Virginia National Bankshares Corp 10-Q

ITEM 1. FINANCIAL STATEMENTS VIRGINIA NATIONAL BANKSHARES CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) June 30, 2021 December 31, 2020* ASSETS (Unaudited) Cash and due from banks $ 29,605 $ 8,116 Interest-bearing deposits in other banks 177,753 — Federal funds sold 106,621 26,579 Securities: Available for sale, at fair value 266,973 174,086 Restricted securities, at cost 4,272 3,010 Total securities 271,245 177,096 Loans 1,166,161 609,406 Allowance for loan losses ( 5,522 ) ( 5,455 ) Loans, net 1,160,639 603,951 Premises and equipment, net 25,386 5,238 Bank owned life insurance 30,832 16,849 Goodwill 8,898 372 Core deposit intangible, net 8,272 — Other intangible assets, net 307 341 Other real estate, net 611 — Right of use asset, net 8,371 3,527 Accrued interest receivable and other assets 18,582 6,341 Total assets $ 1,847,122 $ 848,410 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits: Noninterest-bearing $ 449,483 $ 209,772 Interest-bearing 431,556 148,910 Money market and savings deposit accounts 577,414 272,980 Certificates of deposit and other time deposits 170,995 99,102 Total deposits 1,629,448 730,764 Advances from the FHLB 42,989 30,000 Junior subordinated debt 3,345 — Lease liability 7,833 3,589 Accrued interest payable and other liabilities 4,905 1,459 Total liabilities 1,688,520 765,812 Commitments and contingent liabilities Shareholders' equity: Preferred stock, $ 2.50 par value, 2,000,000 shares authorized, no shares outstanding — — Common stock, $ 2.50 par value, 10,000,000 shares authorized; 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 Capital surplus 104,360 32,457 Retained earnings 41,201 41,959 Accumulated other comprehensive income (loss) ( 135 ) 1,460 Total shareholders' equity 158,602 82,598 Total liabilities and shareholders' equity $ 1,847,122 $ 848,410 * Derived from audited Consolidated Financial Statements See Notes to Consolidated Financial Statements 3 VIRGINIA NATIONAL BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) For the three months ended For the six months ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Interest and dividend income: Loans, including fees $ 13,009 $ 6,156 $ 18,947 $ 12,027 Federal funds sold 21 10 33 95 Other interest-bearing accounts 39 - 39 - Investment securities: Taxable 757 229 1,264 738 Tax exempt 273 92 449 167 Dividends 32 24 66 48 Total interest and dividend income 14,131 6,511 20,798 13,075 Interest expense: Demand and savings deposits 548 390 925 1,085 Certificates and other time deposits 324 366 604 860 Repurchase agreements and other borrowings 108 - 144 - Total interest expense 980 756 1,673 1,945 Net interest income 13,151 5,755 19,125 11,130 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 Noninterest income: Wealth management fees 980 228 1,309 538 Advisory and brokerage income 359 163 550 341 Royalty income 12 24 17 71 Deposit account fees 426 143 586 322 Debit/credit card and ATM fees 599 134 753 291 Earnings/increase in value of bank owned life insurance 199 109 306 216 Fees on mortgage sales - 30 - 77 Gains on sales of securities - 590 - 643 Loan swap fee income 20 124 35 633 Other 325 81 403 163 Total noninterest income 2,920 1,626 3,959 3,295 Noninterest expense: Salaries and employee benefits 4,741 2,258 7,143 4,682 Net occupancy 1,109 452 1,604 904 Equipment 340 136 456 267 Bank franchise tax 429 163 602 326 Computer software 216 136 383 276 Data processing 994 338 1,283 666 FDIC deposit insurance assessment 182 28 245 28 Marketing, advertising and promotion 232 140 369 279 Merger expenses 5,874 - 6,152 - Professional fees 510 190 687 376 Core deposit intangible amortization 428 - 428 - Other 938 563 1,422 1,143 Total noninterest expense 15,993 4,404 20,774 8,947 Income before income taxes 219 2,599 2,100 4,335 Provision for income taxes 72 511 448 843 Net income $ 147 $ 2,088 $ 1,652 $ 3,492 Net income per common share, basic $ 0.03 $ 0.77 $ 0.41 $ 1.29 Net income per common share, diluted $ 0.03 $ 0.77 $ 0.41 $ 1.29 See Notes to Consolidated Financial Statements 4 VIRGINIA NATIONAL BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands) (Unaudited) For the three months ended For the six months ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net income $ 147 $ 2,088 $ 1,652 $ 3,492 Other comprehensive income (loss) Unrealized gains (losses) on securities, net of tax of $ 506 and ($ 394 ) for the three and six months ended June 30, 2021; and net of tax of $ 512 and $ 403 for the three and six months ended June 30, 2020, respectively 1,903 1,920 ( 1,484 ) 1,514 Reclassification adjustment for realized gains on sales of securities, net of tax of ($ 0 ) and ($ 0 ) for the three and six months ended June 30, 2021; and net of tax of ($ 124 ) and ($ 135 ) for the three and six months ended June 30, 2020, respectively — ( 466 ) — ( 508 ) Unrealized losses on interest rate swaps, net of tax of ($ 30 ) and ($ 30 ) for the three