars in thousands):


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

1112

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

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

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

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

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

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

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

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

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $~~8.7~~9.7 million or ~~1.2~~1.3% of non-maturity deposits.

Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $~~191,000~~191 thousand premium and is being amortized into income over a period of ~~seven~~thirty-six months.

Short-term borrowings: The fair value of borrowings was determined by comparison to current interest rates for similar borrowings. The resulting fair value adjustment to short-term borrowings is a $~~473,000~~473 thousand premium which will be amortized into interest expense over the remaining life of the debt on a straight-line basis. (Note that such borrowings were repaid in the third quarter of 2021, and therefore, the premium was fully amortized during the ~~current quarter.~~quarter in which they were repaid.)

Junior subordinated debt: The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate. The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $~~790,000~~790 thousand discount and is being accreted over the remaining life of the debt on a straight-line basis.

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

1213

~~Merger and merger related expenses~~There were $~~1.9~~0 ~~million ($1.5~~ ~~million after taxes) for the three months ended September 30, 2021 and $8.1~~ ~~million ($6.2~~ million after taxes) for the nine months ended September 30, 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments, severance and stay-put bonuses and legal and consulting expenses, which have been expensed as incurred. $~~549~~ ~~thousand ($324~~ ~~thousand after taxes) of~~ merger and merger related expenses ~~were recognized~~incurred during the three ~~and nine~~ months ended ~~September 30, 2020.~~ March 31, 2022 and $278 thousand incurred during the three months ended March 31, 2021, primarily consisting of legal expenses.

Note 3. Securities

The amortized cost and fair values of securities available for sale as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows (dollars in thousands):


September 30, 2021			Gross		Gross
March 31, 2022												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government treasuries										$	39,393	$	-	$	(1	)	$	39,392
U.S. Government agencies	$	33,014	$	54	$	(530	)	$	32,538		35,404		-		(3,140	)		32,264
Mortgage-backed securities/CMOs		146,409		655		(1,066	)		145,998		189,456		2		(12,498	)		176,960
Corporate bonds											3,734		-		(31	)		3,703
Municipal bonds		98,099		1,244		(833	)		98,510		100,985		37		(11,980	)		89,042
Total Securities Available for Sale	$	277,522	$	1,953	$	(2,429	)	$	277,046	$	368,972	$	39	$	(27,650	)	$	341,361


December 31, 2020			Gross		Gross
December 31, 2021												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	25,496	$	7	$	(198	)	$	25,305	$	32,424	$	24	$	(867	)	$	31,581
Mortgage-backed securities/CMOs		77,438		844		(182	)		78,100		172,975		248		(2,259	)		170,964
Municipal bonds		69,303		1,499		(121	)		70,681		101,136		1,162		(1,026	)		101,272
Total Securities Available for Sale	$	172,237	$	2,350	$	(501	)	$	174,086	$	306,535	$	1,434	$	(4,152	)	$	303,817

As of ~~September 30, 2021,~~March 31, 2022, there were $~~160.3~~330.6 million, or ~~104~~245 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $~~2.4~~27.7 million and consisted of 53110 mortgage-backed/collateralized mortgage obligations, ~~(“CMOs”),~~ 35113 municipal bonds, ~~and~~ 1619 agency ~~bonds.~~bonds, 2 corporate bonds, and 1 treasury bond.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020~~2021 (dollars in thousands):


September 30, 2021
March 31, 2022
	Less than 12 Months					12 Months or more					Total					Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized					Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government treasuries																$	39,392	$	(1	)	$	—	$	—		$	39,392	$	(1	)
U.S. Government agencies	$	18,067	$	(319	)	$	9,539	$	(211	)	$	27,606	$	(530	)		9,584		(666	)		19,672		(2,474	)		29,256		(3,140	)
Mortgage-backed/CMOs		86,639		(1,043	)		1,198		(23	)		87,837		(1,066	)		140,478		(9,288	)		33,478		(3,210	)		173,956		(12,498	)
Corporate bonds																	3,703		(31	)		—		—			3,703		(31	)
Municipal bonds		37,700		(658	)		7,202		(175	)		44,902		(833	)		68,007		(9,167	)		16,243		(2,813	)		84,250		(11,980	)
	$	142,406	$	(2,020	)	$	17,939	$	(409	)	$	160,345	$	(2,429	)	$	261,164	$	(19,153	)	$	69,393	$	(8,497	)	$	330,557	$	(27,650	)


December 31, 2020
December 31, 2021
	Less than 12 Months					12 Months or more				Total					Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized				Unrealized					Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	19,298	$	(198	)	$	—	$	—	$	19,298	$	(198	)	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)
Mortgage-backed/CMOs		24,523		(182	)		—		—		24,523		(182	)		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)
Municipal bonds		21,501		(121	)		—		—		21,501		(121	)		40,352		(722	)		10,409		(304	)		50,761		(1,026	)
	$	65,322	$	(501	)	$	—	$	—	$	65,322	$	(501	)	$	186,671	$	(2,797	)	$	40,821	$	(1,355	)	$	227,492	$	(4,152	)

The Company’s securities portfolio is primarily made up of fixed rate instruments, the prices of which move inversely with interest rates. Any unrealized losses are considered by management to be driven by 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 instruments approach their maturity date or repricing date or if market yields for such investments decline. At the end of

1314

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 ~~September 30, 2021,~~March 31, 2022, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” ~~(“OTTI”)~~ is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of ~~September 30, 2021,~~March 31, 2022, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $~~12.8~~5.7 million at ~~September 30, 2021~~March 31, 2022 were pledged as collateral to secure deposits ~~and for other purposes~~ and facilitate borrowing from the Federal Reserve Bank of ~~Richmond (“FRB”).~~Richmond. At December 31, ~~2020,~~2021, securities having carrying values of $~~6.0~~12.7 million were similarly pledged.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021, there were 0 sales of securities. ~~For the three months ended September 30, 2020, proceeds from the sales of securities amounted to $16.1~~ ~~million, with realized gains of $234~~ ~~thousand and realized losses of $143~~ ~~thousand. For the nine months ended September 30, 2020, proceeds from the sales of securities amounted to $62.2~~ ~~million, with realized gains of $881~~ ~~thousand and realized losses of $147~~ ~~thousand.~~

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta, ~~(“FHLB”),~~ CBB Financial Corporation, the holding company for Community Bankers Bank, and an investment in an SBA loan fund. These restricted securities, totaling $~~2.6~~5.1 million and $~~3.0~~5.0 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, are carried at cost.

Note 4. Loans

The composition of the loan portfolio by major loan classifications at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 appears below (dollars in thousands).


	September 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Commercial	$	119,959		$	118,688		$	88,858		$	96,696
Real estate construction and land		92,082			22,509			64,937			79,331
1-4 family residential mortgages		372,474			132,966			343,382			358,148
Commercial mortgages		464,866			277,109			459,103			473,632
Consumer		63,069			58,134			50,682			53,404
Total loans		1,112,450			609,406			1,006,962			1,061,211
Less: Allowance for loan losses		(5,623	)		(5,455	)		(5,834	)		(5,984	)
Net loans	$	1,106,827		$	603,951		$	1,001,128		$	1,055,227

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company and Fauquier, prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $207.5 million of ~~Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)~~SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of ~~September 30, 2021,~~March 31, 2022, the Company had PPP loans of $~~36.7~~10.0 million outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs ~~(fees) on PPP loans~~ and ~~loans purchased prior to the Merger.~~fees. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, unamortized premiums on loans purchased prior to the Merger were $~~1.2~~913 ~~million~~thousand and $~~1.8~~1.1 million, respectively. Net deferred loan ~~costs (fees)~~fees totaled $($~~1.1~~632~~) million~~ thousand and $($~~931~~865) thousand as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The deferred fees ~~increased~~include $~~184~~179 thousand ~~due to the~~in remaining fees collected from the SBA for the ~~additional~~ PPP loans ~~funded during the nine months ended September 30, 2021. Net deferred fees on PPP loans and loans purchased prior to the~~

~~Merger~~that are being amortized over the contractual life of the underlying ~~loans.~~loans, most which are over a 24-month period. As loans are forgiven by the SBA, accounting principles allow for the accelerated recognition of unamortized fees at that time.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The table above includes a net fair value mark of $12.3

million on the purchased impaired loans and $~~7.1~~5.7 million on the purchased performing loans as of ~~September 30, 2021~~March 31, 2022 on the Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

The outstanding principal balance and the carrying amount at ~~September 30, 2021~~March 31, 2022 on these Acquired Loans were as follows:


	September 30, 2021						March 31, 2022						December 31, 2021
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	80,308	$	424,070	$	504,378	$	70,058	$	339,765	$	409,823	$	76,608	$	372,172	$	448,780
Carrying amount:
Commercial	$	1,775	$	41,551	$	43,326	$	913	$	21,214	$	22,127	$	994	$	28,065	$	29,059
Real estate construction and land		24,148		29,404		53,552		16,412		11,596		28,008		18,576		14,297		32,873
1-4 family residential mortgages		17,757		205,724		223,481		13,828		184,065		197,893		16,020		194,708		210,728
Commercial mortgages		24,214		136,949		161,163		26,544		115,337		141,881		28,675		126,638		155,313
Consumer		150		3,379		3,529		105		1,889		1,994		118		2,224		2,342
Total acquired loans	$	68,044	$	417,007	$	485,051	$	57,802	$	334,101	$	391,903	$	64,383	$	365,932	$	430,315

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


	Three months ended			Nine months ended
	September 30, 2021			September 30, 2021			Three Months Ended March 31,
							2022			2021
Accretable yield, beginning of period	$	14,641		$	—		$	13,742		$	—
Additions		—			15,499			—			—
Accretion		(773	)		(1,631	)		(738	)		—
Reclassification from (to) nonaccretable difference								2,193			—
Other changes, net								(2,769	)		—
Accretable yield, end of period	$	13,868		$	13,868		$	12,428		$	—

Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding Acquired Loans, ~~that are not impaired,~~ as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or the twelve months ended December 31, ~~2020.~~2021. Interest income recognized is for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or the twelve months ended December 31, ~~2020~~2021 (dollars in thousands).

1516


September 30, 2021	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2022											Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Real estate construction and land	$	—	$	40	$	-	$	2	$	-
1-4 family residential mortgages		602		602		-		160		23	$	612	$	628	$	-	$	617	$	1
Total impaired loans without a valuation allowance		602		642		-		162		23		612		628		-		617		1

Impaired loans with a valuation allowance
Consumer		952		952		5		987		41		846		846		27		846		12
Total impaired loans with a valuation allowance		952		952		5		987		41		846		846		27		846		12
Total impaired loans	$	1,554	$	1,594	$	5	$	1,149	$	64	$	1,458	$	1,474	$	27	$	1,463	$	13


December 31, 2020	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2021											Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Real estate construction and land	$	8	$	55	$	-	$	97	$	-	$	-	$	37	$	-	$	2	$	-
1-4 family residential mortgages		109		109		-		113		6		594		600		-		269		24
Commercial real estate		-		-		-		781		48
Total impaired loans without a valuation allowance		117		164		-		991		54		594		637		-		271		24

Impaired loans with a valuation allowance
Consumer		1,156		1,156		4		1,145		70		935		935		6		974		54
Total impaired loans with a valuation allowance		1,156		1,156		4		1,145		70		935		935		6		974		54
Total impaired loans	$	1,273	$	1,320	$	4	$	2,136	$	124	$	1,529	$	1,572	$	6	$	1,245	$	78

Included in the impaired loans are non-accrual loans. Generally, a loan is placed on non-accrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. The recorded investment in non-accrual loans is shown below by class (dollars in thousands):


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Real estate construction and land	$	—	$	8
1-4 family residential mortgages		777		—	$	518	$	495
Total non-accrual loans	$	777	$	8	$	518	$	495

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

In accordance with regulatory guidance, the Company approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. Loan deferrals declined to $~~1.2~~670 thousand as of March 31, 2022, from $1.5 million as of ~~September 30, 2021, from $9.4~~ ~~million as of September 30, 2020. Only~~ 3 ~~loans remain~~March 31, 2021. The sole loan remaining in deferral status as of ~~September 30, 2021, and only $~~28 ~~thousand of this balance~~March 31, 2022 is ~~not~~ government guaranteed.

Based on regulatory guidance on student lending, the Company has classified 5756 of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $~~952~~846 thousand as of ~~September 30, 2021. (Note that this excludes the student loans acquired from Fauquier that were~~ 98~~% guaranteed by the U. S. Government (the “Acquired Student Loans”),~~ 97~~% of which were sold to a third party during the three months ended September 30, 2021.)~~March 31, 2022. These borrowers that should

have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any expected loss in the ~~allowance for loan losses;~~ALLL; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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


Troubled debt restructurings	September 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
	No. of		Recorded		No. of		Recorded		No. of		Recorded		No. of		Recorded
	Loans		Investment		Loans		Investment		Loans		Investment		Loans		Investment
Performing TDRs
1-4 family residential mortgages		1	$	101		1	$	109		1	$	94		1	$	99
Consumer		53		828		75		1,156		55		814		58		935
Total performing TDRs		54	$	929		76	$	1,265		56	$	908		59	$	1,034

Nonperforming TDRs
Real estate construction and land development		0	$	-		1	$	8
1-4 family residential mortgages		1		501		0		—		2		518		1		495
Consumer		4		124		0		—		1		32		0		—
Total nonperforming TDRs		5	$	625		1	$	8		3	$	550		1	$	495
Total TDRs		59	$	1,554		77	$	1,273		59	$	1,458		60	$	1,529

A summary of loans shown above that were modified under the terms of a TDR during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, 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.


