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 10,~~November 8, 2021, the registrant had ~~5,306,419~~5,308,335 shares of common stock, $2.50 par value per share, outstanding.


	For the three months ended					For the six months ended				For the three months ended					For the nine months ended
	June 30, 2021			June 30, 2020		June 30, 2021		June 30, 2020		September 30, 2021			September 30, 2020		September 30, 2021			September 30, 2020
Interest and dividend income:
Loans, including fees	$	13,009		$	6,156	$	18,947	$	12,027	$	12,957		$	6,175	$	31,904		$	18,202
Federal funds sold		21			10		33		95		45			3		78			98
Other interest-bearing accounts		39			-		39		-		55			-		94			-
Investment securities:
Taxable		757			229		1,264		738		742			412		2,006			1,150
Tax exempt		273			92		449		167		280			159		729			326
Dividends		32			24		66		48		55			22		121			70
Total interest and dividend income		14,131			6,511		20,798		13,075		14,134			6,771		34,932			19,846

Interest expense:
Demand and savings deposits		548			390		925		1,085		673			383		1,598			1,468
Certificates and other time deposits		324			366		604		860		282			306		886			1,166
Repurchase agreements and other borrowings		108			-		144		-
Borrowings											(325	)		35		(181	)		35
Total interest expense		980			756		1,673		1,945		630			724		2,303			2,669
Net interest income		13,151			5,755		19,125		11,130		13,504			6,047		32,629			17,177
Provision for (recovery of) loan losses		(141	)		378		210		1,143
Net interest income after provision for (recovery of) loan losses		13,292			5,377		18,915		9,987
Provision for loan losses											267			224		477			1,367
Net interest income after provision for loan losses											13,237			5,823		32,152			15,810

Noninterest income:
Wealth management fees		980			228		1,309		538		744			263		2,053			801
Advisory and brokerage income		359			163		550		341		358			175		908			516
Royalty income		12			24		17		71
Deposit account fees		426			143		586		322		396			162		982			484
Debit/credit card and ATM fees		599			134		753		291		808			144		1,561			435
Earnings/increase in value of bank owned life insurance		199			109		306		216		201			111		507			327
Fees on mortgage sales		-			30		-		77
Gains on sales of securities		-			590		-		643		-			91		-			734
Loan swap fee income		20			124		35		633		24			344		59			977
Other		325			81		403		163		947			135		1,367			446
Total noninterest income		2,920			1,626		3,959		3,295		3,478			1,425		7,437			4,720

Noninterest expense:
Salaries and employee benefits		4,741			2,258		7,143		4,682		4,562			2,322		11,705			7,004
Net occupancy		1,109			452		1,604		904		1,039			501		2,643			1,405
Equipment		340			136		456		267		205			134		661			401
ATM, debt and credit card											212			46		589			140
Bank franchise tax		429			163		602		326		320			161		922			487
Computer software		216			136		383		276		361			159		744			435
Data processing		994			338		1,283		666		1,114			302		2,397			968
FDIC deposit insurance assessment		182			28		245		28		349			61		594			89
Marketing, advertising and promotion		232			140		369		279		337			55		706			334
Merger expenses		5,874			-		6,152		-
Merger and merger related expenses											1,935			549		8,087			549
Professional fees		510			190		687		376		186			-		873			376
Core deposit intangible amortization		428			-		428		-		417			-		845			-
Other		938			563		1,422		1,143		1,787			645		2,832			1,694
Total noninterest expense		15,993			4,404		20,774		8,947		12,824			4,935		33,598			13,882

Income before income taxes		219			2,599		2,100		4,335		3,891			2,313		5,991			6,648
Provision for income taxes		72			511		448		843		753			443		1,201			1,286
Net income	$	147		$	2,088	$	1,652	$	3,492	$	3,138		$	1,870	$	4,790		$	5,362
Net income per common share, basic	$	0.03		$	0.77	$	0.41	$	1.29	$	0.59		$	0.69	$	1.08		$	1.98
Net income per common share, diluted	$	0.03		$	0.77	$	0.41	$	1.29	$	0.59		$	0.69	$	1.07		$	1.98


	For the six months ended						For the nine months ended
	June 30, 2021			June 30, 2020			September 30, 2021			September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,652		$	3,492		$	4,790		$	5,362
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		210			1,143			477			1,367
Net accretion of certain acquisition-related discounts		(804	)		-
Net accretion of certain acquisition-related adjustments								(2,474	)		-
Amortization of intangible assets		462			57			896			74
Net amortization and accretion of securities		661			210			1,100			471
Net gains on sale of securities		-			(643	)		-			(734	)
Net gains on sale of other assets								(65	)		-
Earnings on bank owned life insurance		(306	)		(216	)		(507	)		(327	)
Deferred tax		25			-			25			-
Depreciation and other amortization		1,406			915			2,173			1,395
Stock option expense		65			58			96			88
Stock grant expense, restricted		226			-			283			96
Net change in:				54
Accrued interest receivable and other assets		(1,939	)		(430	)		(1,577	)		(1,117	)
Accrued interest payable and other liabilities		2,808			292			1,882			(19	)
Net cash provided by operating activities		4,466			4,932			7,099			6,656

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares		153,278			-			153,278			-
Net decrease (increase) in restricted investments		358			(53	)		2,019			(1,753	)
Purchases of available for sale securities		(15,217	)		(62,259	)		(36,127	)		(122,372	)
Proceeds from maturities, calls and principal payments of available for sale securities		12,923			29,161			22,876			34,821
Proceeds from sales of available for sale securities		—			46,075			—			62,184
Net decrease (increase) in loans		46,452			(93,296	)		95,117			(97,644	)
Proceeds from sale of loans								6,126			—
Cash payment for wealth management book of business		-			(50	)		-			(50	)
Proceeds from sale of premises and equipment								34			—
Purchase of bank premises and equipment		(818	)		(80	)		(1,055	)		(132	)
Net cash provided by (used in) investing activities		196,976			(80,502	)		242,268			(124,946	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and money market accounts		78,892			105,669			192,565			84,493
Net increase (decrease) in certificates of deposit and other time deposits		2,167			(12,679	)
Net decrease in other borrowings		(23	)		—
Net decrease in certificates of deposit and other time deposits								(3,728	)		(11,183	)
Net increase (decrease) in other borrowings								(42,582	)		40,000
Proceeds from stock options exercised		30			-			30			-
Cash dividends paid		(3,224	)		(1,618	)		(4,817	)		(2,433	)
Net cash provided by financing activities		77,842			91,372			141,468			110,877
NET INCREASE IN CASH AND CASH EQUIVALENTS	$	279,284		$	15,802		$	390,835		$	(7,413	)

CASH AND CASH EQUIVALENTS:
Beginning of period	$	34,695		$	19,085		$	34,695		$	19,085
End of period	$	313,979		$	34,887		$	425,530		$	11,672

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	1,611		$	2,032
Taxes	$	1,042		$	375
Cash payments for interest							$	2,289		$	2,788
Cash payments for taxes							$	1,042		$	1,991

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized (losses) gains on available for sale securities	$	(1,878	)	$	1,274		$	(2,324	)	$	1,573
Unrealized (losses) gains on interest rate swaps	$	(141	)	$	—		$	(106	)	$	—
Initial right-of-use assets obtained in exchange for new operating lease liabilities							$	—		$	711
Assets acquired in business combination	$	909,736		$	—		$	909,736		$	—
Liabilities assumed in business combination	$	840,226		$	—		$	840,226		$	—
Change in goodwill	$	8,526		$	—		$	8,526		$	—

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

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

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

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

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

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


	As Recorded					As Recorded
	by Fauquier		Fair Value			by Virginia National
	Bankshares, Inc.		Adjustment			Bankshares

Assets:
Cash and cash equivalents	$	153,282	$	-		$	153,282
Securities available for sale		93,133		-			93,133
Loans, net		615,766		(13,123	)		602,643
Premises and equipment		16,276		3,872			20,148
Other real estate owned		1,356		(745	)		611
Bank-owned life insurance		13,677		-			13,677
Right-of-use assets		4,355		1,077			5,432
Core deposit intangible		-		8,700			8,700
Other assets		12,917		(807	)		12,110
Total assets acquired	$	910,762	$	(1,026	)	$	909,736

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

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

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

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

~~Under the acquisition method (ASC 805), the allowance for loan losses recorded in the books of Fauquier in the amount of $7.2 million was not carried over into the books of the Company.~~

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merger and merger related expenses ~~associated with the Merger of Fauquier~~ were ~~$5.9~~$1.9 million ($~~4.6~~1.5 million after taxes) for the three months ended ~~June~~September 30, 2021 ~~$6.2~~and $8.1 million ($~~4.7~~6.2 million after taxes) for the ~~six~~nine months ended ~~June 30, 2021 and $7.7 million ($5.4 million after taxes) in the aggregate through June~~September 30, 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments, severance and stay-put bonuses and legal and consulting expenses, which have been expensed as incurred. ~~There were 0~~$549 thousand ($324 thousand after taxes) of merger and merger related expenses were recognized during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Note 3. Securities

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

June 30, 2021			Gross		Gross

September 30, 2021												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	35,839	$	58	$	(669	)	$	35,228	$	33,014	$	54	$	(530	)	$	32,538
Mortgage-backed securities/CMOs		136,503		842		(927	)		136,418		146,409		655		(1,066	)		145,998
Municipal bonds		94,661		1,352		(686	)		95,327		98,099		1,244		(833	)		98,510
Total Securities Available for Sale	$	267,003	$	2,252	$	(2,282	)	$	266,973	$	277,522	$	1,953	$	(2,429	)	$	277,046


December 31, 2020			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	25,496	$	7	$	(198	)	$	25,305
Mortgage-backed securities/CMOs		77,438		844		(182	)		78,100
Municipal bonds		69,303		1,499		(121	)		70,681
Total Securities Available for Sale	$	172,237	$	2,350	$	(501	)	$	174,086

December 31, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

(Losses)

Value

U.S. Government agencies

$
25,496

$
7

$
(198
)

$
25,305

Mortgage-backed securities/CMOs

77,438

844

(182
)

78,100

Municipal bonds

69,303

1,499

(121
)

70,681

Total Securities Available for Sale

$
172,237

$
2,350

$
(501
)

$
174,086

As of ~~June~~September 30, 2021, there were ~~$132.7~~$160.3 million, or 86104 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of ~~$2.3~~$2.4 million and consisted of 4653 mortgage-backed/collateralized mortgage obligations (“CMOs”), 2535 municipal bonds, and 1516 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, 2021, and December 31, 2020 (dollars in thousands):