and six months ended June 30, 2021; and net of tax of $ 0 and $ 0 for the three and six months ended June 30, 2020, respectively ( 111 ) — ( 111 ) — Total other comprehensive income (loss) 1,792 1,454 ( 1,595 ) 1,006 Total comprehensive income $ 1,939 $ 3,542 $ 57 $ 4,498 See Notes to Consolidated Financial Statements 5 VIRGINIA NATIONAL BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (Dollars in thousands, except per share data) (Unaudited) 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 See Notes to Consolidated Financial Statements 6 VIRGINIA NATIONAL BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited) For the six months ended June 30, 2021 June 30, 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,652 $ 3,492 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 210 1,143 Net accretion of certain acquisition-related discounts ( 804 ) - Amortization of intangible assets 462 57 Net amortization and accretion of securities 661 210 Net gains on sale of securities - ( 643 ) Earnings on bank owned life insurance ( 306 ) ( 216 ) Deferred tax 25 - Depreciation and other amortization 1,406 915 Stock option expense 65 58 Stock grant expense, restricted 226 - Net change in: 54 Accrued interest receivable and other assets ( 1,939 ) ( 430 ) Accrued interest payable and other liabilities 2,808 292 Net cash provided by operating activities 4,466 4,932 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Fauquier Bankshares 153,278 - Net decrease (increase) in restricted investments 358 ( 53 ) Purchases of available for sale securities ( 15,217 ) ( 62,259 ) Proceeds from maturities, calls and principal payments of available for sale securities 12,923 29,161 Proceeds from sales of available for sale securities — 46,075 Net decrease (increase) in loans 46,452 ( 93,296 ) Cash payment for wealth management book of business - ( 50 ) Purchase of bank premises and equipment ( 818 ) ( 80 ) Net cash provided by (used in) investing activities 196,976 ( 80,502 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand deposits, NOW accounts, and money market accounts 78,892 105,669 Net increase (decrease) in certificates of deposit and other time deposits 2,167 ( 12,679 ) Net decrease in other borrowings ( 23 ) — Proceeds from stock options exercised 30 - Cash dividends paid ( 3,224 ) ( 1,618 ) Net cash provided by financing activities 77,842 91,372 NET INCREASE IN CASH AND CASH EQUIVALENTS $ 279,284 $ 15,802 CASH AND CASH EQUIVALENTS: Beginning of period $ 34,695 $ 19,085 End of period $ 313,979 $ 34,887 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 1,611 $ 2,032 Taxes $ 1,042 $ 375 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized (losses) gains on available for sale securities $ ( 1,878 ) $ 1,274 Unrealized (losses) gains on interest rate swaps $ ( 141 ) $ — Assets acquired in business combination $ 909,736 $ — Liabilities assumed in business combination $ 840,226 $ — Change in goodwill $ 8,526 $ — See Notes to Consolidated Financial Statements 7 VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2021 Note 1. Summary of Significant Accounting Policies Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020. Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), a registered investment advisor. Beginning in 2019, the services offered under the umbrella of VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or Sturman Wealth Advisors, formerly known as VNB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation: The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Reclassifications: If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant Business Combination: On April 1, 2021 , the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $ 78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations. Recent Significant Accounting Pronouncements Financial Instruments – Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan. The Company is capturing the additional loan data which is anticipated to be needed for this calculation. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings. 8 Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ( “ SAB ” ) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“ ASC ”) 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. LIBOR and Other Reference Rates In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified all loans that are directly or indirectly impacted by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments. Recently Adopted Accounting Developments CARES Act In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and treatment of certain loan modifications related to the COVID-19 pandemic. The adoption of the CARES Act had no material impact on the Company’s consolidated financial statements. See further discussion of PPP loans and loan modifications in Notes 4 and 5 of the notes to the Consolidated Financial Statements. Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows. 9 Note 2. Business Combinations On April 1, 2021 (The “Effective Date”), the Company completed the merger with Fauquier Bankshares, Inc. (“Fauquier”) with and into the Company (the “Merger”), with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier (the “Merger Agreement”). Pursuant to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Effective Date of the Merger, plus cash in lieu of fractional shares. In connection with the transaction, the Company issued 2,571,213 shares of its common stock to the shareholders of Fauquier and paid $ 4 thousand in cash lieu of fractional shares. Each share of the Company’s common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger. Shortly after the Effective Date of the Merger, The Fauquier Bank (“TFB”), Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving. The Company accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the Merger and the common stock of the Company issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period may not exceed one year from the acquisition date. 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 10 In connection with the Merger, the Company recorded approximately $ 8.5 million of goodwill and $ 8.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger of 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 million and an estimated fair value of $ 602.6 million. The discount between the outstanding principal balance and fair value of $ 20.3 million represents expected credit losses and adjustments for market interest rates of $ 21.3 million, offset by elimination of net deferred fees/costs of $ 979 thousand. As of the Effective Date, the fair value of the performing loans was $ 513.8 million, which was 1.7 % less than the book value of the loans. The total fair value discount on performing loans of $ 9.0 million consisted of a credit discount of $ 8.4 million and an other fair value discount of $ 647 thousand. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired (“PCI”). As of the Effective Date, the fair value of PCI loans was $ 87.3 million, which was 12.3 % below the book value of the loans. The total fair value mark on PCI loans of $ 12.3 million consisted of a credit discount of $ 11.2 million and an other fair value discount of $ 1.1 million. 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 for 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. 11 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 D ate. 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 million or 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 premium and is being amortized into income over a period of seven 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 premium which will be amortized into interest expense over the remaining life of the debt on a straight-line basis. 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 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 related expenses associated with the Merger of Fauquier were $ 5.9 million ($ 4.6 million after taxes) for the three months ended June 30, 2021, $ 6.2 million ($ 4.7 million after taxes) for the six months ended June 30, 2021 and $ 7.7 million ($ 5.4 million after taxes) in the aggregate through June 30, 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments and legal and consulting expenses, which have been expensed as incurred. There were no merger related expenses during the three and six months ended June 30, 2020. Note 3. Securities The amortized cost and fair values of securities available for sale as of June 30, 2021 and December 31, 2020 were as follows (dollars in thousands): June 30, 2021 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value U.S. Government agencies $ 35,839 $ 58 $ ( 669 ) $ 35,228 Mortgage-backed securities/CMOs 136,503 842 ( 927 ) 136,418 Municipal bonds 94,661 1,352 ( 686 ) 95,327 Total Securities Available for Sale $ 267,003 $ 2,252 $ ( 2,282 ) $ 266,973 12 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 30, 2021, there were $ 132.7 million, or 86 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $ 2.3 million and consisted of 46 mortgage-backed/collateralized mortgage obligations (“CMOs”), 25 municipal bonds, and 15 agency bonds. The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at June 30, 2021, and December 31, 2020 (dollars in thousands): June 30, 2021 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 $ 26,817 $ ( 669 ) $ — $ — $ 26,817 $ ( 669 ) Mortgage-backed/CMOs 68,035 ( 897 ) 1,537 ( 30 ) 69,572 ( 927 ) Municipal bonds 35,582 ( 683 ) 762 ( 3 ) 36,344 ( 686 ) $ 130,434 $ ( 2,249 ) $ 2,299 $ ( 33 ) $ 132,733 $ ( 2,282 ) 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 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 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 million at June 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 million were similarly pledged. 