(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

The registrant had 3,794,725 shares of common stock outstanding as of ~~August 7,~~November 6, 2020.

(In thousands, except share and per share data)	June 30, 2020 (Unaudited)			December 31, 2019			September 30, 2020 (Unaudited)			December 31, 2019
Assets
Cash and due from banks	$	12,839		$	9,124		$	10,994		$	9,124
Interest-bearing deposits in other banks		66,686			37,203			62,666			37,203
Federal funds sold		14			14			13			14
Securities available for sale, at fair value		78,250			79,783			84,590			79,783
Restricted investments		2,687			2,016			1,835			2,016
Mortgage loans held for sale		-			247			235			247
Loans		622,660			550,226			638,103			550,226
Allowance for loan losses		(6,400	)		(5,227	)		(6,701	)		(5,227	)
Loans, net		616,260			544,999			631,402			544,999
Premises and equipment, net		16,978			17,492			16,790			17,492
Accrued interest receivable		2,818			1,984			2,635			1,984
Other real estate owned, net		1,356			1,356			1,356			1,356
Bank-owned life insurance		14,141			13,961			14,231			13,961
Other assets		13,524			13,992			13,539			13,992
Total assets	$	825,553		$	722,171		$	840,286		$	722,171
Liabilities
Deposits:
Noninterest-bearing checking	$	169,542		$	123,492		$	179,650		$	123,492
Interest-bearing:
Checking		262,274			242,531			252,627			242,531
Savings and money market accounts		203,038			182,007			235,718			182,007
Time deposits		70,952			74,125			71,839			74,125
Total interest-bearing		536,264			498,663			560,184			498,663
Total deposits		705,806			622,155			739,834			622,155
Federal Home Loan Bank advances		32,651			16,695			12,629			16,695
Junior subordinated debt		4,124			4,124			4,124			4,124
Other liabilities		11,884			12,075			11,492			12,075
Total liabilities		754,465			655,049			768,079			655,049
Shareholders’ Equity
Common stock, par value $3.13, and additional paid-in capital; authorized: 8,000,000 shares; issued and outstanding: 3,794,725 and 3,783,724 shares including 19,843 and 20,352 unvested restricted shares, respectively		16,117			15,964			16,152			15,964
Retained earnings		51,812			49,787			52,885			49,787
Accumulated other comprehensive income, net		3,159			1,371			3,170			1,371
Total shareholders’ equity		71,088			67,122			72,207			67,122
Total liabilities and shareholders’ equity	$	825,553		$	722,171		$	840,286		$	722,171

	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share data)	2020			2019		2020			2019		2020			2019			2020			2019
Interest Income
Interest and fees on loans	$	6,507		$	6,573	$	12,974		$	13,144	$	6,348		$	6,651		$	19,322		$	19,795
Interest and dividends on securities:
Taxable interest income		364			365		743			734		338			355			1,081			1,089
Tax-exempt interest		100			85		199			174		107			89			306			263
Dividends		27			32		55			70		29			57			84			127
Interest on deposits in other banks		10			224		94			336		19			210			113			547
Total interest income		7,008			7,279		14,065			14,458		6,841			7,362			20,906			21,821
Interest Expense
Interest on deposits		499			957		1,246			1,796		420			930			1,666			2,727
Interest on federal funds purchased		-			-		-			14		-			-			-			14
Interest on Federal Home Loan Bank advances		76			188		147			332		78			190			225			523
Interest on Junior subordinated debt		49			50		99			99		49			51			148			149
Total interest expense		624			1,195		1,492			2,241		547			1,171			2,039			3,413
Net interest income		6,384			6,084		12,573			12,217		6,294			6,191			18,867			18,408
Provision for loan losses		911			205		1,261			255		345			-			1,606			255
Net interest income after provision for loan losses		5,473			5,879		11,312			11,962		5,949			6,191			17,261			18,153
Noninterest Income
Trust and estate fees		499			427		960			843		681			442			1,641			1,285
Brokerage fees		120			128		266			218		127			115			393			333
Service charges on deposit accounts		220			378		572			761		259			382			831			1,142
Interchange fee income, net		297			313		567			584		333			394			900			979
Bank-owned life insurance		90			90		180			183		90			92			270			275
Other income (loss)		(43	)		58		(32	)		206		(27	)		188			(59	)		392
Gain on sale of securities available for sale		-			-		-			79		-			-			-			79
Gain on sale of mortgage loans held for sale, net		33			6		45			6
Gain (loss) on sale of mortgage loans held for sale, net												15			(3	)		60			2
Total noninterest income		1,216			1,400		2,558			2,880		1,478			1,610			4,036			4,487
Noninterest Expenses
Salaries and benefits		2,435			2,923		5,387			5,935		3,076			3,035			8,463			8,968
Occupancy		579			604		1,243			1,219		586			561			1,829			1,781
Furniture and equipment		190			275		381			558		196			269			577			827
Marketing and business development		107			171		216			357		114			129			329			487
Legal, audit and consulting		304			282		574			531		301			270			875			801
Data processing		361			325		736			679		338			353			1,074			1,031
Federal Deposit Insurance Corporation assessment		81			93		165			187		95			-			260			187
Merger related expenses												43			-			43			-
Other operating expenses		832			836		1,792			1,761		921			802			2,713			2,561
Total noninterest expenses		4,889			5,509		10,494			11,227		5,670			5,419			16,163			16,643
Income before income taxes		1,800			1,770		3,376			3,615		1,757			2,382			5,134			5,997
Income tax expense		222			206		402			419		210			330			613			749
Net Income	$	1,578		$	1,564	$	2,974		$	3,196	$	1,547		$	2,052		$	4,521		$	5,248
Earnings per share, basic	$	0.42		$	0.41	$	0.78		$	0.84	$	0.41		$	0.54		$	1.19		$	1.39
Earnings per share, diluted	$	0.42		$	0.41	$	0.78		$	0.84	$	0.41		$	0.54		$	1.19		$	1.38
Dividends per share	$	0.125		$	0.12	$	0.25		$	0.24	$	0.125		$	0.12		$	0.375		$	0.36