June 30, 2021

September 30, 2021
	Less than 12 Months					12 Months or more					Total					Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized					Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	26,817	$	(669	)	$	—	$	—		$	26,817	$	(669	)	$	18,067	$	(319	)	$	9,539	$	(211	)	$	27,606	$	(530	)
Mortgage-backed/CMOs		68,035		(897	)		1,537		(30	)		69,572		(927	)		86,639		(1,043	)		1,198		(23	)		87,837		(1,066	)
Municipal bonds		35,582		(683	)		762		(3	)		36,344		(686	)		37,700		(658	)		7,202		(175	)		44,902		(833	)
	$	130,434	$	(2,249	)	$	2,299	$	(33	)	$	132,733	$	(2,282	)	$	142,406	$	(2,020	)	$	17,939	$	(409	)	$	160,345	$	(2,429	)


December 31, 2020
	Less than 12 Months					12 Months or more				Total
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
U.S. Government agencies	$	19,298	$	(198	)	$	—	$	—	$	19,298	$	(198	)
Mortgage-backed/CMOs		24,523		(182	)		—		—		24,523		(182	)
Municipal bonds		21,501		(121	)		—		—		21,501		(121	)
	$	65,322	$	(501	)	$	—	$	—	$	65,322	$	(501	)

December 31, 2020

Less than 12 Months

12 Months or more

Total

Unrealized

Unrealized

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Government agencies

$
19,298

$
(198
)

$
—

$
—

$
19,298

$
(198
)
Mortgage-backed/CMOs

24,523

(182
)

—

—

24,523

(182
)
Municipal bonds

21,501

(121
)

—

—

21,501

(121
)

$
65,322

$
(501
)

$
—

$
—

$
65,322

$
(501
)

The Company’s securities portfolio is primarily made up of fixed rate instruments, the prices of which move inversely with interest rates. Any unrealized losses are considered by management to be driven by increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the instruments approach their maturity date or repricing date or if market yields for such investments decline. At the end of

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, 2021, 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, 2021, 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 ~~$10.4~~$12.8 million at ~~June~~September 30, 2021 were pledged as collateral to secure deposits and for other purposes and facilitate borrowing from the Federal Reserve Bank of Richmond (“FRB”). At December 31, 2020, securities having carrying values of ~~$6.0~~$6.0 million were similarly pledged.

For the ~~six~~three and nine months ended ~~June~~September 30, 2021, there were 0 sales of securities. For the ~~six~~three months ended ~~June~~September 30, 2020, proceeds from the sales of securities amounted to ~~$46.1~~$16.1 million, with realized gains of ~~$655~~$234 thousand and realized losses of ~~$12~~$143 thousand. For the nine months ended September 30, 2020, proceeds from the sales of securities amounted to $62.2 million, with realized gains of $881 thousand and realized losses of $147 thousand.

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), ~~and~~ CBB Financial Corporation, the holding company for Community Bankers ~~Bank. Additionally with the Fauquier merger, the Company acquired~~Bank, and an investment in an SBA loan ~~fund of $500 thousand.~~fund. These restricted securities, totaling ~~$4.3~~$2.6 million and ~~$3.0~~$3.0 million as of ~~June~~September 30, 2021 and December 31, 2020, are carried at cost.

Note 4. Loans

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


	June 30,			December 31,			September 30,			December 31,
	2021			2020			2021			2020
Commercial	$	160,473		$	118,688		$	119,959		$	118,688
Real estate construction and land		96,421			22,509			92,082			22,509
1-4 family residential mortgages		381,801			132,966			372,474			132,966
Commercial mortgages		455,795			277,109			464,866			277,109
Consumer		71,671			58,134			63,069			58,134
Total loans		1,166,161			609,406			1,112,450			609,406
Less: Allowance for loan losses		(5,522	)		(5,455	)		(5,623	)		(5,455	)
Net loans	$	1,160,639		$	603,951		$	1,106,827		$	603,951

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company ~~including Virginia National Bank~~ and ~~The~~ Fauquier ~~Bank~~ prior to the Merger assisted nonprofit organizations and local businesses by funding a combined total of ~~$207.5~~$207.5 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of ~~June~~September 30, 2021, the Company had PPP loans of ~~$68.8~~$36.7 million outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs (fees) on PPP loans and loans purchased prior to the Merger. As of ~~June~~September 30, 2021 and December 31, 2020, unamortized premiums on loans purchased prior to the Merger were ~~$1.4~~$1.2 million and ~~$1.8~~$1.8 million, respectively. Net deferred loan costs (fees) totaled ~~$(1.7)~~$(1.1) million and ~~$(931)~~$(931) thousand as of ~~June~~September 30, 2021 and December 31, 2020, respectively. The deferred fees increased ~~$805~~$184 thousand due to the fees collected from the SBA for the additional PPP loans funded during the ~~six~~nine months ended ~~June~~September 30, 2021. Net deferred fees on PPP loans and loans purchased prior to the

Merger are being amortized over the contractual life of the underlying loans. As loans are forgiven by the SBA, accounting principles allow for the accelerated recognition of unamortized fees at that time.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The table above includes a net fair value mark of ~~$12.4~~$12.3 million on the purchased impaired loans and ~~$8.2~~$7.1 million on the purchased performing loans as of ~~June~~September 30, 2021 on the ~~loans acquired in the Merger.~~Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

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


	September 30, 2021
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	80,308	$	424,070	$	504,378
Carrying amount:
Commercial	$	1,775	$	41,551	$	43,326
Real estate construction and land		24,148		29,404		53,552
1-4 family residential mortgages		17,757		205,724		223,481
Commercial mortgages		24,214		136,949		161,163
Consumer		150		3,379		3,529
Total acquired loans	$	68,044	$	417,007	$	485,051

June 30, 2021

Acquired Loans -
Purchased
Credit Impaired

Acquired Loans - Purchased Performing

Acquired
Loans -
Total

Outstanding principal balance

$
87,930

$
470,189

$
558,119

Carrying amount:

Commercial

$
1,983

$
61,013

$
62,996

Real estate construction and land

27,972

31,953

59,925

1-4 family residential mortgages

17,324

215,898

233,222

Commercial mortgages

25,348

145,570

170,918

Consumer

2,925

7,552

10,477

Total Acquired Loans

$
75,552

$
461,986

$
537,538

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


				Three months ended			Nine months ended
	June 30, 2021			September 30, 2021			September 30, 2021

Accretable yield, beginning of period	$	—		$	14,641		$	—
Additions		15,499			—			15,499
Accretion		(858	)		(773	)		(1,631	)
Accretable yield, end of period	$	14,641		$	13,868		$	13,868

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

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding Acquired Loans that are not impaired, as of ~~June~~September 30, 2021 and December 31, 2020. 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, 2021 or the twelve months ended December 31, 2020. Interest income recognized is for the ~~six~~nine months ended ~~June~~September 30, 2021 or the twelve months ended December 31, 2020 (dollars in thousands).

June 30, 2021

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

Impaired loans without a valuation allowance:

Real estate construction and land

$
—

$
—

$
-

$
4

$
-

1-4 family residential mortgages

103

103

-

105

3

Total impaired loans without a valuation allowance

103

103

-

109

3

Impaired loans with a valuation allowance

Consumer

955

955

4

1,004

27

Total impaired loans with a valuation allowance

955

955

4

1,004

27

Total impaired loans

$
1,058

$
1,058

$
4

$
1,113

$
30


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

Impaired loans with a valuation allowance
Consumer		952		952		5		987		41
Total impaired loans with a valuation allowance		952		952		5		987		41
Total impaired loans	$	1,554	$	1,594	$	5	$	1,149	$	64


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

Impaired loans with a valuation allowance
Consumer		1,156		1,156		4		1,145		70
Total impaired loans with a valuation allowance		1,156		1,156		4		1,145		70
Total impaired loans	$	1,273	$	1,320	$	4	$	2,136	$	124

December 31, 2020

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

Impaired loans without a valuation allowance:

Real estate construction and land

$
8

$
55

$
-

$
97

$
-

1-4 family residential mortgages

109

109

-

113

6

Commercial real estate

-

-

-

781

48

Total impaired loans without a valuation allowance

117

164

-

991

54

Impaired loans with a valuation allowance

Consumer

1,156

1,156

4

1,145

70

Total impaired loans with a valuation allowance

1,156

1,156

4

1,145

70

Total impaired loans

$
1,273

$
1,320

$
4

$
2,136

$
124

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

June 30, 2021

December 31, 2020

Real estate construction and land

$
—

$
8

Consumer

17

-

Total non-accrual loans

$
17

$
8


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

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

In accordance with regulatory guidance, the Company ~~has~~ approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. ~~While interest will continue~~Loan deferrals declined to accrue to income, in accordance with 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 impacted. A total$1.2 million as of ~~$59.7 million in loan deferments have been approved since the beginning of the pandemic. As of June~~September 30, 2021, ~~$57.7~~from $9.4 million ~~or 96.6%,~~as of ~~the total loan deferments approved have returned to normal payment schedules~~September 30, 2020. Only 3 loans remain in deferral status as of September 30, 2021, and ~~are now current.~~ only $28 thousand of this balance is not government guaranteed.

Based on regulatory guidance on student lending, the Company has classified 57 of its student loans purchased (“Purchased Student Loans”), ~~which exclude~~as TDRs for a total of $952 thousand as of September 30, 2021. (Note that this excludes the student loans acquired from Fauquier that ~~are 98%~~were 98% guaranteed by the U. S. Government (the “Acquired Student Loans”), ~~as TDRs for~~97% of which were sold to a ~~total of $1.0 million as of June~~third party during the three months ended September 30, 2021.) 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~~ (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any expected loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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


Troubled debt restructurings	September 30, 2021				December 31, 2020
	No. of		Recorded		No. of		Recorded
	Loans		Investment		Loans		Investment
Performing TDRs
1-4 family residential mortgages		1	$	101		1	$	109
Consumer		53		828		75		1,156
Total performing TDRs		54	$	929		76	$	1,265

Nonperforming TDRs
Real estate construction and land development		0	$	-		1	$	8
1-4 family residential mortgages		1		501		0		—
Consumer		4		124		0		—
Total nonperforming TDRs		5	$	625		1	$	8
Total TDRs		59	$	1,554		77	$	1,273

Troubled debt restructurings

June 30, 2021

December 31, 2020

No. of

Recorded

No. of

Recorded

Loans

Investment

Loans

Investment

Performing TDRs

1-4 family residential mortgages

1

$
103

1

$
109

Consumer

57

955

75

1,156

Total performing TDRs

58

$
1,058

76

$
1,265

Nonperforming TDRs

Real estate construction and land development

0

$
-

1

$
8

Total nonperforming TDRs

0

$
-

1

$
8

Total TDRs

58

$
1,058

77

$
1,273

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, 2021 and 2020 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.


