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 ~~August 6,~~November 5, 2020, the registrant had 2,714,273 shares of common stock, $2.50 par value per share, outstanding.

	June 30, 2020			December 31, 2019*			September 30, 2020			December 31, 2019*
ASSETS	(Unaudited)						(Unaudited)
Cash and due from banks	$	10,116		$	14,908		$	11,399		$	14,908
Federal funds sold		24,771			4,177			273			4,177
Securities:
Available for sale, at fair value		102,772			114,041			141,245			114,041
Restricted securities, at cost		1,736			1,683			3,436			1,683
Total securities		104,508			115,724			144,681			115,724
Loans		632,394			539,533			636,935			539,533
Allowance for loan losses		(4,917	)		(4,209	)		(5,334	)		(4,209	)
Loans, net		627,477			535,324			631,601			535,324
Premises and equipment, net		5,669			6,145			5,444			6,145
Bank owned life insurance		16,628			16,412			16,739			16,412
Goodwill		372			372			372			372
Other intangible assets, net		374			408			357			408
Accrued interest receivable and other assets		9,669			9,157			10,092			9,157
Total assets	$	799,584		$	702,627		$	820,958		$	702,627
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	197,227		$	166,975		$	190,204		$	166,975
Interest-bearing		136,274			122,994			135,569			122,994
Money market and savings deposit accounts		284,101			221,964			270,653			221,964
Certificates of deposit and other time deposits		96,599			109,278			98,095			109,278
Total deposits		714,201			621,211			694,521			621,211
Advances from the FHLB								40,000			—
Accrued interest payable and other liabilities		6,291			5,309			5,980			5,309
Total liabilities		720,492			626,520			740,501			626,520

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; 2,714,273 (including 26,268 nonvested shares), and 2,692,005 (including 4,000 nonvested shares) issued and outstanding at June 30, 2020 and December 31, 2019, respectively		6,720			6,720
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,714,273 (including 25,268 nonvested) shares issued and outstanding as of September 30, 2020 and 2,692,005 (including 4,000 nonvested) shares issued and outstanding as of December 31, 2019								6,722			6,720
Capital surplus		32,307			32,195			32,377			32,195
Retained earnings		39,102			37,235			40,158			37,235
Accumulated other comprehensive income (loss)		963			(43	)		1,200			(43	)
Total shareholders' equity		79,092			76,107			80,457			76,107
Total liabilities and shareholders' equity	$	799,584		$	702,627		$	820,958		$	702,627

	For the three months ended					For the six months ended				For the three months ended					For the nine months ended
	June 30, 2020		June 30, 2019			June 30, 2020		June 30, 2019		September 30, 2020		September 30, 2019			September 30, 2020		September 30, 2019
Interest and dividend income:
Loans, including fees	$	6,156	$	6,105		$	12,027	$	12,202	$	6,175	$	6,021		$	18,202	$	18,223
Federal funds sold		10		74			95		93		3		174			98		267
Investment securities:
Taxable		229		246			738		498		412		291			1,150		789
Tax exempt		92		76			167	157			159		64			326		221
Dividends		24		31			48		57		22		29			70		86
Total interest and dividend income		6,511		6,532			13,075		13,007		6,771		6,579			19,846		19,586

Interest expense:
Demand and savings deposits		390		463			1,085		844		383		531			1,468		1,375
Certificates and other time deposits		366		586			860		1,045		306		574			1,166		1,619
Repurchase agreements and other borrowings		—		22			—		89		35		-			35		89
Total interest expense		756		1,071			1,945		1,978		724		1,105			2,669		3,083
Net interest income		5,755		5,461			11,130		11,029		6,047		5,474			17,177		16,503
Provision for (recovery of) loan losses		378		(64	)		1,143		620		224		(120	)		1,367		500
Net interest income after provision for (recovery of) loan losses		5,377		5,525			9,987		10,409		5,823		5,594			15,810		16,003

Noninterest income:
Trust income		228		402			538		749
Wealth management fees											263		377			801		1,126
Advisory and brokerage income		163		156			341		292		175		159			516		451
Royalty income		24		4			71		8		16		5			87		13
Deposit account fees		143		192			322		373		162		192			484		565
Debit/credit card and ATM fees		134		189			291		346		144		191			435		537
Earnings/increase in value of bank owned life insurance		109		466			216		576		111		111			327		687
Fees on mortgage sales		30		56			77		86		-		43			77		129
Gains on sales of securities		590		64			643		64		91		7			734		71
Loan swap fee income		124		38			633		46		344		116			977		151
Other		81		133			163		219		119		126			282		356
Total noninterest income		1,626		1,700			3,295		2,759		1,425		1,327			4,720		4,086

Noninterest expense:
Salaries and employee benefits		2,258		2,321			4,682		4,667		2,322		2,268			7,004		6,800
Net occupancy		452		444			904		923		501		450			1,405		1,373
Equipment		136		114			267		231		134		85			401		316
Data processing		338		330			666		646		302		341			968		987
Merger expenses											549		-			549		-
Settlement of claims											-		160			-		460
Other		1,220		1,476			2,428		2,629		1,127		1,257			3,555		3,721
Total noninterest expense		4,404		4,685			8,947		9,096		4,935		4,561			13,882		13,657

Income before income taxes		2,599		2,540			4,335		4,072		2,313		2,360			6,648		6,432
Provision for income taxes		511		425			843		711		443		463			1,286		1,174
Net income	$	2,088	$	2,115		$	3,492	$	3,361	$	1,870	$	1,897		$	5,362	$	5,258
Net income per common share, basic *	$	0.77	$	0.79		$	1.29	$	1.25
Net income per common share, diluted *	$	0.77	$	0.79		$	1.29	$	1.25
Weighted average common shares outstanding, basic *		2,710,019		2,688,005			2,701,411		2,683,122
Weighted average common shares outstanding, diluted *		2,711,017		2,688,965			2,702,311		2,687,391
Net income per common share, basic										$	0.69	$	0.71		$	1.98	$	1.96
Net income per common share, diluted										$	0.69	$	0.71		$	1.98	$	1.96

	For the three months ended						For the six months ended						For the three months ended						For the nine months ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019			September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Net income	$	2,088		$	2,115		$	3,492		$	3,361		$	1,870		$	1,897		$	5,362		$	5,258

Other comprehensive income

Unrealized gain on securities, net of tax of $512 and $403 for the three and six months ended June 30, 2020; and net of tax of $141 and $342 for the three and six months ended June 30, 2019		1,920			537			1,514			1,291
Unrealized gain on securities, net of tax of $81 and $484 for the three and nine months ended September 30, 2020; and net of tax of $29 and $372 for the three and nine months ended September 30, 2019														309			106			1,823			1,396

Reclassification adjustment for realized gains on sales of securities, net of tax of ($124) and ($135) for the three and six months ended June 30, 2020; and net of tax of ($13) and ($13) for the three and six months ended June 30, 2019		(466	)		(51	)		(508	)		(51	)
Reclassification adjustment for realized gains on sales of securities, net of tax of ($19) and ($154) for the three and nine months ended September 30, 2020; and net of tax of ($1) and ($15) for the three and nine months ended September 30, 2019														(72	)		(6	)		(580	)		(56	)

Total other comprehensive income		1,454			486			1,006			1,240			237			100			1,243			1,340

Total comprehensive income	$	3,542		$	2,601		$	4,498		$	4,601		$	2,107		$	1,997		$	6,605		$	6,598

								Accumulated														Accumulated
								Other														Other
	Common		Capital		Retained			Comprehensive						Common		Capital			Retained			Comprehensive
	Stock		Surplus		Earnings			Income (Loss)			Total			Stock		Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2018	$	6,359	$	27,013	$	38,647		$	(1,277	)	$	70,742		$	6,359	$	27,013		$	38,647		$	(1,277	)	$	70,742
Stock options exercised		14		88		-			-			102			14		88			-			-			102
Stock option expense		-		24		-			-			24			-		24			-			-			24
Unrestricted stock grants		27		397		-			-			424			27		397			-			-			424
Cash dividends declared ($0.30 per share)		-		-		(767	)		-			(767	)		-		-			(767	)		-			(767	)
Net income		-		-		1,246			-			1,246			-		-			1,246			-			1,246
Other comprehensive income		-		-		-			754			754			-		-			-			754			754
Balance, March 31, 2019	$	6,400	$	27,522	$	39,126		$	(523	)	$	72,525		$	6,400	$	27,522		$	39,126		$	(523	)	$	72,525
Stock option expense		-		23		-			-			23			-		23			-			-			23
Stock dividend distributable *		320		4,593		(4,913	)		-			-			320		4,593			(4,913	)		-			-
Cash dividends declared ($0.30 per share)		-		-		(806	)		-			(806	)		-		-			(806	)		-			(806	)
Net income		-		-		2,115			-			2,115			-		-			2,115			-			2,115
Other comprehensive income		-		-		-			486			486			-		-			-			486			486
Balance, June 30, 2019	$	6,720	$	32,138	$	35,522		$	(37	)	$	74,343		$	6,720	$	32,138		$	35,522		$	(37	)	$	74,343
Stock option expense															-		24			-			-			24
Stock grants															-		3			-			-			3
Cash in lieu of fractional shares															-		(5	)		-			-			(5	)
Cash dividends declared ($0.30 per share)															-		-			(808	)		-			(808	)
Net income															-		-			1,897			-			1,897
Other comprehensive income															-		-			-			100			100
Balance, September 30, 2019														$	6,720	$	32,160		$	36,611		$	63		$	75,554

Balance, December 31, 2019	$	6,720	$	32,195	$	37,235		$	(43	)	$	76,107		$	6,720	$	32,195		$	37,235		$	(43	)	$	76,107
Stock option expense		-		24		-			-			24			-		24			-			-			24
Restricted stock grant expense		-		15		-			-			15			-		15			-			-			15
Cash dividends declared ($0.30 per share)		-		-		(811	)		-			(811	)		-		-			(811	)		-			(811	)
Net income		-		-		1,404			-			1,404			-		-			1,404			-			1,404
Other comprehensive loss		-		-		-			(448	)		(448	)		-		-			-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234	$	37,828		$	(491	)	$	76,291		$	6,720	$	32,234		$	37,828		$	(491	)	$	76,291
Stock option expense		-		34		-			-			34			-		34			-			-			34
Restricted stock grant expense		-		39		-			-			39			-		39			-			-			39
Cash dividends declared ($0.30 per share)		-		-		(814	)		-			(814	)		-		-			(814	)		-			(814	)
Net income		-		-		2,088			-			2,088			-		-			2,088			-			2,088
Other comprehensive income		-		-		-			1,454			1,454			-		-			-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307	$	39,102		$	963		$	79,092		$	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 and capital surplus as of June 30, 2019 includes the 5% stock dividend distributable effective July 5, 2019.

	For the six months ended						For the nine months ended
	June 30, 2020			June 30, 2019			September 30, 2020			September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,492		$	3,361		$	5,362		$	5,258
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,143			620			1,367			500
Net amortization and accretion of securities		210			133			471			200
Net gains on sale of securities		(643	)		(64	)		(734	)		(71	)
Earnings on bank owned life insurance		(216	)		(576	)		(327	)		(687	)
Amortization of intangible assets		57			51			74			67
Depreciation and other amortization		915			881			1,395			1,338
Stock option expense		58			47			88			71
Stock grants, unrestricted		-			424			-			424
Stock grant expense, restricted		54			-			96			3
Net change in:
Accrued interest receivable and other assets		(430	)		(397	)		(1,117	)		(2,447	)
Accrued interest payable and other liabilities		292			64			(19	)		(58	)
Net cash provided by operating activities		4,932			4,544			6,656			4,598

CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted investments		(53	)		(1	)		(1,753	)		(1	)
Purchases of available for sale securities		(62,259	)		(6,946	)		(122,372	)		(40,608	)
Proceeds from maturities, calls and principal payments of available for sale securities		29,161			2,547			34,821			4,573
Proceeds from sales of available for sale securities		46,075			10,443			62,184			21,065
Net decrease (increase) in organic loans		(103,984	)		14,168			(117,081	)		9,654
Net decrease in purchased loans		10,688			565			19,437			4,024
Cash payment for wealth management book of business		(50	)		(50	)		(50	)		(50	)
Proceeds from settlement of bank owned life insurance		-			1,176			-			1,176
Purchase of bank premises and equipment		(80	)		(84	)		(132	)		(124	)
Net cash provided by (used in) investing activities		(80,502	)		21,818
Net cash used in investing activities								(124,946	)		(291	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts, and money market accounts		105,669			(32,476	)		84,493			(8,148	)
Net increase (decrease) in certificates of deposit and other time deposits		(12,679	)		13,462			(11,183	)		15,061
Net increase in borrowings								40,000			-
Proceeds from stock options exercised		-			102			-			102
Cash payment for stock dividend fractional shares								-			(5	)
Cash dividends paid		(1,618	)		(1,530	)		(2,433	)		(2,336	)
Net cash provided by (used in) financing activities		91,372			(20,442	)
Net cash provided by financing activities								110,877			4,674
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	15,802		$	5,920		$	(7,413	)	$	8,981

CASH AND CASH EQUIVALENTS:
Beginning of period	$	19,085		$	18,874		$	19,085		$	18,874
End of period	$	34,887		$	24,794		$	11,672		$	27,855

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,032		$	1,904		$	2,788		$	2,963
Taxes	$	375		$	1,150		$	1,991		$	1,650

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities	$	1,274		$	1,569		$	1,573		$	1,697
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	—		$	4,279		$	711		$	4,279

The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), a registered investment advisor. Effective July 1, 2018, VNBTrust, National Association (“VNBTrust”), formerly a subsidiary of the Bank, was merged into Virginia National Bank, and the Bank continued to offer investment management, wealth advisory and trust and estate administration services under the name of VNB Wealth Management, also referred to herein as “VNB Wealth.” All references herein to VNB Wealth Management or VNB Wealth refer to VNBTrust for periods prior to July 1, 2018. InBeginning in 2019, the services offered byunder the umbrella of VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or Sturman Wealth Advisors, formerly known as VNB Investment Services. All significant intercompany balances and transactions have been eliminated in 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 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 (including impaired loans), other-than-temporary impairment of securities, intangible assets, and fair value measurements. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Interagency COVID-19 Guidance In March 2020, various regulatory agencies, including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification (“ASC”) 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), issued by the Financial Accounting Standards Board (“FASB”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications 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. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance may have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Financial Instruments – Credit Losses In June 2016, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) No. 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 ~~ASU’s~~ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ~~ASU’s~~ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S.