	For the three months ended						For the three months ended						For the three months ended						For the three months ended
	September 30, 2021						September 30, 2020						March 31, 2022						March 31, 2021
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance

Consumer		0	$	—	$	—		9	$	119	$	119		0	$	—	$	—		6	$	63	$	63
1-4 family residential mortgages		1		501		501		0		—		—		1		54		54		0		—		—
Total loans modified during the period		1	$	501	$	501		9	$	119	$	119		1	$	54	$	54		6	$	63	$	63

	For the nine months ended						For the nine months ended
	September 30, 2021						September 30, 2020
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance

Consumer		6	$	63	$	63		15	$	168	$	168
1-4 family residential mortgages		1		501		501		0		—		—
Total loans modified during the period		7	$	564	$	564		15	$	168	$	168

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, there were 3no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. ~~These student loans had balances of $~~22 ~~thousand prior to being charged off.~~ There were 5 loans modified as a TDR that subsequently defaulted during the year ended December 31, ~~2020~~2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $4856 thousand prior to being charged off.

There were 0 loans secured by 1-4 family residential property that were in the process of foreclosure at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

Note 5. Allowance for Loan Losses

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

For purposes of determining the ~~allowance for loan losses~~ALLL on the outstanding loans that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. Note that under the acquisition method of accounting (ASC 805), the ~~allowance for loan losses~~ALLL recorded in the books of Fauquier was not carried over into the books of the ~~Company.~~Company; however the Acquired Loans were subject to net fair value marks.

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

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

•

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

•

Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.

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

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

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

Risk Ratings and Historical Loss Factor Assigned

Excellent

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

Good

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

Pass

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

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

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

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

Watch

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

Special Mention

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

Substandard

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

Doubtful

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

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.


September 30, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
March 31, 2022															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	63,273	$	15,753	$	38,679	$	34	$	1,836	$	384	$	119,959	$	39,872	$	14,968	$	30,862	$	1,050	$	109	$	1,997	$	88,858
Real estate construction and land		-		-		81,783		7,507		2,159		633		92,082		-		-		45,556		347		4,180		14,854		64,937
1-4 family residential mortgages		-		-		359,304		2,644		627		9,899		372,474		-		-		324,564		7,019		1,135		10,664		343,382
Commercial mortgages		-		-		442,978		5,742		845		15,301		464,866		-		-		394,870		44,180		5,079		14,974		459,103
Consumer		495		25,442		35,734		1,228		119		51		63,069		535		17,965		30,904		1,084		84		110		50,682
Total Loans	$	63,768	$	41,195	$	958,478	$	17,155	$	5,586	$	26,268	$	1,112,450	$	40,407	$	32,933	$	826,756	$	53,680	$	10,587	$	42,599	$	1,006,962


December 31, 2020	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
December 31, 2021															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	87,014	$	14,336	$	16,126	$	485	$	-	$	727	$	118,688	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696
Real estate construction and land		-		-		22,305		-		-		204		22,509		-		-		51,098		7,360		2,849		18,024		79,331
1-4 family residential mortgages		-		-		126,910		3,634		1,357		1,065		132,966		-		2,030		334,300		5,013		1,520		15,285		358,148
Commercial mortgages		-		-		261,663		5,854		-		9,592		277,109		-		-		382,108		61,563		8,530		21,431		473,632
Consumer		1,012		18,929		36,573		1,373		64		183		58,134		524		18,535		32,821		1,225		179		120		53,404
Total Loans	$	88,026	$	33,265	$	463,577	$	11,346	$	1,421	$	11,771	$	609,406	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211

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

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

Changes in the value of underlying collateral;

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

Changes in volume of delinquent loans;

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

Changes in lending policies and procedures, including underwriting standards;

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

Changes in the level of policy exceptions.

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

AsQualitative factors that were initially downgraded with the onset of ~~March 31, 2020 and~~the COVID-19 pandemic were subsequently upgraded with the quarter-ended June 30, ~~2020,~~2021. During that quarter, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy. No additional downgrades of such factors were taken during the quarters ended September 30, 2020, December 31, 2020 or March 31, 2021. During the quarter ended June 30, 2021, the Company upgraded the economic qualitative factors, resulting in a releasereleased of a portion of the reserves for loan losses related to the pandemic, as credit deterioration since the onset of COVID-19 has so far not been experienced to the extent anticipated. No additional changes were made to the economic qualitative factors during the quarter ended September 30, ~~2021.~~2021, December 31, 2021 or March 31, 2022. If economic conditions improve or worsen, the Company could experience changes in the required ALLL. It is possible that asset quality metrics could decline in the future if there is a resurgence of COVID-19 cases that disrupts economic activity.

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 Company’s markets and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $~~1.6~~1.5 million at ~~September 30, 2021,~~March 31, 2022, a specific valuation allowance was recognized 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 borrower. The $527 thousand in the allowance total shown below as individually

evaluated for impairment was attributed to the impaired student loans that required an allowance as of ~~September 30, 2021~~March 31, 2022 due to the loss of the insurance on this portfolio as discussed previously.

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and the year ended December 31, ~~2020~~2021 appears below (dollars in thousands):


As of and for the period ended September 30, 2021
As of and for the period ended March 31, 2022														As of and for the period ended March 31, 2022
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total				Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages			Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	209		$	160	$	3,897	$	1,189		$	5,455			$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		(91	)		—		—		(514	)		(605	)			(240	)		-			-			(233	)		(473	)
Recoveries		185			7		4		100			296				114			4			2			55			175
Provision for (recovery of) loan losses		(134	)		128		291		192			477				134			(50	)		(98	)		162			148
Ending Balance	$	169		$	295	$	4,192	$	967		$	5,623			$	260		$	353		$	4,382		$	839		$	5,834

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	5		$	5			$	-		$	-		$	-		$	27		$	27
Collectively evaluated for impairment		169			295		4,192		962			5,618				260			353			4,382			812			5,807
Acquired loans - purchased credit impaired		-			-		-		-			-				-			-			-			-			-

Loans:
Individually evaluated for impairment		-			-		602		952			1,554			$	-		$	-		$	612		$	846		$	1,458
Collectively evaluated for impairment		118,184			67,934		794,767		61,967			1,042,852				87,945			48,525			761,501			49,731			947,702
Acquired loans - purchased credit impaired		1,775			24,148		41,971		150			68,044				913			16,412			40,372			105			57,802
Ending Balance	$	119,959		$	92,082	$	837,340	$	63,069			1,112,450			$	88,858		$	64,937		$	802,485		$	50,682		$	1,006,962


As of and for the period ended December 31, 2020
As of and for the period ended December 31, 2021														As of and for the period ended December 31, 2021
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total				Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	302		$	109	$	2,684	$	1,114		$	4,209			$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs		—			—		—		(805	)		(805	)			(147	)		-		-		(688	)		(835	)
Recoveries		28			-		1		400			429				191			12		6		141			350
Provision for (recovery of) loan losses		(121	)		51		1,212		480			1,622				(1	)		227		575		213			1,014
Ending Balance	$	209		$	160	$	3,897	$	1,189		$	5,455			$	252		$	399	$	4,478	$	855		$	5,984

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	4		$	4			$	-		$	-	$	-	$	6		$	6
Collectively evaluated for impairment		209			160		3,897		1,185			5,451				252			399		4,478		849			5,978
Acquired loans - purchased credit impaired																-			-		-		-			-

Loans:
Individually evaluated for impairment	$	—		$	8	$	109	$	1,156		$	1,273			$	-		$	-	$	594	$	935		$	1,529
Collectively evaluated for impairment		118,688			22,501		409,966		56,978			608,133				95,702			60,755		786,491		52,351			995,299
Acquired loans - purchased credit impaired																994			18,576		44,695		118			64,383
Ending Balance	$	118,688		$	22,509	$	410,075	$	58,134		$	609,406			$	96,696		$	79,331	$	831,780	$	53,404		$	1,061,211

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ~~allowance for loan losses~~ALLL is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the

Company considers the entire balance of the loan to be contractually delinquent if the minimum

payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (dollars in thousands).

Past Due Aging as of
September 30, 2021

30-59
Days Past
Due

60-89
Days Past
Due

90 Days or
More Past
Due

Total Past
Due

PCI

Current

Total
Loans

90 Days
Past Due
and Still
Accruing

Commercial

$
240

$
-

$
641

$
881

$
1,775

$
117,303

$
119,959

$
641

Real estate
   construction
   and land

8

-

-

8

24,148

67,926

92,082

-

1-4 family
   residential
   mortgages

1,092

-

777

1,869

17,757

352,848

372,474

-

Commercial
   mortgages

-

-

-

-

24,214

440,652

464,866

-

Consumer
   loans

278

155

37

470

150

62,449

63,069

37

Total Loans

$
1,618

$
155

$
1,455

$
3,228

$
68,044

$
1,041,178

$
1,112,450

$
678


Past Due Aging as of March 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	68	$	81	$	548	$	697	$	913	$	87,248	$	88,858	$	548
Real estate construction and land		215		-		-		215		16,412		48,310		64,937		-
1-4 family residential mortgages		926		-		210		1,136		13,828		328,418		343,382		210
Commercial mortgages		227		-		-		227		26,544		432,332		459,103		-
Consumer loans		300		84		79		463		105		50,114		50,682		79
Total Loans	$	1,736	$	165	$	837	$	2,738	$	57,802	$	946,422	$	1,006,962	$	837


Past Due Aging as of December 31, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
Past Due Aging as of December 31, 2021															30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	1,130	$	470	$	-	$	1,600	$	117,088	$	118,688	$	-	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718
Real estate construction and land		-		-		-		-		22,509		22,509		-		873		1,283		-		2,156		18,576		58,599		79,331		-
1-4 family residential mortgages		501		-		-		501		132,465		132,966		-		1,508		100		495		2,103		16,020		340,025		358,148		-
Commercial mortgages		46		-		-		46		277,063		277,109		-		-		-		-		-		28,675		444,957		473,632		-
Consumer loans		298		66		137		501		57,633		58,134		137		345		196		83		624		118		52,662		53,404		83
Total Loans	$	1,975	$	536	$	137	$	2,648	$	606,758	$	609,406	$	137	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801

NOTE 6:6. Goodwill and Other Intangible Assets

The carrying amount of goodwill was $~~8.9~~8.1 million at March 31, 2022 and December 31, 2021 and $372 thousand at ~~September 30,~~March 31, 2021. The acquisition of Fauquier as of April 1, 2021 ~~and December~~accounted for the increase of $7.8 million from March 31, ~~2020, respectively.~~ ~~The following table presents the changes in goodwill during the nine months ended September 30, 2021. There were~~ 0 ~~changes in the recorded balance of goodwill during the three and nine months ended September 30, 2020.~~ 2021 to March 31, 2022.

Sturman Wealth Advisors

Fauquier

Total

Balance as of January 1, 2021

$
372

$
-

$
372

Acquisition of Fauquier

-

8,526

8,526

Balance at September 30, 2021

$
372

$
8,526

$
8,898

The ~~Corporation~~Company had $8.1 million, $8.5 million and $~~341~~324 thousand of other intangible assets as of ~~September 30,~~March 31, 2022, December 31, 2021 and ~~December~~March 31, ~~2020,~~2021, respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to as Sturman Wealth

Advisors, and (ii) the core deposits acquired from Fauquier in 2021. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets (dollars in thousands):


	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	8,700	$	(845	)	$	-	$	-		$	9,660	$	(1,828	)	$	9,660	$	(1,389	)
Customer relationships intangible		773		(483	)		773		(432	)		773		(516	)		773		(499	)
Total	$	9,473	$	(1,328	)	$	773	$	(432	)	$	10,433	$	(2,344	)	$	10,433	$	(1,888	)

Amortization expense was $~~434~~456 thousand and $1817 thousand for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively and $896~~ ~~thousand and $~~74 ~~thousand for the nine months ended September 30, 2021 and 2020,~~ respectively.

Estimated future amortization expense as of ~~September 30, 2021~~March 31, 2022 is as follows (dollars in thousands):


	Core		Customer		Core		Customer
	Deposit		Relationships		Deposit		Relationships
	Intangible		Intangible		Intangible		Intangible
For the three months ending December 31, 2021	$	406	$	17
For the year ending December 31, 2022		1,517		67
For the nine months ending December 31, 2022					$	1,246	$	50
For the year ending December 31, 2023		1,345		67		1,493		67
For the year ending December 31, 2024		1,172		67		1,301		67
For the year ending December 31, 2025		999		67		1,110		67
For the year ending December 31, 2026						918		6
Thereafter		2,416		5		1,764		-
Total	$	7,855	$	290	$	7,832	$	257

Note 7. Leases

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term. Payments for leases with terms longer than twelve months are included in the determination of the lease liability. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Each of the Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases (dollars in thousands):


	March 31, 2022			March 31, 2021
Lease liability	$	7,295		$	3,392
Right-of-use asset	$	7,744		$	3,327
Weighted average remaining lease term	6.19 years			4.97 years
Weighted average discount rate		1.98	%		2.53	%


	Three Months Ended March 31,
Lease Expense	2022		2021
Operating lease expense	$	445	$	222
Short-term lease expense		52		29
Total lease expense	$	497	$	251
Cash paid for amounts included in lease liabilities	$	398	$	219

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):


Undiscounted Cash Flow	March 31, 2022
Nine months ending December 31, 2022	$	1,223
Twelve months ending December 31, 2023		1,567
Twelve months ending December 31, 2024		1,296
Twelve months ending December 31, 2025		1,091
Twelve months ending December 31, 2026		748
Twelve months ending December 31, 2027		650
Thereafter		1,141
Total undiscounted cash flows	$	7,716
Less: Discount		(421	)
Lease liability	$	7,295

Note 7.8. Net Income Per Share

The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive. The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as ~~noted in the Consolidated Balance Sheets as~~ of ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and September 30, 2020~~ is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).