													For the three months ended						For the three months ended
	For the three months ended						For the three months ended						September 30, 2021						September 30, 2020
	June 30, 2021						June 30, 2020						Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Consumer		0	$	—	$	—		6	$	49	$	49		0	$	—	$	—		9	$	119	$	119
1-4 family residential mortgages														1		501		501		0		—		—
Total loans modified during the period		0	$	—	$	—		6	$	49	$	49		1	$	501	$	501		9	$	119	$	119

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

Consumer		6	$	63	$	63		11	$	109	$	109		6	$	63	$	63		15	$	168	$	168
1-4 family residential mortgages														1		501		501		0		—		—
Total loans modified during the period		6	$	63	$	63		11	$	109	$	109		7	$	564	$	564		15	$	168	$	168

During the ~~six~~nine months ended ~~June~~September 30, 2021, there were 3 loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. These student loans had balances of ~~$22~~$22 thousand prior to being charged off. There were 5 loans modified as a TDR that subsequently defaulted during the year ended December 31, 2020 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling ~~$48~~$48 thousand prior to being charged off.

There ~~was 1 loan secured by 1-4 family residential property, from the Acquired Loans, that was in the process of foreclosure with a principal balance of $220 thousand at June 30, 2021 and~~ were 0 loans secured by 1-4 family residential property that were in the process of foreclosure at September 30, 2021 or December 31, 2020.

Note 5. Allowance for Loan Losses

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

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

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

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



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



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

•

loans as the insurance covered the past due loans, but the Company did apply qualitative factors to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.

•

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

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

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

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

Risk Ratings and Historical Loss Factor Assigned

Excellent

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

Good

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

Pass

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

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

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

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

Watch

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

Special Mention

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

Substandard

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

Doubtful

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

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

June 30, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL

September 30, 2021															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	100,879	$	14,189	$	44,911	$	39	$	236	$	219	$	160,473	$	63,273	$	15,753	$	38,679	$	34	$	1,836	$	384	$	119,959
Real estate construction and land		-		-		94,159		-		1,595		667		96,421		-		-		81,783		7,507		2,159		633		92,082
1-4 family residential mortgages		-		-		368,975		2,873		663		9,290		381,801		-		-		359,304		2,644		627		9,899		372,474
Commercial mortgages		-		3,344		429,966		5,604		1,517		15,364		455,795		-		-		442,978		5,742		845		15,301		464,866
Consumer		544		25,691		44,227		1,122		32		55		71,671		495		25,442		35,734		1,228		119		51		63,069
Total Loans	$	101,423	$	43,224	$	982,238	$	9,638	$	4,043	$	25,595	$	1,166,161	$	63,768	$	41,195	$	958,478	$	17,155	$	5,586	$	26,268	$	1,112,450


December 31, 2020	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	87,014	$	14,336	$	16,126	$	485	$	-	$	727	$	118,688
Real estate construction and land		-		-		22,305		-		-		204		22,509
1-4 family residential mortgages		-		-		126,910		3,634		1,357		1,065		132,966
Commercial mortgages		-		-		261,663		5,854		-		9,592		277,109
Consumer		1,012		18,929		36,573		1,373		64		183		58,134
Total Loans	$	88,026	$	33,265	$	463,577	$	11,346	$	1,421	$	11,771	$	609,406

December 31, 2020

Excellent

Good

Pass

Watch

Special
Mention

Sub-
standard

TOTAL

Commercial

$
87,014

$
14,336

$
16,126

$
485

$
-

$
727

$
118,688

Real estate construction and land

-

-

22,305

-

-

204

22,509

1-4 family residential mortgages

-

-

126,910

3,634

1,357

1,065

132,966

Commercial mortgages

-

-

261,663

5,854

-

9,592

277,109

Consumer

1,012

18,929

36,573

1,373

64

183

58,134

Total Loans

$
88,026

$
33,265

$
463,577

$
11,346

$
1,421

$
11,771

$
609,406

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:

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

Changes in the value of underlying collateral;

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

Changes in volume of delinquent loans;

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

Changes in lending policies and procedures, including underwriting standards;

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

Changes in the level of policy exceptions.

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

~~Changes in the value of underlying collateral;~~

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

~~Changes in volume of delinquent loans;~~

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

~~Changes in lending policies and procedures, including underwriting standards;~~

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

~~Changes in the level of policy exceptions.~~

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

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 quarters ended September 30, 2020, December 31, 2020 or March 31, 2021. During the quarter ended June 30, 2021, the Company upgraded the economic qualitative factors, resulting in a release of a portion of the reserves for loan losses related to the pandemic, as credit deterioration since the onset of COVID-19 has so far not been experienced to the extent anticipated. No additional changes were made to the economic qualitative factors during the quarter ended September 30, 2021. If economic conditions improve or worsen, the Company could experience changes in the required ALLL. It is possible that asset quality metrics could decline in the future if there is a resurgence of COVID-19 cases that disrupts economic activity.

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

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling ~~$1.1~~$1.6 million at ~~June~~September 30, 2021, 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 $4$5 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, 2021 due to the loss of the insurance on this portfolio as discussed previously.

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

Allowance for Loan Losses Rollforward by Portfolio Segment

As of and for the period ended June 30, 2021
As of and for the period ended September 30, 2021														As of and for the period ended September 30, 2021
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total				Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	209		$	160	$	3,897	$	1,189		$	5,455			$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs		—			—		—		(397	)		(397	)			(91	)		—		—		(514	)		(605	)
Recoveries		181			2		3		68			254				185			7		4		100			296
Provision for (recovery of) loan losses		(257	)		79		50		338			210				(134	)		128		291		192			477
Ending Balance	$	133		$	241	$	3,950	$	1,198		$	5,522			$	169		$	295	$	4,192	$	967		$	5,623

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	4		$	4			$	—		$	—	$	—	$	5		$	5
Collectively evaluated for impairment		133			241		3,950		1,194			5,518				169			295		4,192		962			5,618
Acquired loans - purchased credit impaired	$	—		$	—	$	—	$	—		$	—				-			-		-		-			-
Loans:
Individually evaluated for impairment	$	—		$	—	$	103	$	955		$	1,058				-			-		602		952			1,554
Collectively evaluated for impairment		158,490			68,449		794,821		67,791			1,089,551				118,184			67,934		794,767		61,967			1,042,852
Acquired loans - purchased credit impaired		1,983			27,972		42,672		2,925			75,552				1,775			24,148		41,971		150			68,044
Ending Balance	$	160,473		$	96,421	$	837,596	$	71,671			1,166,161			$	119,959		$	92,082	$	837,340	$	63,069			1,112,450


As of and for the period ended December 31, 2020
	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
Charge-offs		—			—		—		(805	)		(805	)
Recoveries		28			-		1		400			429
Provision for (recovery of) loan losses		(121	)		51		1,212		480			1,622
Ending Balance	$	209		$	160	$	3,897	$	1,189		$	5,455

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	4		$	4
Collectively evaluated for impairment		209			160		3,897		1,185			5,451
Loans:
Individually evaluated for impairment	$	—		$	8	$	109	$	1,156		$	1,273
Collectively evaluated for impairment		118,688			22,501		409,966		56,978			608,133
Ending Balance	$	118,688		$	22,509	$	410,075	$	58,134		$	609,406

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, 2021 and December 31, 2020 (dollars in thousands).

The carrying amount of goodwill was ~~$8.9~~$8.9 million and ~~$372~~$372 thousand at ~~June~~September 30, 2021 and December 31, 2020, respectively. The following table presents the changes in goodwill during the ~~six~~nine months ended ~~June~~September 30, 2021. There were 0 changes in the recorded balance of goodwill during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

The Corporation had ~~$8.6~~$8.1 million and ~~$341~~$341 thousand of other intangible assets as of ~~June~~September 30, 2021 and December 31, 2020, respectively. Other intangible assets were recognized in connection with ~~the core deposits acquired from Fauquier in 2021 and~~(i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to as Sturman Wealth ~~Advisors.~~

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

June 30,
2021

December 31,
2020

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

Amortized intangible assets:

    Core deposit intangible
$
8,700

$
(428
)

$
-

$
-

    Customer relationships intangible

773

(466
)

773

(432
)
         Total
$
9,473

$
(894
)

$
773

$
(432
)


	September 30, 2021					December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	8,700	$	(845	)	$	-	$	-
Customer relationships intangible		773		(483	)		773		(432	)
Total	$	9,473	$	(1,328	)	$	773	$	(432	)

Amortization expense was ~~$445~~$434 thousand and ~~$17~~$18 thousand for the three months ended ~~June~~September 30, 2021 and 2020, respectively and ~~$462~~$896 thousand and ~~$57~~$74 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively.

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


	Core		Customer
	Deposit		Relationships
	Intangible		Intangible
For the three months ending December 31, 2021	$	406	$	17
For the year ending December 31, 2022		1,517		67
For the year ending December 31, 2023		1,345		67
For the year ending December 31, 2024		1,172		67
For the year ending December 31, 2025		999		67
Thereafter		2,416		5
Total	$	7,855	$	290

Core

Customer

Deposit

Relationships

Intangible

Intangible

For the six months ending December 31, 2021
$
823

$
34

For the year ending December 31, 2022

1,517

67

For the year ending December 31, 2023

1,345

67

For the year ending December 31, 2024

1,172

67

For the year ending December 31, 2025

999

67

Thereafter

2,416

5

Total
$
8,272

$
307

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.

For the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, the Company recognized ~~$65~~$96 thousand and ~~$58~~$88 thousand, respectively, in compensation expense for stock options. As of ~~June~~September 30, 2021, there was ~~$362~~$395 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through ~~2025.~~2025. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. ~~NaN~~17,600 stock option grants were issued during the three months ended ~~June~~September 30, 2021, orand 40,000 stock option grants were issued during the three months ended ~~June~~September 30, 2020. No17,600 stock option grants were issued in the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~420~~66,000 stock options grants were issued during the ~~six~~nine months ended ~~June~~September 30, 2020.

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

Summary information pertaining to options outstanding at ~~June~~September 30, 2021 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.

Restricted stock grants – During the three and ~~six~~nine months ended ~~June~~September 30, ~~2021,5,730~~2021, 1,416 and ~~19,233~~20,649 restricted shares, respectively, were granted to employees and non-employee directors, vesting over a ~~four-~~four- or five-year period. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, ~~11,900~~0 and 22,268 restricted shares, respectively, were granted. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, ~~$165~~$57 thousand and ~~$226~~$283 thousand, respectively, was expensed as a result of restricted stock grants. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, ~~$39~~$42 thousand and ~~$54~~$96 thousand, respectively, in expense was incurred. As of ~~June~~September 30, 2021, there was ~~$1.1 million~~$861 thousand in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through ~~2026.~~ 2026.

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

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

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, 2021, the Company had 1 OREO property acquired through the ~~merger with Fauquier~~Merger which is carried at a fair value of ~~$611~~$611 thousand. As of December 31, 2020, 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~~ (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, excluding ~~acquired impaired~~PCI loans, of ~~$1.1~~$1.6 million as of ~~June~~September 30, 2021 and ~~$1.3~~$1.3 million as of December 31, 2020. 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.