Securities and Exchange Commission ~~(SEC)~~(“SEC”), such as 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. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan. The ~~steering committee meets regularly to address~~Company is capturing the compliance requirements, data requirements and sources, and analysis efforts that are required to adopt these new requirements. In addition to attending seminars and webinars on this topic with regulators and other experts, the committee is working closely with the Company’s vendor to gather additional loan data which is anticipated to be needed for this ~~calculation and is attending training sessions on the software to be utilized to calculate the expected credit losses.~~calculation. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ~~(SAB)~~(“SAB”) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 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.

Income Taxes In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

Investments – Equity Securities In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the FASB’s Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

LIBOR and Other Reference Rates In March 2020, the ~~Financial Accounting Standards Board (FASB)~~FASB issued ASU No. 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”) 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. To facilitate an orderly transition from LIBOR, Inter-bank Offered Rate (“IBOR”) and other benchmark rates to alternative reference rates (“ARRs”), the Company has established a focus committee, which includes members of senior management, including the Chief Credit Officer and Chief Financial Officer, among others. The task of this committee is to identify, assess and monitor risk associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operations readiness and engage impacted clients in connection with the transition to ARRs. 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.

SEC Filing Requirements On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects ~~to meet this expanded category of smaller reporting company and~~that it will no longer be considered an accelerated ~~filer.~~filer beginning in 2021. If the Company’s annual revenues

exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting ~~(ICFR)~~(“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K. ~~Smaller reporting companies also have additional time to file quarterly and annual financial statements.~~ All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. As the Bank’s total assets exceed $500 million, it remains subject to FDICIA’s internal reporting requirements, but does not require an auditor attestation concerning internal controls over financial reporting. As such, professional and consulting expenditures should decline by an immaterial amount.

Nonrefundable Fees and Other Costs In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

The amortized cost and fair values of securities available for sale as of ~~June~~September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):

June 30, 2020	Amortized		Gross Unrealized		Gross Unrealized			Fair
September 30, 2020												Gross		Gross
										Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	9,003	$	40	$	(6	)	$	9,037	$	19,996	$	3	$	(159	)	$	19,840
Mortgage-backed securities/CMOs		57,842		762		(202	)		58,402		63,462		790		(94	)		64,158
Municipal bonds		34,707		773		(147	)		35,333		56,268		1,075		(96	)		57,247
Total Securities Available for Sale	$	101,552	$	1,575	$	(355	)	$	102,772	$	139,726	$	1,868	$	(349	)	$	141,245

December 31, 2019	Amortized		Gross Unrealized		Gross Unrealized			Fair				Gross		Gross
										Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	15,000	$	-	$	(48	)	$	14,952	$	15,000	$	-	$	(48	)	$	14,952
Corporate bonds		7,469		-		-			7,469		7,469		-		-			7,469
Mortgage-backed securities/CMOs		71,970		76		(314	)		71,732		71,970		76		(314	)		71,732
Municipal bonds		19,656		282		(50	)		19,888		19,656		282		(50	)		19,888
Total Securities Available for Sale	$	114,095	$	358	$	(412	)	$	114,041	$	114,095	$	358	$	(412	)	$	114,041

As of ~~June~~September 30, 2020, there were ~~$42.2~~$53.1 million, or 2932 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of ~~$355~~$349 thousand and consisted of 11 mortgage-backed/collateralized mortgage obligations (“CMOs”), 12 ~~mortgage-backed/CMOs, 15~~ municipal bonds, and 29 agency bonds.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at ~~June~~September 30, 2020, and December 31, 2019 (dollars in thousands):

June 30, 2020
September 30, 2020
	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	$	2,994	$	(6	)	$	—	$	—	$	2,994	$	(6	)	$	15,340	$	(159	)	$	—	$	—	$	15,340	$	(159	)
Mortgage-backed/CMOs		25,205		(202	)		—		—		25,205		(202	)		22,496		(94	)		—		—		22,496		(94	)
Municipal bonds		13,958		(147	)		—		—		13,958		(147	)		15,266		(96	)		—		—		15,266		(96	)
	$	42,157	$	(355	)	$	—	$	—	$	42,157	$	(355	)	$	53,102	$	(349	)	$	—	$	—	$	53,102	$	(349	)

The Company’s securities portfolio is primarily made up of fixed rate bonds, 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 bonds approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of ~~June~~September 30, 2020, 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 ~~June~~September 30, 2020, 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 ~~$4.0~~$6.0 million at ~~June~~September 30, 2020 were pledged as collateral to secure public deposits and facilitate borrowing from the Federal Reserve Bank of Richmond (“FRB”). At December 31, 2019, securities having carrying values of $5.0 million were similarly pledged.

For the ~~six~~nine months ended ~~June~~September 30, 2020, proceeds from the sales of securities amounted to ~~$46.1~~$62.2 million, with gross realized gains of ~~$655~~$882 thousand and gross realized losses of ~~$12~~$147 thousand, for a net realized gain of ~~$643~~$734 thousand. For the ~~six~~nine months ended ~~June~~September 30, 2019, proceeds from the sales of securities amounted to ~~$10.4~~$21.1 million, with gross realized gains of ~~$93~~$114 thousand and gross realized losses of ~~$29~~$43 thousand, for a net realized gain of ~~$64~~$71 thousand.

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation, ~~(“CBBFC”),~~ the holding company for Community Bankers Bank. These restricted securities, totaling $3.4 million and $1.7 million as of ~~both June~~September 30, 2020 and December 31, 2019, are carried at cost. The increase was attributed to the required purchase of additional FHLB stock with the advances made in the third quarter of 2020.

The composition of the loan portfolio by loan classification at ~~June~~September 30, 2020 and December 31, 2019 appears below (dollars in thousands).

	June 30,			December 31,			September 30,			December 31,
	2020			2019			2020			2019
Commercial
Commercial and industrial - organic	$	37,459		$	38,843		$	32,949		$	38,843
Commercial and industrial - Paycheck Protection Program		84,244			—			84,706			—
Commercial and industrial - government guaranteed		33,959			35,347			32,455			35,347
Commercial and industrial - syndicated		6,374			6,398			6,367			6,398
Total commercial and industrial		162,036			80,588			156,477			80,588
Real estate construction and land
Residential construction		3,208			2,197			1,597			2,197
Commercial construction		16,010			6,880			15,565			6,880
Land and land development		7,282			8,063			6,591			8,063
Total construction and land		26,500			17,140			23,753			17,140
Real estate mortgages
1-4 family residential, first lien, investment		55,180			44,099			61,656			44,099
1-4 family residential, first lien, owner occupied		16,766			20,671			18,848			20,671
1-4 family residential, junior lien		2,254			2,520			2,625			2,520
1-4 family residential - purchased		27,050			33,428			22,368			33,428
Home equity lines of credit, first lien		9,862			10,268			9,827			10,268
Home equity lines of credit, junior lien		9,990			9,671			8,537			9,671
Farm		7,949			8,808			7,217			8,808
Multifamily		32,330			27,093			36,113			27,093
Commercial owner occupied		97,267			96,117			98,219			96,117
Commercial non-owner occupied		121,823			118,561			128,999			118,561
Total real estate mortgage		380,471			371,236			394,409			371,236
Consumer
Consumer revolving credit		18,435			20,081			19,312			20,081
Consumer all other credit		4,209			5,741			3,953			5,741
Student loans purchased		40,743			44,747			39,031			44,747
Total consumer		63,387			70,569			62,296			70,569
Total loans		632,394			539,533			636,935			539,533
Less: Allowance for loan losses		(4,917	)		(4,209	)		(5,334	)		(4,209	)
Net loans	$	627,477		$	535,324		$	631,601		$	535,324

During the ~~second quarter of~~nine months ended September 30, 2020, the Bank originated $86.9 million of Small Business Administration ~~(SBA)~~(“SBA”) Paycheck Protection Program ~~(PPP)~~(“PPP”) loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19.

The balances in the table above include unamortized premiums and net deferred loan costs (fees). As of ~~June~~September 30, 2020 and December 31, 2019, unamortized premiums on loans purchased were ~~$2.2~~$2.0 million and $2.5 million, respectively. Net deferred loan costs (fees) totaled ~~$(2.5)~~$(2.1) million and $100 thousand as of ~~June~~September 30, 2020 and December 31, 2019. The deferred fees increased ~~$2.6~~$2.2 million due to the fees collected from the SBA for the PPP loans ~~which~~that are being amortized over the contractual life of the underlying loans, most of which are over a 24-month period.

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.

~~Following is a~~The following tables reflect the breakdown by class of the loans classified as impaired loans as of ~~June~~September 30, 2020 and December 31, 2019. 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 ~~six~~nine months ended ~~June~~September 30, 2020 or the twelve months ended December 31, 2019. Interest income recognized is for the ~~six~~nine months ended ~~June~~September 30, 2020 or the twelve months ended December 31, ~~2019.(Dollars~~2019 (dollars below reported in ~~thousands.)~~thousands).

June 30, 2020	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2020											Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Land and land development	$	11	$	57	$	-	$	185	$	-	$	9	$	56	$	-	$	185	$	-
1-4 family residential mortgages, junior lien		113		113		-		115		3		110		110		-		115		4
Commercial non-owner occupied real estate		854		854		-		865		23		838		838		-		865		35
Total impaired loans without a valuation allowance		978		1,024		-		1,165		26		957		1,004		-		1,165		39

Impaired loans with a valuation allowance
Student loans purchased		1,090		1,090		7		1,110		37		1,202		1,202		4		1,110		58
Total impaired loans with a valuation allowance		1,090		1,090		7		1,110		37		1,202		1,202		4		1,110		58
Total impaired loans	$	2,068	$	2,114	$	7	$	2,275	$	63	$	2,159	$	2,206	$	4	$	2,275	$	97

Included in the impaired loans above are non-accrual loans. Generally, loans are placed on non-accrual when a loan 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):

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Land and land development	$	11	$	279	$	9	$	279
Commercial and industrial - organic		-		20		-		20
Total non-accrual loans	$	11	$	299	$	9	$	299

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 Bank has approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest, payments for a 90- to 180-day period. 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. While interest will continue to accrue to income, in accordance with GAAP, if the Bank ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively impacted. A total of ~~$56.8~~$58.4 million in loan deferments have been approved ~~in total~~ since the beginning of the ~~pandemic, and as~~pandemic. As of ~~June~~September 30, 2020, ~~$17.0~~$48.9 million, or ~~29.9%~~83.8%, of the total loan deferments approved have returned to normal payment schedules and are now current.

Based on regulatory guidance on ~~Student Lending,~~student lending, the Company has classified 7281 of its student loans purchased as TDRs for a total of ~~$1.1~~$1.2 million as of ~~June~~September 30, 2020. 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 restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the 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 probable loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of 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 (TDRs)	June 30, 2020				December 31, 2019
Troubled debt restructurings									September 30, 2020				December 31, 2019
	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, junior lien		1	$	113		1	$	117		1	$	110		1	$	117
Commercial non-owner occupied real estate		1		854		1		879		1		838		1		879
Student loans purchased		72		1,090		67		1,184		81		1,202		67		1,184
Total performing TDRs		74	$	2,057		69	$	2,180		83	$	2,150		69	$	2,180

Nonperforming TDRs
Land and land development		1	$	11		1	$	13		1	$	9		1	$	13
Total nonperforming TDRs		1	$	11		1	$	13		1	$	9		1	$	13
Total TDRs		75	$	2,068		70	$	2,193		84	$	2,159		70	$	2,193

A summary of loans shown above that were modified under the terms of a TDR during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 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 three months ended						For three months ended						For three months ended						For three months ended
	June 30, 2020						June 30, 2019						September 30, 2020						September 30, 2019
	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
Student loans purchased		6	$	49	$	49		10	$	78	$	78		9	$	119	$	119		10	$	78	$	78
Total loans modified during the period		6	$	49	$	49		10	$	78	$	78		9	$	119	$	119		10	$	78	$	78

	For the six months ended						For the six months ended						For the nine months ended						For the nine months ended
	June 30, 2020						June 30, 2019						September 30, 2020						September 30, 2019
	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
Student loans purchased		11	$	109	$	109		12	$	133	$	133		15	$	168	$	168		12	$	133	$	133
Total loans modified during the period		11	$	109	$	109		12	$	133	$	133		15	$	168	$	168		12	$	133	$	133

During the ~~six~~nine months ended ~~June~~September 30, 2020, there were 2 loans modified as TDRs that subsequently defaulted which had been modified as TDRs during the twelve months prior to default. These student loans had a balance of $7 thousand prior to being charged off. There were 3 loans modified as a TDR that subsequently defaulted during the year ended December 31, 2019 which had been modified as a TDR during the twelve months prior to default. These student ~~loan~~loans had balances totaling $23 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 either ~~June~~September 30, 2020 or December 31, 2019.

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

For purposes of determining the allowance for loan losses, 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.

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.

¹~~Commercial and industrial – government guaranteed class excludes Paycheck Protection Program loans~~

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

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 ~~on a semi-annual basis.~~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.

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.

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.

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

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.

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.

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.