Three Months Ended	September 30, 2021							September 30, 2020						March 31, 2022							March 31, 2021
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	3,138		5,306,370	$	0.59		$	1,870		2,714,273	$	0.69	$	4,924		5,311,983	$	0.93		$	1,505		2,719,840	$	0.55
Effect of dilutive stock options		-		32,502		-			-		624		-		-		31,581		(0.01	)		-		7,608		-
Diluted net income per share	$	3,138		5,338,872	$	0.59		$	1,870		2,714,897	$	0.69	$	4,924		5,343,564	$	0.92		$	1,505		2,727,448	$	0.55

Nine Months Ended	September 30, 2021							September 30, 2020
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	4,790		4,453,303	$	1.08		$	5,362		2,705,730	$	1.98
Effect of dilutive stock options		-		25,476		(0.01	)		-		708		-
Diluted net income per share	$	4,790	$	4,478,779	$	1.07		$	5,362	$	2,706,438	$	1.98

For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, there were ~~91,501~~101,901 option shares considered anti-dilutive and excluded from this calculation. For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, there were ~~145,404~~78,301 option shares considered anti-dilutive and excluded from this calculation.

Note 8.9. Stock Incentive Plans

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive ~~Plan (“2014 Plan”).~~Plan. The 2014 Plan ~~makes~~made available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. NaN new grants ~~will~~can be issued under the 2005 Stock Incentive Plan ~~(“2005 Plan”)~~ as this plan has expired.

For the 2014 Plan and the 2005 Plan, ~~(the “Plans”),~~ the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of ~~September 30, 2021.~~March 31, 2022. Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends. Although the 2005 Plan has expired and 0 new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.


	2005 Plan			2014 Plan			2014 Plan			2005 Plan
Aggregate shares issuable		253,575			275,625			275,625			253,575
Options issued, net of forfeited and expired options		(59,870	)		(164,106	)		(170,106	)		(59,870	)
Unrestricted stock issued		0			(11,535	)		(11,635	)		—
Restricted stock grants issued		0			(46,917	)
Restricted stock grants issued, net of forfeited								(65,853	)		—
Cancelled due to Plan expiration		(193,705	)		0			0			(193,705	)
Remaining available for grant		0			53,067			28,031			-

Stock grants issued and outstanding:
Total vested and unvested shares		0			58,452			77,488			—
Fully vested shares		0			22,541			27,509			—

Option grants issued and outstanding:
Total vested and unvested shares		1,379			161,901			167,901			1,379
Fully vested shares		1,379			55,293			62,894			1,379

Exercise price range	$13.69			$23.75 to $42.62			$23.75 to $42.62			$13.69

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

Stock Options

Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):


	September 30, 2021								March 31, 2022
	Number of Options			Weighted Average Exercise Price			Aggregate Intrinsic Value		Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2021		146,783		$	33.51		$	-
Outstanding at January 1, 2022										169,280	$	33.89	$	962
Issued		17,600			36.14					0		—
Exercised		(1,103	)		(27.39	)				—		—
Expired		—			—					—		—
Outstanding at September 30, 2021		163,280		$	33.84		$	790
Outstanding at March 31, 2022										169,280	$	33.89	$	680

Options exercisable at September 30, 2021		56,672		$	37.21		$	183
Options exercisable at March 31, 2022										64,273	$	36.30	$	203

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recognized $9641 thousand and $8834 thousand, respectively, in compensation expense for stock options. As of ~~September 30, 2021,~~March 31, 2022, there was $~~395~~356 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through ~~2025~~2026. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were ~~17,600~~0 stock option grants ~~were~~ issued during the three months ended ~~September 30, 2021, and~~ ~~40,000~~ ~~stock option grants were issued during~~March 31, 2022 or the three months ended ~~September 30, 2020.~~ March 31, 2021.~~17,600~~ ~~stock option grants were issued in the nine months ended September 30, 2021 and~~ ~~66,000~~ ~~stock options grants were issued during the nine months ended September 30, 2020.~~

~~The fair value of each option granted in the nine months ended September 30, 2021 and 2020 was estimated based on the assumptions noted in the following table:~~

For the nine months ended

September 30, 2021

September 30, 2020
Expected volatility1

25.16%

22.97%
Expected dividends2

3.32%

4.75%
Expected term (in years)3

6.25

6.50
Risk-free rate4

1.19%

0.68%

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

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

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

~~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 ~~September 30, 2021~~March 31, 2022 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.


	Options Outstanding					Options Exercisable				Options Outstanding					Options Exercisable
Exercise Price	Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price		Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$13.69 to $20.00		1,379	1.4 Years	$	13.69		1,379	$	13.69		1,379	0.9 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		66,000	8.8 Years		24.64		13,200		24.64		66,000	8.3 Years		24.64		18,400		25.02
$30.01 to $40.00		38,420	8.6 Years		37.23		7,608		38.73		44,420	8.3 Years		36.97		10,008		38.38
$40.01 to $42.62		57,481	6.6 Years		42.62		34,485		42.62		57,481	6.1 Years		42.62		34,486		42.62
Total		163,280	7.9 Years	$	33.84		56,672	$	37.21		169,280	7.5 Years	$	33.89		64,273	$	36.30

Stock Grants

Restricted stock grants – During the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, ~~1,416~~5,680 and ~~20,649~~12,856 restricted shares, respectively, were granted to employees and non-employee directors, vesting over a ~~four- or~~ ~~five-year~~four-year period. During the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, 05,025 and ~~22,268~~8,478 restricted shares, respectively, were granted. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, $5793 thousand and $~~283~~61 thousand, respectively, was expensed as a result of restricted stock grants. ~~For the three and nine months ended September 30, 2020, $~~42 ~~thousand and $~~96 ~~thousand, respectively, in expense was incurred.~~ As of ~~September 30, 2021,~~March 31, 2022, there was $~~861~~1.4 ~~thousand~~million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2026.

Changes in the restricted stock grants outstanding during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 are summarized below (dollars in thousands except per share data):


	September 30, 2021									March 31, 2022
	Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value			Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value
Nonvested as of January 1, 2021		25,268		$	26.60		$	913
Nonvested as of January 1, 2022											37,011		$	28.98		$	1,277
Issued		20,649			29.22		746				18,536			35.62		639
Vested		(10,006	)		(27.01	)		(362	)		(4,968	)		(27.91	)		(171	)
Nonvested at September 30, 2021		35,911		$	28.00		$	1,297
Forfeited											(600	)		(33.74	)		(21	)
Nonvested at March 31, 2022											49,979		$	31.49		$	1,724

Note 9.10. Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or 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 the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant

decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple

valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

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


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

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

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

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

Securities available for sale

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

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2.

The following tables present the balances measured at fair value on a recurring basis as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (dollars in thousands):


			Fair Value Measurements at September 30, 2021 Using:								Fair Value Measurements at March 31, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government treasuries									$	39,392	$	-	$	39,392	$	-
U.S. Government agencies	$	32,538	$	-	$	32,538	$	-		32,264		-		32,264		-
Mortgage-backed securities/CMOs		145,998		-		145,998		-		176,960		-		176,960		-
Corporate bonds										3,703		-		3,703		-
Municipal bonds		98,510		-		98,510		-		89,042		-		89,042		-
Total securities available for sale	$	277,046	$	-	$	277,046	$	-	$	341,361	$	-	$	341,361	$	-

Liabilities:
Interest rate swaps	$	241			$	241
Total liabilities at fair value	$	241	$	-	$	241	$	-
Interest rate swap asset										107		-		107		-
Total assets at fair value									$	341,468	$	-	$	341,468	$	-

Fair Value Measurements at December 31, 2020 Using:

Quoted Prices
in Active
Markets for
Identical Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

U.S. Government agencies

$
25,305

$
-

$
25,305

$
-

Mortgage-backed securities/CMOs

78,100

-

78,100

-

Municipal bonds

70,681

-

70,681

-

Total securities available for sale

$
174,086

$
-

$
174,086

$
-


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

Liabilities:
Interest rate swap liabilities	$	197	$	-	$	197	$	-
Total liabilities at fair value	$	197	$	-	$	197	$	-

Certain 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 assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned ~~(“OREO”)~~ 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.~~ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of ~~September 30,~~March 31, 2022 and December 31, 2021, the Company had 1 OREO property acquired through the Merger which is carried at a fair value of $611 thousand. ~~As of December 31, 2020, the Company had~~ 0 ~~OREO property.~~

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price

of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

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

The value of business equipment is based upon an outside appraisal if deemed significant, 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~~ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The

Company had impaired loans, excluding PCI loans, of $~~1.6~~1.5 million as of ~~September 30, 2021~~both March 31, 2022 and $~~1.3~~ ~~million as of~~ December 31, ~~2020.~~2021. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted ~~above.~~above.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of ~~September 30, 2021.~~March 31, 2022. There were 0 such assets to report as of December 31, ~~2020.~~2021.


			Fair Value Measurements at September 30, 2021 Using:								Fair Value Measurements at March 31, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
Other Real Estate Owned	$	611	$	—	$	—	$	611	$	611	$	—	$	—	$	611

For the assets measured at fair value on a nonrecurring basis as of ~~September 30, 2021,~~March 31, 2022, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands):

Description

Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

Assets:

Other Real Estate Owned

611

Market comparables

Discount applied to bonafide offer *

6.0

611

Market comparables

Discount applied to bonafide offer

6.0

* A discount percentage is applied based on age of independent appraisals, current market conditions, and cost to sell.

* A discount percentage is applied based on estimated cost to sell.

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

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

The carrying values and estimated fair values of the Company's financial instruments as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are as follows (dollars in thousands):


			Fair Value Measurements at September 30, 2021 Using:										Fair Value Measurements at March 31, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	425,530	$	425,530	$	-	$	-	$	425,530	$	480,608	$	480,608	$	-	$	-	$	480,608
Available for sale securities		277,046		-		277,046		-		277,046		341,361		-		341,361		-		341,361
Loans, net		1,106,827		-		-		1,121,177		1,121,177		1,001,128		-		-		993,671		993,671
Bank owned life insurance		31,033		-		31,033		-		31,033		36,987		-		36,987		-		36,987
Other real estate, net		611		-		-		611		611
Other real estate owned, net												611		-		-		611		611
Accrued interest receivable		3,690		-		1,017		2,673		3,690		3,471		-		1,162		2,309		3,471
Interest rate swap asset												107		-		107		-		107

Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts	$	1,572,126	$	-	$	1,572,126	$	-	$	1,572,126
Certificates of deposit and other time deposits		165,057		-		165,357		-		165,357
Junior subordinated debt		3,356		-		-		3,356		3,356
Demand deposits and interest-bearing transaction and money market accounts											$	1,618,946	$	-	$	1,618,946	$	-	$	1,618,946
Certificates of deposit												155,402		-		155,093		-		155,093
Junior subordinated debt, net												3,379		-		3,804		-		3,804
Accrued interest payable		173		-		173		-		173		136		-		136		-		136
Interest rate swaps		241				241


			Fair Value Measurements at December 31, 2020 Using:										Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	34,695	$	34,695	$	-	$	-	$	34,695	$	508,840	$	508,840	$	-	$	-	$	508,840
Available for sale securities		174,086		-		174,086		-		174,086		303,817		-		303,817		-		303,817
Loans, net		603,951		-		-		602,859		602,859		1,055,227		-		-		1,059,650		1,059,650
Bank owned life insurance		16,849		-		16,849		-		16,849		31,234		-		31,234		-		31,234
Other real estate owned, net												611		-		-		611		611
Accrued interest receivable		2,904		-		729		2,175		2,904		3,778		-		1,252		2,526		3,778

Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts	$	631,662	$	-	$	631,662	$	-	$	631,662
Certificates of deposit and other time deposits		99,102		-		99,580		-		99,580
Borrowings		30,000		-		30,000		-		30,000
Demand deposits and interest-bearing transaction and money market accounts											$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125
Certificates of deposit												162,045		-		161,850		-		161,850
Junior subordinated debt												3,367		-		3,367		-		3,367
Accrued interest payable		159		-		159		-		159		174		-		174		-		174
Interest rate swap liabilities												197		-		197		-		197

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate 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 ~~10.~~11. Other Comprehensive Income (Loss)

A component of the Company’s other comprehensive income (loss), in addition to net income from operations, is the recognition of the unrealized gains and losses on ~~available for sale~~AFS securities, net of income taxes. Reclassifications of realized gains and losses on ~~available for sale~~AFS securities are reported in the income statement as “Gains on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense. There were 0 sales of securities in the first three ~~quarters of 2021. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020 (dollars in thousands).~~2021.

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Available for sale securities

Realized gains on sales of securities

$
—

$
91

$
—

$
734

Tax effect

---

(18
)

---

(154
)
Realized gains, net of tax

$
—

$
73

$
—

$
580

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $($~~122~~4.5 ~~thousand~~) million and ($~~389~~464) thousand, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively (dollars in thousands).