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


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

Fair Value Measurements at June 30, 2021 Using:

Quoted Prices
in Active
Markets for
Identical Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Other Real Estate Owned

$
611

$
—

$
—

$
611

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

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, 2021 and December 31, 2020 are as follows (dollars in thousands):

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.

June 30, 2021

December 31, 2020

Accumulated other comprehensive income (loss) on securities

$
(24
)

$
1,460

Accumulated other comprehensive income (loss) on interest rate swap

(111
)

---

Total accumulated other comprehensive income (loss)

$
(135
)

$
1,460

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. For both the three months ended ~~June~~September 30, 2021 and 2020, management fees totaling ~~$25~~$25 thousand were charged by the Bank and eliminated in consolidated totals. For both the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, management fees totaling ~~$50~~$75 thousand were charged by the Bank and eliminated in consolidated totals.

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

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

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

June 30, 2021

June 30, 2020

Lease liability

$
7,833

$
3,966

Right-of-use asset

$
8,371

$
3,923

Weighted average remaining lease term

6.37 years

5.55 years

Weighted average discount rate

1.98
%

2.56
%

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):

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

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

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s allowance for loan losses (“ALLL”); the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management; expected revenue synergies and cost savings from the recently completed merger with Fauquier Bankshares, Inc. (“Fauquier”) may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and other reports filed from time to time by the Company with the Securities and Exchange 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 April 1, 2021, the Company completed its merger with Fauquier. The merger of Fauquier with and into the Company (the “Merger”) was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger (together, the “Merger Agreement”). Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank (the “Bank”), the Company’s wholly-owned bank subsidiary.

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

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

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

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

Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. While more than ~~50%~~75% of adults in the U.S. and in Virginia are fully vaccinated against COVID-19, the rate of vaccinations appears to have peaked, ~~during the second quarter of 2021,~~ and the Delta variant has shown that there remains a threat of a resurgence of cases. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

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

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

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

Interest income could be reduced due to the economic impact of COVID-19. In accordance with guidance from regulators, the Company is working with borrowers who were adversely affected by COVID-19 to defer principal only, or principal and interest. 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 beginningLoan deferrals as of the pandemic, the Company has accommodated 194 deferrals on outstanding loan balances of $59.7 million (of which 131 deferrals on outstanding loan balances of $1.8 million were related to student loans). As of JuneSeptember 30, 2021 ~~$57.7~~amount to $1.2 million ~~in loan balances, or 96.6%~~and consist of ~~the total loan deferments approved, have returned to normal payment schedules and are now current, leaving a remaining~~only three loans. 99% of this balance ~~of deferments of $2.0 million. Of this remaining balance, $1.9 million, or 92.8%, are~~is 100% government-guaranteed ~~loans~~ for which the deferrals were approved by the United States Department of Agriculture; and ~~$144~~$28 thousand, or ~~7.2%~~less than 1%, are student loans, which are private student loans not subject to potential federal forgiveness. In accordance with interagency guidance issued in March 2020 and the CARES Act, these short-term deferrals are not considered troubled debt restructurings (“TDRs”).

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll. In total, the Company, including Virginia National Bank and The Fauquier Bank, funded $207.5 million in PPP loans, with average origination fees of 3.9%, assisting many nonprofits and local businesses through this program. As of ~~June~~September 30, 2021, ~~66.9%~~82.3% of the total dollars of PPP loans had been forgiven by the SBA, with ~~$68.8~~$36.7 million outstanding. Loans funded through the PPP are fully guaranteed by the U.S. government. The Company believes that it performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination is made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.

As of ~~June~~September 30, 2021, 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.

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

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

The Company reacted quickly to the COVID-19 pandemic. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile ~~app.~~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 most staff members ~~are~~would be 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 and encourage them to utilize online and mobile banking. The client service center was also temporarily moved to a larger location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. Beginning mid-July of 2020, 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 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 2020 Form 10-K. The only significant changes in the Company’s application of critical accounting policies since December 31, 2020 relates to loans acquired in a business combination, as follows.

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

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

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

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

The total assets of the Company as of ~~June~~September 30, 2021 were ~~$1.8~~$1.9 billion. This is a ~~$998.7 million,~~$1.1 billion, or ~~117.7%~~125.5%, increase from the $848.4 million total assets reported at December 31, 2020 and a ~~$1.0~~$1.1 billion, or ~~131.0%~~133.0%, increase from the ~~$799.6~~$821.0 million reported at ~~June~~September 30, 2020. These increases were substantially due to the acquisition of Fauquier, which became effective April 1, 2021.

The Company had ~~$177.8~~$254.2 million of interest-bearing deposits in other banks as of ~~June~~September 30, 2021, compared to zero as of December 31, 2020 and ~~June~~September 30, 2020, as the current balance included accounts held by Fauquier, primarily at the Federal Reserve Bank of Richmond.

The Company had overnight federal funds sold of ~~$106.6~~$152.4 million as of ~~June~~September 30, 2021, compared to $26.6 million as of December 31, 2020 and ~~$24.8 million~~$273 thousand as of ~~June~~September 30, 2020. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Excess Balance Account (“EBA”) of the Federal Reserve Bank of Richmond (“FRB”). The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

The Company’s investment securities portfolio as of ~~June~~September 30, 2021 totaled ~~$271.2~~$279.7 million, an increase of ~~$94.1~~$102.6 million compared with the $177.1 million reported at December 31, 2020 and an increase of ~~$166.7~~$135.5 million from the ~~$104.5~~$144.7 million reported at ~~June~~September 30, 2020. The increases are primarily due to the inclusion of the investment securities portfolio of Fauquier upon effective date of the ~~merger~~Merger as of April 1, 2021. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~June~~September 30, 2021 and December 31, 2020, the investment securities holdings represented ~~14.7%~~14.6% and 20.9% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling ~~$4.3~~$2.6 million as of ~~June~~September 30, 2021, compared to $3.0 million as of December 31, 2020 and ~~$1.7~~$3.4 million as of ~~June~~September 30, 2020. These securities represent stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), CBB Financial Corporation, the holding company for Community Bankers Bank, and ~~stock~~an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Board of Governors of the Federal

Reserve System (“Federal Reserve”) and the FHLB, respectively. Stock ownership in the bank holding company

for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At ~~June~~September 30, 2021, the unrestricted securities portfolio totaled ~~$267.0~~$277.0 million. The following table summarizes the Company's available for sale securities by type as of ~~June~~September 30, 2021, December 31, 2020, and ~~June~~September 30, 2020 (dollars in thousands):

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

As of ~~June~~September 30, 2021, total loans were ~~$1.2~~$1.1 billion, compared to $609.4 million as of December 31, 2020 and ~~$632.4~~$636.9 million at ~~June~~September 30, 2020. Loans as a percentage of total assets at ~~June~~September 30, 2021 were ~~63.1%~~58.2%, compared to ~~79.1%~~77.6% as of ~~June~~September 30, 2020. Loans as a percentage of deposits at ~~June~~September 30, 2021 were ~~71.6%~~64.0%, compared to ~~88.5%~~91.7% as of ~~June~~September 30, 2020.

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

Loan balances increased ~~$556.8~~$503.0 million, or ~~91.4%~~82.5%, since December 31, 2020 and increased ~~$533.8~~$475.5 million, or ~~84.4%~~74.7%, from ~~June~~September 30, 2020. The increases are primarily due to the inclusion of Fauquier’s loans of $602.6 million, net of the fair value mark, as of the effective date of the ~~merger~~Merger of April 1, 2021, for which the carrying amount as of ~~June~~September 30, 2021 amounts to ~~$537.5~~$485.1 million. The increase from the same period in the prior year was offset by the decline in PPP loans of ~~$18.1~~$50.3 million due to loan forgiveness. As of ~~June~~September 30, 2021, ~~67%~~81% of the total dollars of PPP loans had been forgiven by the SBA, with ~~$68.8~~$36.7 million outstanding.

Non-accrual loans, comprised of only two loans, totaled ~~$17~~$777 thousand at ~~June~~September 30, 2021, compared to the $8 thousand and ~~$11~~$9 thousand reported at December 31, 2020 and ~~June~~September 30, 2020, respectively. Acquired Loans which otherwise would be in non-accrual status are not included in this figure, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling ~~$2.8 million,~~$678 thousand, $137 thousand and ~~$1.1 million,~~$61 thousand, as of ~~June~~September 30, 2021, December 31, 2020 and ~~June~~September 30, 2020, respectively, that were 90 or more days past due, with all such loans still accruing interest as the Company deemed them to be collectible. The balance as of ~~June~~September 30, 2021 includes ~~three~~a government-guaranteed ~~loans~~loan in the amount ~~$1.7 million and 54 federally insured student loans totaling $572~~of $548 thousand. ~~This past due total~~The portfolio only includes ~~four~~three non-insured student loans that are 90 days or more past due and still accruing ~~interesting,~~interest, amounting to ~~$52~~$31 thousand. Two loans acquired from TFB which are greater than 90 days past due and still accruing interest, totaling $366 thousand, are not included in this figure, as PCI loans are tracked and reported upon separately.

At ~~June~~September 30, 2021, the Company had loans classified as impaired loans in the amount of ~~$1.1~~$1.6 million, ~~a decline~~ compared to $1.3 million at December 31, 2020 and ~~$2.1~~$2.2 million at ~~June~~September 30, 2020. Based on regulatory guidance on student lending, the Company has classified 57 of its Purchased Student Loans as TDRs for a total of ~~$1.0 million~~$952 thousand as of ~~June~~September 30, 2021. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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

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

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

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

The ALLL as a percentage of loans was ~~0.47%~~0.51% as of ~~June~~September 30, 2021, 0.90% as of December 31, 2020, and ~~0.78%~~0.84% as of ~~June~~September 30, 2020. The percentage decrease as compared to year-end and the same period in the prior year relate to the elimination of Fauquier’s ALLL as the Acquired Loans were recorded at fair value. The ALLL as a percentage of loans, excluding the impact of Acquired Loans and the fair value mark (a non-GAAP financial measure), would have been ~~0.88%~~0.90% as of ~~June~~September 30, 2021. ~~The ALLL as a percentage of loans, excluding PPP loans (a non-GAAP financial measure), would have been 0.51% as of June 30, 2021 and 0.98% as of December 31, 2020.~~ Refer to the Reconciliation of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.