13 For the six months ended June 30, 2021 , there were no sales of securities . For the six months ended June 30, 2020 , proceeds from the sales of securities amounted to $ 46.1 million, with realized gains of $ 655 thousand and realized losses of $ 12 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 an investment in an SBA loan fund of $ 500 thousand. These restricted securities, totaling $ 4.3 million and $ 3.0 million as of June 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 30, 2021 and December 31, 2020 appears below (dollars in thousands). June 30, December 31, 2021 2020 Commercial $ 160,473 $ 118,688 Real estate construction and land 96,421 22,509 1-4 family residential mortgages 381,801 132,966 Commercial mortgages 455,795 277,109 Consumer 71,671 58,134 Total loans 1,166,161 609,406 Less: Allowance for loan losses ( 5,522 ) ( 5,455 ) Net loans $ 1,160,639 $ 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 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 30, 2021, the Company had PPP loans of $ 68.8 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 30, 2021 and December 31, 2020, unamortized premiums on loans purchased prior to the Merger were $ 1.4 million and $ 1.8 million, respectively. Net deferred loan costs (fees) totaled $( 1.7 ) million and $( 931 ) thousand as of June 30, 2021 and December 31, 2020, respectively. The deferred fees increased $ 805 thousand due to the fees collected from the SBA for the additional PPP loans funded during the six months ended June 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 million on the purchased impaired loans and $ 8.2 million on the purchased performing loans as of June 30, 2021 on the loans acquired in the Merger. 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 30, 2021 on these Acquired Loans were as follows: 14 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 15 The following table presents a summary of the change in the accretable yield of loans classified as purchased credit impaired: June 30, 2021 Accretable yield, beginning of period $ — Additions 15,499 Accretion ( 858 ) Accretable yield, end of period $ 14,641 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 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 months ended June 30, 2021 or the twelve months ended December 31, 2020. Interest income recognized is for the six months ended June 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 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 16 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 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 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 of $ 59.7 million in loan deferments have been approved since the beginning of the pandemic. As of June 30, 2021, $ 57.7 million, or 96.6 %, of the total loan deferments approved have returned to normal payment schedules and are now current. Based on regulatory guidance on student lending, the Company has classified 57 of its student loans purchased (“Purchased Student Loans”), which exclude the student loans acquired from Fauquier that are 98 % guaranteed by the U. S. Government (the “Acquired Student Loans”), as TDRs for a total of $ 1.0 million as of June 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. 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 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 17 A summary of loans shown above that were modified under the terms of a TDR during the three and six months ended June 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 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 Consumer 0 $ — $ — 6 $ 49 $ 49 Total loans modified during the period 0 $ — $ — 6 $ 49 $ 49 For the six months ended For the six months ended 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 Consumer 6 $ 63 $ 63 11 $ 109 $ 109 Total loans modified during the period 6 $ 63 $ 63 11 $ 109 $ 109 During the six months ended June 30, 2021, there were three loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. These student loans had balances of $ 22 thousand prior to being charged off. There were five 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 thousand prior to being charged off. There was one 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 no loans secured by 1-4 family residential property were in the process of foreclosure at 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 18 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. 19 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 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 Commercial $ 100,879 $ 14,189 $ 44,911 $ 39 $ 236 $ 219 $ 160,473 Real estate construction and land - - 94,159 - 1,595 667 96,421 1-4 family residential mortgages - - 368,975 2,873 663 9,290 381,801 Commercial mortgages - 3,344 429,966 5,604 1,517 15,364 455,795 Consumer 544 25,691 44,227 1,122 32 55 71,671 Total Loans $ 101,423 $ 43,224 $ 982,238 $ 9,638 $ 4,043 $ 25,595 $ 1,166,161 20 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: 1) Changes in national and local economic conditions, including the condition of various market segments; 2) Changes in the value of underlying collateral; 3) Changes in volume of classified assets, measured as a percentage of capital; 4) Changes in volume of delinquent loans; 5) The existence and effect of any concentrations of credit and changes in the level of such concentrations; 6) Changes in lending policies and procedures, including underwriting standards; 7) Changes in the experience, ability and depth of lending management and staff; and 8) 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. 