	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2020		2019			2020			2019			2020			2019			2020			2019
Net income	$	1,578	$	1,564		$	2,974		$	3,196		$	1,547		$	2,052		$	4,521		$	5,248
Other comprehensive income, net of tax:
Change in fair value of securities available for sale, net of tax, $(188), $(257), $(580) and $(519), respectively		708		970			2,181			1,954
Change in fair value of securities available for sale, net of tax, $9, $(100), $(571) and $(619), respectively													(34	)		374			2,147			2,328
Reclassification adjustment for gains on securities available for sale, net of tax, $0, $0, $0 and $17, respectively		-		-			-			(62	)		-			-			-			(62	)
Change in fair value of interest rate swap, net of tax, $(1), $37, $104 and $61, respectively		6		(136	)		(393	)		(228	)
Total other comprehensive income, net of tax, $(189), $(220), $(476) and $(441), respectively		714		834			1,788			1,664
Change in fair value of interest rate swap, net of tax, $(11), $37, $93 and $98, respectively													45			(141	)		(348	)		(369	)
Total other comprehensive income, net of tax, $(2), $(63), $(478) and $(504), respectively													11			233			1,799			1,897
Total comprehensive income	$	2,292	$	2,398		$	4,762		$	4,860		$	1,558		$	2,285		$	6,320		$	7,145

(In thousands, except share and per share data)	Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total			Common Stock and Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, March 31, 2019	$	15,861		$	45,980		$	292	$	62,133
Balance, June 30, 2019												$	15,890	$	47,090		$	1,126	$	64,106
Net income		-			1,564			-		1,564			0		2,052			0		2,052
Other comprehensive loss, net of tax, $(220)		-			-			834		834
Other comprehensive income, net of tax, $(63)													0		0			233		233
Cash dividends ($0.12 per share)		-			(454	)		-		(454	)		0		(455	)		0		(455	)
Amortization of unearned compensation, restricted stock awards		40			-			-		40			40		0			0		40
Repurchase of common stock (520 shares)		(11	)		-			-		(11	)
Balance, June 30, 2019	$	15,890		$	47,090		$	1,126	$	64,106
Balance, September 30, 2019												$	15,930	$	48,687		$	1,359	$	65,976

Balance, March 31, 2020	$	16,083		$	50,709		$	2,445	$	69,237
Balance, June 30, 2020												$	16,117	$	51,812		$	3,159	$	71,088
Net income		-			1,578			-		1,578			0		1,547			0		1,547
Other comprehensive income, net of tax, $(189)		-			-			714		714
Other comprehensive income, net of tax, $(2)													0		0			11		11
Cash dividends ($0.125 per share)		-			(475	)		-		(475	)		0		(474	)		0		(474	)
Amortization of unearned compensation, restricted stock awards		34			-			-		34			35		0			0		35
Balance, June 30, 2020	$	16,117		$	51,812		$	3,159	$	71,088
Balance, September 30, 2020												$	16,152	$	52,885		$	3,170	$	72,207

(In thousands, except share and per share data)	Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2018	$	15,742		$	44,803		$	(538	)	$	60,007		$	15,742		$	44,803		$	(538	)	$	60,007
Net income		-			3,196			-			3,196			0			5,248			0			5,248
Other comprehensive income, net of tax effect, $(441)		-			-			1,664			1,664
Cash dividends ($0.24 per share)		-			(909	)		-			(909	)
Other comprehensive income, net of tax effect, $(504)														0			0			1,897			1,897
Cash dividends ($0.36 per share)														0			(1,364	)		0			(1,364	)
Amortization of unearned compensation, restricted stock awards		74			-			-			74			114			0			0			114
Issuance of common stock - unvested shares (5,884 shares)		-			-			-			-			0			0			0			0
Issuance of common stock - vested shares (4,149 shares)		95			-			-			95			95			0			0			95
Repurchase of common stock (960 shares)		(21	)		-			-			(21	)		(21	)		0			0			(21	)
Balance, June 30, 2019	$	15,890		$	47,090		$	1,126		$	64,106
Balance, September 30, 2019													$	15,930		$	48,687		$	1,359		$	65,976

Balance, December 31, 2019	$	15,964		$	49,787		$	1,371		$	67,122		$	15,964		$	49,787		$	1,371		$	67,122
Net income		-			2,974			-			2,974			0			4,521			0			4,521
Other comprehensive income, net of tax, $(476)		-			-			1,788			1,788
Cash dividends ($0.25 per share)		-			(949	)		-			(949	)
Other comprehensive income, net of tax, $(478)														0			0			1,799			1,799
Cash dividends ($0.375 per share)														0			(1,423	)		0			(1,423	)
Amortization of unearned compensation, restricted stock awards		69			-			-			69			104			0			0			104
Issuance of common stock - unvested shares (7,889 shares)		-			-			-			-			0			0			0			0
Issuance of common stock - vested shares (4,293 shares)		90			-			-			90			90			0			0			90
Issuance of common stock - performance-based restricted stock units (826 shares)		18			-			-			18			18			0			0			18
Repurchase of common stock (2,007 shares)		(24	)		-			-			(24	)		(24	)		0			0			(24	)
Balance, June 30, 2020	$	16,117		$	51,812		$	3,159		$	71,088
Balance, September 30, 2020													$	16,152		$	52,885		$	3,170		$	72,207

	Six Months Ended June 30,						Nine Months Ended September 30,
(In thousands)	2020			2019			2020			2019
Cash Flows from Operating Activities
Net income	$	2,974		$	3,196		$	4,521		$	5,248
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		535			644			809			967
Provision for loan losses		1,261			255			1,606			255
Loss on interest rate swaps		2			-
(Gain) loss on interest rate swaps								(3	)		8
Gain on sales of securities available for sale		-			(79	)		-			(79	)
Amortization of security premiums, net		247			206			377			330
Amortization of unearned compensation, net of forfeiture		(30	)		134			22			190
Issuance of vested restricted stock		108			95			108			95
Bank-owned life insurance income		(180	)		(183	)		(270	)		(275	)
Originations of mortgage loans held for sale		(1,884	)		(260	)		(2,761	)		(2,362	)
Proceeds from mortgage loans held for sale		2,176			266			2,833			864
Gain on mortgage loans held for sale		(45	)		(6	)		(60	)		(2	)
Changes in assets and liabilities:
Increase in other assets		(844	)		(5,650	)		(678	)		(4,998	)
Increase (decrease) in other liabilities		(744	)		4,925			(993	)		4,916
Net cash provided by operating activities		3,576			3,543			5,511			5,157
Cash Flows from Investing Activities
Proceeds from sales, maturities, calls and principal payments of securities available for sale		6,317			18,014			10,500			19,934
Purchase of securities available for sale		(2,270	)		(15,601	)		(12,966	)		(17,990	)
Purchase of premises and equipment		(21	)		(374	)		(107	)		(500	)
Purchase of restricted investments, net		(671	)		(331	)
(Purchase) redemption of restricted investments, net								181			(331	)
Loan originations, net		(72,367	)		5,483			(87,953	)		4,270
Net cash provided by (used in) investing activities		(69,012	)		7,191			(90,345	)		5,383
Cash Flows from Financing Activities
Increase (decrease) in noninterest-bearing checking, interest-bearing checking, savings and money market accounts		86,824			(39,428	)		119,965			(29,926	)
Increase (decrease) in time deposits		(3,173	)		11,046			(2,286	)		8,288
Increase in Federal Home Loan Bank advances		15,956			5,958
Increase (decrease) in Federal Home Loan Bank advances								(4,066	)		5,937
Cash dividends paid on common stock		(949	)		(909	)		(1,423	)		(1,364	)
Repurchase of common stock		(24	)		(21	)		(24	)		(21	)
Net cash provided by (used in) financing activities		98,634			(23,354	)		112,166			(17,086	)
Increase (decrease) in cash and cash equivalents		33,198			(12,620	)		27,332			(6,546	)
Cash and Cash Equivalents
Beginning		46,341			67,110			46,341			67,110
Ending	$	79,539		$	54,490		$	73,673		$	60,564
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,556		$	2,037		$	2,121		$	3,159
Income taxes	$	-		$	420		$	785		$	640