Provisions for loan losses totaling ~~$210~~$477 thousand and ~~$1.1~~$1.4 million were recorded in the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. The following is a summary of the changes in the ALLL for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 (dollars in thousands):

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

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of ~~June~~September 30, 2021 and acknowledges that the 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, 2021 totaled ~~$25.4~~$25.2 million compared to $5.2 million as of December 31, 2020 and ~~$5.7~~$5.4 million as of ~~June~~September 30, 2020, with the increases due to the inclusion of Fauquier’s land and buildings at fair value effective April 1, 2021. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

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

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

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

As of ~~June~~September 30, 2021, the Company has recorded ~~$8.4~~$8.0 million of right-of-use assets and ~~$7.8~~$7.5 million of lease liabilities, in accordance with Accounting Standards Update 2016-02 “Leases” (Topic 842). As of December 31, 2020, $3.5 million of right-of-use assets and $3.6 million of lease liabilities were included on the balance sheet. The increase is due to the inclusion of Fauquier’s leases effective April 1, 2021, at fair value. 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.

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

Total deposits as of ~~June~~September 30, 2021 were ~~$1.6~~$1.7 billion, an increase of ~~$898.7 million~~$1.0 billion compared to the balances of $730.8 million at December 31, 2020, and an increase of ~~$915.2 million~~$1.0 billion compared to the ~~$714.2~~$694.5 million total as of ~~June~~September 30, 2020. The primary reason for the increases in the periodic comparisons is the inclusion of Fauquier’s deposits of $817.7 million, at fair value, effective upon the ~~merger~~Merger date of April 1, 2021, as well as increased balances in PPP customer accounts.

Noninterest-bearing demand deposits on ~~June~~September 30, 2021 were ~~$449.5~~$504.7 million, representing ~~27.6%~~29.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$1.0~~$1.1 billion, and represented ~~61.9%~~61.4% of total deposits at ~~June~~September 30, 2021. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~89.5%~~90.5% of total deposit accounts at ~~June~~September 30, 2021. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep (“ICS®”) deposit products. ICS® deposit balances of ~~$29.2~~$38.3 million and ~~$121.7~~$179.2 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, 2021. As of December 31, 2020, ICS® deposit balances of $28.0 million and $81.1 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 ~~10.5%~~9.5% and 13.6% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$171.0~~$165.1 million and $99.1 million at ~~June~~September 30, 2021 and December 31, 2020, respectively. Included in these deposit totals are Certificate of Deposit Account Registry Service CDs, known as CDARSTM, whereby depositors can obtain Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled ~~$8.8~~$6.9 million as of ~~June~~September 30, 2021 and $ 8.5 million as of December 31, 2020, all of which were reciprocal balances for the Company’s customers.

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

The Company has a collateral dependent line of credit with the FHLB. ~~As of June~~During the three months ended September 30, 2021, the Company prepaid 100% of its outstanding FHLB advances, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such acquired Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand. Due to this repayment, as of September 30, 2021, the Company had no outstanding balances from FHLB advances. As of December 31, 2020, the Company had ~~$43.0 million and~~ $30 million in outstanding balances from FHLB advances, ~~respectively. As~~and as of ~~June~~September 30, 2020, the Company had no outstanding balances from FHLB advances. The Company had an outstanding letter of credit, which is off-balance sheet, in the amount of $60 million as of September 30, 2021.

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

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

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

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~12.96%~~13.22%, ~~12.96%~~13.22%, ~~13.47%~~13.74% and ~~7.66%~~7.59%, respectively, as of ~~June~~September 30, 2021, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~13.26%~~13.47%, ~~13.26%~~13.47%, ~~13.77%~~13.99% and ~~7.86%~~7.75%, respectively, as of ~~June~~September 30, 2021, also exceeding the minimum requirements.

As of ~~June~~September 30, 2021, 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 at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

The 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:

Management uses these non-GAAP measures to evaluate the Company’s operating performance on a basis comparable to other financial periods. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

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


Reconcilement of Non-GAAP Measures:	As of or for the Three Months Ended						For the Six Months Ended						As of or for the Three Months Ended						For the Nine Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Performance measures
Return on average assets ("ROAA")		0.03	%		1.07	%		0.24	%		0.93	%		0.65	%		0.89	%		0.41	%		0.92	%
Impact of merger expenses, net of tax		0.99	%		—			0.69	%		—
ROAA, excluding merger expenses (non-GAAP)		1.02	%		1.07	%		0.93	%		0.93	%
Impact of merger and merger related expenses, net of tax														0.31	%		0.19	%		0.53	%		0.06	%
ROAA, excluding merger and merger related expenses (non-GAAP)														0.96	%		1.08	%		0.95	%		0.97	%

Return on average equity ("ROAE")		0.37	%		10.64	%		2.76	%		8.98	%		7.70	%		9.20	%		4.80	%		9.05	%
Impact of merger expenses, net of tax		11.51	%		—			7.90	%		—
ROAE, excluding merger expenses (non-GAAP)		11.88	%		10.64	%		10.66	%		8.98	%
Impact of merger and merger related expenses, net of tax														3.59	%		1.92	%		6.20	%		0.55	%
ROAE, excluding merger and merger related expenses (non-GAAP)														11.30	%		11.12	%		11.01	%		9.60	%

Net income	$	147		$	2,088		$	1,652		$	3,492		$	3,138		$	1,870		$	4,790		$	5,362
Impact of merger expenses, net of tax		4,553			-			4,722			-
Net income, excluding merger expenses (non-GAAP)	$	4,700		$	2,088		$	6,374		$	3,492
Impact of merger and merger related expenses, net of tax														1,465			391			6,188			324
Net income, excluding merger and merger related expenses (non-GAAP)													$	4,603		$	2,261		$	10,978		$	5,686

Net income per share, basic and diluted	$	0.03		$	0.77		$	0.41		$	1.29
Impact of merger expenses, net of tax		0.86			-			0.92			-
Net income per share, excluding merger expenses (non-GAAP), basic and diluted	$	0.89		$	0.77		$	1.33		$	1.29
Net income per share, diluted													$	0.59		$	0.69		$	1.07		$	1.98
Impact of merger and merger related expenses, net of tax														0.27			0.14			1.38			0.12
Net income per share, excluding merger and merger related expenses (non-GAAP), diluted													$	0.86		$	0.83		$	2.45		$	2.10

Fully tax-equivalent measures
Net interest income	$	13,151		$	5,755		$	19,125		$	11,130		$	13,504		$	6,047		$	32,629		$	17,177
Fully tax-equivalent adjustment		73			25			120			45			77			42			194			87
Net interest income (FTE)	$	13,224		$	5,780		$	19,245		$	11,175		$	13,581		$	6,089		$	32,823		$	17,264

Efficiency ratio		99.5	%		59.7	%		90.0	%		62.0	%		75.5	%		66.0	%		83.9	%		63.4	%
Fully tax-equivalent adjustment		-0.4	%		-0.2	%		-0.5	%		-0.2	%		-0.3	%		-0.3	%		-0.4	%		-0.3	%
Efficiency ratio (FTE)		99.1	%		59.5	%		89.5	%		61.8	%		75.2	%		65.7	%		83.5	%		63.1	%

Net interest margin		3.03	%		3.11	%		3.02	%		3.14	%		3.06	%		3.03	%		3.01	%		3.10	%
Fully tax-equivalent adjustment		0.02	%		0.01	%		-0.02	%		0.02	%		0.02	%		0.02	%		0.02	%		0.02	%
Net interest margin (FTE)		3.05	%		3.12	%		3.00	%		3.16	%		3.08	%		3.05	%		3.03	%		3.12	%

Other financial measures
ALLL to total loans		0.47	%		0.78	%								0.51	%		0.84	%
Impact of acquired loans and fair value mark		0.41	%		0.00	%								0.39	%		0.00	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.88	%		0.78	%								0.90	%		0.84	%

ALLL to total loans		0.47	%		0.78	%
Impact of PPP loans		0.04	%		0.12	%
ALLL to total loans, excluding PPP loans (non-GAAP)		0.51	%		0.90	%

Book value per share	$	29.89		$	29.14								$	30.13		$	29.64
Impact of intangible assets		(3.29	)		(0.28	)								(3.21	)		(0.27	)
Tangible book value per share (non-GAAP)	$	26.60		$	28.86								$	26.92		$	29.37

Total equity													$	159,910		$	80,457
Impact of intangible assets														(17,043	)		(729	)
Tangible equity													$	142,867		$	79,728

Net income for the three months ended ~~June~~September 30, 2021 was ~~$147 thousand,~~$3.1 million, a ~~$1.9~~$1.3 million or ~~93.0% decrease~~68% increase compared to net income reported for the three months ended ~~June~~September 30, 2020. Net income per diluted share was ~~$0.03~~$0.59 for the quarter ended ~~June~~September 30, 2021 compared to ~~$0.77~~$0.69 per diluted share for the same quarter in the prior year. ~~The entirety of~~Note that the ~~decrease~~decline in net income per diluted share for periods noted was driven by the ~~three months ended June 30, 2021, when compared to~~increase in number of shares outstanding as a result of the ~~same period of 2020, was attributable to $5.9 million in pre-tax ($4.6 million after-tax) merger expenses incurred in the second quarter of 2021.~~merger. Excluding merger and merger related costs, the Company would have posted net income of ~~$0.89~~$4.6 million, or $0.86 per diluted share (a non-GAAP financial measure)., compared to $2.3 million, or $0.83 per diluted share, for the three months ended September 30, 2020.

Net interest income (FTE) for the three months ended ~~June~~September 30, 2021 was ~~$13.2~~$13.6 million, a ~~$7.4~~$7.5 million or ~~128.8%~~123.0% increase compared to net interest income (FTE) of ~~$5.8~~$6.1 million for the three months ended ~~June~~September 30, 2020. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the current quarter, as the ~~merger~~Merger was effective April 1, 2021. Net interest income (FTE) was ~~also~~ positively impacted by the ~~decrease~~$94 thousand decline in ~~rates paid on deposit accounts, which decreased~~ interest expense, ~~by $431 thousand, offset by the increased volume of deposits, which increased interest expense by $547 thousand.~~as described below. The increased volume of loans, also a result of the ~~merger with Fauquier,~~Merger, increasing from an average of ~~$618.1~~$630.7 million in the ~~second quarter of~~three months ended September 30, 2020 to ~~$1.2~~$1.1 billion in the ~~second quarter of~~three months ended September 30, 2021, positively impacted interest income by ~~$6.4~~$5.7 million. The higher average yield earned on loans, increasing to 4.51% from ~~4.01% to 4.30%~~3.89% for the periods noted, positively impacted interest income by ~~$500 thousand. In addition, the~~$1.1 million. The fair value accretion on ~~loans acquired~~Acquired Loans positively impacted net interest income by 1627 basis points during the three months ended ~~June~~September 30, 2021. The increase in volume of securities held, ~~increasing~~primarily as the result of the Merger, from an average balance of ~~$68.7~~$146.0 million for the ~~second quarter of~~three months ended September 30, 2020 to ~~$270.2~~$274.1 million for the ~~second quarter of~~three months ended September 30, 2021, positively impacted net interest income by ~~$865~~$555 thousand, while the decline in yield earned on such securities decreased from ~~2.15%~~1.74% to 1.68% for the periods noted, negatively impacted net interest income by ~~$97~~$38 thousand.