September 30, 2021

December 31, 2020

Accumulated other comprehensive income (loss) on securities

$
(376
)

$
1,460

Accumulated other comprehensive loss on interest rate swap

(84
)

---

Total accumulated other comprehensive income (loss)

$
(460
)

$
1,460


	March 31, 2022			December 31, 2021
Accumulated other comprehensive loss on securities	$	(21,812	)	$	(2,164	)
Accumulated other comprehensive income (loss) on interest rate swap		171			(47	)
Total accumulated other comprehensive loss	$	(21,641	)	$	(2,211	)

Note 12.Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Customer accommodation loan swaps are derivative contracts that are not designated in a qualifying hedging relationship.

Cash flow hedges. The Company designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company’s junior subordinated debt. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Company’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of March 31, 2022 and December 31, 2021, the Company had designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings through 2036.

Unrealized gains or losses recorded in other comprehensive income (loss) related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Cash collateral held at other banks for swaps was $570 thousand as of March 31, 2022 and December 31, 2021. Collateral is dependent on the market valuation of the underlying hedges.

The follow table summarizes the Company’s derivative instruments as of March 31, 2022 and December 31, 2021 (dollars in thousands):


	March 31, 2022
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(621	)	Junior subordinated debt	6/15/2031

	December 31, 2021
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(633	)	Junior subordinated debt	6/15/2031
Interest rate swap - fair value	$	3,940	$	(8	)	Other Liabilities	2/12/2022

Note ~~11.~~13. Segment Reporting

The Company has 4 reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

The 4 reportable segments are:

•

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

•

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.

•

VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management and, prior to 2020, incentive income that was based on the investment returns generated on performance-based Assets Under Management. Investment management services currently are offered through in-house and third-party managers. ~~In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More~~

information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2020.

•

Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business. For both the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. ~~For both the nine months ended September 30, 2021 and 2020, management fees totaling $~~75 ~~thousand were charged by the Bank and eliminated in consolidated totals.~~

Segment information for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust &

Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.


Three months ended September 30, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	13,504	$	-	$	-		$	-		$	13,504
Provision for (recovery of) loan losses		267		-		-			-			267
Noninterest income		2,890		209		203			176			3,478
Noninterest expense		12,183		163		315			163			12,824
Income (loss) before income taxes		3,944		46		(112	)		13			3,891
Provision for (benefit from) income taxes		763		10		(23	)		3			753
Net income (loss)	$	3,181	$	36	$	(89	)	$	10		$	3,138


Nine months ended September 30, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Three months ended March 31, 2022													Bank		Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital		Consolidated
Net interest income	$	32,629	$	-	$	-		$	-		$	32,629	$	11,425	$	-	$	-	$	-	$	11,425
Provision for loan losses		477		-		-			-			477		148		-		-		-		148
Noninterest income		5,760		602		607			468			7,437		1,534		216		2,831		206		4,787
Noninterest expense		31,854		490		736			518			33,598		8,821		166		922		186		10,095
Income (loss) before income taxes		6,058		112		(129	)		(50	)		5,991
Income before income taxes														3,990		50		1,909		20		5,969
Provision for income taxes		1,214		24		(27	)		(10	)		1,201		630		10		401		4		1,045
Net income (loss)	$	4,844	$	88	$	(102	)	$	(40	)	$	4,790
Net income													$	3,360	$	40	$	1,508	$	16	$	4,924

Three months ended September 30, 2020

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
6,047

$
-

$
-

$
-

$
6,047

Provision for loan losses

224

-

-

-

224

Noninterest income

970

176

192

87

1,425

Noninterest expense

4,373

155

196

211

4,935

Income (loss) before income taxes

2,420

21

(4
)

(124
)

2,313

Provision for (benefit from) income
taxes

466

4

(1
)

(26
)

443

Net income (loss)

$
1,954

$
17

$
(3
)

$
(98
)

$
1,870

Nine months ended September 30, 2020

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
17,177

$
-

$
-

$
-

$
17,177

Provision for loan losses

1,367

-

-

-

1,367

Noninterest income

3,316

516

625

263

4,720

Noninterest expense

12,147

483

668

584

13,882

Income (loss) before income taxes

6,979

33

(43
)

(321
)

6,648

Provision for income taxes

1,355

7

(9
)

(67
)

1,286

Net income (loss)

$
5,624

$
26

$
(34
)

$
(254
)

$
5,362

~~Note 12. Leases~~

~~The following tables present information about the Company’s leases (dollars in thousands):~~

September 30, 2021

September 30, 2020

Lease liability

$
7,463

$
3,783

Right-of-use asset

$
7,970

$
3,725

Weighted average remaining lease term

6.19 years

5.35 years

Weighted average discount rate

1.98
%

2.55
%

Three Months Ended September 30,

Nine Months Ended September 30,

Lease Expense

2021

2020

2021

2020

Operating lease expense

$
420

$
228

$
1,069

$
636

Short-term lease expense

127

28

188

85

Total lease expense

$
547

$
256

$
1,257

$
721

Cash paid for amounts included in
lease liabilities

$
390

$
199

$
998

$
597

~~A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):~~

Undiscounted Cash Flow

September 30, 2021

Three months ending December 31, 2021

$
391

Twelve months ending December 31, 2022

1,534

Twelve months ending December 31, 2023

1,462

Twelve months ending December 31, 2024

1,175

Twelve months ending December 31, 2025

968

Twelve months ending December 31, 2026

622

Thereafter

1,771

Total undiscounted cash flows

$
7,923

Less: Discount

(460
)
Lease liability

$
7,463


Three months ended March 31, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	5,974	$	-	$	-		$	-		$	5,974
Provision for loan losses		351		-		-			-			351
Noninterest income		514		191		201			133			1,039
Noninterest expense		4,255		160		206			160			4,781
Income (loss) before income taxes		1,882		31		(5	)		(27	)		1,881
Provision for (benefit from) income taxes		376		7		(1	)		(6	)		376
Net income (loss)	$	1,506	$	24	$	(4	)	$	(21	)	$	1,505

3534

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation ~~(the “Company”)~~ included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021. Operating results for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results for the year ending December 31, ~~2021~~2022 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s ~~allowance for loan losses (“ALLL”);~~ALLL; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management; expected revenue synergies and cost savings from the recently completed merger with Fauquier ~~Bankshares, Inc. (“Fauquier”)~~ may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the ~~merger~~Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and other reports filed from time to time by the Company with the Securities and Exchange ~~Commission (“SEC”).~~Commission. These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.

MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK

On April 1, 2021, the Company completed its ~~merger~~Merger with Fauquier. The ~~merger~~Merger of Fauquier with and into the Company ~~(the “Merger”)~~ was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of ~~Merger (together, the “Merger Agreement”).~~Merger. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank, ~~(the “Bank”),~~ the Company’s wholly-owned bank subsidiary.

Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.

3635

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, ~~(ROAA),~~ 2) return on average equity, ~~(ROAE),~~ and 3) net income per ~~share (EPS).~~share.

•

~~Return on average assets (“ROAA”)~~ROAA for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~0.65%~~1.03% compared to ~~0.89%~~0.68% realized in the same period in the prior ~~year. ROAA excluding~~year, as the ~~impact~~increase in net income outweighed the increase in assets as a result of ~~merger and merger related expenses (a non-GAAP financial measure) would have been 0.96%~~the Merger.

•

ROAE for the three months ended ~~September 30, 2021 and 1.08% for the three months ended September 30, 2020. ROAA for the nine months ended September 30, 2021~~March 31, 2022 was ~~0.41%~~12.53% compared to 0.92% realized in the same period in the prior year. ROAA excluding the impact of merger and merger related expenses (a non-GAAP financial measure) would have been 0.95% for the nine months ended September 30, 2021, 2 basis points ("bps") less than the ROAA for the prior comparable period of 0.97% excluding the impact of merger and merger related expenses (a non-GAAP financial measure).



~~Return on average equity (“ROAE”) for the three months ended September 30, 2021 was 7.70% compared to 9.20%~~7.40% realized in same period in the prior ~~year. ROAE excluding~~year, as the ~~impact~~increase in net income was greater than the increase in equity as a result of ~~merger and merger related expenses (a non-GAAP financial measure) would have been 11.30%~~the Merger.

•

Net income per diluted share was $0.92 for the three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~11.12%~~$0.55 for the same period in the prior year. ~~ROAE for the nine months ended September 30, 2021 was 4.80% compared to 9.05% realized~~The increase in ~~same period in the prior year. ROAE excluding the impact~~net income of ~~merger and merger related expenses (a non-GAAP financial measure) would have been 11.01% for the nine months ended September 30, 2021, exceeding the ROAE~~$3.4 million, from ~~the comparable period in the prior year of 9.60% excluding the impact of merger and merger related expenses (a non-GAAP financial measure).~~



~~The Company incurred $1.9~~$1.5 million in merger and merger related expenses during the three months ended September 30, 2021, compared to $549 thousand during the nine months ended September 30, 2020, related to the combination with Fauquier, which closed on April 1, 2021. The majority of such merger and merger related expenses during the current period related to a change-of-control payment, severance and stay-put bonuses, while the prior year expense related primarily to legal expenses. The post-tax expense of $1.4 million represents $0.27 per diluted share for the three months ended ~~September 30, 2021. The Company incurred $8.1~~March 31, 2021 to $4.9 million ~~in merger and merger related expenses during the nine months ended September 30, 2021, compared to $549 thousand during the nine months ended September 30, 2020.~~



~~Net income per diluted share was $0.59~~ for the three months ended ~~September 30, 2021, compared~~March 31, 2022, was proportionately larger than the increase in number of shares outstanding period over period due to ~~$0.69 for~~ the same period in the prior year. Net income per diluted share, excluding merger and merger related expenses (a non-GAAP financial measure), would have been $0.86 in the current quarter, exceeding the net income per diluted share of the comparable prior period, excluding merger and merger related expenses, of $0.83. Net income per diluted share was $1.07 for the nine months ended September 30, 2021, compared to $1.98 for the same period in the prior year. Net income per diluted share, excluding merger and merger related expenses (a non-GAAP financial measure), would have been $2.45 for the nine months ended September 30, 2021, exceeding the net income per diluted share, excluding merger and merger related expenses, of the comparable prior period of $2.10.Merger.

We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management’s Discussion and Analysis for more discussion on these financial performance measures.

IMPACT OF COVID-19

The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. While more than 75% of adults in the U.S. and in Virginia are fully vaccinated against COVID-19, the rate of vaccinations appears to have peaked, and the Delta variant has shown that there remains a threat of a resurgence of cases. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

Management ~~continues to~~will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.

~~Financial Condition and Results of Operations~~

Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure.

During the year ended December 31, 2020, we provided an additional $1.6 million for loan losses primarily by downgrading the qualitative economic factors within the ALLL model in light of the effects of COVID-19 on the economy. At the end of the second quarter of 2021, credit deterioration since the onset of the COVID-19 pandemic had not been experienced to the extent previously anticipated, and therefore, during the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses. The Company continues to maintain reserves for loan losses at September 30, 2021 related to the pandemic and believe that our allowance for loan losses will be adequate to absorb probable losses that are inherent in our loan portfolio. If loan losses ultimately are not realized to the extent of the reserves provided for during the pandemic, our allowance for loan losses may be reduced in future periods through further reversals of provision for loan losses, which could benefit our results of operations for any such future period. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus that threaten to disrupt economic activity, additional provision for loan losses may be required in future periods.

Interest income could be reduced due to the economic impact of COVID-19. In accordance with guidance from regulators, the Company is working with borrowers who were adversely affected by COVID-19 to defer principal only, or principal and interest. Loan deferrals as of ~~September 30, 2021 amount to $1.2 million and consist of only three loans. 99% of this balance is 100% government-guaranteed for which the deferrals~~March 31, 2022 were approved by the United States Department of Agriculture; and $28 thousand, or less than 1%, are student loans, which are private student loans not subject to potential federal forgiveness. In accordance with interagency guidance issued in March 2020 and the CARES Act, these short-term deferrals are not considered troubled debt restructurings (“TDRs”).

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll. In total, the Company, including Virginia National Bank and The Fauquier Bank, funded $207.5 million in PPP loans, with average origination fees of 3.9%, assisting many nonprofits and local businesses through this program. As of September 30, 2021, 82.3% of the total dollars of PPP loans had been forgiven by the SBA, with $36.7 million outstanding. Loans funded through the PPP are fully guaranteed by the U.S. government. The Company believes that it performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination is made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.negligible.

~~Capital and Liquidity~~

As of ~~September 30, 2021,~~March 31, 2022, capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity. Management has also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans to validate how the Company can react effectively to the economic downturn caused by this pandemic.

~~Goodwill~~

The Company’s goodwill was recognized in connection with the acquisition of Fauquier in 2021 and Sturman Wealth Management in 2016. The Company reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exists. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events and circumstance, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. As of September 30, 2021, the goodwill on the balance sheet was not deemed to be impaired. However,

management may determine that goodwill is required to be evaluated for impairment in the future due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app. The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a temporary schedule whereby most staff members ~~would be working~~worked remotely, ~~at any given time,~~ allowing the remaining essential staff to create more distance between each other within the offices. We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking. The client service center was also ~~temporarily~~ moved on a short-term basis to a larger

location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. ~~Beginning mid-July~~The Bank remains very focused on the safety and well-being of ~~2020, the Company took steps~~its employees and customers during COVID-19 and is committed to ~~resume normal branch activities with specific guidelines in place~~safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to ~~continue protecting our customers and employees.~~normal.