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 million at June 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 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 30, 2021 due to the loss of the insurance on this portfolio as discussed previously. 21 A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the six months ended June 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 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 Charge-offs — — — ( 397 ) ( 397 ) Recoveries 181 2 3 68 254 Provision for (recovery of) loan losses ( 257 ) 79 50 338 210 Ending Balance $ 133 $ 241 $ 3,950 $ 1,198 $ 5,522 Ending Balance: Individually evaluated for impairment $ — $ — $ — $ 4 $ 4 Collectively evaluated for impairment 133 241 3,950 1,194 5,518 Acquired loans - purchased credit impaired $ — $ — $ — $ — $ — Loans: Individually evaluated for impairment $ — $ — $ 103 $ 955 $ 1,058 Collectively evaluated for impairment 158,490 68,449 794,821 67,791 1,089,551 Acquired loans - purchased credit impaired 1,983 27,972 42,672 2,925 75,552 Ending Balance $ 160,473 $ 96,421 $ 837,596 $ 71,671 1,166,161 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. 22 The following tables show the aging of past due loans as of June 30, 2021 and December 31, 2020 (dollars in thousands). 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 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 NOTE 6: Goodwill and Other Intangible Assets The carrying amount of goodwill was $ 8.9 million and $ 372 thousand at June 30, 2021 and December 31, 2020, respectively. The following table presents the changes in goodwill during the six months ended June 30, 2021. There were no changes in the recorded balance of goodwill during the three and six months ended June 30, 2020. 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 23 The Corporation had $ 8.6 million and $ 341 thousand of other intangible assets as of June 30, 2021 and December 31, 2020, respectively. Other intangible assets were recognized in connection with the core deposits acquired from Fauquier in 2021 and the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, Sturman Wealth Advisors. 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 ) Amortization expense was $ 445 thousand and $ 17 thousand for the three months ended June 30, 2021 and 2020, respectively and $ 462 thousand and $ 57 thousand for the six months ended June 30, 2021 and 2020, respectively. Estimated future amortization expense as of June 30, 2021 is as follows (dollars in thousands): 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 Note 7. Net Income Per Share The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three and six months ended June 30, 2021 and 2020. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive. The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as noted in the Consolidated Balance Sheets as of June 30, 2021 and June 30, 2020 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data). 24 Three Months Ended June 30, 2021 June 30, 2020 Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Basic net income per share $ 147 5,305,277 $ 0.03 $ 2,088 2,710,019 $ 0.77 Effect of dilutive stock options - 15,013 - - 625 - Diluted net income per share $ 147 5,320,290 $ 0.03 $ 2,088 2,710,644 $ 0.77 Six Months Ended June 30, 2021 June 30, 2020 Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Basic net income per share $ 1,652 4,019,700 $ 0.41 $ 3,492 2,701,411 $ 1.29 Effect of dilutive stock options - 11,601 - - 900 - Diluted net income per share $ 1,652 $ 4,031,301 $ 0.41 $ 3,492 $ 2,702,311 $ 1.29 For the three and six months ended June 30, 2021, there were 78,301 option shares considered anti-dilutive and excluded from this calculation. For the three and six months ended June 30, 2020, there were 105,404 and 104,301 option shares, respectively, considered anti-dilutive and excluded from this calculation. Note 8. Stock Incentive Plans At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. No new grants will be issued under the 2005 Stock Incentive Plan (“2005 Plan”) as this plan has expired. For the 2014 Plan and the 2005 Plan (the “Plans”), the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant. 25 A summary of the shares issued and available under each of the Plans is shown below as of June 30, 2021. Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends. Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below. 2005 Plan 2014 Plan Aggregate shares issuable 253,575 275,625 Options issued, net of forfeited and expired options ( 59,870 ) ( 146,506 ) Unrestricted stock issued - ( 11,535 ) Restricted stock grants issued - ( 49,898 ) Cancelled due to Plan expiration ( 193,705 ) - Remaining available for grant - 67,686 Stock grants issued and outstanding: Total vested and unvested shares — 57,036 Fully vested shares — 21,541 Option grants issued and outstanding: Total vested and unvested shares 1,379 144,301 Fully vested shares 1,379 47,293 Exercise price range $13.69 $23.75 to $42.62 The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period. Stock Options Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data): June 30, 2021 Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at January 1, 2021 146,783 $ 33.51 $ - Issued — — Exercised ( 1,103 ) 27.39 Expired — — Outstanding at June 30, 2021 145,680 $ 33.56 $ 996 Options exercisable at June 30, 2021 48,672 $ 39.42 $ 106 For the six months ended June 30, 2021 and 2020, the Company recognized $ 65 thousand and $ 58 thousand, respectively, in compensation expense for stock options. As of June 30, 2021, there was $ 362 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2025 . The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. No stock option grants were issued during the three months ended June 30, 2021, or during the three months ended June 30, 2020. No stock option grants were issued in the six months ended June 30, 2021, and 420 stock options grants were issued during the six months ended June 30, 2020. 26 The fair value of each option granted in the six months ended June 30, 2021 and 2020 was estimated based on the assumptions noted in the following table: 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 6.50 Risk-free rate 4 N/A 0.68 % 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. Summary information pertaining to options outstanding at June 30, 2021 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued. 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 $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 Total 145,680 7.9 Years $ 33.56 48,672 $ 39.42 Stock Grants Restricted stock grants – During the three and six months ended June 30, 2021, 5,730 and 19,233 restricted shares, respectively, were granted to employees and non-employee directors, vesting over a four- or five-year period. During the three and six months ended June 30, 2020, 11,900 and 22,268 restricted shares, respectively, were granted. For the three and six months ended June 30, 2021, $ 165 thousand and $ 226 thousand, respectively, was expensed as a result of restricted stock grants. For the three and six months ended June 30, 2020, $ 39 thousand and $ 54 thousand, respectively, in expense was incurred. As of June 30, 2021, there was $ 1.1 million in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2026 . Changes in the restricted stock grants outstanding during the six months ended June 30, 2021 are summarized below (dollars in thousands except per share data): June 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 $ 982 Issued 19,233 30.20 748 Vested ( 9,006 ) 26.01 ( 350 ) Nonvested at June 30, 2021 35,495 $ 28.70 $ 1,380 27 Note 9. Fair Value Measurements Determination of Fair Value The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. Fair Value Hierarchy In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 – Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements: Securities available for sale Securities available for sale 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). 28 The following tables present the balances measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (dollars in thousands): 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: U.S. Government agencies $ 35,228 $ - $ 35,228 $ - Mortgage-backed securities/CMOs 136,418 - 136,418 - Municipal bonds 95,327 - 95,327 - Total securities available for sale $ 266,973 $ - $ 266,973 $ - 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 $ - Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements: Other Real Estate Owned Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. 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 30, 2021, the Company had one OREO property acquired through the merger with Fauquier which is carried at a fair value of $ 611 thousand. As of December 31, 2020, the Company had no OREO property. Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data 29 (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 loans, of $ 1.1 million as of June 30, 2021 and $ 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 30, 2021. There were no such assets to report as of December 31, 2020. 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 30, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands): Description Fair Value Valuation Technique Unobservable Inputs Weighted Average Assets: Other Real Estate Owned $ 611 Market comparables Discount applied to bonafide offer * 6.0 % * A discount percentage is applied based on age of independent appraisals, current market conditions, and cost to sell. 