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 ~~June~~September 30, 2020 and December 31, 2019 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

June 30, 2020	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
September 30, 2020															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial
Commercial and industrial - organic	$	5,980	$	16,733	$	14,182	$	224	$	—	$	340	$	37,459	$	6,313	$	14,985	$	11,084	$	-	$	-	$	567	$	32,949
Commercial and industrial - Paycheck Protection Program		84,244		-		-		-		-		-		84,244		84,706		-		-		-		-		-		84,706
Commercial and industrial - government guaranteed		33,959		-		-		-		-		-		33,959		32,455		-		-		-		-		-		32,455
Commercial and industrial - syndicated		-		-		6,374		-		-		-		6,374		-		-		6,367		-		-		-		6,367
Real estate construction
Residential construction		-		-		3,208		-		-		-		3,208		-		-		1,597		-		-		-		1,597
Commercial construction		-		-		16,010		-		-		-		16,010		-		-		15,565		-		-		-		15,565
Land and land development		-		-		7,059		200		-		23		7,282		-		-		6,375		-		-		216		6,591
Real estate mortgages
1-4 family residential, first lien investment		-		-		52,114		2,702		-		364		55,180		-		-		58,089		2,349		544		674		61,656
1-4 family residential, first lien, owner occupied		-		-		14,979		1,022		-		765		16,766		-		-		16,633		1,012		640		563		18,848
1-4 family residential, junior lien		-		-		1,805		31		15		403		2,254		-		-		2,471		30		14		110		2,625
1-4 family residential, first lien - purchased		-		-		27,050		-		-		-		27,050		-		-		22,368		-		-		-		22,368
Home equity lines of credit, first lien		-		-		9,862		-		-		-		9,862		-		-		9,827		-		-		-		9,827
Home equity lines of credit, junior lien		-		-		9,824		84		-		82		9,990		-		-		8,371		84		-		82		8,537
Farm		-		-		6,366		307		-		1,276		7,949		-		-		5,650		302		-		1,265		7,217
Multifamily		-		-		31,934		396		-		-		32,330		-		-		35,720		228		-		165		36,113
Commercial owner occupied		-		-		86,895		5,533		-		4,839		97,267		-		-		88,810		1,153		-		8,256		98,219
Commercial non-owner occupied		-		-		119,431		1,510		-		882		121,823		-		-		126,754		995		-		1,250		128,999
Consumer
Consumer revolving credit		839		17,433		160		-		-		3		18,435		844		18,218		250		-		-		-		19,312
Consumer all other credit		400		3,340		468		-		-		1		4,209		409		3,027		516		-		-		1		3,953
Student loans purchased		-		-		39,374		1,213		64		92		40,743		-		-		37,339		1,407		132		153		39,031
Total Loans	$	125,422	$	37,506	$	447,095	$	13,222	$	79	$	9,070	$	632,394	$	124,727	$	36,230	$	453,786	$	7,560	$	1,330	$	13,302	$	636,935

December 31, 2019	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial
Commercial and industrial - organic	$	6,463	$	16,453	$	14,257	$	1,493	$	37	$	140	$	38,843
Commercial and industrial - government guaranteed		35,347		-		-		-		-		-		35,347
Commercial and industrial - syndicated		-		-		6,398		-		-		-		6,398
Real estate construction
Residential construction		-		-		2,197		-		-		-		2,197
Commercial construction		-		-		6,880		-		-		-		6,880
Land and land development		-		-		7,563		207		-		293		8,063
Real estate mortgages
1-4 family residential, first lien, investment		-		-		39,641		4,076		-		382		44,099
1-4 family residential, first lien, owner occupied		-		-		19,578		1,040		-		53		20,671
1-4 family residential, junior lien		-		-		2,029		33		17		441		2,520
1-4 family residential, first lien - purchased		-		-		33,428		-		-		-		33,428
Home equity lines of credit, first lien		-		-		9,591		677		-		-		10,268
Home equity lines of credit, junior lien		-		-		9,357		232		-		82		9,671
Farm		-		-		6,149		318		-		2,341		8,808
Multifamily		-		-		26,690		403		-		-		27,093
Commercial owner occupied		-		-		86,884		5,928		1,677		1,628		96,117
Commercial non-owner occupied		-		-		116,092		1,558		-		911		118,561
Consumer										-
Consumer revolving credit		279		19,176		606		20		-		-		20,081
Consumer all other credit		199		5,035		507		-		-		-		5,741
Student loans purchased		-		-		42,598		1,729		211		209		44,747
Total Loans	$	42,288	$	40,664	$	430,445	$	17,714	$	1,942	$	6,480	$	539,533

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

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.

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. 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 the effects of COVID-19 are sustained.

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 market 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 ~~$2.1~~$2.2 million at ~~June~~September 30, 2020, 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 $7$4 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 ~~June~~September 30, 2020 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 loan portfolio segment for the ~~six~~nine months ended ~~June~~September 30, 2020 and the year ended December 31, 2019 appears below (dollars in thousands):

Allowance for Loan Losses Rollforward by Portfolio Segment	Allowance for Loan Losses Rollforward by Portfolio Segment														Allowance for Loan Losses Rollforward by Portfolio Segment

As of and for the period ended June 30, 2020
As of and for the period ended September 30, 2020															As of and for the period ended September 30, 2020
		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			$	302		$	109	$	2,684	$	1,114		$	4,209
Charge-offs			-			-		-		(581	)		(581	)			-			-		-		(643	)		(643	)
Recoveries			19			-		-		127			146				23			-		-		378			401
Provision for (recovery of) loan losses			(59	)		96		691		415			1,143				(86	)		65		997		391			1,367
Ending Balance		$	262		$	205	$	3,375	$	1,075		$	4,917			$	239		$	174	$	3,681	$	1,240		$	5,334

Ending Balance:
Individually evaluated for impairment		$	-		$	-	$	-	$	7		$	7			$	-		$	-	$	-	$	4		$	4
Collectively evaluated for impairment			262			205		3,375		1,068			4,910				239			174		3,681		1,236			5,330
Loans:
Individually evaluated for impairment		$	-		$	11	$	967	$	1,090		$	2,068			$	-		$	9	$	948	$	1,202		$	2,159
Collectively evaluated for impairment			162,036			26,489		379,504		62,297			630,326				156,477			23,744		393,461		61,094			634,776
Ending Balance		$	162,036		$	26,500	$	380,471	$	63,387		$	632,394			$	156,477		$	23,753	$	394,409	$	62,296		$	636,935

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses 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 ~~June~~September 30, 2020 and December 31, ~~2019. (Dollars~~2019 (dollars below reported in ~~thousands.)~~thousands).

Past Due Aging as of June 30, 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 September 30, 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
Commercial loans
Commercial and industrial - organic	$	45	$	421	$	-	$	466	$	36,993	$	37,459	$	-	$	-	$	-	$	-	$	-	$	32,949	$	32,949	$	-
Commercial and industrial - Paycheck Protection Program		-		-		-		-		84,244		84,244		-		-		-		-		-		84,706		84,706		-
Commercial and industrial - government guaranteed		-		-		548		548		33,411		33,959		548		491		-		-		491		31,964		32,455		-
Commercial and industrial - syndicated		-		-		-		-		6,374		6,374		-		-		-		-		-		6,367		6,367		-
Real estate construction and land
Residential construction		-		-		-		-		3,208		3,208		-		-		-		-		-		1,597		1,597		-
Commercial construction		-		-		-		-		16,010		16,010		-		-		-		-		-		15,565		15,565		-
Land and land development		-		12		-		12		7,270		7,282		-		-		12		-		12		6,579		6,591		-
Real estate mortgages
1-4 family residential, first lien, investment		-		681		-		681		54,499		55,180		-		-		75		-		75		61,581		61,656		-
1-4 family residential, first lien, owner occupied		-		-		-		-		16,766		16,766		-		-		-		-		-		18,848		18,848		-
1-4 family residential, junior lien		-		-		-		-		2,254		2,254		-		-		-		-		-		2,625		2,625		-
1-4 family residential - purchased		-		384		437		821		26,229		27,050		437		-		500		-		500		21,868		22,368		-
Home equity lines of credit, first lien		-		-		-		-		9,862		9,862		-		-		-		-		-		9,827		9,827		-
Home equity lines of credit, junior lien		-		-		-		-		9,990		9,990		-		-		-		-		-		8,537		8,537		-
Farm		-		-		-		-		7,949		7,949		-		-		-		-		-		7,217		7,217		-
Multifamily		-		-		-		-		32,330		32,330		-		-		-		-		-		36,113		36,113		-
Commercial owner occupied		-		-		-		-		97,267		97,267		-		-		-		-		-		98,219		98,219		-
Commercial non-owner occupied		-		-		-		-		121,823		121,823		-		-		-		-		-		128,999		128,999		-
Consumer loans
Consumer revolving credit		-		20		-		20		18,415		18,435		-		-		-		-		-		19,312		19,312		-
Consumer all other credit		-		-		-		-		4,209		4,209		-		-		-		-		-		3,953		3,953		-
Student loans purchased		123		64		92		279		40,464		40,743		92		205		133		61		399		38,632		39,031		61
Total Loans	$	168	$	1,582	$	1,077	$	2,827	$	629,567	$	632,394	$	1,077	$	696	$	720	$	61	$	1,477	$	635,458	$	636,935	$	61

Past Due Aging as of December 31, 2019	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		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
Commercial loans
Commercial and industrial - organic	$	604	$	20	$	-	$	624	$	38,219	$	38,843	$	-	$	604	$	20	$	-	$	624	$	38,219	$	38,843	$	-
Commercial and industrial - government guaranteed		-		-		548		548		34,799		35,347		548		-		-		548		548		34,799		35,347		548
Commercial and industrial - syndicated		-		-		-		-		6,398		6,398		-		-		-		-		-		6,398		6,398		-
Real estate construction and land
Residential construction		-		-		-		-		2,197		2,197		-		-		-		-		-		2,197		2,197		-
Commercial construction		-		-		-		-		6,880		6,880		-		-		-		-		-		6,880		6,880		-
Land and land development		1		-		280		281		7,782		8,063		14		1		-		280		281		7,782		8,063		14
Real estate mortgages
1-4 family residential, first lien, investment		188		-		-		188		43,911		44,099		-		188		-		-		188		43,911		44,099		-
1-4 family residential, first lien, owner occupied		-		123		-		123		20,548		20,671		-		-		123		-		123		20,548		20,671		-
1-4 family residential, junior lien		-		-		-		-		2,520		2,520		-		-		-		-		-		2,520		2,520		-
1-4 family residential - purchased		501		158		-		659		32,769		33,428		-		501		158		-		659		32,769		33,428		-
Home equity lines of credit, first lien		-		-		-		-		10,268		10,268		-		-		-		-		-		10,268		10,268		-
Home equity lines of credit, junior lien		-		-		-		-		9,671		9,671		-		-		-		-		-		9,671		9,671		-
Farm		-		-		-		-		8,808		8,808		-		-		-		-		-		8,808		8,808		-
Multifamily		-		-		-		-		27,093		27,093		-		-		-		-		-		27,093		27,093		-
Commercial owner occupied		-		-		-		-		96,117		96,117		-		-		-		-		-		96,117		96,117		-
Commercial non-owner occupied		0		-		-		0		118,561		118,561		-		-		-		-		-		118,561		118,561		-
Consumer loans
Consumer revolving credit		20		-		-		20		20,061		20,081		-		20		-		-		20		20,061		20,081		-
Consumer all other credit		43		0		-		43		5,698		5,741		-		43		-		-		43		5,698		5,741		-
Student loans purchased		697		218		209		1,124		43,623		44,747		209		697		218		209		1,124		43,623		44,747		209
Total Loans	$	2,054	$	519	$	1,037	$	3,610	$	535,923	$	539,533	$	771	$	2,054	$	519	$	1,037	$	3,610	$	535,923	$	539,533	$	771

On June 13, 2019, the Board of Directors approved a stock dividend of five percent (5%) on the outstanding shares of common stock of the Company (or .05 share for each share outstanding) which was issued on July 5, 2019 to all shareholders of record as of the close of business on June 26, 2019, referred to as the “5% Stock Dividend”. Shareholders received cash in lieu of any fractional shares that they otherwise would have been entitled to receive in connection with the stock dividend. The price paid for fractional shares was based on the volume-weighted average price of a share of common stock for the most recent three ~~(3)~~ days prior to the record date during which a trade of the Company’s stock occurred.

For the following table, share and per share data have been adjusted to reflect the 5% Stock Dividend. The table 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, 2020 and 2019. Diluted net income per share is computed based on the weighted average number of shares of ~~diluted potential common stock for the three and six months ended June 30, 2020 and 2019. Potential dilutive~~ common stock equivalents ~~have no effect on net income available~~outstanding, to the extent dilutive. The Company’s common ~~shareholders.~~stock equivalents relate to outstanding common stock options. Unvested restricted stock as noted in the Consolidated Balance Sheets as of ~~June~~September 30, 2020 and December 31, 2019 is included in the calculation of basic and diluted net income per ~~share. (Dollars~~share (dollars below reported in thousands except per share ~~data.)~~data).

Three Months Ended	June 30, 2020						June 30, 2019						September 30, 2020						September 30, 2019
	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	$	2,088		2,710,019	$	0.77	$	2,115		2,688,005	$	0.79	$	1,870		2,714,273	$	0.69	$	1,897		2,689,092	$	0.71
Effect of dilutive stock options		-		998		-		-		960		-		-		624		-		-		1,022		-
Diluted net income per share	$	2,088	$	2,711,017	$	0.77	$	2,115	$	2,688,965	$	0.79	$	1,870	$	2,714,897	$	0.69	$	1,897	$	2,690,114	$	0.71

Six Months Ended	June 30, 2020						June 30, 2019
Nine Months Ended													September 30, 2020						September 30, 2019
	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	$	3,492		2,701,411	$	1.29	$	3,361		2,683,122	$	1.25	$	5,362		2,705,730	$	1.98	$	5,258		2,685,134	$	1.96
Effect of dilutive stock options		-		900		-		-		4,269		-		-		708		-		-		3,627		-
Diluted net income per share	$	3,492	$	2,702,311	$	1.29	$	3,361	$	2,687,391	$	1.25	$	5,362	$	2,706,438	$	1.98	$	5,258	$	2,688,761	$	1.96

For the ~~six~~nine months ended ~~June~~September 30, 2020, there were ~~104,301~~145,404 option shares considered anti-dilutive and excluded from this calculation. For the ~~six~~nine months ended ~~June~~September 30, 2019, there were ~~66,308~~66,301 option shares, as adjusted, considered anti-dilutive and excluded from this calculation.