Supplemental Disclosures of Noncash Investing Activities
Unrealized gain on securities available for sale, net of tax	$	2,181		$	1,892		$	2,147		$	2,266
Unrealized loss on interest rate swap, net of tax	$	(393	)	$	(228	)	$	(348	)	$	(369	)

The consolidated financial statements include the accounts of Fauquier Bankshares, Inc. (the “Company”) and its wholly-owned subsidiary, The Fauquier Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Fauquier Bank Services, Inc. and Specialty Properties Acquisitions - VA, LLC. Specialty Properties Acquisitions - VA, LLC was formed with the sole purpose of holding foreclosed property. The consolidated financial statements do not include the accounts of Fauquier Statutory Trust II, a wholly-owned subsidiary of the Company. In consolidation, significant intercompany financial balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of ~~June~~September 30, 2020 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The notes included herein should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 are not necessarily indicative of the results expected for the full year or any other interim period.

~~Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation. No reclassifications were significant and there was no effect on net income.~~

On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a pandemic as a result of the global spread of the illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders and strict social distancing.

The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets and employment. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act~~(the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19.~~

The outbreak is having a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants. As of June 30, 2020, the Company’s aggregate exposure in these industries was $65.9 million, or 10.6% of total loans. Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan losses increased $1.2 million, or 22.4%, compared to December 31, 2019. The increase in the allowance for loan losses was in large part due to an increase in the qualitative factors related to COVID-19. Most notably, a $860,000 increase, was driven by the deteriorating economic conditions caused by COVID-19, including the increase in the unemployment rate for the Commonwealth of Virginia.

Due to the significant uncertainties related to the ultimate duration of ~~COVID-19,~~the novel coronavirus (“COVID-19”) pandemic and measures taken in response thereto, it is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including that the credit quality of the Company’s loan portfolio may decline and loan defaults could increase.

Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation. No reclassifications were significant and there was no effect on net income.

On October 1, 2020, the Company and Virginia National Bankshares Corporation (“Virginia National”) announced a definitive agreement to combine in a strategic merger (the “Merger Agreement”) pursuant to which the Company will merge with and into Virginia National (the “Merger”). As a result of the Merger, the holders of shares of the Company's common stock will receive 0.6750 shares of Virginia National common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to be completed in the first quarter of 2021, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments, 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 No. 2016-13 as codified in Topic 326, including ~~ASUs~~ASU Nos. 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 SEC 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. Changes under ASU No. 2016-13 and subsequent updates represent a fundamental shift from existing GAAP and may result in a material increase to the Company's accounting for credit losses on financial instruments. To prepare for implementation of the new standard the Company ~~has~~ established a working group to evaluate the impact these changes will have on the Company’s financial statements and related disclosures. The Company ~~has~~ also contracted with a third-party for credit modeling in accordance with ASU No. 2016-13. The Company has focused on model validations, the

development of processes and related controls, and the evaluation of parallel runs. The Company has not yet determined an estimate of the effect of these changes.

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

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 ~~modifies~~modified the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in Topic 820 were also removed or modified. ASU No. 2018-13 was effective for the Company on January 1, 2020. The ~~Company does not expect the~~Company’s adoption of ASU No. 2018-13 ~~to have~~has not had a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements ~~have been~~were deleted while the following disclosure requirements ~~have been~~were added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2018-14 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” ~~The~~This ASU is expected to reduce the cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU No. 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” ~~The~~This ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU No. 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair

value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments ~~clarify~~clarified that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in ~~the~~this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2020-01 to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the

potential burden in accounting for reference rate reform. ~~The~~This ASU also provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London ~~Inter-bank~~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. The Company ~~is currently evaluating~~continues to evaluate the impact of the reference rate reform on the Company’s consolidated financial statements.

On June 28, 2018, the SEC adopted amendments to the definition of “smaller reporting company” that were effective on September 10, 2018. Under the ~~new~~amended definition, generally, a company qualifies as a “smaller reporting company” if (i) it has public float of less than $250 million or (ii) it has less than $100 million in annual revenues and (a) no public float or (b) public float of less than $700 million. Because of the Company’s public float being less than $250 million as of the measurement date in 2019, the Company is considered a smaller reporting company with respect to its SEC filings. On March 12, 2020, the SEC finalized amendments to its definitions of “accelerated filer” and “large accelerated filer.” The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. For the Company, this will be its annual report on Form 10-K with respect to the year ending December 31, 2020. Pursuant to Section 404(b) of the Sarbanes-Oxley Act, the classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an external auditor attestation concerning the effectiveness of a company’s internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K. The Company has complied with such requirements during the years it was considered an accelerated filer. The SEC’s March 2020 definition amendments exclude from the accelerated filer and large accelerated filer definitions an issuer that (i) is eligible to be a smaller reporting company and (ii) had annual revenues of less than $100 million in the most recent fiscal year. Such entity can now be considered a “non-accelerated filer.” With respect to the 2020 fiscal year, the Company expects to continue to be a smaller reporting company and no longer be considered an accelerated filer. This would mean the Company would not be required to obtain the external auditor attestation of its ICFR. If the Company’s annual revenues exceed $100 million, its category may change back to that of an accelerated filer. Non-accelerated filers have additional time to file quarterly and annual financial statements.