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. Interest rate swaps The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2. 30 The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2021 and December 31, 2020 are as follows (dollars in thousands): Fair Value Measurements at June 30, 2021 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Carrying value Level 1 Level 2 Level 3 Fair Value Assets Cash and cash equivalent $ 313,979 $ 313,979 $ - $ - $ 313,979 Available for sale securities 266,973 - 266,973 - 266,973 Loans, net 1,160,639 - - 1,174,565 1,174,565 Bank owned life insurance 30,775 - 30,775 - 30,775 Other real estate, net 611 - - 611 611 Accrued interest receivable 4,197 - 1,135 3,062 4,197 Liabilities Demand deposits and interest-bearing transaction, money market, and savings accounts $ 1,458,453 $ - $ 1,458,453 $ - $ 1,458,453 Certificates of deposit and other time deposits 170,995 - 171,295 - 171,295 Borrowings 42,989 - 42,741 - 42,741 Junior subordinated debt 3,345 - - 3,345 3,345 Accrued interest payable 221 - 221 - 221 Interest rate swaps 291 291 Fair Value Measurements at December 31, 2020 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Carrying value Level 1 Level 2 Level 3 Fair Value Assets Cash and cash equivalent $ 34,695 $ 34,695 $ - $ - $ 34,695 Available for sale securities 174,086 - 174,086 - 174,086 Loans, net 603,951 - - 602,859 602,859 Bank owned life insurance 16,849 - 16,849 - 16,849 Accrued interest receivable 2,904 - 729 2,175 2,904 Liabilities Demand deposits and interest-bearing transaction and money market accounts $ 631,662 $ - $ 631,662 $ - $ 631,662 Certificates of deposit and other time deposits 99,102 - 99,580 - 99,580 Borrowings 30,000 - 30,000 - 30,000 Accrued interest payable 159 - 159 - 159 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 31 assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk. Note 10. Other Comprehensive Income A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense. There were no sales of securities in the first two quarters of 2021. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and six months ended June 30, 2021 and 2020 (dollars in thousands). 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 The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $ 36 thousand and ($ 389 ) thousand, as of June 30, 2021 and December 31, 2020, respectively (dollars in thousands). 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 Note 11. Segment Reporting The Company has four reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report. The four reportable segments are: • Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment. • Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions. • VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management and, prior to 2020, incentive income that was based on the investment returns generated on performance-based Assets Under Management. Investment management services currently are offered through in-house and third-party managers. In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2020. 32 • Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management. A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business. For both the three months ended June 30, 2021 and 2020, management fees totaling $ 25 thousand were charged by the Bank and eliminated in consolidated totals. For both the six months ended June 30, 2021 and 2020, management fees totaling $ 50 thousand were charged by the Bank and eliminated in consolidated totals. Segment information for the three and six months ended June 30, 2021 and 2020 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker. Three months ended 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 33 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 Note 12. Leases Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term. Payments for leases with terms longer than twelve months are included in the determination of the lease liability. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. Each of the Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. The following tables present information about the Company’s leases (dollars in thousands): 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 % 34 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 A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands): Undiscounted Cash Flow June 30, 2021 Six months ending December 31, 2021 $ 781 Twelve months ending December 31, 2022 1,534 Twelve months ending December 31, 2023 1,462 Twelve months ending December 31, 2024 1,175 Twelve months ending December 31, 2025 968 Twelve months ending December 31, 2026 622 Thereafter 1,771 Total undiscounted cash flows $ 8,313 Less: Discount ( 480 ) Lease liability $ 7,833 35