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 275,625 shares of the Company’s common stock, as adjusted by the 5% Stock Dividend and prior 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 and other ~~stock based~~stock-based awards. NaN new grants will 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 ~~will not~~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 ~~June~~September 30, 2020. Share data and exercise price range per share have been adjusted to reflect the 5% Stock Dividend and prior 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			2005 Plan			2014 Plan
Aggregate shares issuable		253,575			275,625			253,575			275,625
Options issued, net of forfeited and expired options		(59,870	)		(122,047	)		(59,870	)		(162,047	)
Unrestricted stock issued		-			(11,535	)		0			(11,535	)
Restricted stock grants issued		-			(26,268	)		0			(26,268	)
Cancelled due to Plan expiration		(193,705	)		-			(193,705	)		0
Remaining available for grant		-			115,775			0			75,775

Grants issued and outstanding:
Total vested and unvested shares		1,379			105,404			1,379			145,404
Fully vested shares		1,379			13,722			1,379			26,977
Exercise price range	$13.69 to $13.69			$26.00 to $42.62			$13.69 to $13.69			$23.75 to $42.62

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.

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

	June 30, 2020						September 30, 2020
	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2020		80,783	$	40.76				80,783	$	40.76
Issued		26,000		26.00				66,000		24.64
Exercised		—		—				—		—
Expired		—		—				—		—
Outstanding at June 30, 2020		106,783	$	37.17	$	16
Outstanding at September 30, 2020								146,783	$	33.51	$	28

Options exercisable at June 30, 2020		28,356	$	40.53	$	16
Options exercisable at September 30, 2020								28,356	$	40.53	$	14

For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company recognized ~~$58~~$88 thousand and ~~$47~~$71 thousand, respectively, in compensation expense for stock options. As of ~~June~~September 30, 2020, there was ~~$377~~$432 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2025. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. ~~26,000 stock~~Stock option grants for 40,000 shares were issued during the ~~six~~three months ended ~~June~~September 30, 2020 and ~~420 stock option grants were issued during the six months ended June 30, 2019. NaN~~0 stock option grants were issued during the three months ended ~~June~~September 30, ~~2020 and 420 stock~~2019. Stock option grants for 66,000 shares were issued during the ~~three~~nine months ended ~~June~~September 30, 2020, and stock option grants for 420 shares were issued during the nine months ended September 30, 2019.

The fair value of each option granted in 2020 was estimated based on the assumptions noted in the following table:

Summary information pertaining to options outstanding at ~~June~~September 30, 2020 is shown below. Share and per share data have been adjusted to reflect the 5% Stock Dividend and prior stock dividends.

	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
$10.65 to $20.00		1,379	2.6 Years	$	13.69		1,379	$	13.69		1,379	2.4 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		27,103	9.6 Years		26.06		551		27.39		67,103	9.7 Years		24.68		551		27.39
$30.01 to $40.00		20,820	8.7 Years		38.14		3,444		39.44		20,820	8.4 Years		38.14		3,444		39.44
$40.01 to $42.62		57,481	7.9 Years		42.62		22,982		42.62		57,481	7.6 Years		42.62		22,982		42.62
Total		106,783	8.4 Years	$	37.17		28,356	$	40.53		146,783	8.7 Years	$	33.51		28,356	$	40.53

Unrestricted stock grants - NaN unrestricted stock grants were issued in the ~~first six~~nine months ofended September 30, 2020. On February 20, 2019, a total of 11,535 shares of unrestricted stock, as adjusted for the 5% Stock Dividend, were granted to non-employee directors and certain members of executive management for services to be provided during the year ended December 31, 2019. Based on the market price on February 20, 2019 of $38.65, the total expense for these shares of $424 thousand was expensed in 2019 as those services were provided. As of ~~June~~September 30, 2019, ~~$212~~$318 thousand of this total had been realized in stock grant expense.

Restricted stock grants – In September 2019, 4,000 restricted shares were granted to certain members of executive management, vesting over a four-year period. In March 2020, 10,368 restricted shares were granted to non-employee directors, vesting over a four-year period. In April 2020, 1,900 shares were issued to lenders in accordance with an internal lender incentive plan, vesting over a five-year period, and in May 2020, 10,000 restricted shares were granted to certain members of executive management, vesting over a four-year period. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, ~~$39~~$42 thousand and ~~$54~~$96 thousand, respectively, was expensed as a result of restricted stock grants. As of ~~June~~September 30, 2020, there was ~~$643~~$599 thousand in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2025. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, ~~there~~$3 thousand in expense was ~~0 expense incurred, and as of June 30, 2019, there was 0 unrecognized compensation expense, for restricted stock grants, as 0 restricted stock had been granted during or at such time.~~incurred.

Changes in the restricted stock grants outstanding during the ~~six~~nine months ended ~~June~~September 30, 2020 are summarized ~~below. (Dollars~~below (dollars in thousands except per share data):

	June 30, 2020						September 30, 2020
	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, 2020		4,000	$	36.00	$	101		4,000		$	36.00		$	96
Issued		22,268		25.34	562			22,268			25.34		537
Vested		—		—				(1,000	)		(36.00	)		(24	)
Nonvested at June 30, 2020		26,268	$	28.78	$	663
Nonvested at September 30, 2020								25,268		$	26.60		$	609

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.

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.

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 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).

The following tables present the balances measured at fair value on a recurring basis as of ~~June~~September 30, 2020 and December 31, 2019 (dollars in thousands):

			Fair Value Measurements at June 30, 2020 Using:								Fair Value Measurements at September 30, 2020 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 agencies	$	9,037	$	-	$	9,037	$	-	$	19,840	$	-	$	19,840	$	-
Mortgage-backed securities/CMOs		58,402		-		58,402		-		64,158		-		64,158		-
Municipal bonds		35,333		-		35,333		-		57,247		-		57,247		-
Total securities available for sale	$	102,772	$	-	$	102,772	$	-	$	141,245	$	-	$	141,245	$	-

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 (“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. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of ~~June~~September 30, 2020 and December 31, 2019, the Company had 0 OREO property.

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 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 of ~~$2.1~~$2.2 million as of ~~June~~September 30, 2020 and $2.5 million as of December 31, 2019. 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.

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 ~~June~~September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):

			Fair Value Measurements at June 30, 2020 Using:										Fair Value Measurements at September 30, 2020 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	$	34,887	$	34,887	$	-	$	-	$	34,887	$	11,672	$	11,672	$	-	$	-	$	11,672
Available for sale securities		102,772		-		102,772		-		102,772		141,245		-		141,245		-		141,245
Loans, net		624,477		-		-		615,070		615,070		631,601		-		-		633,165		633,165
Bank owned life insurance		16,628		-		16,628		-		16,628		16,739		-		16,739		-		16,739
Accrued interest receivable		2,548		-		336		2,212		2,548		2,878		-		530		2,348		2,878

Liabilities
Demand deposits and
interest-bearing transaction, money market, and savings accounts	$	617,602	$	-	$	617,602	$	-	$	617,602	$	596,426	$	-	$	596,426	$	-	$	596,426
Certificates of deposit and other time deposits		96,599		-		97,646		-		97,646		98,095		-		98,995		-		98,995
Accrued interest payable		208		-		208		-		208		176		-		176		-		176

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.

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale 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. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 (dollars in thousands)

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019			September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Available for sale securities
Realized gains on sales of securities	$	590		$	64		$	643		$	64		$	91		$	7		$	734		$	71
Tax effect		(124	)		(13	)		(135	)		(13	)		(19	)		(1	)		(154	)		(15	)
Realized gains, net of tax	$	466		$	51		$	508		$	51		$	72		$	6		$	580		$	56

Beginning in 2019, 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.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of ~~business previously combined under VNB Wealth.~~business. For both the three months ended ~~June~~September 30, 2020 and 2019, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, management fees totaling ~~$50~~$75 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets ~~previously allocated to~~of Sturman Wealth Advisors and VNB ~~Wealth~~Trust & Estate Services are

reported at the Bank ~~level subsequent to the merger of VNBTrust, National Association, into the Bank effective July 1, 2018;~~level; also, assets specifically allocated to the ~~VNB Wealth~~ lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.

Three months ended June 30, 2020	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Three months ended September 30, 2019													Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income													$	5,474		$	-	$	-	$	-		$	5,474
Provision for (recovery of) loan losses														(120	)		-		-		-			(120	)
Noninterest income														786			159		314		68			1,327
Noninterest expense														3,905			155		308		193			4,561
Income (loss) before income taxes														2,475			4		6		(125	)		2,360
Provision for income taxes														487			1		1		(26	)		463
Net income (loss)													$	1,988		$	3	$	5	$	(99	)	$	1,897

Nine months ended September 30, 2019													Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income	$	5,755	$	-	$	-		$	-		$	5,755	$	16,503		$	-	$	-	$	-		$	16,503
Provision for loan losses		378		-		-			-			378		500			-		-		-			500
Noninterest income		1,211		162		175			78			1,626		2,496			451		1,008		131			4,086
Noninterest expense		3,811		154		234			205			4,404		11,777			438		918		524			13,657
Income (loss) before income taxes		2,777		8		(59	)		(127	)		2,599		6,722			13		90		(393	)		6,432
Provision for income taxes		547		2		(12	)		(26	)		511		1,234			3		19		(82	)		1,174
Net income (loss)	$	2,230	$	6	$	(47	)	$	(101	)	$	2,088	$	5,488		$	10	$	71	$	(311	)	$	5,258


Six months ended June 30, 2020	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	11,130	$	-	$	-		$	-		$	11,130
Provision for loan losses		1,143		-		-			-			1,143
Noninterest income		2,346		340		433			176			3,295
Noninterest expense		7,774		328		472			373			8,947
Income (loss) before income taxes		4,559		12		(39	)		(197	)		4,335
Provision for income taxes		889		3		(8	)		(41	)		843
Net income (loss)	$	3,670	$	9	$	(31	)	$	(156	)	$	3,492

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. 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.

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.

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):

	June 30, 2020			September 30, 2020
Lease liability	$	3,966		$	3,783
Right-of-use asset	$	3,923		$	3,725
Weighted average remaining lease term	5.55 years			5.35 years
Weighted average discount rate		2.56	%		2.55	%

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Lease Expense	2020		2019		2020		2019		2020		2019		2020		2019
Operating lease expense	$	204	$	204	$	408	$	408	$	228	$	203	$	636	$	611
Short-term lease expense		29		37		57		73		28		34		85		107
Total lease expense	$	233	$	241	$	465	$	481	$	256	$	237	$	721	$	718
Cash paid for amounts included in lease liabilities	$	199	$	197	$	398	$	393	$	199	$	196	$	597	$	589

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	June 30, 2020			September 30, 2020
Six months ending December 31, 2020	$	426
Three months ending December 31, 2020				$	218
Twelve months ending December 31, 2021		877			877
Twelve months ending December 31, 2022		839			839
Twelve months ending December 31, 2023		753			753
Twelve months ending December 31, 2024		544			544
Twelve months ending December 31, 2025		469			469
Thereafter		372			372
Total undiscounted cash flows	$	4,280		$	4,072
Less: Discount		(314	)		(289	)
Lease liability	$	3,966		$	3,783

On October 1, 2020, the Company announced the signing of a definitive merger agreement with Fauquier Bankshares, Inc. (“Fauquier”), pursuant to which the companies will combine in an all-stock merger with the Company as the surviving company. At or immediately following consummation of the merger, The Fauquier Bank, the wholly owned banking subsidiary of Fauquier, will be merged with and into the Bank, with the Bank as the surviving bank. Under the terms of the merger agreement, Fauquier shareholders will receive 0.675 shares of Company stock for each share of Fauquier common stock they own. Shareholders of the Company will own approximately 51.4% and Fauquier shareholders will own approximately 48.6% of the combined company. The combined company will operate under the Virginia National Bankshares name and the combined bank will operate under the Virginia National Bank name. Additional information on the merger can be found in the Company’s 8-Ks filed with the SEC on October 1, 2020 and October 2, 2020.

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

The following discussion should be read in conjunction with ~~Virginia National Bankshares Corporation’s~~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, 2019. ~~Per share data for June 30, 2019 has been adjusted to reflect the 5% stock dividend effective July 5, 2019 (the “5% Stock Dividend”).~~ Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020 or any future period.

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, change in laws and regulations applicable to the Company and its subsidiaries, adequacy of funding sources, actuarial expected benefit payment, valuation of foreclosed assets, regulatory requirements, economic environment and other statements contained herein regarding matters that are not historical facts, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or 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;~~losses (“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; laws, regulations and guidance; accounting principles or guidelines; performance of assets under management; expenses related to the Company’s proposed merger with Fauquier Bankshares, Inc. (“Fauquier”), unexpected delays related to the merger, or the inability to obtain regulatory and shareholder approvals or satisfy other closing conditions required to complete the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Form 10-K for the year ended December 31, 2019 (the ~~Company’s~~“Company’s 2019 Form ~~10-K)~~10-K”) and other reports filed from time to time by the Company with the Securities and Exchange ~~Commission.~~Commission (“SEC”). 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.

On October 1, 2020, the Company announced the signing of a definitive merger agreement with Fauquier, pursuant to which the companies will combine in an all-stock merger with the Company as the surviving company. At or immediately following consummation of the merger, The Fauquier Bank, the wholly owned banking subsidiary of Fauquier, will be merged with and into the Virginia National Bank (the “Bank”), with the Bank as the surviving bank. Under the terms of the merger agreement, Fauquier shareholders will receive 0.675 shares of Company stock for each share of Fauquier common stock they own. Shareholders of the Company will own approximately 51.4% and Fauquier shareholders will own approximately 48.6% of the combined company. The combined company will operate under the Virginia National Bankshares name and the combined bank will operate under the Virginia National Bank name. Additional information on the merger can be found in the Company’s 8-Ks filed with the SEC on October 1, 2020 and October 2, 2020.