In March 2020 (revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation ~~(“the~~(collectively, “the agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. See Note 3 of the consolidated financial statements for additional disclosure of TDRs as of ~~June~~September 30, 2020.

In August 2020, the FASB issued ASU No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. ASU No. 2020-08 states that all entities should apply the amendments in this ASU on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

	June 30, 2020								September 30, 2020
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	58,895	$	3,071	$	-	$	61,966	$	60,791	$	3,040	$	(16	)	$	63,815
Obligations of states and political subdivisions		14,956		1,328		-		16,284		19,444		1,401		(70	)		20,775
	$	73,851	$	4,399	$	-	$	78,250	$	80,235	$	4,441	$	(86	)	$	84,590

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

	June 30, 2020				September 30, 2020
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less					$	1,055	$	1,065
Due after one year through five years	$	17,305	$	18,360		16,204		17,221
Due after five years through ten years		10,020		10,588		10,396		11,032
Due after ten years		46,526		49,302		52,580		55,272
	$	73,851	$	78,250	$	80,235	$	84,590

During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, securities purchased were ~~$2.3~~$13.0 million and ~~$15.6~~$18.0 million, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, proceeds from maturities, calls and principal payments of securities were ~~$6.3~~$10.5 million and ~~$4.1~~$13.9 million, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020 there were 0 securities sold. During the ~~six~~nine months ended ~~June~~September 30, 2019, securities sold were ~~$13.9~~$6.0 million. There were 0 impairment losses on securities during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

~~There were 0 securities with gross unrealized losses at June 30, 2020.~~ The following table shows the Company’s securities with gross unrealized losses, by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019.

(In thousands)	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More				Total
December 31, 2019	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
September 30, 2020																Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)		Fair Value		Unrealized (Losses)
Obligations of U.S. Government corporations and agencies	$	11,460	$	(42	)	$	5,651	$	(44	)	$	17,111	$	(86	)	$	6,097	$	(16	)	$	0	$	0	$	6,097	$	(16	)
Obligations of states and political subdivisions		2,049		(14	)		-		-			2,049		(14	)		4,081		(70	)		0		0		4,081		(70	)
Total temporary impaired securities	$	13,509	$	(56	)	$	5,651	$	(44	)	$	19,160	$	(100	)	$	10,178	$	(86	)	$	0	$	0	$	10,178	$	(86	)

There were 12 debt securities totaling $10.1 million of aggregate fair value considered temporarily impaired at September 30, 2020. The primary cause of the temporary impairments in the Company’s investments in debt securities was fluctuations in interest rates. The Company concluded that 0 other-than-temporary impairment existed in its securities portfolio at September 30, 2020, and 0 other-than-temporary impairment loss has been recognized in net income, based primarily on the fact that changes in fair value were caused primarily by fluctuations in interest rates, there were 0 securities with unrealized losses that were significant relative to their carrying amounts, 0 securities have been in an unrealized loss position continuously for more than 12 months, securities with unrealized losses had generally high credit quality, the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

The carrying value of securities pledged to secure deposits and for other purposes was ~~$16.9~~$16.7 million and $16.6 million at ~~June~~September 30, 2020 and December 31, 2019, respectively.

The Company’s allowance for loan losses has three basic components: specific, general, and unallocated. The specific component is used to individually allocate an allowance for larger balance, non-homogeneous loans identified as impaired. The general component is used to estimate the loss on pools of smaller balance, homogeneous loans, including 1-4 family mortgage loans and other consumer loans. The general component is also used for the remaining pool of larger balance, non-homogeneous loans, not identified as impaired. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19. A provision in the CARES Act included the creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”). Loans provided by the Bank through the PPP may be forgiven based on the borrowers’ compliance with the terms of the program. The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans within the allowance for loan loss calculation. The Commercial and

Industrial loan portfolio segment in the tables below include ~~543~~549 PPP loans that totaled ~~$52.8~~$53.1 million at ~~June~~September 30, 2020. There were no loans that were forgiven at ~~June~~September 30, 2020.

The following tables present the total allowance for loan losses by portfolio segment for the periods presented.

	June 30, 2020																							September 30, 2020
(In thousands)	Commercial and Industrial			Commercial Real Estate		Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total			Commercial and Industrial			Commercial Real Estate		Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance, December 31, 2019	$	296		$	1,788	$	652	$	154		$	65		$	1,596	$	326		$	350	$	5,227		$	296		$	1,788	$	652	$	154		$	65		$	1,596	$	326		$	350	$	5,227
Charge-offs		(99	)		-		-		(19	)		(2	)		-		-			-		(120	)		(148	)		0		0		(21	)		(8	)		0		0			0		(177	)
Recoveries		7			5		-		20			-			-		-			-		32			11			14		0		20			0			0		0			0		45
Provision (recovery)		339			382		366		(2	)		10			182		(16	)		-		1,261			699			361		294		(18	)		31			263		(24	)		0		1,606
Ending balance, June 30, 2020	$	543		$	2,175	$	1,018	$	153		$	73		$	1,778	$	310		$	350	$	6,400
Ending balance, September 30, 2020																								$	858		$	2,163	$	946	$	135		$	88		$	1,859	$	302		$	350	$	6,701
Ending balances individually evaluated for impairment	$	69		$	67	$	-	$	-		$	-		$	-	$	-		$	-	$	136		$	20		$	60	$	0	$	0		$	0		$	0	$	0		$	0	$	80
Ending balances collectively evaluated for impairment	$	474		$	2,108	$	1,018	$	153		$	73		$	1,778	$	310		$	350	$	6,264		$	838		$	2,103	$	946	$	135		$	88		$	1,859	$	302		$	350	$	6,621
Loans
Individually evaluated for impairment	$	702		$	9,025	$	201	$	-		$	-		$	377	$	-				$	10,305		$	509		$	8,369	$	0	$	0		$	0		$	377	$	0				$	9,255
Collectively evaluated for impairment		86,342			177,979		73,500		6,428			7,832			227,540		32,734					612,355			88,473			191,404		72,465		6,264			7,333			232,147		30,762					628,848
Ending balance, June 30, 2020	$	87,044		$	187,004	$	73,701	$	6,428		$	7,832		$	227,917	$	32,734				$	622,660
Ending balance, September 30, 2020																								$	88,982		$	199,773	$	72,465	$	6,264		$	7,333		$	232,524	$	30,762				$	638,103