Net interest income (FTE) for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$19.2~~$32.8 million, ~~an $8.1~~a $15.5 million or ~~72.2%~~90.1% increase compared to net interest income (FTE) of ~~$11.2~~$17.3 million for the ~~six~~nine months ended ~~June~~September 30, ~~2020~~2020. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the ~~first half of the current year~~ nine months ended September 30, 2021,as the merger was effective April 1, 2021. Net interest income (FTE) was ~~also~~ positively impacted by the ~~decrease~~$366 thousand decline in ~~rates paid on deposit accounts, which decreased~~ interest expense, ~~by $1.2 million, offset partially by the increased volume of deposits, which increased interest expense by $938 thousand.~~as described below. The increased volume of loans, also a result of the ~~merger with Fauquier,~~Merger, increasing from an average of ~~$577.0~~$595.0 million in the ~~six~~nine months ended ~~June~~September 30, 2020 to ~~$910.0~~$995.5 million in the ~~six~~nine months ended ~~June~~September 30, 2021, positively impacted interest income by ~~$6.9~~$12.8 million. The fair value accretion on Acquired Loans positively impacted net interest income by 52 basis points during the nine months ended September 30, 2021. The increase in volume of securities held, ~~increasing~~primarily as the result of the Merger, from an average balance of ~~$91.5~~$109.8 million for the ~~six~~nine months ended ~~June~~September 30, 2020 to ~~$222.0~~$239.8 million for the ~~six~~nine months ended ~~June~~September 30, 2021, positively impacted net interest income by ~~$1.2~~$1.7 million, while the decline in yield earned on such securities decreased from ~~2.18%~~1.98% to ~~1.65%~~1.70% for the periods noted, negatively impacted net interest income by ~~$335~~$315 thousand.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.08% for the three months ended September 30, 2021 was 3 basis points higher than the 3.05% for the three months ended ~~June~~September 30, 2020. The net interest margin (FTE) of 3.03% for the nine months ended September 30, 2021 was 79 basis points lower than the 3.12% for the ~~three~~nine months ended ~~June 30, 2020. The net interest margin (FTE) of 3.00% for the six months ended June 30, 2021 was 16 basis points lower than the 3.16% for the six months ended June~~September 30, 2020. 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 ~~increased $224~~decreased $94 thousand for the three months ended ~~June~~September 30, 2021 compared to the same period in the prior year, due to increased volume of deposits from the ~~Fauquier merger,~~Merger, as average interest-bearing deposits increased ~~$681.8~~$684.8 million for the period noted, negatively impacting interest expense by ~~$547~~$555 thousand, offset by lower rates paid on deposits, positively impacting interest expense by ~~$431~~$289 thousand. The rate paid on interest-bearing deposits averaged 3031 basis points in the three months ended ~~June~~September 30, 2021, compared to 6253 basis points for the three months ended ~~June~~September 30, 2020. ~~Average balances of borrowed funds, from FHLB advances, increased from zero in~~During the three months ended ~~June~~September 30, ~~2020 to $43.0 million~~2021, the Company prepaid 100% of its outstanding FHLB advances, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such Fauquier debt. A prepayment penalty in the ~~three months ended June 30, 2021, causing~~amount of $243 thousand was incurred and is reported in noninterest expense, netting to an ~~increase in interest expense~~overall gain on ~~borrowed funds~~the transaction of ~~$59~~$173 thousand. Average balances of junior subordinated debt, increased from zero in the three months ended June 30, 2020 to $3.3 million in the three months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $49 thousand.

Interest expense decreased ~~$272~~$366 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 compared to the same period in the prior year, due primarily to the lower rates paid on deposits, positively impacting interest expense by ~~$1.2~~$1.5 million,

offset by the increased volume of deposits from the ~~Fauquier merger,~~Merger, as average interest-bearing deposits increased ~~$373.5~~$477.9 million for the period noted, negatively impacting interest expense by ~~$794 thousand.~~$1.4 million. The rate paid on interest-bearing deposits averaged 3634 basis points in the ~~six~~nine months ended ~~June~~September 30, 2021, compared to 8372 basis points for the ~~six~~nine months ended ~~June~~September 30, 2020. ~~Average balances~~The prepayment of ~~borrowed funds, from FHLB advances, increased from zero in~~debt during the ~~six~~nine months ended ~~June 30, 2020 to $36.60 million in the six months ended June~~September 30, 2021, ~~causing an increase in~~as noted above, positively impacted net interest ~~expense on borrowed funds of $95~~income by $280 thousand. Average balances of junior subordinated debt, increased from zero in the six months ended June 30, 2020 to $1.3 million in the six months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $49 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, 2021 and 2020. These tables also include rate/volume analyses for these same periods (dollars in thousands).

For the three months ended

June 30, 2021

June 30, 2020

Change in Interest Income/ Expense

Average

Interest

Average

Average

Interest

Average

Change Due to : ⁴

Total

Balance

Income/

Yield/Cost

Balance

Income/

Yield/Cost

Volume

Rate

Increase/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities

Taxable Securities

$
211,827

$
792

1.50
%

$
53,953

$
253

1.88
%

$
600

$
(61
)

$
539

Tax Exempt Securities ¹

58,398

346

2.37
%

14,793

117

3.16
%

265

(36
)

229

Total Securities ¹

270,225

1,138

1.68
%

68,746

370

2.15
%

865

(97
)

768

Total Loans

1,214,123

13,009

4.30
%

618,096

6,156

4.01
%

6,353

500

6,853

Fed Funds Sold

106,934

21

0.08
%

57,920

10

0.07
%

9

2

11

Other interest-bearing deposits

149,056

36

0.10
%

—

—

—

36

0

36

Total Earning Assets

1,740,338

14,204

3.27
%

744,762

6,536

3.53
%

7,263

405

7,668

Less: Allowance for Loan Losses

(5,732
)

(4,788
)

Total Non-Earning Assets

124,287

46,543

Total Assets

$
1,858,893

$
786,517

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
437,611

$
93

0.09
%

$
131,333

$
26

0.08
%

$
65

$
2

$
67

Money Market and Savings Deposits

561,940

455

0.32
%

257,174

365

0.57
%

296

(206
)

90

Time Deposits

169,556

324

0.77
%

98,762

365

1.49
%

186

(227
)

(41
)
Total Interest-Bearing Deposits

1,169,107

872

0.30
%

487,269

756

0.62
%

547

(431
)

116

Short term borrowings

43,030

59

0.55
%

—

—

—

59

—

59

Junior subordinated debt

3,334

49

5.89
%

—

—

—

49

0

49

Total Interest-Bearing Liabilities

1,215,471

980

0.32
%

487,269

��

756

0.62
%

655

(431
)

224

Non-Interest-Bearing Liabilities:

Demand deposits

471,078

216,747

Other liabilities

14,109

3,577

Total Liabilities

1,700,658

707,593

Shareholders' Equity

158,235

78,924

Total Liabilities & Shareholders' Equity

$
1,858,893

$
786,517

Net Interest Income (FTE)

$
13,224

$
5,780

$
6,608

$
836

$
7,444

Interest Rate Spread ²

2.95
%

2.91
%

Interest Expense as a Percentage of Average Earning Assets

0.23
%

0.41
%

Net Interest Margin (FTE) ³

3.05
%

3.12
%

(1)

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

For the Six Months Ended

June 30, 2021

June 30, 2020

Change in Interest Income/ Expense

Average

Interest

Average

Average

Interest

Average

Change Due to : ⁴

Total

Balance

Income/

Yield/Cost

Balance

Income/

Yield/Cost

Volume

Rate

Increase/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities

Taxable Securities

$
176,151

$
1,264

1.44
%

$
78,370

$
786

2.01
%

$
753

$
(275
)

$
478

Tax Exempt Securities ⁽¹⁾

45,818

569

2.48
%

13,109

212

3.23
%

417

(60
)

357

Total Securities ⁽¹⁾

221,969

1,833

1.65
%

91,479

998

2.18
%

1,170

(335
)

835

Total Loans

910,040

18,947

4.20
%

576,952

12,027

4.19
%

6,935

(15
)

6,920

Fed Funds Sold

87,276

72

0.17
%

43,409

95

0.44
%

59

(82
)

(23
)
Other interest-bearing deposits

74,475

66

0.18
%

—

—

—

66

0

66

Total Earning Assets

1,293,760

20,918

3.26
%

711,840

13,120

3.71
%

8,230

(432
)

7,798

Less: Allowance for Loan Losses

(5,624
)

(4,523
)

Total Non-Earning Assets

84,069

45,650

Total Assets

$
1,372,205

$
752,967

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
291,025

$
119

0.08
%

$
127,026

$
57

0.09
%

$
67

$
(5
)

$
62

Money Market and Savings Deposits

422,048

806

0.39
%

243,036

1,029

0.85
%

520

(743
)

(223
)
Time Deposits

134,355

604

0.91
%

103,851

859

1.66
%

207

(462
)

(255
)
Total Interest-Bearing Deposits

847,428

1,529

0.36
%

473,913

1,945

0.83
%

794

(1,210
)

(416
)
Short term borrowings

36,551

95

0.52
%

—

—

—

95

—

95

Junior subordinated debt

1,255

49

7.87
%

—

—

—

49

—

49

Total Interest-Bearing Liabilities

885,234

1,673

0.38
%

473,913

1,945

0.83
%

938

(1,210
)

(272
)
Non-Interest-Bearing Liabilities:

Demand deposits

363,709

197,312

Other liabilities

2,877

3,507

Total Liabilities

1,251,820

674,732

Shareholders' Equity

120,385

78,235

Total Liabilities & Shareholders' Equity

$
1,372,205

$
752,967

Net Interest Income (FTE)

$
19,245

$
11,175

$
7,292

$
778

$
8,070

Interest Rate Spread ²

2.88
%

2.88
%

Interest Expense as a Percentage of Average Earning Assets

0.26
%

0.55
%

Net Interest Margin (FTE) ³

3.00
%

3.16
%

(1)

A ~~recovery of~~provision for loan losses of ~~$141~~$267 thousand was recognized during the three months ended ~~June~~September 30, 2021 compared to ~~a provision for loan losses of $378~~$224 thousand recognized during the three months ended ~~June~~September 30, 2020, and a provision for loan losses of ~~$210~~$477 thousand was recognized during the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$1.1~~$1.4 million recognized during the ~~six~~nine months ended ~~June~~September 30, 2020. During the first two quarters of 2020, the Company increased the economic qualitative factors in the ALLL calculation due to the deterioration in the economic outlook resulting from the impact of COVID-19. During the second quarter of 2021, the Company released of a portion of the reserves that were added during 2020 since the credit deterioration has so far not been experienced to the extent previously anticipated. No further changes were made to the economic qualitative factors in the third quarter of 2021.