The COVID-19 pandemic has caused, and will likely continue to cause, economic and social disruption, significantly affecting many industries, including many of our clients. Significant uncertainty exists regarding the magnitude of the impact and duration of this pandemic. Following are brief descriptions of areas within our Company that have been or may be impacted.

The Company’s consolidated financial statements include estimates and assumptions made by management which affect the reported amounts of assets and liabilities, including the level of the ~~allowance for loan losses (ALLL)~~ALLL that is established. ~~While the Company has not yet experienced any charge-offs directly related to COVID-19, the~~The ALLL calculation and resulting provision for loan losses are impacted by changes in economic conditions. 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. If economic conditions ~~continue to~~improve or worsen, the Company could experience further ~~increases~~changes in the required ~~ALLL and record additional provision for loan loss expense.~~ALLL. It is possible that asset quality metrics could decline in the future if the effects of COVID-19 are sustained.

While most industries have been adversely impacted by COVID-19, the Company has exposures on its balance sheet as of ~~June~~September 30, 2020 in the following categories of loans that are considered to have higher risk of significant impact:

Note that the loan balances and percentages above do not include Small Business Administration ~~(SBA)~~(“SBA”) Paycheck Protection Program ~~(PPP)~~(“PPP”) loans made to entities within such categories.

Interest income could be reduced due to the economic impact of COVID-19. In accordance with guidance from regulators, we are working with borrowers who have been adversely affected by COVID-19 to defer principal only, or principal and interest payments for a 90- to 180-day period. While interest will continue to accrue to income, in accordance with accounting principles generally accepted in the United States (“GAAP”), if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively affected. Since the beginning of the pandemic, the Company has accommodated ~~169~~192 deferrals on outstanding loan balances of ~~$56.8~~$58.4 million (of which 131 deferrals on outstanding loan balances of $1.8 million were related to student loans). In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt ~~restructurings.~~restructurings (“TDRs”).

~~Within~~Primarily within the second quarter of 2020, 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 has closed 574 loans representing $86.9 million in funding, with average origination fees of 3.4%, assisting many nonprofits and local businesses through this program. Loans funded through the PPP are fully guaranteed by the U.S. government. The Company performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination was 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.

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.

As of ~~June~~September 30, 2020, 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 and to gauge the amount of SBA PPP loans the Company ~~can~~could and should accept.

As of ~~June~~September 30, 2020, the goodwill on our 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.

The Company reacted quickly to the COVID-19 pandemic. We began internal social distancing in mid-March, 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 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 schedule whereby ~~the majority of~~most staff members are working 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.~~telephone and encourage them to utilize online and mobile banking. The client service center was also temporarily moved to a larger location to allow ~~the team members to be physically separated in accordance with~~for appropriate social ~~distancing guidelines.~~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 ~~to customers~~ and ~~employees~~social media updates regarding ~~updates on~~ COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. Beginning mid-July, the Company took steps to resume normal branch activities with specific guidelines in place to continue protecting our customers and employees.

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 ~~the majority~~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.

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 2019 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2019.

The total assets of the Company as of ~~June~~September 30, 2020 were ~~$799.6~~$821.0 million. This is a ~~$97.0~~$118.4 million increase from the $702.6 million total assets reported at December 31, 2019 and a ~~$165.8~~$160.2 million increase from the ~~$633.8~~$660.8 million reported at ~~June~~September 30, 2019. A ~~$92.9~~$97.4 million increase in gross loans, primarily from the origination of $86.9 million in PPP loans, was the major reason for the increase in assets since year-end. In addition, the Company increased the balances in its securities portfolio by $29.0 million since year-end.

The Company had overnight federal funds sold of ~~$24.8 million~~$273 thousand as of ~~June~~September 30, 2020, compared to $4.2 million as of December 31, 2019 and ~~$12.3~~$14.0 million as of ~~June~~September 30, 2019. 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 ~~Federal Reserve Bank of Richmond’s~~ Excess Balance Account (“EBA”) of the Federal Reserve Bank of Richmond (“FRB”). The EBA is a limited-purpose account at the ~~Federal Reserve Bank~~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.

The Company’s investment securities portfolio as of ~~June~~September 30, 2020 totaled ~~$104.5~~$144.7 million, ~~a decrease~~an increase of ~~$11.2~~$29.0 million compared with the $115.7 million reported at December 31, 2019 and an increase of ~~$46.0~~$65.1 million from the ~~$58.5~~$79.6 million reported at ~~June~~September 30, 2019. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~June~~September 30, 2020 and December 31, 2019, the investment securities holdings represented ~~13.1%~~17.6% and 16.5% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $3.4 million as of September 30, 2020, and $1.7 million as of ~~June 30, 2020,~~ December 31, 2019 and ~~June~~September 30, 2019. These securities represent stock in the ~~Federal Reserve Bank of Richmond (“FRB-R”),~~FRB, the Federal Home Loan Bank of Atlanta (“~~FHLB-A”~~FHLB”), and CBB Financial Corporation, ~~(“CBBFC”),~~ the holding company for Community Bankers Bank. The level of ~~FRB-R~~FRB and ~~FHLB-A~~FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the ~~Federal Reserve Bank~~ Board of Governors of the Federal Reserve System (“Federal Reserve”) and the ~~Federal Home Loan Bank of Atlanta,~~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 ~~June~~September 30, 2020, the unrestricted securities portfolio totaled ~~$102.8~~$141.2 million. The following table summarizes the Company's available for sale securities by type as of ~~June~~September 30, 2020, December 31, 2019, and ~~June~~September 30, 2019 (dollars in thousands):

	June 30, 2020					December 31, 2019					June 30, 2019					September 30, 2020					December 31, 2019					September 30, 2019
			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 agencies	$	9,037		8.8	%	$	14,952		13.1	%	$	19,461		34.2	%	$	19,840		14.1	%	$	14,952		13.1	%	$	11,975		15.4	%
Corporate bonds		—		—			7,469		6.5	%		—		—			-		-			7,469		6.5	%		-		-
Mortgage-backed securities/CMOs		58,402		56.8	%		71,732		63.0	%		26,465		46.6	%		64,158		45.4	%		71,732		63.0	%		50,771		65.1	%
Municipal bonds		35,333		34.4	%		19,888		17.4	%		10,922		19.2	%		57,247		40.5	%		19,888		17.4	%		15,184		19.5	%
Total available for sale securities	$	102,772		100.0	%	$	114,041		100.0	%	$	56,848		100.0	%	$	141,245		100.0	%	$	114,041		100.0	%	$	77,930		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.

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 ~~borrower.~~borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification ~~in order~~ to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for loans includes Charlottesville, Albemarle County, Winchester, Frederick County, Richmond and areas in the Commonwealth of Virginia that are within a ~~75 mile~~75-mile radius of any ~~Virginia National Bank office.~~office of the Company.

As of ~~June~~September 30, 2020, total loans were ~~$632.4~~$636.9 million, compared to $539.5 million as of December 31, 2019 and ~~$521.8~~$522.1 million at ~~June~~September 30, 2019. Loans as a percentage of total assets at ~~June~~September 30, 2020 were ~~79.1%~~77.6%, compared to ~~82.3%~~79.0% as of ~~June~~September 30, 2019. Loans as a percentage of deposits at ~~June~~September 30, 2020 were ~~88.5%~~91.7%, compared to ~~94.3%~~90.1% as of ~~June~~September 30, 2019.

The following table summarizes the Company's loan portfolio by type of loan as of ~~June~~September 30, 2020, December 31, 2019, and ~~June~~September 30, 2019 (dollars in thousands):

	June 30, 2020					December 31, 2019					June 30, 2019					September 30, 2020					December 31, 2019					September 30, 2019
	Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total
Commercial and industrial	$	162,036		25.6	%	$	80,588		14.9	%	$	86,610		16.6	%	$	156,477		24.6	%	$	80,588		14.9	%	$	81,513		15.6	%
Real estate - commercial		259,369		41.0	%		250,579		46.4	%		245,906		47.1	%		270,548		42.5	%		250,579		46.4	%		246,554		47.2	%
Real estate - residential mortgage		121,102		19.2	%		120,657		22.4	%		96,472		18.5	%		123,861		19.4	%		120,657		22.4	%		100,532		19.3	%
Real estate - construction		26,500		4.2	%		17,140		3.2	%		14,320		2.8	%		23,753		3.7	%		17,140		3.2	%		16,671		3.2	%
Consumer loans		63,387		10.0	%		70,569		13.1	%		78,455		15.0	%		62,296		9.8	%		70,569		13.1	%		76,834		14.7	%
Total loans	$	632,394		100.0	%	$	539,533		100.0	%	$	521,763		100.0	%	$	636,935		100.0	%	$	539,533		100.0	%	$	522,104		100.0	%

Loan balances increased ~~$92.9~~$97.4 million, or ~~17.2%~~18.1%, since December 31, 2019 and increased ~~$110.6~~$114.8 million, or ~~21.2%~~22.0%, from ~~June~~September 30, 2019. The ~~primary reason for the increase since year-end was~~increases are largely due to the origination of $86.9 million in ~~SBA~~ PPP ~~loans.~~loans, as well as $10.5 million in net non-PPP loan growth in the first nine months of 2020 and the purchase of a $17.4 million 1-4 family residential mortgage package in the fourth quarter of 2019.

The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth. Purchased loans with balances outstanding of ~~$108.2~~$100.2 million as of ~~June~~September 30, 2020 were comprised of:

Management will continue to evaluate loan purchase transactions to strengthen earnings, diversity the loan portfolio and supplement organic loan growth.

Non-accrual loans totaled ~~$11~~$9 thousand at ~~June~~September 30, 2020, compared to the $299 thousand and ~~$390~~$337 thousand reported at December 31, 2019 and ~~June~~September 30, 2019, respectively. The December 31, 2019 non-accrual balance included a loan which was foreclosed upon during the second quarter of 2020, with the Company being made whole on the loan with the proceeds from a third-party bidder without the Company’s taking title to the property. The ~~June~~September 30, 2019 non-accrual balance included ~~$363~~$337 thousand of student loan balances for which the Company has received payment from the liquidation process in the fourth quarter of 2019.

The Company had loans in its portfolio totaling ~~$1.1 million,~~$61 thousand, $771 thousand and ~~$617~~$199 thousand, as of ~~June~~September 30, 2020, December 31, 2019 and ~~June~~September 30, 2019, respectively, that were ~~ninety~~90 or more days past due, with all such loans still accruing interest as the Company deemed them to be collectible. ~~Each~~The balance as of ~~these balances includes~~December 31, 2019 included a ~~government guaranteed~~ loan of approximately $548 ~~thousand. The past due balance as of June 30, 2020 included one mortgage loan of $437~~ thousand, ~~covered~~which was granted a deferral by ~~a formal forbearance agreement. As of June 30, 2020, a total of seven loans were 90 days or more past due~~the USDA and ~~still accruing interest, of which five were student loans totaling $92 thousand.~~is 100% guaranteed by such governmental entity.

At ~~June~~September 30, 2020, the Company had loans classified as impaired loans in the amount of ~~$2.1~~$2.2 million, compared to $2.5 million at December 31, 2019 and $2.6 million at ~~June~~September 30, 2019. Based on regulatory guidance on ~~Student Lending,~~student lending, the Company has classified 7281 of its purchased student loans as TDRs for a total of ~~$1.1~~$1.2 million as of ~~June~~September 30, 2020. 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 restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. 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.

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

As discussed earlier, the Company utilizes a loss migration model. Migration analysis 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. 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 the effects of COVID-19 are sustained.

The relationship of the ~~allowance for loan losses~~ALLL to total loans appears below (dollars in thousands):

	June 30, 2020			December 31, 2019			June 30, 2019			September 30, 2020			December 31, 2019			September 30, 2019
Loans held for investment at period-end	$	632,394		$	539,533		$	521,763		$	636,935		$	539,533		$	522,104
Allowance for loan losses	$	4,917		$	4,209		$	4,817		$	5,334		$	4,209		$	3,983
Allowance as a percent of period-end loans		0.78	%		0.78	%		0.92	%		0.84	%		0.78	%		0.76	%

The ~~Allowance for Loan Losses~~ALLL as a percentage of assets was 0.84% as of September 30, 2020, 0.78% as of ~~June 30, 2020 and~~ December 31, 2019, ~~compared to 0.92%~~and 0.76% as of ~~June~~September 30, 2019. The percentage ~~remained flat~~increased as compared to year-end aswas primarily due to the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors, and was partially offset by the SBA-guaranteed PPP loans not ~~needing~~requiring an allowance. Note that the allowance for loan losses as a percentage of total loans, excluding PPP loans, was 0.90% as of June 30, 2020. The decline in the recorded percentage compared to the same quarter in the prior year was primarily due to a shared national credit with a higher loan loss allowance, which was later sold in the third quarter of 2019, and the impact of the PPP loans.

Provisions for loan losses totaling ~~$1.1~~$1.4 million and ~~$620~~$500 thousand were recorded in the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The following is a summary of the changes in the ~~allowance for loan losses~~ALLL for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 (dollars in thousands):

	2020			2019			2020			2019
Allowance for loan losses, January 1	$	4,209		$	4,891		$	4,209		$	4,891
Charge-offs		(581	)		(823	)		(643	)		(1,570	)
Recoveries		146			129			401			162
Provision for loan losses		1,143			620			1,367			500
Allowance for loan losses, June 30	$	4,917		$	4,817
Allowance for loan losses, September 30							$	5,334		$	3,983

For additional insight into management’s approach and methodology in estimating the ~~allowance for loan losses,~~ALLL, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 4 of the Notes to Consolidated Financial Statements. In addition, Note 4 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 ~~Allowance for Loan Losses~~ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ~~allowance for loan losses~~ALLL was adequately provided for as of ~~June~~September 30, 2020 and acknowledges that the ~~allowance for loan losses~~ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

The Company’s premises and equipment, net of depreciation, as of ~~June~~September 30, 2020 totaled ~~$5.7~~$5.4 million compared to $6.1 million as of December 31, 2019 and ~~$6.6~~$6.4 million as of ~~June~~September 30, 2019. 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 ~~June~~September 30, 2020, the Company occupied five full-service banking facilities in the cities of Charlottesville and Winchester, as well as the county of Albemarle in 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 anticipates opening the office ~~by year-end~~within 90 days, absent delays as a result of COVID-19.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters and operations center, as well as the principal offices of both Masonry Capital and Sturman Wealth Advisors. VNB Trust & Estate Services is located at 112 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.