	June 30, 2019																								September 30, 2019
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total			Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance, December 31, 2018	$	483		$	1,738		$	635	$	145		$	68		$	1,311	$	446		$	350	$	5,176		$	483		$	1,738		$	635	$	145		$	68		$	1,311	$	446		$	350	$	5,176
Charge-offs		(74	)		-			-		(23	)		(10	)		-		-			-		(107	)		(93	)		0			0		(24	)		(12	)		0		0			0		(129	)
Recoveries		1			75			-		9			-			-		-			-		85			2			77			0		14			0			0		0			0		93
Provision (recovery)		162			(34	)		15		10			9			137		(44	)		-		255			162			(34	)		15		10			9			137		(44	)		0		255
Ending balance, June 30, 2019	$	572		$	1,779		$	650	$	141		$	67		$	1,448	$	402		$	350	$	5,409
Ending balance, September 30, 2019																									$	554		$	1,781		$	650	$	145		$	65		$	1,448	$	402		$	350	$	5,395

	December 31, 2019																								December 31, 2019
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total			Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Lines of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance, December 31, 2018	$	483		$	1,738		$	635	$	145		$	68		$	1,311	$	446		$	350	$	5,176		$	483		$	1,738		$	635	$	145		$	68		$	1,311	$	446		$	350	$	5,176
Charge-offs		(328	)		-			-		(50	)		(13	)		-		-			-		(391	)		(328	)		0			0		(50	)		(13	)		0		0			0		(391	)
Recoveries		2			80			-		14			-			-		-			-		96			2			80			0		14			0			0		0			0		96
Provision (recovery)		139			(30	)		17		45			10			285		(120	)		-		346			139			(30	)		17		45			10			285		(120	)		0		346
Ending balance, December 31, 2019	$	296		$	1,788		$	652	$	154		$	65		$	1,596	$	326		$	350	$	5,227		$	296		$	1,788		$	652	$	154		$	65		$	1,596	$	326		$	350	$	5,227
Ending balances individually evaluated for impairment	$	-		$	229		$	-	$	-		$	-		$	-	$	-		$	-	$	229		$	0		$	229		$	0	$	0		$	0		$	0	$	0		$	0	$	229
Ending balances collectively evaluated for impairment	$	296		$	1,559		$	652	$	154		$	65		$	1,596	$	326		$	350	$	4,998		$	296		$	1,559		$	652	$	154		$	65		$	1,596	$	326		$	350	$	4,998
Loans
Individually evaluated for impairment	$	187		$	2,847		$	233	$	-		$	-		$	379	$	-				$	3,646		$	187		$	2,847		$	233	$	0		$	0		$	379	$	0				$	3,646
Collectively evaluated for impairment		27,217			179,051			64,998		5,958			8,151			224,937		36,268					546,580			27,217			179,051			64,998		5,958			8,151			224,937		36,268					546,580
Ending balance, December 31, 2019	$	27,404		$	181,898		$	65,231	$	5,958		$	8,151		$	225,316	$	36,268				$	550,226		$	27,404		$	181,898		$	65,231	$	5,958		$	8,151		$	225,316	$	36,268				$	550,226

	June 30, 2020																September 30, 2020
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total		Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total
Grade:
Pass	$	86,035	$	175,248	$	71,046	$	6,426	$	7,832	$	220,639	$	30,691	$	597,917	$	88,139	$	188,682	$	70,110	$	6,261	$	7,333	$	225,260	$	28,785	$	614,570
Special mention		166		8,500		2,292		2		-		322		127		11,409		212		9,291		2,289		3		0		321		127		12,243
Substandard		843		3,256		363		-		-		6,956		1,916		13,334		631		1,800		66		0		0		6,943		1,850		11,290
Doubtful		-		-		-		-		-		-		-		-		0		0		0		0		0		0		0		0
Loss		-		-		-		-		-		-		-		-		0		0		0		0		0		0		0		0
Total	$	87,044	$	187,004	$	73,701	$	6,428	$	7,832	$	227,917	$	32,734	$	622,660	$	88,982	$	199,773	$	72,465	$	6,264	$	7,333	$	232,524	$	30,762	$	638,103

	December 31, 2019																December 31, 2019
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total		Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total
Grade:
Pass	$	26,555	$	175,063	$	62,231	$	5,955	$	8,151	$	218,686	$	34,218	$	530,859	$	26,555	$	175,063	$	62,231	$	5,955	$	8,151	$	218,686	$	34,218	$	530,859
Special mention		422		3,487		2,594		3		-		336		127		6,969		422		3,487		2,594		3		0		336		127		6,969
Substandard		427		3,348		406		-		-		6,294		1,923		12,398		427		3,348		406		0		0		6,294		1,923		12,398
Doubtful		-		-		-		-		-		-		-		-		0		0		0		0		0		0		0		0
Loss		-		-		-		-		-		-		-		-		0		0		0		0		0		0		0		0
Total	$	27,404	$	181,898	$	65,231	$	5,958	$	8,151	$	225,316	$	36,268	$	550,226	$	27,404	$	181,898	$	65,231	$	5,958	$	8,151	$	225,316	$	36,268	$	550,226

	June 30, 2020																September 30, 2020
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing		Nonaccruals		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing		Nonaccruals
Commercial and industrial	$	710	$	10	$	702	$	1,422	$	85,622	$	87,044	$	144	$	558	$	11	$	43	$	640	$	694	$	88,288	$	88,982	$	131	$	509
Commercial real estate		-		-		989		989		186,015		187,004		-		989		0		0		357		357		199,416		199,773		0		357
Construction and land		860		-		-		860		72,841		73,701		-		-		318		0		0		318		72,147		72,465		0		0
Consumer		7		1		-		8		6,420		6,428		-		-		24		0		7		31		6,233		6,264		7		0
Student		546		157		765		1,468		6,364		7,832		765		-		311		265		509		1,085		6,248		7,333		509		0
Residential real estate		392		763		-		1,155		226,762		227,917		-		-		708		383		379		1,470		231,054		232,524		0		379
Home equity lines of credit		44		-		65		109		32,625		32,734		65		-		129		0		0		129		30,633		30,762		0		0
Total	$	2,559	$	931	$	2,521	$	6,011	$	616,649	$	622,660	$	974	$	1,547	$	1,501	$	691	$	1,892	$	4,084	$	634,019	$	638,103	$	647	$	1,245