The period-end ALLL as a percentage of assets was ~~0.47%~~0.51% as of ~~June~~September 30, 2021, 0.90% as of December 31, 2020 and ~~0.78%~~0.84% as of ~~June~~September 30, 2020. The percentage decrease as compared to the prior year end and the same period in the prior year was due to the addition of ~~purchased loans upon~~Acquired Loans effective with the ~~acquisition of Fauquier,~~Merger, and the elimination of their ALLL as the loans were acquired and booked at fair value. The ALLL as of ~~June~~September 30, 2021, excluding the impact of the Acquired Loans and the fair value mark, would have been ~~0.88%~~0.90%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to Non-GAAP ALLL.

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

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

Noninterest income for the three months ended ~~June~~September 30, 2021 of ~~$2.9~~$3.5 million was ~~$1.3~~$2.1 million or ~~79.6%~~144.1% higher than the amount recorded for the three months ended ~~June~~September 30, 2020. Noninterest income increased predominantly due to the inclusion of ~~TFB’s~~Fauquier’s accounts, contributing to the increase in debit card income of $664 thousand, wealth management fees of ~~$647~~$481 thousand, deposit fees of $234 thousand, and advisory and brokerage income of ~~$157 thousand, deposit fees of $258 thousand and debit card income of $418~~$183 thousand. ~~Gains on sales of securities declined from the second quarter of the prior year by $590 thousand, as no securities were sold and swap~~Swap fee income declined ~~$104~~$320 thousand, as swap arrangements are not as attractive to borrowers in the current rate ~~environment.~~environment, and gains on sales of securities declined from the same quarter of the prior year by $91 thousand, as no securities were sold during the current quarter. Other income increased quarter over quarter by $812 thousand, primarily due to the following: (i) realization of a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.

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

Noninterest income for the ~~six~~nine months ended ~~June~~September 30, 2021 of ~~$4.0~~$7.4 million was ~~$664 thousand~~$2.7 million or ~~20.2%~~57.6% higher than the amount recorded for the ~~six~~nine months ended ~~June~~September 30, 2020. Noninterest income increased predominantly due to the inclusion of ~~TFB’s~~Fauquier’s accounts, contributing to the increase in wealth management fees of ~~$647~~$1.3 million, debit card income of $1.1 million, deposit fees of $498 thousand and advisory and brokerage income of $157 thousand, deposit fees of $258 thousand and debit card income of $418 thousand, which are the same increases as noted above, as the effective date of the merger was April 1, 2021 and therefore, only TFB’s second quarter is included in the year-to-date figures.$392 thousand. Gains on sales of securities declined from the ~~second~~same quarter of the prior year by ~~$643~~$734 thousand, as no securities were sold and swap fee income declined ~~$598~~$918 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment.

As noted above, other income increased period over period, primarily due to the following: (i) realization of a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.

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

Noninterest expense for the quarter ended ~~June~~September 30, 2021 of ~~$16.0~~$12.8 million was ~~$11.6~~$7.9 million or ~~263.1%~~159.9% higher than the quarter ended ~~June~~September 30, 2020. The predominant reason for the increase was that the current year figures include the expenses of the merged company. In addition, the Company incurred $1.9 million in merger and merger related expenses during the three months ended September 30, 2021, which was $1.4 million higher than the amount of merger and merger related expenses incurred in the same quarter of the prior year.

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

Noninterest expense for the nine months ended September 30, 2021 of $33.6 million was $19.7 million or 142.0% higher than the nine months ended September 30, 2020. The predominant reason for the increase was that the Company incurred ~~$5.9~~$8.1 million in ~~merger-related~~merger and merger related expenses during the ~~three~~nine months ended ~~June~~September 30, ~~2021.~~2021, which was $7.5 million higher than the amount of merger and merger related expenses incurred in the same period of the prior year. Additionally, the ~~second quarter~~first nine months of 2021 includes the salaries of the employees of the combined company for two quarters, as the Merger was effective ~~date of merger with Fauquier was~~ April 1, 2021.

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

Noninterest expense for the six months ended June 30, 2021 of $20.8 million was $11.8 million or 132.2% higher than the six months ended June 30, 2020. The predominant reason for the increase was that the Company incurred $6.2 million in merger-related expenses during the six months ended June 30, 2021. Additionally, the first half of 2021 includes the salaries of the employees of the combined company, as the effective date of merger with Fauquier was April 1, 2021.

The efficiency ratio (FTE) of ~~99.1%~~75.2% for the three months ended ~~June~~September 30, 2021 was elevated compared to the ~~59.5%~~65.7% for the same quarter of 2020, due primarily to the increase in noninterest expense, as described above. The efficiency ratio (FTE) of ~~89.5%~~83.5% for the ~~six~~nine months ended ~~June~~September 30, 2021 was elevated compared to the ~~61.8%~~63.1% for the same period of 2020, also due to the increase in noninterest expense, as described above. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

For the three months ended ~~June~~September 30, 2021 and 2020, the Company provided ~~$72~~$753 thousand and ~~$511~~$443 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of ~~32.9%~~19.4% and ~~19.7%~~19.2%, respectively. The effective income tax rate for the three months ended ~~June~~September 30, 2021 was higher than the prior year, as certain merger and merger related expenses are non-deductible for tax purposes. For the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, the Company provided ~~$448 thousand~~$1.2 million and ~~$843 thousand~~$1.3 million for Federal income taxes, respectively, resulting in an effective income tax rate of ~~21.3%~~20.0% and ~~19.4%~~19.3%, respectively. The effective income tax rate for the ~~six~~nine months ended ~~June~~September 30, 2021 was higher than the prior year, as certain merger and merger related expenses are non-deductible for tax purposes. For all periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds.

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended ~~June~~September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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

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~~incorporation or organization)	Identification No.)
~~Charlottesville~~404 People Place~~, Virginia~~	~~22911~~
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 36
Application of Critical Accounting Policies and Estimates		Page 39
Financial Condition		Page 40
Results of Operations		Page 4647

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 55

Item 4 Controls and Procedures		Page 55

Part II. Other Information
Item 1 Legal Proceedings		Page 55
Item 1A Risk Factors		Page 55
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 55
Item 3 Defaults Upon Senior Securities		Page 55
Item 4 Mine Safety Disclosures		Page 55
Item 5 Other Information		Page 55
Item 6 Exhibits		Page 56

Signatures		Page 57


	June 30, 2021			December 31, 2020*			September 30, 2021			December 31, 2020*
ASSETS	(Unaudited)						(Unaudited)
Cash and due from banks	$	29,605		$	8,116		$	18,919		$	8,116
Interest-bearing deposits in other banks		177,753			—			254,194			—
Federal funds sold		106,621			26,579			152,417			26,579
Securities:
Available for sale, at fair value		266,973			174,086			277,046			174,086
Restricted securities, at cost		4,272			3,010			2,610			3,010
Total securities		271,245			177,096			279,656			177,096
Loans		1,166,161			609,406			1,112,450			609,406
Allowance for loan losses		(5,522	)		(5,455	)		(5,623	)		(5,455	)
Loans, net		1,160,639			603,951			1,106,827			603,951
Premises and equipment, net		25,386			5,238			25,239			5,238
Bank owned life insurance		30,832			16,849			31,033			16,849
Goodwill		8,898			372			8,898			372
Core deposit intangible, net		8,272			—			7,855			—
Other intangible assets, net		307			341			290			341
Other real estate, net		611			—			611			—
Right of use asset, net		8,371			3,527			7,970			3,527
Accrued interest receivable and other assets		18,582			6,341			17,916			6,341
Total assets	$	1,847,122		$	848,410		$	1,911,825		$	848,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	449,483		$	209,772		$	504,696		$	209,772
Interest-bearing		431,556			148,910			424,642			148,910
Money market and savings deposit accounts		577,414			272,980			642,788			272,980
Certificates of deposit and other time deposits		170,995			99,102			165,057			99,102
Total deposits		1,629,448			730,764			1,737,183			730,764
Advances from the FHLB		42,989			30,000			—			30,000
Junior subordinated debt		3,345			—			3,356			—
Lease liability		7,833			3,589			7,463			3,589
Accrued interest payable and other liabilities		4,905			1,459			3,913			1,459
Total liabilities		1,688,520			765,812			1,751,915			765,812

Commitments and contingent liabilities
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, 0 shares outstanding		—			—
Common stock, $2.50 par value, 10,000,000 shares authorized; 5,305,819 shares issued and outstanding as of June 30, 2021 (includes 35,495 nonvested), and 2,714,273 shares issued and outstanding as of December 31, 2020 (includes 25,268 nonvested)		13,176			6,722
Preferred stock, $2.50 par value, 2,000,000 shares authorized, 0 shares outstanding								—			—
Common stock, $2.50 par value, 10,000,000 shares authorized; 5,307,235 shares issued and outstanding as of September 30, 2021 (includes 35,911 nonvested), and 2,714,273 shares issued and outstanding as of December 31, 2020 (includes 25,268 nonvested)								13,178			6,722
Capital surplus		104,360			32,457			104,446			32,457
Retained earnings		41,201			41,959			42,746			41,959
Accumulated other comprehensive income (loss)		(135	)		1,460			(460	)		1,460
Total shareholders' equity		158,602			82,598			159,910			82,598
Total liabilities and shareholders' equity	$	1,847,122		$	848,410		$	1,911,825		$	848,410

									Accumulated
									Other
	Common		Capital			Retained			Comprehensive
	Stock		Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2019	$	6,720	$	32,195		$	37,235		$	(43	)	$	76,107
Stock option expense		-		24			-			-			24
Restricted stock grant expense		-		15			-			-			15
Cash dividends declared ($0.30 per share)		-		-			(811	)		-			(811	)
Net income		-		-			1,404			-			1,404
Other comprehensive loss		-		-			-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234		$	37,828		$	(491	)	$	76,291
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		39			-			-			39
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			2,088			-			2,088
Other comprehensive income		-		-			-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307		$	39,102		$	963		$	79,092

Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Exercise of stock options		1		14			-			-			15
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61
Vested stock grants		7		(7	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			(3,387	)		(3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165
Vested stock grants		16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2019	$	6,720	$	32,195		$	37,235		$	(43	)	$	76,107
Stock option expense		-		24			-			-			24
Restricted stock grant expense		-		15			-			-			15
Cash dividends declared ($0.30 per share)		-		-			(811	)		-			(811	)
Net income		-		-			1,404			-			1,404
Other comprehensive loss		-		-			-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234		$	37,828		$	(491	)	$	76,291
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		39			-			-			39
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			2,088			-			2,088
Other comprehensive income		-		-			-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307		$	39,102		$	963		$	79,092
Stock option expense		-		30			-			-			30
Restricted stock grant expense		-		42			-			-			42
Vested stock grants		2		(2	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,870			-			1,870
Other comprehensive income		-		-			-			237			237
Balance, September 30, 2020	$	6,722	$	32,377		$	40,158		$	1,200		$	80,457

Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Exercise of stock options		1		14			-			-			15
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61
Vested stock grants		7		(7	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			(3,387	)		(3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165
Vested stock grants		16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		57			-			-			57
Vested stock grants		2		(2	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,593	)		-			(1,593	)
Net income		-		-			3,138			-			3,138
Other comprehensive loss		-		-			-			(325	)		(325	)
Balance, September 30, 2021	$	13,178	$	104,446		$	42,746		$	(460	)	$	159,910


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


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


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

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


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

Commercial	$	1,130	$	470	$	-	$	1,600	$	117,088	$	118,688	$	-
Real estate construction and land		-		-		-		-		22,509		22,509		-
1-4 family residential mortgages		501		-		-		501		132,465		132,966		-
Commercial mortgages		46		-		-		46		277,063		277,109		-
Consumer loans		298		66		137		501		57,633		58,134		137
Total Loans	$	1,975	$	536	$	137	$	2,648	$	606,758	$	609,406	$	137

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

Commercial	$	790	$	77	$	1,117	$	1,984	$	1,983	$	156,506	$	160,473	$	1,117
Real estate construction and land		51		-		-		51		27,972		68,398		96,421		-
1-4 family residential mortgages		1,528		-		280		1,808		17,324		362,669		381,801		280
Commercial mortgages		1,923		-		-		1,923		25,348		428,524		455,795		-
Consumer loans		304		44		158		506		2,925		68,240		71,671		141
Total Loans	$	4,596	$	121	$	1,555	$	6,272	$	75,552	$	1,084,337	$	1,166,161	$	1,538

	Sturman Wealth Advisors		Fauquier		Total
Balance as of January 1, 2021	$	372	$	-	$	372
Acquisition of Fauquier Bankshares, Inc.		-		8,526		8,526
Balance at June 30, 2021	$	372	$	8,526	$	8,898


	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	)		(146,506	)		(59,870	)		(164,106	)
Unrestricted stock issued		0			(11,535	)		0			(11,535	)
Restricted stock grants issued		0			(49,898	)		0			(46,917	)
Cancelled due to Plan expiration		(193,705	)		0			(193,705	)		0
Remaining available for grant		0			67,686			0			53,067

Stock grants issued and outstanding:
Total vested and unvested shares		0			57,036			0			58,452
Fully vested shares		0			21,541			0			22,541

Option grants issued and outstanding:
Total vested and unvested shares		1,379			144,301			1,379			161,901
Fully vested shares		1,379			47,293			1,379			55,293

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


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

Options exercisable at September 30, 2021		56,672		$	37.21		$	183

	~~For the six months ended~~
	~~June 30, 2021~~	~~June 30, 2020~~
~~Expected volatility~~¹	~~N/A~~	~~22.97%~~
~~Expected dividends~~²	~~N/A~~	~~4.75%~~
~~Expected term (in years)~~³	~~N/A~~		1. Based on the monthly historical volatility of the Company’s stock price over the expected life of the options. 2. Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant. 3. Based on the average of the contractual life and vesting period for the respective option. 4. Based upon an interpolated U.S. Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant. 26 ~~6.50~~
~~Risk-free rate~~⁴	~~N/A~~	~~0.68%~~


	Options Outstanding					Options Exercisable				Options Outstanding					Options Exercisable
Exercise Price	Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price		Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$13.69 to $20.00		1,379	1.6 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		66,000	9.0 Years		24.64		5,200		26.00
$30.01 to $40.00		20,820	7.7 Years		38.14		7,608		38.73
$40.01 to $42.62		57,481	6.9 Years		42.62		34,485		42.62
$13.69 to $20.00											1,379	1.4 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00											66,000	8.8 Years		24.64		13,200		24.64
$30.01 to $40.00											38,420	8.6 Years		37.23		7,608		38.73
$40.01 to $42.62											57,481	6.6 Years		42.62		34,485		42.62
Total		145,680	7.9 Years	$	33.56		48,672	$	39.42		163,280	7.9 Years	$	33.84		56,672	$	37.21


	September 30, 2021
	Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value
Nonvested as of January 1, 2021		25,268		$	26.60		$	913
Issued		20,649			29.22		746
Vested		(10,006	)		(27.01	)		(362	)
Nonvested at September 30, 2021		35,911		$	28.00		$	1,297


	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


			Fair Value Measurements at December 31, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	25,305	$	-	$	25,305	$	-
Mortgage-backed securities/CMOs		78,100		-		78,100		-
Municipal bonds		70,681		-		70,681		-
Total securities available for sale	$	174,086	$	-	$	174,086	$	-

	Three Months Ended					Six Months Ended
	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020
Available for sale securities
Realized gains on sales of securities	$	—	$	590		$	—	$	643
Tax effect	---			(124	)	---			(135	)
Realized gains, net of tax	$	—	$	466		$	—	$	508


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


Nine months ended September 30, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	32,629	$	-	$	-		$	-		$	32,629
Provision for loan losses		477		-		-			-			477
Noninterest income		5,760		602		607			468			7,437
Noninterest expense		31,854		490		736			518			33,598
Income (loss) before income taxes		6,058		112		(129	)		(50	)		5,991
Provision for income taxes		1,214		24		(27	)		(10	)		1,201
Net income (loss)	$	4,844	$	88	$	(102	)	$	(40	)	$	4,790


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

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

Three months ended June 30, 2021	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	13,151		$	-	$	-		$	-		$	13,151
Provision for (recovery of) loan losses		(141	)		-		-			-			(141	)
Noninterest income		2,356			202		203			159			2,920
Noninterest expense		15,416			167		215			195			15,993
Income (loss) before income taxes		232			35		(12	)		(36	)		219
Provision for (benefit from) income taxes		75			7		(3	)		(7	)		72
Net income (loss)	$	157		$	28	$	(9	)	$	(29	)	$	147


Six months ended June 30, 2021	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	19,125		$	-	$	-		$	-		$	19,125
Provision for loan losses		210			-		-			-			210
Noninterest income		2,870			393		404			292			3,959
Noninterest expense		19,671			327		421			355			20,774
Income (loss) before income taxes		2,114			66		(17	)		(63	)		2,100
Provision for income taxes		451			14		(4	)		(13	)		448
Net income (loss)	$	1,663		$	52	$	(13	)	$	(50	)	$	1,652

Three months ended June 30, 2020	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	5,755	$	-	$	-		$	-		$	5,755
Provision for loan losses		378		-		-			-			378
Noninterest income		1,211		162		175			78			1,626
Noninterest expense		3,811		154		234			205			4,404
Income (loss) before income taxes		2,777		8		(59	)		(127	)		2,599
Provision for (benefit from) income taxes		547		2		(12	)		(26	)		511
Net income (loss)	$	2,230	$	6	$	(47	)	$	(101	)	$	2,088

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


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

	Three Months Ended June 30,				Six Months Ended June 30,
Lease Expense	2021		2020		2021		2020
Operating lease expense	$	427	$	204	$	649	$	408
Short-term lease expense		32		29		61		57
Total lease expense	$	459	$	233	$	710	$	465
Cash paid for amounts included in lease liabilities	$	389	$	199	$	608	$	398


Undiscounted Cash Flow	June 30, 2021			September 30, 2021
Six months ending December 31, 2021	$	781
Three months ending December 31, 2021				$	391
Twelve months ending December 31, 2022		1,534			1,534
Twelve months ending December 31, 2023		1,462			1,462
Twelve months ending December 31, 2024		1,175			1,175
Twelve months ending December 31, 2025		968			968
Twelve months ending December 31, 2026		622			622
Thereafter		1,771			1,771
Total undiscounted cash flows	$	8,313		$	7,923
Less: Discount		(480	)		(460	)
Lease liability	$	7,833		$	7,463


Deposit accounts
(dollars in thousands)	June 30, 2021					December 31, 2020					June 30, 2020					September 30, 2021					December 31, 2020					September 30, 2020
	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	$	449,483		27.6	%	$	209,772		28.71	%	$	197,227		27.6	%	$	504,696		29.1	%	$	209,772		28.71	%	$	190,204		27.4	%
Interest checking accounts		431,556		26.5	%		148,910		20.37	%		136,274		19.1	%		424,642		24.4	%		148,910		20.37	%		135,569		19.5	%
Money market and savings deposit accounts		577,414		35.4	%		272,980		37.36	%		284,101		39.8	%		642,788		37.0	%		272,980		37.36	%		270,653		39.0	%

Total noninterest and low cost deposit accounts		1,458,453		89.5	%		631,662		86.4	%		617,602		86.5	%		1,572,126		90.5	%		631,662		86.4	%		596,426		85.9	%

Time deposit accounts:
Certificates of deposit		162,217		10.0	%		90,615		12.4	%		88,071		12.3	%		158,113		9.1	%		90,615		12.4	%		89,596		12.9	%
CDARS deposits		8,778		0.5	%		8,487		1.2	%		8,528		1.2	%		6,944		0.4	%		8,487		1.2	%		8,499		1.2	%
Total certificates of deposit and other time deposits		170,995		10.5	%		99,102		13.6	%		96,599		13.5	%		165,057		9.5	%		99,102		13.6	%		98,095		14.1	%

Total deposit account balances	$	1,629,448		100.0	%	$	730,764		100.0	%	$	714,201		100.0	%	$	1,737,183		100.0	%	$	730,764		100.0	%	$	694,521		100.0	%


Equity, December 31, 2020	$	82,598		$	82,598
Net income		1,652			4,790
Acquisition of Fauquier Bankshares, Inc.		78,036			78,036
Other comprehensive loss		(1,595	)		(1,920	)
Cash dividends declared		(2,410	)		(4,003	)
Equity increase due to exercise of stock options		30			30
Equity increase due to expensing of stock options		65			96
Equity increase due to expensing of restricted stock		226			283
Equity, June 30, 2021	$	158,602
Equity, September 30, 2021				$	159,910


	For the three months ended				Variance
	September 30, 2021		September 30, 2020		$			%
Noninterest income:
Wealth management fees	$	744	$	263	$	481			182.9	%
Advisory and brokerage income		358		175		183			104.6	%
Deposit account fees		396		162		234			144.4	%
Debit/credit card and ATM fees		808		144		664			461.1	%
Earnings/increase in value of bank owned life insurance		201		111		90			81.1	%
Gains on sales of securities		-		91		(91	)		-100.0	%
Loan swap fee income		24		344		(320	)		-93.0	%
Other		947		135		812			601.5	%
Total noninterest income	$	3,478	$	1,425	$	2,053			144.1	%


Exhibit Number		Description of Exhibit


31.1		302 Certification of Principal Executive Officer

31.2		302 Certification of Principal Financial Officer

32.1		906 Certification

101		The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2021, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (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, 2021, 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 13,~~November 12, 2021

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company