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

As of ~~June~~September 30, 2020, ~~$3.9~~$3.7 million of right-of-use assets and ~~$4.0~~$3.8 million of lease liabilities are included in Other Assets and Other Liabilities, respectively, in accordance with ~~the Company’s implementation of ASU~~Accounting Standards Update 2016-02 “Leases” (Topic 842) ~~in the first quarter~~. As of September 30, 2019, ~~and subsequent leasing activities. This implementation required the Company to recognize~~$3.8 million of right-of-use assets ~~which~~and lease liabilities were included in Other Assets and Other Liabilities, respectively. 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.

~~Depository~~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, Richmond and Winchester areas.

Total deposits as of ~~June~~September 30, 2020 were ~~$714.2~~$694.5 million, an increase of ~~$93.0~~$73.3 million compared to the balances of $621.2 million at December 31, 2019, and an increase of ~~$160.7~~$115.1 million compared to the ~~$553.5~~$579.4 million total as of ~~June~~September 30, 2019. The primary reason for the increase since year-end is due to increased balances in PPP customer accounts.

Deposit accounts
(dollars in thousands)	June 30, 2020					December 31, 2019					June 30, 2019					September 30, 2020					December 31, 2019					September 30, 2019
	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	$	197,227		27.6	%	$	166,975		26.9	%	$	158,166		28.6	%	$	190,204		27.4	%	$	166,975		26.9	%	$	155,134		26.8	%
Interest checking accounts		136,274		19.1	%		122,994		19.8	%		97,620		17.6	%		135,569		19.5	%		122,994		19.8	%		110,152		19.0	%
Money market and savings deposit accounts		284,101		39.8	%		221,964		35.7	%		175,740		31.8	%		270,653		39.0	%		221,964		35.7	%		190,568		32.9	%

Total noninterest and low cost deposit accounts		617,602		86.5	%		511,933		82.4	%		431,526		78.0	%		596,426		85.9	%		511,933		82.4	%		455,854		78.7	%

Time deposit accounts:
Certificates of deposit		88,071		12.3	%		95,621		15.4	%		96,925		17.5	%		89,596		12.9	%		95,621		15.4	%		96,040		16.5	%
CDARS deposits		8,528		1.2	%		13,657		2.2	%		25,068		4.5	%		8,499		1.2	%		13,657		2.2	%		27,552		4.8	%
Total certificates of deposit and other time deposits		96,599		13.5	%		109,278		17.6	%		121,993		22.0	%		98,095		14.1	%		109,278		17.6	%		123,592		21.3	%

Total deposit account balances	$	714,201		100.0	%	$	621,211		100.0	%	$	553,519		100.0	%	$	694,521		100.0	%	$	621,211		100.0	%	$	579,446		100.0	%

Noninterest-bearing demand deposits on ~~June~~September 30, 2020 were ~~$197.2~~$190.2 million, representing ~~27.6%~~27.4% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$420.4~~$406.2 million, and represented ~~58.9%~~58.5% of total deposits at ~~June~~September 30, 2020. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~86.5%~~85.9% of total deposit accounts at ~~June~~September 30, 2020. These account types are an excellent source of low-cost funding for the Company.

The Company also offers an insured cash sweep (“ICS^®”) deposit products. ICS^® deposit balances of ~~$30.6~~$28.9 million and ~~$68.7~~$67.2 million are included in the interest checking accounts and the money market and savings deposit accounts

balances, respectively, in the table above, as of ~~June~~September 30, 2020. As of December 31, 2019, ICS^® deposit balances of $19.3 million and $53.6 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 ~~13.5%~~14.1% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$96.6~~$98.1 million at ~~June~~September 30, 2020. Included in this deposit total are Certificate of Deposit Account Registry Service CDs, known as CDARS^TM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARS^TM deposits totaled $8.5 million as of ~~June~~September 30, 2020, all of which were reciprocal balances for the Company’s customers.

Short-term borrowings, consisting primarily of ~~Federal Home Loan Bank (FHLB)~~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 of Atlanta.~~FHLB. As of ~~June~~September 30, 2020, the Company has $40.0 million in outstanding balances from FHLB advances. As of December 31, 2019 and ~~June~~September 30, 2019, the Company had no outstanding balances from FHLB advances.

Additional borrowing arrangements maintained by the Company include formal federal funds lines with four major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of ~~June~~September 30, 2020, December 31, 2019 or ~~June~~September 30, 2019.

The following table displays the changes in shareholders' equity for the Company from December 31, 2019 to ~~June~~September 30, 2020 (dollars in thousands):

Equity, December 31, 2019	$	76,107		$	76,107
Net income		3,492			5,362
Other comprehensive income		1,006			1,243
Cash dividends declared		(1,625	)		(2,439	)
Equity increase due to expensing of restricted stock		54			96
Equity increase due to expensing of stock options		58			88
Equity, June 30, 2020	$	79,092
Equity, September 30, 2020				$	80,457

The Basel III Capital Rules require banks and bank holding companies to comply with the ~~calendar year 2019 and beyond,~~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 ~~which was phased~~(effectively resulting in ~~over~~ a ~~four year period under Basel III regulatory~~minimum Tier 1 capital ~~rules, effectively results~~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 14.42%, 14.42%, 15.41% and 9.41%, respectively, as of September 30, 2020, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 14.46%, 14.46%, 15.44% and 9.45%, respectively, as of September 30, 2020, also exceeding the minimum requirements.

As of September 30, 2020, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the “prompt corrective action” regulations, as revised: (i) a common equity Tier 1 capital ratio of ~~7.00% of risk-weighted assets;~~at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of ~~8.50% of risk-weighted assets; and~~at least 8.0%; (iii) total capital ratio of 10.50% of risk-weighted assets. The minimum leverage ratio remains at 4.00%. For additional information regarding the new capital requirements, refer to the Supervision and Regulation section, under Item 1. Business, found in the Company’s 2019 Form 10-K.

Using the current capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at June 30, 2020. The Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at 14.63% of its risk-weighted assets and are in excess of the well-capitalized minimum capital requirements of 6.50% and 8.00%, respectively. Additionally, the Company has a total capital to risk-weighted assets ratio of ~~15.56% of its risk-weighted assets~~at least 10.0%; and (iv) a leverage ratio of ~~9.84% of total assets, which are both in excess of the well-capitalized minimum 10.00% and 5.00% levels, respectively, designated by bank regulators under “well capitalized” capital guidelines.~~at least 5.0%.

On September 17, 2019 the Federal Deposit Insurance Corporation (“FDIC”) finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the community bank leverage ratio ~~(CBLR)~~(“CBLR”) framework, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

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

all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

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

The Company, in referring to its net income and net interest income, is referring to income computed in accordance with GAAP, unless otherwise noted. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations also refer to various calculations that are non-GAAP presentations. They include:

Net interest income is discussed in Management’s Discussion and Analysis on a GAAP basis, unless noted as “FTE”; and the reconcilement below shows the fully taxable-equivalent adjustment to net interest income to aid the reader in understanding the computations of net interest margin and the efficiency ratio on a non-GAAP basis (dollars in thousands):

Reconcilement of Non-GAAP Measures:	For the three months ended						For the six months ended						Three Months Ended						Nine Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019			September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Net interest income	$	5,755		$	5,461		$	11,130		$	11,029		$	6,047		$	5,474		$	17,177		$	16,503
Fully taxable-equivalent adjustment		25			20			45			42
Fully tax-equivalent adjustment														42			17			87			58
Net interest income (FTE)	$	5,780		$	5,481		$	11,175		$	11,071		$	6,089		$	5,491		$	17,264		$	16,561

Efficiency ratio		59.7	%		65.4	%		62.0	%		66.0	%		66.0	%		67.1	%		63.4	%		66.3	%
Impact of FTE adjustment		-0.2	%		-0.2	%		-0.2	%		-0.2	%
Fully tax-equivalent adjustment														-0.3	%		-0.2	%		-0.3	%		-0.2	%
Efficiency ratio (FTE)		59.5	%		65.2	%		61.8	%		65.8	%		65.7	%		66.9	%		63.1	%		66.1	%

Net interest margin		3.11	%		3.65	%		3.14	%		3.71	%		3.03	%		3.52	%		3.10	%		3.64	%
Fully tax-equivalent adjustment		0.01	%		0.02	%		0.02	%		0.01	%		0.02	%		0.02	%		0.02	%		0.02	%
Net interest margin (FTE)		3.12	%		3.67	%		3.16	%		3.72	%		3.05	%		3.54	%		3.12	%		3.66	%

Net income for the three months ended ~~June~~September 30, 2020 was ~~$2.1~~$1.9 million, a $27 thousand or ~~1.3%~~1.4% decrease compared to net income reported for the three months ended ~~June~~September 30, 2019. Net income per diluted share was ~~$0.77~~$0.69 for the quarter ended ~~June~~September 30, 2020 compared to ~~$0.79~~$0.71 per diluted share for the same quarter in the prior ~~year, as adjusted to reflect the 5% Stock Dividend issued in July 2019.~~year. The decrease in net income for the three months ended ~~June~~September 30, 2020, when compared to the same period of 2019, was attributable to the combination of: i) a ~~$442~~$344 thousand increase in provision for loan losses, largely as a result of worsening economic factors associated with the COVID-19 pandemic; ii) a ~~$294~~$573 thousand increase in net interest income, primarily due to lower cost of funds; iii) a ~~$74~~$98 thousand ~~decrease~~increase in noninterest income, as explained in the Noninterest income section below; iv) a ~~$281~~$374 thousand ~~decrease~~increase in noninterest expense, as explained in the Noninterest expense section below, and v) an ~~$86~~$20 thousand ~~increase~~decrease in provision for income taxes.

Net income for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$3.5~~$5.4 million, a ~~$131~~$104 thousand or ~~3.9%~~2.0% increase compared to net income reported for the ~~six~~nine months ended ~~June~~September 30, 2019. Net income per diluted share was ~~$1.29~~$1.98 for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$1.25~~$1.96 per diluted share for the same period in the prior ~~year, as adjusted to reflect the 5% Stock Dividend.~~year. The increase in net income for the ~~first six month of~~nine months ended September 30, 2020, when compared to the same period in ~~2019,~~the prior year, was attributable to the combination of: i) a ~~$523~~$867 thousand increase in provision for loan losses largely as a result of worsening economic factors associated with the COVID-19 pandemic; ii) a ~~$101~~$674 thousand increase in net interest income, primarily due to lower cost of funds incurred in the second ~~quarter~~and third quarters of the current year; iii) a ~~$536~~$634 thousand increase in noninterest income, as explained in the Noninterest income section below; iv) a ~~$149~~$225 thousand ~~decrease~~increase in noninterest expense, as explained in the Noninterest expense section below, and v) a ~~$132~~$112 thousand increase in provision for income taxes.

Net interest income (FTE) for the three months ended ~~June~~September 30, 2020 was ~~$5.8~~$6.1 million, a ~~$299~~$598 thousand or ~~5.5%~~10.9% increase compared to net interest income (FTE) of $5.5 million for the three months ended ~~June~~September 30, 2019. Net interest income (FTE) was positively impacted by the decrease in rates paid on deposit accounts, which decreased interest expense by ~~$364~~$510 thousand, offset by the increased volume of deposits, which increased interest expense by ~~$49~~$94 thousand. The increased volume of loans, increasing from an average of ~~$524.4~~$516.6 million in the ~~second~~third quarter of 2019 to ~~$618.1~~$630.7 million in the ~~second~~third quarter of 2020, positively impacted interest income by ~~$1.0~~$1.2 million; however, the lower rate earned on loans, declining from ~~4.67%~~4.62% to ~~4.01%~~3.89% for the periods noted, negatively impacted interest income by ~~$952 thousand,~~$1.1 million, nearly offsetting the positive impact of the increase in volume. The increase in volume of securities held, increasing from an average balance of $67.7 million for the third quarter of 2019 to $146.0 million for the third quarter of 2020, positively impacted net interest income by $382 thousand, while the decline in yield earned on such securities decreased from 2.37% to 1.74% for the periods noted, negatively impacting net interest income by $148 thousand.