	December 31, 2019																December 31, 2019
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing		Nonaccruals		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing		Nonaccruals
Commercial and industrial	$	330	$	-	$	34	$	364	$	27,040	$	27,404	$	34	$	-	$	330	$	0	$	34	$	364	$	27,040	$	27,404	$	34	$	0
Commercial real estate		-		-		989		989		180,909		181,898		-		989		0		0		989		989		180,909		181,898		0		989
Construction and land		5,472		-		-		5,472		59,759		65,231		-		-		5,472		0		0		5,472		59,759		65,231		0		0
Consumer		11		1		-		12		5,946		5,958		-		-		11		1		0		12		5,946		5,958		0		0
Student		345		220		1,204		1,769		6,382		8,151		1,205		-		345		220		1,204		1,769		6,382		8,151		1,205		0
Residential real estate		739		109		397		1,245		224,071		225,316		397		-		739		109		397		1,245		224,071		225,316		397		0
Home equity lines of credit		389		-		-		389		35,879		36,268		-		-		389		0		0		389		35,879		36,268		0		0
Total	$	7,286	$	330	$	2,624	$	10,240	$	539,986	$	550,226	$	1,636	$	989	$	7,286	$	330	$	2,624	$	10,240	$	539,986	$	550,226	$	1,636	$	989

The following table presents information related to impaired loans, by portfolio segment, at the dates presented.

	June 30, 2020										September 30, 2020
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	144	$	144	$	-	$	165	$	2
Commercial real estate		8,227		8,227		-		8,263		171	$	7,578	$	7,578	$	-	$	7,938	$	242
Construction and land		201		201		-		210		5
Residential real estate		377		377		-		378		4		377		377		-		378		4
With an allowance recorded:
Commercial and industrial	$	558	$	558	$	69	$	939	$	8	$	509	$	509	$	20	$	509	$	8
Commercial real estate		798		798		67		804		15		791		791		60		801		28
Total:
Commercial and industrial	$	702	$	702	$	69	$	1,104	$	10	$	509	$	509	$	20	$	509	$	8
Commercial real estate		9,025		9,025		67		9,067		186		8,369		8,369		60		8,739		270
Construction and land		201		201		-		210		5
Residential real estate		377		377		-		378		4		377		377		0		378		4
Total	$	10,305	$	10,305	$	136	$	10,759	$	205	$	9,255	$	9,255	$	80	$	9,626	$	282

	December 31, 2019										December 31, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	187	$	187	$	-	$	287	$	13	$	187	$	187	$	-	$	287	$	13
Commercial real estate		1,048		1,048		-		1,213		61		1,048		1,048		-		1,213		61
Construction and land		233		233		-		494		25		233		233		-		494		25
Residential real estate		379		379		-		384		16		379		379		-		384		16
With an allowance recorded:
Commercial real estate		1,799		1,813		229		1,806		38		1,799		1,813		229		1,806		38
Total:
Commercial and industrial	$	187	$	187	$	-	$	287	$	13	$	187	$	187	$	0	$	287	$	13
Commercial real estate		2,847		2,861		229		3,019		99		2,847		2,861		229		3,019		99
Construction and land		233		233		-		494		25		233		233		0		494		25
Residential real estate		379		379		-		384		16		379		379		0		384		16
Total	$	3,646	$	3,660	$	229	$	4,184	$	153	$	3,646	$	3,660	$	229	$	4,184	$	153

TDRs are those loans for which a concession has been granted to a borrower experiencing financial difficulties. TDRs are identified at the point when the borrower enters into a modification agreement. The following table summarizes a modification that was classified as a TDR during the ~~three and six~~nine months ended ~~June~~September 30, 2020. There were 0 loan modifications that were classified as TDRs during the three ~~and six~~ months ended ~~June~~September 30, 2020 or during the three and nine months ended September 30, 2019.

(Dollars in thousands)

Three and Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Class of Loan

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial real estate

6,221

TDRs are considered impaired loans and are individually evaluated for impairment in the determination of the allowance for loan losses. TDR payment defaults occur when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or the TDR becomes 90 days or more past due. There were 0 TDR defaults during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

At ~~June~~September 30, 2020, there were 65 loans totaling ~~$8.6~~$8.4 million that have

been identified as TDRs, which were current and performing in accordance with the modified terms. At December 31, 2019, there were 5 loans in the portfolio, totaling $2.5 million, that were identified as TDRs, which were current and performing in accordance with the modified terms.

At ~~June~~September 30, 2020 and 2019, the Company had 0 foreclosed residential real estate property in its possession or in the process of foreclosure.

In response to COVID-19 and under the provisions of the CARES Act, the Company ~~granted~~established a short-term loan ~~modifications for~~modification program, allowing the deferral of scheduled payments for a 90-day period beginning in April 2020. Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief ~~are~~were not considered TDRs. Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time athe modification was entered. ~~At June 30, 2020, the~~The Company modified 194 loans totaling $92.8 million under this initial payment deferral program. As of September 30, 2020, 94% of these deferments have ended and have returned to their normal payment schedules, while subsequent deferments totaling $5.5 million have been granted to 7 borrowers, consisting of 2 commercial and industrial loans, 1 commercial real estate loan, 1 construction and land loan, and 3 residential real estate loans. These additional deferrals remained within the CARES Act and the March 2020 interagency guidance and ~~such loans~~ were not considered TDRs.

On September 21, 2006, the Company’s wholly-owned Connecticut statutory business trust, Fauquier Statutory Trust II (“Trust II”), privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, Trust II used the proceeds of that sale to purchase $4.0 million principal amount of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR. Interest is paid quarterly. Total capital securities at ~~June~~September 30, 2020 and December 31, 2019 were $4.1 million. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

The Company uses interest rate swaps to reduce interest rate risk and to manage net interest income. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest income. These interest rate swap agreements include both cash flow and fair value hedge derivative instruments that qualify for hedge accounting. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. In the event of default by a counter party, the risk in these transactions is the cost of replacing the agreements at current market rates.