The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19. Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s ~~2020~~2021 Form 10-K. ~~The only~~There have been no significant changes in the Company’s application of critical accounting policies since December 31, ~~2020 relates to loans acquired in a business combination, as follows.~~

~~Loans acquired in a business combination~~: Acquired Loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

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

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

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the Acquired Loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.2021.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of ~~September 30, 2021~~March 31, 2022 were $1.9 billion. This is a ~~$1.1 billion,~~$37 thousand, or ~~125.5%~~1.9%, ~~increase~~decrease from ~~the $848.4 million~~ total assets reported at December 31, ~~2020~~2021 and a ~~$1.1~~$1.0 billion, or ~~133.0%~~110.7%, increase from the ~~$821.0~~$918.4 million reported at ~~September 30, 2020. These increases were~~March 31, 2021. The year-over-year increase was substantially due to the acquisition of Fauquier, which became effective April 1, 2021.

Interest-bearing deposits in other banks

The Company had ~~$254.2~~$311.5 million of interest-bearing deposits in other banks as of ~~September 30, 2021,~~March 31, 2022, compared to ~~zero~~$336.0 million as of December 31, ~~2020~~2021 and ~~September 30, 2020,~~zero as of March 31, 2021, as the current and year-end balance included accounts held by Fauquier, primarily at the Federal Reserve Bank of Richmond.

Federal funds sold

The Company had overnight federal funds sold of ~~$152.4~~$152.5 million as of ~~September 30,~~March 31, 2022 and December 31, 2021 ~~compared to $26.6~~and $77.1 million as of ~~December~~March 31, ~~2020 and $273 thousand as of September 30, 2020.~~2021. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Excess Balance Account ~~(“EBA”)~~ of the Federal Reserve Bank of ~~Richmond (“FRB”).~~Richmond. The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The

EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

Securities

The Company’s investment securities portfolio as of ~~September 30, 2021~~March 31, 2022 totaled ~~$279.7~~$346.5 million, an increase of ~~$102.6~~$37.7 million compared with the ~~$177.1~~$308.8 million reported at December 31, ~~2020~~2021 and an increase of ~~$135.5~~$170.8 million from the ~~$144.7~~$175.7 million reported at ~~September 30, 2020.~~March 31, 2021. The ~~increases are primarily~~increase from year-end is the result of deploying excess funds into higher yielding assets and the increase from the same period in the prior year is due to the inclusion of the investment securities portfolio of Fauquier upon effective date of the Merger as of April 1, 2021. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the investment securities holdings represented ~~14.6%~~17.9% and ~~20.9%~~15.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling ~~$2.6~~$5.1 million as of ~~September 30, 2021,~~March 31, 2022, compared to ~~$3.0~~$5.0 million as of December 31, ~~2020~~2021 and ~~$3.4~~$2.7 million as of ~~September 30, 2020.~~March 31, 2021. These securities represent stock in the FRB, the ~~Federal Home Loan Bank of Atlanta (“FHLB”),~~FHLB, CBB Financial Corporation, the holding company for Community Bankers Bank, and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the ~~Board of Governors of the Federal~~

~~Reserve System (“~~Federal ~~Reserve”)~~Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At ~~September 30, 2021,~~March 31, 2022, the unrestricted securities portfolio totaled ~~$277.0~~$341.4 million. The following table summarizes the Company's ~~available for sale~~AFS securities by type as of ~~September 30, 2021,~~March 31, 2022, December 31, ~~2020,~~2021, and ~~September 30, 2020~~March 31, 2021 (dollars in thousands):


	September 30, 2021					December 31, 2020					September 30, 2020					March 31, 2022					December 31, 2021					March 31, 2021
			Percent					Percent					Percent					Percent					Percent					Percent
	Balance		of Total			Balance		of Total			Balance		of Total			Balance		of Total			Balance		of Total			Balance		of Total
U.S. Government treasuries																$	39,392		11.5	%	$	—		—		$	—		—
U.S. Government agencies	$	32,538		11.7	%	$	25,305		14.5	%	$	19,840		14.1	%		32,264		9.5	%		31,581		10.4	%		32,561		18.8	%
Mortgage-backed securities/CMOs		145,998		52.7	%		78,100		44.9	%		64,158		45.4	%		176,960		51.8	%		170,964		56.3	%		72,328		41.8	%
Corporate bonds																	3,703		1.1	%		—		—			—		—
Municipal bonds		98,510		35.6	%		70,681		40.6	%		57,247		40.5	%		89,042		26.1	%		101,272		33.3	%		68,199		39.4	%
Total available for sale securities	$	277,046		100.0	%	$	174,086		100.0	%	$	141,245		100.0	%	$	341,361		100.0	%	$	303,817		100.0	%	$	173,088		100.0	%

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset 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 borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for the loans shown below includes the cities of Charlottesville, Winchester, Manassas and Richmond (and the greater Richmond area), the counties of Albemarle, Fauquier, Prince William and Frederick, and areas in the Commonwealth of Virginia that are within a ~~75-mile~~100-mile radius of any office of the Company.

As of ~~September 30, 2021,~~March 31, 2022, total loans were ~~$1.1~~$1.0 billion, compared to ~~$609.4 million~~$1.1 billion as of December 31, ~~2020~~2021 and ~~$636.9~~$621.1 million at ~~September 30, 2020.~~March 31, 2021. Loans as a percentage of total assets at ~~September 30, 2021~~March 31, 2022 were ~~58.2%~~52.0%, compared to ~~77.6%~~67.6% as of ~~September 30, 2020.~~March 31, 2021. Loans as a percentage of deposits at ~~September 30, 2021~~March 31, 2022 were ~~64.0%~~56.8%, compared to ~~91.7%~~77.2% as of ~~September 30, 2020.~~March 31, 2021.

The following table summarizes the Company's loan portfolio by type of loan as of ~~September 30, 2021,~~March 31, 2022, December 31, ~~2020,~~2021, and ~~September 30, 2020~~March 31, 2021 (dollars in thousands):


Categories changed	September 30, 2021					December 31, 2020					September 30, 2020
	Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			March 31, 2022					December 31, 2021					March 31, 2021
																Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total
Commercial loans																$	88,858		8.8	%	$	96,696		9.1	%	$	130,388		21.0	%
Real estate mortgage:
Construction and land																	64,937		6.5	%		79,331		7.5	%		26,254		4.2	%
1-4 family residential mortgages																	343,382		34.1	%		358,148		33.8	%		134,826		21.7	%
Commercial	$	119,959		10.8	%	$	118,688		19.5	%	$	156,477		24.6	%		459,103		45.6	%		473,632		44.6	%		274,610		44.2	%
Real estate construction and land		92,082		8.3	%		22,509		3.7	%		23,753		3.7	%
1-4 family residential mortgages		372,474		33.5	%		132,966		21.8	%		131,078		20.6	%
Commercial mortgages		464,866		41.8	%		277,109		45.5	%		263,331		41.3	%
Total real estate mortgage																	867,422		86.2	%		911,111		85.9	%		435,690		70.1	%
Consumer		63,069		5.6	%		58,134		9.5	%		62,296		9.8	%		50,682		5.0	%		53,404		5.0	%		54,990		8.9	%
Total loans	$	1,112,450		100.0	%	$	609,406		100.0	%	$	636,935		100.0	%	$	1,006,962		100.0	%	$	1,061,211		100.0	%	$	621,068		100.0	%

The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decease in loan balances of $54.2 million, or 5.1%, from December 31, 2021 to March 31, 2022. Loan balances increased ~~$503.0~~$385.9 million, or ~~82.5%, since December 31, 2020 and increased $475.5 million, or 74.7%~~62.1%, from ~~September 30, 2020.~~March 31, 2021. The ~~increases are~~increase year-over-year is primarily due to the inclusion of Fauquier’s loans of $602.6 million, net of the fair value mark, as of the effective date of the Merger of April 1, 2021, for which the carrying amount as of ~~September 30, 2021~~March 31, 2022 amounts to ~~$485.1~~$391.9 million. ~~The increase from the same period in the prior year was offset by the decline in PPP loans of $50.3 million due to loan forgiveness.~~ As of ~~September 30, 2021, 81% of the total dollars~~March 31, 2022, less than $10.0 million of PPP loans ~~had been forgiven by~~remain outstanding on the ~~SBA, with $36.7 million outstanding.~~

Bank's balance sheet.

Loan quality

Non-accrual loans, comprised of only two loans to one borrower, totaled ~~$777~~$518 thousand at ~~September 30, 2021,~~March 31, 2022, compared to ~~the $8~~balances of $495 thousand and $9$5 thousand reported at December 31, ~~2020~~2021 and ~~September 30, 2020,~~March 31, 2021, respectively. Acquired Loans which otherwise would be in non-accrual status are not included in ~~this figure,~~the March 31, 2022 and December 31, 2021 balances, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling ~~$678~~$837 thousand, ~~$137~~$801 thousand and ~~$61~~$399 thousand, as of ~~September 30, 2021,~~March 31, 2022, December 31, ~~2020~~2021 and ~~September 30, 2020,~~March 31, 2021, respectively, that were 90 or more days past due, with all such loans still accruing interest as the Company deemed them to be collectible. The balance as of ~~September 30, 2021~~March 31, 2022 includes a government-guaranteed loan in the amount of $548 thousand. The portfolio only includes ~~three~~four non-insured student loans that are 90 days or more past due and still accruing interest, amounting to ~~$31~~$79 thousand. Two loans acquired from TFB which are greater than 90 days past due and still accruing interest, totaling $366 thousand, are not included in this figure, as PCI loans are tracked and reported upon separately.

At ~~September 30,~~March 31, 2022 and December 31, 2021, the Company had loans classified as impaired loans in the amount of ~~$1.6~~$1.5 million, compared to ~~$1.3~~$1.2 million at ~~December~~March 31, ~~2020 and $2.2 million at September 30, 2020.~~2021. Based on regulatory guidance on student lending, the Company has classified 5756 of its Purchased Student Loans as TDRs for a total of ~~$952~~$846 thousand as of ~~September 30, 2021.~~March 31, 2022. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

Allowance for loan losses

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

rating classifications. In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

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

Changes in the value of underlying collateral;

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

Changes in volume of delinquent loans;

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

Changes in lending policies and procedures, including underwriting standards;

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

Changes in the level of policy exceptions.

The Company utilizes a loss migration model, which uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio. As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy. No additional downgrades of such factors were taken during the quarter ended September 30, 2020, December 31, 2020 or March 31, 2021. As of June 30, 2021, credit deterioration since the onset of the pandemic had so far not been experienced to the extent previously anticipated and therefore, during the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses. No further changes were made to the economic qualitative factors in the quarter ended September 30, 2021. If economic conditions improve or worsen, the Company could experience changes in the required ALLL. It is possible that asset quality metrics could decline in the future if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.

The relationship of the ALLL to total loans and nonaccrual loans appears below (dollars in thousands):

September 30,
2021

December 31,
2020

September 30,
2020

Loans held for investment at period-end

$
1,112,450

$
609,406

$
636,935

Allowance for loan losses

$
5,623

$
5,455

$
5,334

Allowance as a percent of period-end loans

0.51
%

0.90
%

0.84
%


	March 31, 2022			December 31, 2021			March 31, 2021
Total loans	$	1,006,962		$	1,061,211		$	621,068
Nonaccrual loans	$	518		$	495		$	5
Allowance for loan losses	$	5,834		$	5,984		$	5,615
Nonaccrual loans to total loans		0.05	%		0.05	%		0.00	%
ALLL to total loans		0.58	%		0.56	%		0.90	%
ALLL to nonaccrual loans		1126.25	%		1208.89	%		112300.00	%

The ALLL as a percentage of loans was ~~0.51%~~0.58% as of ~~September 30, 2021, 0.90%~~March 31, 2022, 0.56% as of December 31, ~~2020,~~2021, and ~~0.84%~~0.90% as of ~~September 30, 2020.~~March 31, 2021. The percentage decrease as compared to ~~year-end and~~ the same period in the prior year ~~relate~~relates to the elimination of Fauquier’s ALLL as the Acquired Loans were recorded at fair value. The ALLL as a percentage of loans, excluding the impact of Acquired Loans and the fair value mark (a non-GAAP financial measure), would have been ~~0.90%~~0.95% as of ~~September 30, 2021.~~March 31, 2022. Refer to the Reconciliation of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.

Provisions for loan losses totaling ~~$477~~$148 thousand and ~~$1.4 million~~$351 thousand were recorded in the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. The following is a summary of the changes in the ALLL for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (dollars in thousands):


	2021			2020			2022			2021
Allowance for loan losses, January 1	$	5,455		$	4,209		$	5,984		$	5,455
Charge-offs		(605	)		(643	)		(473	)		(241	)
Recoveries		296			401			175			50
Provision for loan losses		477			1,367			148			351
Allowance for loan losses, September 30	$	5,623		$	5,334
Allowance for loan losses, March 31							$	5,834		$	5,615

For additional insight into management’s approach and methodology in estimating the ALLL, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 5 of the Notes to Consolidated Financial Statements. In addition, Note 5 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of ~~September 30, 2021~~March 31, 2022 and acknowledges that the ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of ~~September 30, 2021~~March 31, 2022 totaled ~~$25.2~~$24.7 million compared to ~~$5.2~~$25.1 million as of December 31, ~~2020~~2021 and ~~$5.4~~$5.1 million as of ~~September 30, 2020,~~March 31, 2021, with the ~~increases~~increase from the same period in the prior year due to the inclusion of Fauquier’s land and buildings at fair value effective April 1, 2021. 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. 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, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of ~~September 30, 2021,~~March 31, 2022, the Company occupied sixteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Company entered into a lease for branch and office space in Richmond, Virginia during the first quarter of 2020 and, after delays related to construction and COVID-19, anticipates opening the office during the fourth quarter of 2021.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters, operations center, and offices of both Masonry Capital and Sturman Wealth Advisors. VNB Trust & Estate Services is located at ~~112~~103 Third Street, SE, Charlottesville, Virginia, which is part of the same leased space that the Company uses to operate the drive-through location at 301 East Water Street, Charlottesville, Virginia. TFB Wealth Management is located at 10 Courthouse Square, Warrenton, Virginia.