Net interest income (FTE) for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$11.2~~$17.3 million, a ~~$104~~$703 thousand or ~~0.9%~~4.2% increase compared to net interest income (FTE) of ~~$11.1~~$16.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Net interest income (FTE) was positively impacted by the increase in the volume of the securities portfolio, which increased from an average of ~~$62.9~~$64.5 million in the ~~first six~~nine months ofended September 30, 2019 to ~~$91.5~~$109.8 million in the ~~first six~~nine months ofended September 30, 2020, increasing interest income by ~~$292~~$690 thousand. The decline in rates paid on securities ~~slightly~~modestly offset the impact of the volume increase, declining from an average yield of ~~2.40%~~2.39% to ~~2.18%~~1.98% for the periods noted, negatively impacting interest income ~~negatively~~ by ~~$48~~$211 thousand. The increase in the volume of loans, up from an average of ~~$528.9~~$524.7 million in the ~~first six~~nine months ofended September 30, 2019 to ~~$577.0~~$595.0 million in ~~first six~~nine months ofended September 30, 2020, positively impacted interest income by ~~$1.1~~$2.3 million; however, the lower rate earned on loans, declining from ~~4.65%~~4.64% to ~~4.19%~~4.09% for the periods noted, negatively impacted interest income by ~~$1.2~~$2.3 million, completely offsetting the positive impact of the increase in volume. Net interest income (FTE) was positively impacted by the decrease in rates paid on deposit accounts, which decreased interest expense by $648 thousand, offset by the increased volume of deposits, which increased interest expense by $287 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 ~~3.12%~~3.05% for the three months ended ~~June~~September 30, 2020 was 5549 basis points lower than the ~~3.67%~~3.54% for the three months ended ~~June~~September 30, 2019. The net interest margin (FTE) of ~~3.16%~~3.12% for the ~~six~~nine months ended ~~June~~September 30, 2020 was 5654 basis points lower than the ~~3.72%~~3.66% for the ~~six~~nine months ended ~~June~~September 30, 2019. 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 ~~$315~~$381 thousand for the three months ended ~~June~~September 30, 2020 compared to the same period in the prior year, due predominantly to rate decreases. The rate paid on interest-bearing deposits averaged 6253 basis points in the three months ended ~~June~~September 30, 2020, compared to 106 basis points for the three months ended ~~June~~September 30, 2019. Average balances of interest-bearing deposits increased from ~~$397.1~~$414.5 million in the three months ended ~~June~~September 30, 2019 to ~~$487.3~~$518.2 million in the three months ended ~~June~~September 30, 2020. Average balances of borrowed funds, from ~~fed funds sold,~~

~~decreased~~FHLB advances, increased from ~~$3.8~~zero in the three months ended September 30, 2019 to $28.6 million in the three months ended ~~June 30, 2019 to zero in the three months ended June~~September 30, 2020, causing ~~a decrease~~an increase in interest expense on borrowed ~~funds.~~ funds of $35 thousand.

Interest expense decreased ~~$33~~$414 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same period in the prior year, due predominantly to the ~~lack of borrowing expense,~~lower rates paid on deposits, as noted above. The increased volume of deposits increased interest expense by ~~$206~~$287 thousand, while the decrease in rates paid on deposit accounts decreased interest expense by ~~$150~~$648 thousand, netting to an overall impact of increasing net interest income by $56 thousand. Average balances of borrowed funds, from fed funds sold, decreased from $6.9 million in the six months ended June 30, 2019 to zero in the six months ended June 30, 2020, causing a decrease in interest expense on borrowed funds. The lack of borrowed funds during the first six months of 2020 had a positive impact on net interest income in the amount of $89$361 thousand. The rate paid on interest-bearing deposits averaged 8372 basis points in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to 98101 basis points for the ~~six~~nine months ended ~~June~~September 30, 2019. Average balances of interest-bearing deposits increased from ~~$388.6~~$397.3 million in the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$473.9~~$488.8 million in the ~~six~~nine months ended ~~June~~September 30, 2020. A table showing the mix of no cost and low-cost deposit accounts is shown under “Financial Condition - Deposits” earlier in this report. Average balances of borrowed funds increased from $4.6 million in the nine months ended September 30, 2019 to $9.6 million in the nine months ended September 30, 2020. The increase in volume of borrowed funds increased interest expense by $51 thousand; however, the decline in the rate paid on borrowed funds, from 2.57% in the prior period to 0.49% in the current period, had a positive impact on interest expense of $104 thousand. The combination of the volume and rate differences resulted in a decrease in interest expense on borrowed funds of $53 thousand.

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 ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. These tables also include a rate/volume analysis for these same periods (dollars in thousands).

	For the three months ended																									For the three months ended
	June 30, 2020								June 30, 2019								Change in Interest Income/ Expense									September 30, 2020								September 30, 2019								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
Taxable Securities	$	53,953		$	253		1.88	%	$	49,814		$	277		2.22	%	$	22		$	(46	)	$	(24	)	$	118,557		$	433		1.46	%	$	58,210		$	320		2.20	%	$	248		$	(135	)	$	113
Tax Exempt Securities ¹		14,793			117		3.16	%		12,715			96		3.02	%		16			5			21			27,473			202		2.94	%		9,505			81		3.41	%		134			(13	)		121
Total Securities ¹		68,746			370		2.15	%		62,529			373		2.39	%		38			(41	)		(3	)		146,030			635		1.74	%		67,715			401		2.37	%		382			(148	)		234
Total Loans		618,096			6,156		4.01	%		524,424			6,105		4.67	%		1,003			(952	)		51			630,704			6,175		3.89	%		516,637			6,021		4.62	%		1,206			(1,052	)		154
Fed Funds Sold		57,920			10		0.07	%		12,885			74		2.30	%		62			(126	)		(64	)		16,980			3		0.07	%		31,956			174		2.16	%		(56	)		(115	)		(171	)
Total Earning Assets		744,762			6,536		3.53	%		599,838			6,552		4.38	%		1,103			(1,119	)		(16	)		793,714			6,813		3.41	%		616,308			6,596		4.25	%		1,532			(1,315	)		217
Less: Allowance for Loan Losses		(4,788	)							(4,951	)																(5,141	)							(4,827	)
Total Non-Earning Assets		46,543								44,452																	47,736								43,604
Total Assets	$	786,517							$	639,339																$	836,309							$	655,085

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$	131,333		$	26		0.08	%	$	100,983		$	47		0.19	%	$	11		$	(32	)	$	(21	)	$	139,698		$	40		0.11	%	$	107,179		$	57		0.21	%		14		$	(31	)	$	(17	)
Money Market and Savings Deposits		257,174			365		0.57	%		169,128			416		0.99	%		166			(217	)		(51	)		281,161			343		0.49	%		185,019			474		1.02	%		182			(313	)		(131	)
Time Deposits		98,762			365		1.49	%		126,993			586		1.85	%		(117	)		(104	)		(221	)		97,300			306		1.25	%		122,274			574		1.86	%		(102	)		(166	)		(268	)
Total Interest-Bearing Deposits		487,269			756		0.62	%		397,104			1,049		1.06	%		60			(353	)		(293	)		518,159			689		0.53	%		414,472			1,105		1.06	%		94			(510	)		(416	)
Other borrowed funds		—			—		—			3,800			22		2.32	%		(11	)		(11	)		(22	)		28,620			35		0.49	%		—			—		—			18			17			35
Total Interest-Bearing Liabilities		487,269			756		0.62	%		400,904			1,071		1.07	%		49			(364	)		(315	)		546,779			724		0.53	%		414,472			1,105		1.06	%		112			(493	)		(381	)
Non-Interest-Bearing Liabilities:
Demand deposits		216,747								159,425																	203,798								160,491
Other liabilities		3,577								5,421																	4,870								4,574
Total Liabilities		707,593								565,750																	755,447								579,537
Shareholders' Equity		78,924								73,589																	80,862								75,548
Total Liabilities & Shareholders' Equity	$	786,517							$	639,339																$	836,309							$	655,085
Net Interest Income (FTE)				$	5,780							$	5,481				$	1,054		$	(755	)	$	299					$	6,089							$	5,491				$	1,420		$	(822	)	$	598
Interest Rate Spread ²							2.91	%							3.31	%																2.89	%							3.19	%
Interest Expense as a Percentage of Average Earning Assets							0.41	%							0.72	%																0.36	%							0.71	%
Net Interest Margin (FTE) ³							3.12	%							3.67	%																3.05	%							3.54	%

	For the six months ended																									For the Nine Months Ended
	June 30, 2020								June 30, 2019								Change in Interest Income/ Expense									September 30, 2020								September 30, 2019								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
Taxable Securities	$	78,370		$	786		2.01	%	$	50,046		$	555		2.22	%	$	288		$	(57	)	$	231		$	91,863		$	1,220		1.77	%	$	52,798		$	874		2.21	%	$	546		$	(200	)	$	346
Tax Exempt Securities ⁽¹⁾		13,109			212		3.23	%		12,824			199		3.10	%		4			9			13			17,933			413		3.07	%		11,705			280		3.19	%		144			(11	)		133
Total Securities ⁽¹⁾		91,479			998		2.18	%		62,870			754		2.40	%		292			(48	)		244			109,796			1,633		1.98	%		64,503			1,154		2.39	%		690			(211	)		479
Total Loans		576,952			12,027		4.19	%		528,854			12,202		4.65	%		1,058			(1,233	)		(175	)		594,998			18,202		4.09	%		524,723			18,223		4.64	%		2,287			(2,308	)		(21	)
Fed Funds Sold		43,409			95		0.44	%		8,077			93		2.32	%		129			(127	)		2			34,535			98		0.38	%		16,124			267		2.21	%		158			(327	)		(169	)
Total Earning Assets		711,840			13,120		3.71	%		599,801			13,049		4.39	%		1,479			(1,408	)		71			739,329			19,933		3.60	%		605,350			19,644		4.34	%		3,135			(2,846	)		289
Less: Allowance for Loan Losses		(4,523	)							(4,928	)																(4,731	)							(4,892	)
Total Non-Earning Assets		45,650								42,074																	46,995								42,602
Total Assets	$	752,967							$	636,947																$	781,593							$	643,060

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$	127,026		$	57		0.09	%	$	101,944		$	96		0.19	%	$	20		$	(59	)	$	(39	)	$	131,281		$	96		0.10	%	$	103,708		$	153		0.20	%	$	34		$	(91	)	$	(57	)
Money Market and Savings Deposits		243,036			1,029		0.85	%		165,339			748		0.91	%		332			(51	)		281			255,837			1,372		0.72	%		171,971			1,222		0.95	%		499			(349	)		150
Time Deposits		103,851			859		1.66	%		121,327			1,045		1.74	%		(146	)		(40	)		(186	)		101,651			1,166		1.53	%		121,646			1,620		1.78	%		(246	)		(208	)		(454	)
Total Interest-Bearing Deposits		473,913			1,945		0.83	%		388,610			1,889		0.98	%		206			(150	)		56			488,769			2,634		0.72	%		397,325			2,995		1.01	%		287			(648	)		(361	)
Other borrowed funds		—			—		0.00	%		6,908			89		2.60	%		(45	)		(44	)		(89	)		9,610			35		0.49	%		4,580			88		2.57	%		51			(104	)		(53	)
Total Interest-Bearing Liabilities		473,913			1,945		0.83	%		395,518			1,978		1.01	%		161			(194	)		(33	)		498,379			2,669		0.72	%		401,905			3,083		1.03	%		338			(752	)		(414	)
Non-Interest-Bearing Liabilities:
Demand deposits		197,312								165,322																	199,490								164,093
Other liabilities		3,507								3,337																	4,607								3,443
Total Liabilities		674,732								564,177																	702,476								569,441
Shareholders' Equity		78,235								72,770																	79,117								73,619
Total Liabilities & Shareholders' Equity	$	752,967							$	636,947																$	781,593							$	643,060
Net Interest Income (FTE)				$	11,175							$	11,071				$	1,318		$	(1,214	)	$	104					$	17,264							$	16,561				$	2,797		$	(2,094	)	$	703
Interest Rate Spread ⁽²⁾							2.88	%							3.37	%																2.89	%							3.31	%
Interest Expense as a Percentage of Average Earning Assets							0.55	%							0.67	%																0.48	%							0.68	%
Net Interest Margin (FTE) ³							3.16	%							3.72	%																3.12	%							3.66	%

A provision for loan losses of ~~$378~~$224 thousand was recognized induring the ~~second quarter of~~three months ended September 30, 2020 ~~primarily driven by further deterioration in the economic outlook resulting from the impact of COVID-19. A~~compared to a recovery of loan loss provision of ~~$64~~$120 thousand ~~was~~ recognized induring the ~~second quarter of~~three months ended September 30, 2019. A provision for loan losses of ~~$1.1~~$1.4 million was recognized induring the ~~first six~~nine months ofended September 30, 2020, compared to ~~$620~~$500 thousand recognized induring the ~~first six~~nine months ofended September 30, 2019, ~~and such increase was also~~ primarily due to the deterioration in the economic outlook resulting from the impact of COVID-19.

The period-end ~~allowance for loan losses~~ALLL as a percentage of ~~total loans~~assets was 0.84% as of September 30, 2020, 0.78% as of ~~June 30, 2020 and~~ December 31, 2019, ~~compared to 0.92%~~and 0.76% as of ~~June~~September 30, 2019. The percentage ~~remained flat~~increase as compared to year-end aswas primarily due to the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors, which was partially offset by the SBA-guaranteed PPP loans not needing an allowance. Note that the allowance for loan losses as a percentage of total loans, excluding PPP loans, would have been 0.90% as of June 30, 2020. The decline in the percentage from the second quarter of 2019 to year-end 2019 was related to the sale of a shared national credit with a higher loan loss allowance.

Further discussion of management’s assessment of the ~~allowance for loan losses~~ALLL is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at ~~June~~September 30, 2020. ~~While we have not experienced any charge-offs related to COVID-19, our~~The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded the qualitative factors pertaining to economic conditions within our ALLL ~~methodology. Should~~methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

The components of noninterest income for the three months ended ~~June~~September 30, 2020 and 2019 are shown below (dollars in thousands):

	For the three months ended				Variance						For the three months ended				Variance
	June 30, 2020		June 30, 2019		$			%			September 30, 2020		September 30, 2019		$			%
Noninterest income:
Trust income	$	228	$	402	$	(174	)		-43.3	%
Wealth management fees											$	263	$	377	$	(114	)		-30.2	%
Advisory and brokerage income		163		156		7			4.5	%		175		159		16			10.1	%
Royalty income		24		4		20			500.0	%		16		5		11			220.0	%
Deposit account fees		143		192		(49	)		-25.5	%		162		192		(30	)		-15.6	%
Debit/credit card and ATM fees		134		189		(55	)		-29.1	%		144		191		(47	)		-24.6	%
Earnings/increase in value of bank owned life insurance		109		466		(357	)		-76.6	%		111		111		0			0.0	%
Fees on mortgage sales		30		56		(26	)		-46.4	%		-		43		(43	)		-100.0	%
Gains on sales of securities		590		64		526			821.9	%		91		7		84			1200.0	%
Loan swap fee income		124		38		86			226.3	%		344		116		228			196.6	%
Other		81		133		(52	)		-39.1	%		119		126		(7	)		-5.6	%
Total noninterest income	$	1,626	$	1,700	$	(74	)		-4.4	%	$	1,425	$	1,327	$	98			7.4	%

Noninterest income for the three months ended ~~June~~September 30, 2020 of ~~$1.6~~$1.4 million was ~~$74~~$98 thousand or ~~4.4% lower~~7.4% higher than the amount recorded for the three months ended ~~June~~September 30, 2019. Noninterest income ~~declined~~rose due to fluctuations in several categories. ~~Earnings from the proceeds~~Loan swap fee income increased $228 thousand and gains on sales of ~~bank owned life insurance~~securities increased $84 thousand. Wealth management fees declined ~~by $357 thousand, as the result of a death benefit received in the second quarter of 2019. Trust income declined $174~~$114 thousand due to restructuring of the entities and market conditions. In addition, deposit account fees and debit/credit card and ATM fees declined in total by ~~$104~~$77 thousand due to suppressed customer activity. ~~Those declines were offset by $526~~In addition, fees on mortgage sales declined $43 thousand ~~increase in gains on sales~~due to elimination of ~~securities, which was used to provide liquidity for PPP funding, and an $86 thousand increase in loan swap fee income.~~that business line.