The Company entered into an interest rate swap agreement on July 1, 2010 to manage the interest rate exposure on its Junior Subordinated Debt due 2036. By entering into this agreement, the Company ~~converts~~converted a floating rate liability into a fixed rate liability through the maturity date of September 15, 2020. Under the terms of the agreement, the Company ~~receives~~received interest quarterly at the rate equivalent to the three-month LIBOR plus 1.70%, repricing every three months on the same date as the Company’s Junior Subordinated Debt

and ~~pays~~paid interest monthly at the fixed rate of 3.21%. Interest expense on the interest rate swap was $27,900 and $6,300 for the three months ended June 30, 2020 and 2019, respectively, and $41,200 and $10,900 for the six months ended June 30, 2020 and 2019, respectively. In addition, on June 24, 2016, the Company entered into a forward interest rate swap agreement to convert the floating rate liability on the same Junior Subordinated Debt to fixed from 2020 to 2031. ~~There was 0 interest~~Interest expense ~~recognized~~ on ~~the forward~~these interest rate ~~swap~~swaps was $28,000 and $9,000 for the three ~~and six~~ months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~there will be no exchange of payments until~~$69,000 and $20,000 for the nine months ended September ~~15,~~30, 2020 ~~the expiration date of the interest rate swap.~~and 2019, respectively. These swaps are designated as cash flow hedges with changes in the fair value recorded through other comprehensive income.

The Company entered into 2 swap agreements to manage the interest rate risk related to 2 commercial loans on February 11, 2015 and April 7, 2015. The agreements allow the Company to convert fixed rate assets to floating rate assets through 2022 and 2025. The Company receives interest monthly at the rate equivalent to one-month LIBOR plus a spread repricing on the same date as the loans and pays interest at fixed rates. Interest expense on these swaps was ~~$16,200~~$19,000 for the three months ended ~~June~~September 30, 2020 and interest income was ~~$9,100~~$7,000 for the three months ended ~~June~~September 30, 2019. Interest expense for these swaps was ~~$18,000~~$37,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and interest income was ~~$18,100~~

$25,000 for the ~~six~~nine months ended ~~June~~September 30, 2019. These swaps are designated as fair value hedges and changes in fair value are recorded in current earnings. On July 28, 2020, 1 of these swap agreements with a notional/contract amount of $1.2 million was terminated resulting in a termination fee of $89,200.

Cash collateral held at other banks for these swaps was $1.1 million and $730,000 at ~~June~~September 30, 2020 and December 31, 2019, respectively. Collateral is dependent on the market valuation of the underlying hedges.

The following table summarizes the Company’s derivative instruments as of ~~June~~September 30, 2020 and December 31, 2019:

(In thousands)	June 30, 2020							September 30, 2020
Derivatives designated as hedging instruments	Notional/Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date	Notional/Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate swap - cash flow	$	4,000	$	(24	)	Other Liabilities	9/15/2020	$	4,000	$	(541	)	Other Liabilities	6/15/2031
Interest rate forward swap - cash flow		4,000		(572	)	Other Liabilities	6/15/2031
Interest rate swap - fair value		1,215		(87	)	Other Liabilities	4/9/2025		4,112		(93	)	Other Liabilities	2/12/2022
Interest rate swap - fair value		4,251		(111	)	Other Liabilities	2/12/2022

The components of the Company’s earnings per share calculations are as follows:

	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019				2020				2019				2020				2019
	Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount
Basic earnings per share		3,794,725	$	0.42		3,784,934	$	0.41		3,791,676	$	0.78		3,781,931	$	0.84		3,794,725	$	0.41		3,784,934	$	0.54		3,792,700	$	1.19		3,782,943	$	1.39
Effect of dilutive stock awards		6,840				9,032				6,539				9,524				6,554				5,912				6,544				8,320
Diluted earnings per share		3,801,565	$	0.42		3,793,966	$	0.41		3,798,215	$	0.78		3,791,455	$	0.84		3,801,279	$	0.41		3,790,846	$	0.54		3,799,244	$	1.19		3,791,263	$	1.38

Unvested restricted shares have voting rights and receive nonforfeitable dividends during the vesting period; therefore, they are included in calculating basic earnings per share. The portion of unvested performance-based restricted stock units that are expected to vest, but have not yet been awarded, are included in the calculation of diluted earnings per share. Performance-based restricted stock units are expected to vest prior to the completion of the Merger.

On May 21, 2019, the shareholders of the Company approved the Fauquier Bankshares, Inc. Amended and Restated Stock Incentive Plan (the “Plan”). The Plan superseded the Company’s stock incentive plan that was approved by shareholders in 2009. Under the Plan, awards of options, restricted stock, and other stock-based awards may be granted to employees, directors or consultants of the Company or any affiliate. The effective date of the Plan iswas May 21, ~~2019 with~~2019. The Plan has a termination date of May 21, 2029. The Company’s Board of Directors may terminate, suspend or modify the Plan within certain restrictions. The Plan authorizes for issuance 350,000 shares of the Company’s common stock.

Restricted shares are accounted for using the fair market value of the Company’s common stock on the date on which these shares were awarded. The restricted shares issued to certain executive officers are subject to a vesting period, whereby the restrictions on the shares lapse on the third anniversary of the date the shares were awarded. Compensation expense for these shares is recognized over the three-year period. The restricted shares issued to nonemployee directors are not subject to a vesting period and compensation expense is recognized on the date the shares are granted. Compensation expense for restricted shares was ~~$34,400~~$35,000 and ~~$39,600,~~$40,000, net of forfeitures, for the three months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~$158,800~~$194,000 and ~~$168,800~~$208,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The total unrecognized compensation expense related to restricted shares was ~~$238,000~~$203,000 and ~~$241,000~~$200,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. This expense is expected to be recognized through 2023. Restricted stock expense is expected to be accelerated upon the completion of the Merger.