Both the Arlington Boulevard facility in Charlottesville and the People Place facility in Albemarle County also contain office space that is currently under lease to tenants.

Leases

As of ~~September 30, 2021,~~March 31, 2022, the Company has recorded ~~$8.0~~$7.7 million of right-of-use assets and ~~$7.5~~$7.3 million of lease liabilities, in accordance with ~~Accounting Standards Update~~ASU 2016-02 “Leases” (Topic 842). As of December 31, ~~2020, $3.5~~2021, $7.6 million of right-of-use assets and ~~$3.6~~$7.1 million of lease liabilities were included on the balance sheet. The increase is due to the ~~inclusion~~addition of ~~Fauquier’s leases effective April 1, 2021, at fair value.~~a new lease for wealth management space and an extension of an existing lease for an additional five-year term. Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.

Deposits

Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville, Albemarle, Fauquier, Prince William, Richmond and Winchester areas.

Total deposits as of ~~September 30, 2021~~March 31, 2022 were ~~$1.7~~$1.8 billion, ~~an increase~~a decrease of ~~$1.0 billion~~$22 million compared to ~~the balances of $730.8 million at~~ December 31, ~~2020,~~2021, and an increase of ~~$1.0 billion~~$970.2 million compared to ~~the $694.5 million total as of September 30, 2020.~~March 31, 2021. The primary reason for the ~~increases~~increase in the ~~periodic comparisons~~year-over-year

comparison is the inclusion of Fauquier’s deposits of $817.7 million, at fair value, effective upon the Merger date of April 1, ~~2021, as well as increased balances in PPP customer accounts.~~2021.


Deposit accounts
(dollars in thousands)	September 30, 2021					December 31, 2020					September 30, 2020					March 31, 2022					December 31, 2021					March 31, 2021
	Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits
No cost and low cost deposits:
Noninterest demand deposits	$	504,696		29.1	%	$	209,772		28.71	%	$	190,204		27.4	%	$	523,189		29.5	%	$	522,281		29.1	%	$	248,212		30.9	%
Interest checking accounts		424,642		24.4	%		148,910		20.37	%		135,569		19.5	%		451,339		25.5	%		446,314		24.8	%		162,218		20.2	%
Money market and savings deposit accounts		642,788		37.0	%		272,980		37.36	%		270,653		39.0	%		644,418		36.3	%		665,530		37.1	%		292,886		36.4	%

Total noninterest and low cost deposit accounts		1,572,126		90.5	%		631,662		86.4	%		596,426		85.9	%		1,618,946		91.3	%		1,634,125		91.0	%		703,316		87.5	%

Time deposit accounts:
Certificates of deposit		158,113		9.1	%		90,615		12.4	%		89,596		12.9	%		149,759		8.4	%		155,901		8.7	%		92,352		11.4	%
CDARS deposits		6,944		0.4	%		8,487		1.2	%		8,499		1.2	%		5,643		0.3	%		6,144		0.3	%		8,492		1.1	%
Total certificates of deposit and other time deposits		165,057		9.5	%		99,102		13.6	%		98,095		14.1	%		155,402		8.7	%		162,045		9.0	%		100,844		12.5	%

Total deposit account balances	$	1,737,183		100.0	%	$	730,764		100.0	%	$	694,521		100.0	%	$	1,774,348		100.0	%	$	1,796,170		100.0	%	$	804,160		100.0	%

Noninterest-bearing demand deposits on ~~September 30, 2021~~March 31, 2022 were ~~$504.7~~$523.2 million, representing ~~29.1%~~29.5% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $1.1 billion, and represented ~~61.4%~~61.8% of total deposits at ~~September 30, 2021.~~March 31, 2022. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~90.5%~~91.3% of total deposit accounts at ~~September 30, 2021.~~March 31, 2022. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep ~~(“ICS~~®”) deposit products. ICS® deposit balances of ~~$38.3~~$31.0 million and ~~$179.2~~$229.1 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of ~~September 30, 2021.~~March 31, 2022. As of December 31, ~~2020,~~2021, ICS® deposit balances of ~~$28.0~~$39.2 million and ~~$81.1~~$225.9 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively. All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining ~~9.5%~~8.7% and ~~13.6%~~9.0% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$165.1~~$155.4 million and ~~$99.1~~$162.0 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Included in these deposit totals are ~~Certificate of Deposit Account Registry Service CDs, known as~~ CDARSTM, whereby depositors can obtain ~~Federal Deposit Insurance Corporation (“FDIC”)~~FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled ~~$6.9~~$5.6 million as of ~~September 30, 2021~~March 31, 2022 and ~~$ 8.5~~$6.1 million as of December 31, ~~2020,~~2021, all of which were reciprocal balances for the Company’s customers.

Borrowings

Borrowings,

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

The Company has a collateral dependent line of credit with the ~~FHLB. During the three months ended September 30, 2021, the Company prepaid 100% of its outstanding~~ FHLB, advances, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such acquired Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand. Due to this repayment, as of September 30, 2021, the Companyyet had no outstanding ~~balances from FHLB advances. As of December 31, 2020, the Company had $30 million in outstanding balances~~borrowings from FHLB advances ~~and~~ as of ~~September 30, 2020, the Company had no outstanding balances from FHLB advances.~~March 31, 2022 or December 31, 2021. The Company had an ~~outstanding~~off-balance sheet letter of credit, ~~which is off-balance sheet,~~issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts and pledged commercial mortgages, in the amount of $60 million as of ~~September 30, 2021.~~March 31, 2022 and December 31, 2021, as collateral for that letter of credit.

Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of ~~September 30, 2021,~~March 31, 2022, December 31, ~~2020~~2021 or ~~September 30, 2020.~~March 31, 2021.

Junior Subordinated Debt

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of March 31, 2022 and December 31, 2021, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR.

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

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, ~~2020~~2021 to ~~September 30, 2021~~March 31, 2022 (dollars in thousands):


Equity, December 31, 2020	$	82,598
Equity, December 31, 2021				$	161,987
Net income		4,790			4,924
Acquisition of Fauquier Bankshares, Inc.		78,036
Other comprehensive loss		(1,920	)		(19,430	)
Cash dividends declared		(4,003	)		(1,596	)
Equity increase due to exercise of stock options		30
Equity increase due to expensing of stock options		96			41
Equity increase due to expensing of restricted stock		283			93
Equity, September 30, 2021	$	159,910
Equity, March 31, 2022				$	146,019

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

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~13.22%~~15.09%, ~~13.22%~~15.09%, ~~13.74%~~15.66% and ~~7.59%~~8.03%, respectively, as of ~~September 30, 2021,~~March 31, 2022, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~13.47%~~14.88%, ~~13.47%~~14.88%, ~~13.99%~~15.45% and ~~7.75%~~7.92%, respectively, as of ~~September 30, 2021,~~March 31, 2022, also exceeding the minimum requirements.

As of ~~September 30, 2021,~~March 31, 2022, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the ~~“prompt corrective action”~~PCA regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

4643

RESULTS OF OPERATIONS

Non-GAAP presentations

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in ~~referring~~the banking industry. However, certain non-GAAP measures are used by management to ~~its~~supplement the evaluation of the Company’s performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income ~~is referring~~on loans and investments for which no income taxes are paid to the equivalent yield as if income ~~computed in accordance with GAAP, unless otherwise noted. Management’s Discussion and Analysis~~taxes were paid) using the federal corporate income tax rate of ~~Consolidated Financial Condition and Results of Operations also refer to various calculations~~21 percent that ~~are non-GAAP presentations. They include:~~was applicable for all periods presented.



~~Performance measures~~ exclude nonrecurring merger and merger related expenses, which were incurred in connection with change-in-control, severance, due diligence, legal, and other professional fees associated with the merger with Fauquier. Management believes that the ~~exclusion~~use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the significant one-time effect of merger and merger related expenses provides users of the Company’s financial information a presentation of the Company’s financial results that is representative of its ongoing operations. In this non-GAAP presentation, the merger and merger related expenses incurred is addedALLL to ~~the Company’s net income.~~



~~Fully taxable-equivalent (“FTE”) adjustments~~– Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis. This is a non-GAAP presentation. The FTE basis adjusts for the tax-exempt status of net interest income from certain investments using a federal tax rate of 21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.



~~Efficiency ratio –~~ One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base,total loans, such as well as to align presentation of this financial measure with peers in the industry. The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with FDIC studies.



~~Net interest margin~~– Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets. The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.



~~The ALLL as a percentage of loans, excluding~~ the impact of ~~loans acquired from Fauquier (the "Acquired Loans") and the related~~ fair value ~~mark~~ on the Acquired Loans. Management believes that the exclusion of the Acquired Loans provides users of the Company’s financial information a presentation of the Company’s ALLL percentage that is representative of its ongoing operations.



~~Tangible book value per share~~ ~~excludes the impact of the~~adjustment, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other ~~intangibles. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, to evaluate use of equity, financial condition~~banks and ~~capital strength.~~

~~Management uses~~bank holding companies may define or calculate these ~~non-GAAP~~or similar measures ~~to evaluate the Company’s operating performance on a basis comparable to other financial periods.~~differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

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

~~The reconcilement below shows how these non-GAAP measures are computed from their respective GAAP measures (dollars in thousands):~~

Reconcilement of Non-GAAP Measures:

As of or for the Three Months Ended

For the Nine Months Ended

September 30,
2021

September 30,
2020

September 30, 2021

September 30, 2020

Performance measures

Return on average assets ("ROAA")

0.65
%

0.89
%

0.41
%

0.92
%
Impact of merger and merger related expenses, net of tax

0.31
%

0.19
%

0.53
%

0.06
%
ROAA, excluding merger and merger related expenses (non-GAAP)

0.96
%

1.08
%

0.95
%

0.97
%

Return on average equity ("ROAE")

7.70
%

9.20
%

4.80
%

9.05
%
Impact of merger and merger related expenses, net of tax

3.59
%

1.92
%

6.20
%

0.55
%
ROAE, excluding merger and merger related expenses (non-GAAP)

11.30
%

11.12
%

11.01
%

9.60
%

Net income

$
3,138

$
1,870

$
4,790

$
5,362

Impact of merger and merger related expenses, net of tax

1,465

391

6,188

324

Net income, excluding merger and merger related expenses (non-GAAP)

$
4,603

$
2,261

$
10,978

$
5,686

Net income per share, diluted

$
0.59

$
0.69

$
1.07

$
1.98

Impact of merger and merger related expenses, net of tax

0.27

0.14

1.38

0.12

Net income per share, excluding merger and merger related expenses (non-GAAP), diluted

$
0.86

$
0.83

$
2.45

$
2.10

Fully tax-equivalent measures

Net interest income

$
13,504

$
6,047

$
32,629

$
17,177

Fully tax-equivalent adjustment

77

42

194

87

Net interest income (FTE)

$
13,581

$
6,089

$
32,823

$
17,264

Efficiency ratio

75.5
%

66.0
%

83.9
%

63.4
%
Fully tax-equivalent adjustment

-0.3
%

-0.3
%

-0.4
%

-0.3
%
Efficiency ratio (FTE)

75.2
%

65.7
%

83.5
%

63.1
%

Net interest margin

3.06
%

3.03
%

3.01
%

3.10
%
Fully tax-equivalent adjustment

0.02
%

0.02
%

0.02
%

0.02
%
Net interest margin (FTE)

3.08
%

3.05
%

3.03
%

3.12
%

Other financial measures

ALLL to total loans

0.51
%

0.84
%

Impact of acquired loans and fair value mark

0.39
%

0.00
%

ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)

0.90
%

0.84
%

Book value per share

$
30.13

$
29.64

Impact of intangible assets

(3.21
)

(0.27
)

Tangible book value per share (non-GAAP)

$
26.92

$
29.37

Total equity

$
159,910

$
80,457

Impact of intangible assets

(17,043
)

(729
)

Tangible equity

$
142,867

$
79,728


Reconcilement of Non-GAAP Measures:	As of or for the Three Months Ended
	March 31, 2022			March 31, 2021
Fully tax-equivalent measures
Net interest income	$	11,425		$	5,974
Fully tax-equivalent adjustment		65			47
Net interest income (FTE)	$	11,490		$	6,021

Efficiency ratio		62.3	%		68.2	%
Fully tax-equivalent adjustment		-0.3	%		-0.5	%
Efficiency ratio (FTE)		62.0	%		67.7	%

Net interest margin		2.57	%		2.81	%
Fully tax-equivalent adjustment		0.02	%		0.02	%
Net interest margin (FTE)		2.59	%		2.83	%

Other financial measures
ALLL to total loans		0.58	%		0.90	%
Impact of acquired loans and fair value mark		0.37	%		0.00	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.95	%		0.90	%

Book value per share	$	27.42		$	29.33
Impact of intangible assets		(3.05	)		(0.26	)
Tangible book value per share (non-GAAP)	$	24.37		$	29.07

Total equity	$	146,019		$	80,012
Impact of intangible assets		(16,231	)		(696	)
Tangible equity	$	129,788		$	79,316

Net income

Net income for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~$3.1~~$4.9 million, a ~~$1.3~~$3.4 million or ~~68%~~227% increase compared to net income reported for the three months ended ~~September 30, 2020.~~March 31, 2021. Net income per diluted share was ~~$0.59~~$0.92 for the quarter ended ~~September 30, 2021~~March 31, 2022 compared to ~~$0.69~~$0.55 per diluted share for the same quarter in the prior ~~year. Note that~~year, increasing as the ~~decline in~~ expansion of

net income ~~per diluted share for periods noted~~ was ~~driven by~~proportionately larger than the increase in ~~number of~~weighted average diluted shares outstanding as a result of the merger. Excluding merger and merger related costs, the Company would have posted net income of $4.6 million, or $0.86 per diluted share (a non-GAAP financial measure), compared to $2.3 million, or $0.83 per diluted share, for the three months ended September 30, 2020.Merger.