The components of noninterest income for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 are shown below (dollars in thousands):

	For the six months ended				Variance						For the Nine Months Ended				Variance
	June 30, 2020		June 30, 2019		$			%			September 30, 2020		September 30, 2019		$			%
Noninterest income:
Trust income	$	538	$	749	$	(211	)		-28.2	%
Wealth management fees											$	801	$	1,126	$	(325	)		-28.9	%
Advisory and brokerage income		341		292		49			16.8	%		516		451		65			14.4	%
Royalty income		71		8		63			787.5	%		87		13		74			569.2	%
Deposit account fees		322		373		(51	)		-13.7	%		484		565		(81	)		-14.3	%
Debit/credit card and ATM fees		291		346		(55	)		-15.9	%		435		537		(102	)		-19.0	%
Earnings/increase in value of bank owned life insurance		216		576		(360	)		-62.5	%		327		687		(360	)		-52.4	%
Fees on mortgage sales		77		86		(9	)		-10.5	%		77		129		(52	)		-40.3	%
Gains on sales of securities		643		64		579			904.7	%		734		71		663			933.8	%
Loan swap fee income		633		46		587			1276.1	%		977		151		826			547.0	%
Other		163		219		(56	)		-25.6	%		282		356		(74	)		-20.8	%
Total noninterest income	$	3,295	$	2,759	$	536			19.4	%	$	4,720	$	4,086	$	634			15.5	%

Noninterest income for the ~~six~~nine months ended ~~June~~September 30, 2020 of ~~$3.3~~$4.7 million was ~~$536~~$634 thousand or ~~19.4%~~15.5% higher than the amount recorded for the ~~six~~nine months ended ~~June~~September 30, 2019. Noninterest income increased due to fluctuations in several categories. Loan swap fee income increased ~~$587~~$826 thousand and gains on sales of securities increased ~~$579~~$663 thousand over the periods noted. Earnings from the proceeds of bank owned life insurance declined by $360 thousand as death proceeds were collected in the prior year, and ~~trust income~~wealth management fees declined ~~$211 thousand.~~$325 thousand due to the reasons noted above. Deposit account fees and debit/credit card and ATM fees declined in total by ~~$106~~$183 thousand due to suppressed customer activity.

The components of noninterest expense for the three months ended ~~June~~September 30, 2020 and 2019 are shown below (dollars in thousands):

	For the three months ended				Variance						For the three months ended				Variance
	June 30, 2020		June 30, 2019		$			%			September 30, 2020		September 30, 2019		$			%
Noninterest expense:
Salaries and employee benefits	$	2,258	$	2,321	$	(63	)		-2.7	%	$	2,322	$	2,268	$	54			2.4	%
Net occupancy		452		444		8			1.8	%		501		450		51			11.3	%
Equipment		136		114		22			19.3	%		134		85		49			57.6	%
ATM, debit and credit card		41		45		(4	)		-8.9	%		46		51		(5	)		-9.8	%
Bank franchise tax		163		152		11			7.2	%		161		151		10			6.6	%
Computer software		136		139		(3	)		-2.2	%		159		144		15			10.4	%
Data processing		338		330		8			2.4	%		302		341		(39	)		-11.4	%
FDIC deposit insurance assessment		28		15		13			86.7	%		61		6		55			916.7	%
Loan expenses		66		80		(14	)		-17.5	%		69		67		2			3.0	%
Marketing, advertising and promotion		140		195		(55	)		-28.2	%		55		203		(148	)		-72.9	%
Merger expenses												549		-		549		N/A
Professional fees		190		204		(14	)		-6.9	%		-		213		(213	)		-100.0	%
Settlement of claims		-		300		(300	)		-100.0	%		-		160		(160	)		-100.0	%
Other		456		346		110			31.8	%		576		422		154			36.5	%
Total noninterest expense	$	4,404	$	4,685	$	(281	)		-6.0	%	$	4,935	$	4,561	$	374			8.2	%

Noninterest expense for the quarter ended ~~June~~September 30, 2020 of ~~$4.4~~$4.9 million was ~~$281~~$374 thousand or ~~6.0% lower~~8.2% higher than the quarter ended ~~June~~September 30, 2019. The predominant reason for the increase was that the Company incurred $549 thousand in merger-related expenses during the three months ended September 30, 2020. All professional fees accrued during the third quarter were related to due diligence and other merger-related expenses. During the ~~second quarter of~~three months ended September 30, 2019, ~~$300~~$160 thousand was accrued in connection with a settlement of claims related to pending and threatened legal proceedings. Other noninterest expense increased ~~$110~~$154 thousand period over period, primarily due to

increased expense of stock grants and cash compensation for directors. Marketing, advertising and promotion expenses declined over the period noted by $148 thousand, due to a conscious effort to reduce such expenses.

The components of noninterest expense for the nine months ended September 30, 2020 and 2019 are shown below (dollars in thousands):

Noninterest expense for the nine months ended September 30, 2020 of $13.9 million was $225 thousand or 1.6% higher than the nine months ended September 30, 2019. The predominant reason for the increase was that the Company incurred $549 thousand in merger-related expenses during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, $460 thousand was accrued in connection with a settlement of claims related to pending and threatened legal proceedings. Other noninterest expense increased $191 thousand period over period, primarily due to increased expense of stock grants and cash compensation for directors.

~~The components of noninterest expense for the six months ended June 30, 2020 and 2019 are shown below (dollars in thousands):~~

Noninterest expense for the six months ended June 30, 2020 of $8.9 million was $149 thousand or 1.6% lower than the six months ended June 30, 2019. Other noninterest expense increased $172 thousand period over period, primarily due to increased expense of stock grants and cash compensation for directors. As noted above, during the first six months of 2019, $300 thousand was accrued in connection with a settlement of claims related to pending and threatened legal proceedings. Marketing, advertising and promotion expenses declined ~~$110~~$258 thousand ~~from~~for the ~~first six months of 2019 to the first six months of 2020~~periods noted due to concerted efforts to reduce those expenses in 2020. Management continues to evaluate expenses for potential containments and reductions that would have a positive impact on net income on an ongoing basis.

The efficiency ratio (FTE) of ~~59.5%~~65.75% for the three months ended ~~June~~September 30, 2020 compared favorably to the ~~65.2%~~66.9% for the same quarter of 2019, due primarily to the increase in net interest income. The efficiency ~~rations~~ratio (FTE) of ~~61.8%~~63.1% for the ~~six~~nine months ended ~~June~~September 30, 2020 also compared favorably to the ~~65.8%~~66.1% for the same period of 2019, due to a combination of increased net interest income and increased noninterest income. 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.

The Company benefited from the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017, which permanently lowered the corporate income tax rate to 21% effective January 1, 2018, amongst other significant changes to the U.S. tax law. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company provided ~~$843 thousand~~$1.3 million and ~~$711 thousand~~$1.2 million for Federal income taxes, respectively, resulting in an effective income tax rate of ~~19.4%~~19.1% and ~~17.5%~~18.3%, respectively. The effective income tax rates differed from the U.S. statutory rate of 21% primarily due to the effect of tax-exempt income from life insurance policies and municipal bonds, and the effective rate for the ~~six~~nine months ended ~~June~~September 30, 2019 was lower than the current year, as the proceeds from a bank-owned life insurance death benefit received during that period were tax-exempt. Certain merger related expenses will be non-deductible for tax purposes.

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 ~~Securities and Exchange Commission’s~~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 ~~June~~September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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	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)

Part I. Financial Information
Item 1 Financial Statements		Page 3
Consolidated Balance Sheets (unaudited)		Page 3
Consolidated Statements of Income (unaudited)		Page 4
Consolidated Statements of Comprehensive Income (unaudited)		Page 5
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 6
Consolidated Statements of Cash Flows (unaudited)		Page 7
Notes to Consolidated Financial Statements (unaudited)		Page 8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 35
Application of Critical Accounting Policies and Estimates		Page 37
Financial Condition		Page 37
Results of Operations		Page 44

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 5152

Item 4 Controls and Procedures		Page 52

Part II. Other Information
Item 1 Legal Proceedings		Page 52
Item 1A Risk Factors		Page 52
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 52
Item 3 Defaults Upon Senior Securities		Page 52
Item 4 Mine Safety Disclosures		Page 52
Item 5 Other Information		Page 52
Item 6 Exhibits		Page 53

Signatures		Page 54

	For the ~~six~~nine months ended
	~~June~~September 30, 2020
Expected volatility¹		~~24.33~~22.97	%
Expected dividends²		4.75	%
Expected term (in years)³		6.50
Risk-free rate⁴		~~0.72~~0.68	%

	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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

~~Emerging growth company~~	☐		Emerging growth company	☐


Loan Classes by Segments

Commercial loan segment:
	Commercial and industrial - organic
	Commercial and industrial - Paycheck Protection Program ~~(“PPP”)~~
	Commercial and industrial - government guaranteed ¹
	Commercial and industrial - syndicated

Real estate construction and land loan segment:
	Residential construction
	Commercial construction
	Land and land development

Real estate mortgage loan segment:
	1-4 family residential, first lien, investment
	1-4 family residential, first lien, owner occupied
	1-4 family residential, junior lien
	Home equity lines of credit, first lien
	Home equity lines of credit, junior lien
	Farm
	Multifamily
	Commercial owner occupied
	Commercial non-owner occupied

Consumer loan segment:
	Consumer revolving credit
	Consumer all other credit
	Student loans purchased

As of and for the period ended December 31, 2019
	Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	811		$	119		$	2,611	$	1,350		$	4,891
Charge-offs		(482	)		-			-		(1,777	)		(2,259	)
Recoveries		51			1			14		136			202
Provision for (recovery of) loan losses		(78	)		(11	)		59		1,405			1,375
Ending Balance	$	302		$	109		$	2,684	$	1,114		$	4,209

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-	$	21		$	21
Collectively evaluated for impairment		302			109			2,684		1,093			4,188
Loans:
Individually evaluated for impairment	$	20		$	279		$	996	$	1,184		$	2,479
Collectively evaluated for impairment		80,568			16,861			370,240		69,385			537,054
Ending Balance	$	80,588		$	17,140		$	371,236	$	70,569		$	539,533

			Fair Value Measurements at December 31, 2019 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	$	14,952	$	-	$	14,952	$	-
Corporate bonds		7,469		-		7,469		-
Mortgage-backed securities/CMOs		71,732		-		71,732		-
Municipal bonds		19,888		-		19,888		-
Total securities available for sale	$	114,041	$	-	$	114,041	$	-

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 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 June 30, 2019	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income	$	5,461		$	-	$	-	$	-		$	5,461
Provision for (recovery of) loan losses		(64	)		-		-		-			(64	)
Noninterest income		1,137			156		348		59			1,700
Noninterest expense		4,073			147		303		162			4,685
Income (loss) before income taxes		2,589			9		45		(103	)		2,540
Provision for income taxes		435			2		10		(22	)		425
Net income (loss)	$	2,154		$	7	$	35	$	(81	)	$	2,115

Six months ended June 30, 2019	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income	$	11,029		$	-	$	-	$	-		$	11,029
Provision for loan losses		620			-		-		-			620
Noninterest income		1,710			292		694		63			2,759
Noninterest expense		7,872			283		610		331			9,096
Income (loss) before income taxes		4,247			9		84		(268	)		4,072
Provision for income taxes		747			2		18		(56	)		711
Net income (loss)	$	3,500		$	7	$	66	$	(212	)	$	3,361

Exhibit Number		Description of Exhibit

2.1 3.1		Agreement and Plan of Reorganization, dated September 30, 2020, between Virginia National Bankshares Corporation and Fauquier Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Virginia National Bankshares Corporation’s Form 8-K filed with the SEC on October 2, 2020). Articles of Incorporation of Virginia National Bankshares Corporation, as amended and restated (incorporated by reference to Exhibit 3.1 to Virginia National Bankshares Corporation’s Pre-effective Amendment No. 1 to Form S-4 Registration Statement filed with the ~~Securities and Exchange Commission~~SEC on April 12, 2013).

3.2		Bylaws of Virginia National Bankshares Corporation, as amended and restated, (incorporated by reference to Exhibit 3.2 to Virginia National Bankshares Corporation’s Current Report on Form 8-K filed with the ~~Securities and Exchange Commission~~SEC on ~~December 18, 2013)~~March 30, 2020).

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

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 ~~June~~September 30, 2020, 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 Net Loss and Comprehensive 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 ~~June~~September 30, 2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

VIRGINIA NATIONAL BANKSHARES CORPORATION
(Registrant)

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

Date:		~~August 10,~~November 6, 2020

By:		/s/ Tara Y. Harrison
		Tara Y. Harrison
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Date:		~~August 10,~~November 6, 2020