Net interest income

Net interest income (FTE) for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~$13.6~~$11.5 million, a ~~$7.5~~$5.5 million ~~or 123.0%~~ increase compared to net interest income (FTE) of ~~$6.1~~$6.0 million for the three months ended ~~September 30, 2020.~~March 31, 2021. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the current quarter, as the Merger was effective April 1, 2021. ~~Net interest income (FTE) was positively impacted by the $94 thousand decline in interest expense, as described below.~~ The increased volume of loans, ~~also~~ a result of the Merger, increasing from an average of ~~$630.7~~$618.9 million in the three months ended ~~September 30, 2020~~March 31, 2021 to ~~$1.1~~$1.0 billion in the three months ended ~~September 30, 2021,~~March 31, 2022, positively impacted interest income by ~~$5.7~~$4.2 million. The higher average yield earned on loans, increasing to ~~4.51%~~4.23% from 3.89% for the periods noted, positively impacted interest income by ~~$1.1 million.~~$641 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by ~~27 basis points~~12 bps during the three months ended ~~September 30, 2021.~~March 31, 2022. The increase in volume of securities held, primarily as the result of the Merger, from an average balance of ~~$146.0~~$176.1 million for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~$274.1~~$313.4 million for the three months ended ~~September 30, 2021,~~March 31, 2022, positively impacted net interest income by ~~$555~~$638 thousand, ~~while~~and the ~~decline~~increase in yield earned on such securities ~~decreased~~increased from 1.74% to ~~1.68%~~1.86% for the periods noted, ~~negatively~~positively impacted net interest income by ~~$38~~$57 thousand.

~~Net interest income (FTE) for the nine months ended September 30, 2021 was $32.8 million, a $15.5 million or 90.1% increase compared~~ Interest bearing deposits in other banks contributed $120 thousand to ~~net interest income (FTE) of $17.3 million for the nine months ended September 30, 2020. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s~~ net interest income (FTE) for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, as such assets were acquired during the ~~merger was effective April 1, 2021.~~Merger and not held prior to the Effective Date. Net interest income (FTE) was ~~positively~~negatively impacted by the ~~$366~~$227 thousand ~~decline~~increase in interest expense, as described below. The increased volume of loans, also a result of the Merger, increasing from an average of $595.0 million in the nine months ended September 30, 2020 to $995.5 million in the nine months ended September 30, 2021, positively impacted interest income by $12.8 million. The fair value accretion on Acquired Loans positively impacted net interest income by 52 basis points during the nine months ended September 30, 2021. The increase in volume of securities held, primarily as the result of the Merger, from an average balance of $109.8 million for the nine months ended September 30, 2020 to $239.8 million for the nine months ended September 30, 2021, positively impacted net interest income by $1.7 million, while the decline in yield earned on such securities decreased from 1.98% to 1.70% for the periods noted, negatively impacted net interest income by $315 thousand.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of ~~3.08%~~2.59% for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~3 basis points higher~~24 bps lower than the ~~3.05%~~2.83% for the three months ended ~~September 30, 2020. The net interest margin (FTE) of 3.03% for the nine months ended September 30, 2021 was 9 basis points lower than the 3.12% for the nine months ended September 30, 2020.~~March 31, 2021. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Interest expense ~~decreased $94~~increased $227 thousand for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in the prior year, due to increased volume of deposits from the Merger, as average interest-bearing deposits increased ~~$684.8~~$705.3 million for the period noted, negatively impacting interest expense by ~~$555~~$525 thousand, offset by lower rates paid on deposits, positively impacting interest expense by ~~$289~~$311 thousand. The rate paid on interest-bearing deposits averaged ~~31 basis points~~29 bps in the three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~53 basis points~~50 bps for the three months ended September 30, 2020. During the three months ended September 30, 2021, the Company prepaid 100% of its outstanding FHLB advances, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand.March 31, 2021.

Interest expense decreased $366 thousand for the nine months ended September 30, 2021 compared to the same period in the prior year, due primarily to the lower rates paid on deposits, positively impacting interest expense by $1.5 million,

offset by the increased volume of deposits from the Merger, as average interest-bearing deposits increased $477.9 million for the period noted, negatively impacting interest expense by $1.4 million. The rate paid on interest-bearing deposits averaged 34 basis points in the nine months ended September 30, 2021, compared to 72 basis points for the nine months ended September 30, 2020. The prepayment of debt during the nine months ended September 30, 2021, as noted above, positively impacted net interest income by $280 thousand.45

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income


	For the three months ended																										For the three months ended
	September 30, 2021									September 30, 2020								Change in Interest Income/ Expense									March 31, 2022								March 31, 2021								Change in Interest Income/ Expense
	Average			Interest			Average			Average			Interest		Average			Change Due to : 4						Total			Average			Interest		Average			Average			Interest		Average			Change Due to : 4						Total
	Balance			Income/			Yield/Cost			Balance			Income/		Yield/Cost			Volume			Rate			Increase/			Balance			Income/		Yield/Cost			Balance			Income/		Yield/Cost			Volume			Rate			Increase/
(dollars in thousands)				Expense									Expense											(Decrease)						Expense								Expense											(Decrease)
ASSETS
Interest Earning Assets:
Securities
Securities:
Taxable Securities	$	214,194		$	797			1.49	%	$	118,557		$	433		1.46	%	$	356		$	8		$	364		$	248,219		$	1,074		1.73	%	$	142,837		$	541		1.52	%	$	447		$	86		$	533
Tax Exempt Securities 1		59,869			355			2.37	%		27,473			202		2.94	%		199			(46	)		153			65,145			385		2.36	%		33,234			223		2.68	%		191			(29	)		162
Total Securities 1		274,063			1,152			1.68	%		146,030			635		1.74	%		555			(38	)		517			313,364			1,459		1.86	%		176,071			764		1.74	%		638			57			695
Loans:
Real Estate																												887,117			9,095		4.16	%		433,789			4,107		3.84	%		4,622			366			4,988
Commercial																												92,742			1,089		4.76	%		128,994			1,189		3.74	%		(381	)		281			(100	)
Consumer																												51,734			586		4.59	%		56,119			642		4.64	%		(50	)		(6	)		(56	)
Total Loans		1,140,281			12,959			4.51	%		630,704			6,175		3.89	%		5,658			1,126			6,784			1,031,593			10,770		4.23	%		618,902			5,938		3.89	%		4,191			641			4,832
Fed Funds Sold		137,472			45			0.13	%		16,980			3					37			5			42			152,477			61		0.16	%		67,400			12		0.07	%		25			24			49
Other interest-bearing deposits		198,983			55			0.11	%		—			—		—			55			—			55			305,027			120		0.16	%		—			—		—			120			—			120
Total Earning Assets		1,750,799			14,211			3.22	%		793,714			6,813		3.41	%		6,305			1,093			7,398			1,802,461			12,410		2.79	%		862,373			6,714		3.16	%		4,974			722			5,696
Less: Allowance for Loan Losses		(5,607	)								(5,141	)																(6,027	)							(5,476	)
Total Non-Earning Assets		159,106									47,736																	140,916								45,619
Total Assets	$	1,904,298								$	836,309																$	1,937,350							$	902,516

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$	410,504		$	72			0.07	%	$	139,698		$	40		0.11	%	$	52		$	(20	)	$	32		$	421,468		$	61		0.06	%	$	146,781		$	26		0.07	%	$	41		$	(6	)	$	35
Money Market and Savings Deposits		621,211			601			0.38	%		281,161			343		0.49	%		340			(82	)		258			656,219			615		0.38	%		284,333			351		0.50	%		366			(102	)		264
Time Deposits		171,256			282			0.65	%		97,300			306		1.25	%		163			(187	)		(24	)		158,423			195		0.50	%		99,692			280		1.14	%		118			(203	)		(85	)
Total Interest-Bearing Deposits		1,202,971			955			0.31	%		518,159			689		0.53	%		555			(289	)		266			1,236,110			871		0.29	%		530,806			657		0.50	%		525			(311	)		214
Short term borrowings		22,260			(375	)		-6.68	%		28,620			35		0.49	%		(5	)		(405	)		(410	)
Borrowings																												—			—		—			30,000			36		0.49	%		(18	)		(18	)		(36	)
Junior subordinated debt		3,349			50			5.92	%		—			—		—			50			—			50			3,371			49		5.90	%		—			—		—			49			—			49
Total Interest-Bearing Liabilities		1,228,580			630			0.20	%		546,779			724		0.53	%		600			(694	)		(94	)		1,239,481			920		0.30	%		560,806			693		0.50	%		556			(329	)		227
Non-Interest-Bearing Liabilities:
Demand deposits		499,068									203,798																	527,091								255,227
Other liabilities		15,003									4,870																	11,347								3,948
Total Liabilities		1,742,651									755,447																	1,777,919								819,981
Shareholders' Equity		161,647									80,862																	159,431								82,535
Total Liabilities & Shareholders' Equity	$	1,904,298								$	836,309																$	1,937,350							$	902,516
Net Interest Income (FTE)				$	13,581								$	6,089				$	5,705		$	1,787		$	7,492					$	11,490							$	6,021				$	4,418		$	1,051		$	5,469
Interest Rate Spread 2								3.02	%							2.89	%																2.49	%							2.66	%
Cost of Funds																																	0.21	%							0.34	%
Interest Expense as a Percentage of Average Earning Assets								0.14	%							0.36	%																0.21	%							0.33	%
Net Interest Margin (FTE) 3								3.08	%							3.05	%																2.59	%							2.83	%

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period 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.

~~Consolidated Average Balance Sheet and Analysis of Net Interest Income~~

For the Nine Months Ended

September 30, 2021

September 30, 2020

Change in Interest Income/ Expense

Average

Interest

Average

Average

Interest

Average

Change Due to : 4

Total

Balance

Income/

Yield/Cost

Balance

Income/

Yield/Cost

Volume

Rate

Increase/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities

Taxable Securities

$
189,250

$
2,127

1.50
%

$
91,863

$
1,220

1.77
%

$
1,120

$
(213
)

$
907

Tax Exempt Securities (1)

50,559

923

2.43
%

17,933

413

3.07
%

612

(102
)

510

Total Securities (1)

239,809

3,050

1.70
%

109,796

1,633

1.98
%

1,732

(315
)

1,417

Total Loans

995,524

31,904

4.28
%

594,998

18,202

4.09
%

12,797

905

13,702

Fed Funds Sold

94,502

78

0.11
%

34,535

98

0.38
%

84

(104
)

(20
)
Other interest-bearing deposits

118,331

94

0.11
%

—

—

—

94

—

94

Total Earning Assets

1,448,166

35,126

3.24
%

739,329

19,933

3.60
%

14,707

486

15,193

Less: Allowance for Loan Losses

(5,618
)

(4,731
)

Total Non-Earning Assets

104,539

46,995

Total Assets

$
1,547,087

$
781,593

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
333,193

$
191

0.08
%

$
131,281

$
96

0.10
%

$
120

$
(25
)

$
95

Money Market and Savings Deposits

484,742

1,407

0.39
%

255,837

1,372

0.72
%

855

(820
)

35

Time Deposits

148,715

886

0.80
%

101,651

1,166

1.53
%

413

(693
)

(280
)
Total Interest-Bearing Deposits

966,650

2,484

0.34
%

488,769

2,634

0.72
%

1,388

(1,538
)

(150
)
Short term borrowings

31,967

(280
)

-1.17
%

9,610

35

0.49
%

(32
)

(283
)

(315
)
Junior subordinated debt

2,324

99

5.70
%

—

—

—

99

—

99

Total Interest-Bearing Liabilities

1,000,941

2,303

0.31
%

498,379

2,669

0.72
%

1,455

(1,821
)

(366
)
Non-Interest-Bearing Liabilities:

Demand deposits

402,163

199,490

Other liabilities

10,617

4,607

Total Liabilities

1,413,721

702,476

Shareholders' Equity

133,366

79,117

Total Liabilities & Shareholders' Equity

$
1,547,087

$
781,593

Net Interest Income (FTE)

$
32,823

$
17,264

$
13,252

$
2,307

$
15,559

Interest Rate Spread 2

2.94
%

2.89
%

Interest Expense as a Percentage of Average
Earning Assets

0.21
%

0.48
%

Net Interest Margin (FTE) 3

3.03
%

3.12
%

~~(1)~~

~~(2)~~

~~Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.~~

~~(3)~~

~~Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.~~

~~(4)~~

5146

Provision for loan losses

A provision for loan losses of ~~$267~~$148 thousand was recognized during the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$224~~$351 thousand recognized during the three months ended September 30, 2020, and a provision for loan losses of $477 thousand was recognized during the nine months ended September 30, 2021, compared to $1.4 million recognized during the nine months ended September 30, 2020. During the first two quarters of 2020, the Company increased the economic qualitative factors in the ALLL calculation due to the deterioration in the economic outlook resulting from the impact of COVID-19. During the second quarter of 2021, the Company released of a portion of the reserves that were added during 2020 since the credit deterioration has so far not been experienced to the extent previously anticipated. No further changes were made to the economic qualitative factors in the third quarter ofMarch 31, 2021.

The period-end ALLL as a percentage of assets was ~~0.51%~~0.58% as of ~~September 30, 2021, 0.90%~~March 31, 2022, 0.56% as of December 31, ~~2020~~2021 and ~~0.84%~~0.90% as of ~~September 30, 2020.~~March 31, 2021. The percentage decrease as compared to ~~the prior year end and~~ the same period in the prior year was due to the addition of Acquired Loans effective with the Merger, and the elimination of their ALLL as the loans were acquired and booked at fair value. The ALLL as of ~~September 30, 2021,~~March 31, 2022, excluding the impact of the Acquired Loans and the fair value mark, would have been ~~0.90%~~0.95%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to Non-GAAP ALLL.

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 5 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at ~~September 30, 2021.~~March 31, 2022. The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

Noninterest income

The components of noninterest income for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ are shown below (dollars in thousands):


	For the three months ended				Variance						For the three months ended				Variance
	September 30, 2021		September 30, 2020		$			%			March 31, 2022		March 31, 2021		$		%
Noninterest income:
Wealth management fees	$	744	$	263	$	481			182.9	%	$	557	$	329	$	228		69.3	%
Advisory and brokerage income		358		175		183			104.6	%		216		191		25		13.1	%
Deposit account fees		396		162		234			144.4	%		465		160		305		190.6	%
Debit/credit card and ATM fees		808		144		664			461.1	%		707		154		553		359.1	%
Earnings/increase in value of bank owned life insurance		201		111		90			81.1	%
Gains on sales of securities		-		91		(91	)		-100.0	%
Loan swap fee income		24		344		(320	)		-93.0	%
Bank owned life insurance income												211		107		104		97.2	%
Resolution of commercial dispute												2,400	--		--		--
Other		947		135		812			601.5	%		231		98		133		135.7	%
Total noninterest income	$	3,478	$	1,425	$	2,053			144.1	%	$	4,787	$	1,039	$	3,748		360.7	%

Noninterest income for the three months ended ~~September 30, 2021~~March 31, 2022 of ~~$3.5~~$4.8 million was ~~$2.1~~$3.7 million or ~~144.1%~~360.7% higher than the amount recorded for the three months ended ~~September 30, 2020.~~March 31, 2021. Noninterest income increased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial dispute. Also, the inclusion of Fauquier’s accounts ~~contributing~~contributed to the increase in debit card income of ~~$664~~$553 thousand, deposit fees of $305 thousand, wealth management fees of ~~$481 thousand, deposit fees of $234~~$228 thousand, and ~~advisory and brokerage~~ income from bank-owned life insurance policies of ~~$183~~$104 thousand. Swap fee income declined $320 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment, and gains on sales of securities declined from the same quarter of the prior year by $91 thousand, as no securities were sold during the current quarter. Other income increased quarter over quarter by $812 thousand, primarily due to the following: (i) realization of a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.

5247

~~The components of noninterest income for the nine months ended September 30, 2021 and 2020 are shown below (dollars in thousands):~~

For the Nine Months Ended

Variance

September 30,
2021

September 30,
2020

$

%

Noninterest income:

Wealth management fees

$
2,053

$
801

$
1,252

156.3
%
Advisory and brokerage income

908

516

392

76.0
%
Deposit account fees

982

484

498

102.9
%
Debit/credit card and ATM fees

1,561

435

1,126

258.9
%
Earnings/increase in value of bank owned
life insurance

507

327

180

55.0
%
Gains on sales of securities

-

734

(734
)

-100.0
%
Loan swap fee income

59

977

(918
)

-94.0
%
Other

1,367

446

921

206.5
%
Total noninterest income

$
7,437

$
4,720

$
2,717

57.6
%

Noninterest income for the nine months ended September 30, 2021 of $7.4 million was $2.7 million or 57.6% higher than the amount recorded for the nine months ended September 30, 2020. Noninterest income increased predominantly due to the inclusion of Fauquier’s accounts, contributing to the increase in wealth management fees of $1.3 million, debit card income of $1.1 million, deposit fees of $498 thousand and advisory and brokerage income of $392 thousand. Gains on sales of securities declined from the same quarter of the prior year by $734 thousand, as no securities were sold and swap fee income declined $918 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment. As noted above, other income increased period over period, primarily due to the following: (i) realization of a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.

Noninterest expense

The components of noninterest expense for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ are shown below (dollars in thousands):

For the three months ended

Variance

September 30,
2021

September 30,
2020

$

%

Noninterest expense:

Salaries and employee benefits

$
4,562

$
2,322

$
2,240

96.5
%
Net occupancy

1,039

501

538

107.4
%
Equipment

205

134

71

53.0
%
ATM, debit and credit card

212

46

166

360.9
%
Bank franchise tax

320

161

159

98.8
%
Computer software

361

159

202

127.0
%
Data processing

1,114

302

812

268.9
%
FDIC deposit insurance assessment

349

61

288

472.1
%
Marketing, advertising and promotion

337

55

282

512.7
%
Merger and merger related expenses

1,935

549

1,386

252.5
%
Professional fees

186

-

186

N/A

Core deposit intangible amortization

417

-

417

N/A

Other

1,787

645

1,142

177.1
%
Total noninterest expense

$
12,824

$
4,935

$
7,889

159.9
%


	For the three months ended				Variance
	March 31, 2022		March 31, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	4,731	$	2,402	$	2,329			97.0	%
Net occupancy		1,197		495		702			141.8	%
Equipment		283		116		167			144.0	%
Bank franchise tax		304		173		131			75.7	%
Computer software		263		167		96			57.5	%
Data processing		738		289		449			155.4	%
FDIC deposit insurance assessment		226		63		163			258.7	%
Marketing, advertising and promotion		267		137		130			94.9	%
Merger and merger related expenses		-		278		(278	)		-100.0	%
Plastics expense		139		42		97			231.0	%
Professional fees		337		177		160			90.4	%
Core deposit intangible amortization		439		-		439		N/A
Other		1,171		442		729			164.9	%
Total noninterest expense	$	10,095	$	4,781	$	5,314			111.1	%

Noninterest expense for the quarter ended ~~September 30, 2021~~March 31, 2022 of ~~$12.8~~$10.1 million was ~~$7.9~~$5.3 million or ~~159.9%~~111.1% higher than the quarter ended ~~September 30, 2020.~~March 31, 2021. The predominant reason for the increase was that the current year figures include the expenses of the merged company. ~~In addition, the~~The Company incurred ~~$1.9 million~~$685 thousand for the quarter ended March 31, 2022 in ~~merger and merger~~expenses related ~~expenses~~to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier. Core deposit intangible amortization expense, which was not incurred prior to the Merger, was $439 thousand during the three months ended ~~September 30, 2021, which was $1.4 million higher than the amount of merger and merger related expenses incurred in the same quarter of the prior year.~~

~~The components of noninterest expense for the nine months ended September 30, 2021 and 2020 are shown below (dollars in thousands):~~

For the Nine Months Ended

Variance

September 30,
2021

September 30,
2020

$

%

Noninterest expense:

Salaries and employee benefits

$
11,705

$
7,004

$
4,701

67.1
%
Net occupancy

2,643

1,405

1,238

88.1
%
Equipment

661

401

260

64.8
%
ATM, debit and credit card

589

140

449

320.7
%
Bank franchise tax

922

487

435

89.3
%
Computer software

744

435

309

71.0
%
Data processing

2,397

968

1,429

147.6
%
FDIC deposit insurance assessment

594

89

505

567.4
%
Marketing, advertising and promotion

706

334

372

111.4
%
Merger and merger related expenses

8,087

549

7,538

1373.0
%
Professional fees

873

376

497

132.2
%
Core deposit intangible amortization

845

-

845

N/A

Other

2,832

1,694

1,138

67.2
%
Total noninterest expense

$
33,598

$
13,882

$
19,716

142.0
%

Noninterest expense for the nine months ended September 30, 2021 of $33.6 million was $19.7 million or 142.0% higher than the nine months ended September 30, 2020. The predominant reason for the increase was that the Company incurred $8.1 million in merger and merger related expenses during the nine months ended September 30, 2021, which was $7.5 million higher than the amount of merger and merger related expenses incurred in the same period of the prior year. Additionally, the first nine months of 2021 includes the salaries of the employees of the combined company for two quarters, as the Merger was effective April 1, 2021.March 31, 2022.

The efficiency ratio (FTE) of ~~75.2%~~62.0% for the three months ended ~~September 30, 2021 was elevated~~March 31, 2022 compared favorably to the ~~65.7%~~67.7% for the same quarter of ~~2020,~~2021, due primarily to the increase in noninterest expense, as described above. The efficiency ratio (FTE) of 83.5% for the nine months ended September 30, 2021 was elevated compared to the 63.1% for the same period of 2020, also due to the increase in noninterest expense,income, as described above. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company provided ~~$753 thousand~~$1.0 million and ~~$443~~$376 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of ~~19.4%~~17.5% and ~~19.2%~~20.0%, respectively. The effective income tax rate for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~higher~~lower than the prior year, ~~as certain merger and merger related expenses are non-deductible for~~due to the recognition of low-income housing tax ~~purposes.~~credits in the current period. For the nine months ended September 30, 2021 and 2020, the Company provided $1.2 million and $1.3 million for Federal income taxes, respectively, resulting in an effective income tax rate of 20.0% and 19.3%, respectively. The effective income tax rate for the nine months ended September 30, 2021 was higher than the prior year, as certain merger and merger related expenses are non-deductible for tax purposes. For allboth periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds.

OTHER SIGNIFICANT EVENTS

None

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the ~~Securities~~ Exchange Act, ~~of 1934 (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 the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the 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 quarterly report on Form 10-Q, 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. There was no change in the internal control over financial reporting that occurred during the quarter ended ~~September 30, 2021~~March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.

(a)

Required 8-K disclosures.

None

(b)

Changes in procedures for director nominations by security holders.

None

ITEM 6. EXHIBITS.


Exhibit Number		Description of Exhibit


31.1		302 Certification of Principal Executive Officer

31.2		302 Certification of Principal Financial Officer

32.1		906 Certification

101		The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2021,~~March 31, 2022, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss (unaudited), (iv) Consolidated Statements of Stockholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2021,~~March 31, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

5650

SIGNATURES

Pursuant to the requirements 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
(Registrant)

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

Date:		~~November 12, 2021~~May 13, 2022

By:		/s/ Tara Y. Harrison
		Tara Y. Harrison
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Date:		~~November 12, 2021~~May 13, 2022

5751


Past Due Aging as of September 30, 2021	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	240	$	-	$	641	$	881	$	1,775	$	117,303	$	119,959	$	641
Real estate construction and land		8		-		-		8		24,148		67,926		92,082		-
1-4 family residential mortgages		1,092		-		777		1,869		17,757		352,848		372,474		-
Commercial mortgages		-		-		-		-		24,214		440,652		464,866		-
Consumer loans		278		155		37		470		150		62,449		63,069		37
Total Loans	$	1,618	$	155	$	1,455	$	3,228	$	68,044	$	1,041,178	$	1,112,450	$	678


Three months ended September 30, 2020	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	6,047	$	-	$	-		$	-		$	6,047
Provision for loan losses		224		-		-			-			224
Noninterest income		970		176		192			87			1,425
Noninterest expense		4,373		155		196			211			4,935
Income (loss) before income taxes		2,420		21		(4	)		(124	)		2,313
Provision for (benefit from) income taxes		466		4		(1	)		(26	)		443
Net income (loss)	$	1,954	$	17	$	(3	)	$	(98	)	$	1,870

Nine months ended September 30, 2020	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	17,177	$	-	$	-		$	-		$	17,177
Provision for loan losses		1,367		-		-			-			1,367
Noninterest income		3,316		516		625			263			4,720
Noninterest expense		12,147		483		668			584			13,882
Income (loss) before income taxes		6,979		33		(43	)		(321	)		6,648
Provision for income taxes		1,355		7		(9	)		(67	)		1,286
Net income (loss)	$	5,624	$	26	$	(34	)	$	(254	)	$	5,362


	Three Months Ended September 30,				Nine Months Ended September 30,
Lease Expense	2021		2020		2021		2020
Operating lease expense	$	420	$	228	$	1,069	$	636
Short-term lease expense		127		28		188		85
Total lease expense	$	547	$	256	$	1,257	$	721
Cash paid for amounts included in lease liabilities	$	390	$	199	$	998	$	597


Undiscounted Cash Flow	September 30, 2021
Three months ending December 31, 2021	$	391
Twelve months ending December 31, 2022		1,534
Twelve months ending December 31, 2023		1,462
Twelve months ending December 31, 2024		1,175
Twelve months ending December 31, 2025		968
Twelve months ending December 31, 2026		622
Thereafter		1,771
Total undiscounted cash flows	$	7,923
Less: Discount		(460	)
Lease liability	$	7,463

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company