A summary of the status of the Company’s unvested restricted shares granted under the Plan is presented below:

	June 30, 2020					June 30, 2019					September 30, 2020					September 30, 2019
	Shares			Weighted Average Grant Date Fair Value Per Share		Shares			Weighted Average Grant Date Fair Value Per Share		Shares			Weighted Average Grant Date Fair Value Per Share		Shares			Weighted Average Grant Date Fair Value Per Share
Unvested shares, beginning		20,352		$	20.20		22,569		$	17.98		20,352		$	20.20		22,569		$	17.98
Granted		12,182			20.95		12,058			21.69		12,182			20.95		12,058			21.69
Vested		(10,684	)		19.14		(10,553	)		17.84		(10,684	)		19.14		(10,553	)		17.84
Forfeited or surrendered		(2,007	)		19.21		(440	)		14.98		(2,007	)		19.21		(440	)		14.98
Unvested shares, ending		19,843		$	21.33		23,634		$	20.10		19,843		$	21.33		23,634		$	20.10

The Company grants performance-based restricted stock units to certain executive officers. Performance-based restricted stock units are accounted for using the fair market value of the Company’s common stock on the date awarded, and adjusted for subsequent changes in the market value. Performance-based restricted stock units are subject to a vesting period, whereby the restrictions on the rights lapse on the third anniversary of the date the units were awarded. Until vesting, the shares underlying the units are not issued and are not included in shares outstanding. Vesting is contingent upon the Company’s reaching predetermined performance goals as compared with a predetermined peer group of banks. Compensation expense for performance-based restricted stock units was ~~$13,100 and $28,400,~~$17,000, net of forfeitures, for each of the three months ended ~~June~~September 30, 2020 and 2019, ~~respectively,~~ and ~~$(98,900)~~$(82,000) and ~~$53,700~~$71,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The total unrecognized compensation expense related to performance-based restricted stock units was ~~$99,000~~$98,000 and ~~$188,000~~$104,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. This expense is expected to be recognized through ~~2023 and is dependent~~2023. Expenses associated with performance-based restricted stock units are expected to be accelerated upon ~~management reaching~~ the ~~predetermined goals.~~completion of the Merger.

A summary of the status of the Company’s unvested performance-based restricted stock units is presented below:

	June 30, 2020					June 30, 2019				September 30, 2020					September 30, 2019
	Restricted Stock Units			Weighted Average Grant Date Fair Value Per Share		Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share		Restricted Stock Units			Weighted Average Grant Date Fair Value Per Share		Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share
Unvested shares, beginning		30,012		$	18.90		22,103	$	17.90		30,012		$	18.90		22,103	$	17.90
Granted		7,889			20.95		7,909		21.69		7,889			20.95		7,909		21.69
Vested		(826	)		19.74		-		-		(826	)		19.74		0		0
Forfeited		(11,701	)		16.92		-		-		(11,701	)		16.92		0		-
Unvested shares, ending		25,374		$	20.43		30,012	$	18.98		25,374		$	20.43		30,012	$	18.98

The Company has supplemental executive retirement plans (“SERP”) for certain executives in which the contributions are solely funded by the Company. Benefits are to be paid in monthly installments following retirement or death. The SERP liability was $2.9 million at ~~June~~September 30, 2020 and December 31, 2019. For the three months ended ~~June~~September 30, 2020 and 2019, SERP expenses were ~~$71,100~~$71,000 and ~~$74,700,~~$75,000, respectively, and ~~$142,200~~$213,000 and ~~$147,600~~$222,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The Company has a defined contribution retirement plan under Internal Revenue Code of 1986 Section 401(k) covering all employees who are at least 18 years of age and worked more than 20 hours per week. Under the plan, a participant may contribute an amount up to 100% of their covered compensation for the year, not to exceed the dollar limit set by law (Code Section 402(g)). The Company will make an annual matching contribution equal to 100% on the first 6% of compensation deferred, for a maximum match of 6% of compensation. The Company makes an additional safe harbor contribution equal to 3% of compensation to all eligible participants. The Company’s 401(k) plan expenses were ~~$169,100~~$176,000 and ~~$180,700~~$181,000 for the three months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~$405,400~~$582,000 and ~~$411,500~~$592,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The Company maintains a Director Deferred Compensation Plan (“Deferred Compensation Plan”). This plan provides that any nonemployee director of the Company may elect to defer receipt of all or any portion of his or her compensation as a director. A participating director may elect to have amounts held in a deferred cash account, which is credited on a quarterly basis with interest equal to the highest rate offered by the Bank at the end of the preceding quarter. Alternatively, a participant may elect to have a deferred stock account in which deferred amounts are treated as if invested in the Company’s common stock at the fair market value on the date of deferral. The value of a stock account will change based upon the fair market value of an equivalent number of shares of common stock. In addition, the deferred amounts deemed invested in common stock will be credited with dividends on an equivalent number of shares. Amounts considered invested in the Company’s common stock are paid, at the election of the director, either in cash or in whole shares of the common stock and

cash-in-lieu of fractional shares. Directors may elect to receive amounts contributed to their respective accounts in 1 or up to 5 installments. There were 0 directors participating in the Deferred Compensation Plan during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

The Company has a nonqualified deferred compensation program for a former key employee’s retirement, in which the contribution expense is funded solely by the Company. The retirement benefit to be provided is variable based upon the performance of underlying life insurance policy assets. Deferred compensation expense for the three months ended ~~June~~September 30, 2020 and 2019 was ~~$6,900~~$6,000 and ~~$21,300,~~$20,000, respectively, and ~~$14,800~~$21,000 and ~~$37,200~~$57,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. Concurrent with the establishment of the deferred compensation program, the Company purchased life insurance policies on this employee with the Company named as owner and beneficiary. These life insurance policies are intended to be utilized as a source of funding the deferred compensation program. Income on these life insurance policies was ~~$7,100 and $7,300~~$7,000 for each of the three months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~$14,200 and $14,300~~$21,000 for each of the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The Company has recorded on its consolidated balance sheets $1.4 million in cash surrender value of these policies at ~~June~~September 30, 2020 and December 31, 2019 and accrued liabilities of ~~$154,000~~$155,000 and $153,000 at ~~June~~September 30, 2020 and December 31, 2019, respectively.

GAAP requires the Company to record fair value adjustments to certain assets and liabilities. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants as of the measurement date.

GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

Level 1:Inputs are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities.

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: 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 (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3). The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with an independent pricing service that uses Intercontinental Exchange (“ICE”) as the primary source for valuation. ICE utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Interest rate swaps: The Company recognizes interest rate swaps at fair value and classifies as Level 2. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis:

	Fair Value Measurements								Fair Value Measurements
(In thousands)	Balance		Level 1		Level 2		Level 3		Balance		Level 1		Level 2		Level 3
Assets at June 30, 2020:
Assets at September 30, 2020:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	61,966	$	-	$	61,966	$	-	$	63,815	$	0	$	63,815	$	0
Obligations of states and political subdivisions		16,284		-		16,284		-		20,775		0		20,775		0
Total available for sale securities		78,250		-		78,250		-		84,590		0		84,590		0
Mutual funds		417		417		-		-		419		419		0		0
Total assets at fair value	$	78,667	$	417	$	78,250	$	-
Liabilities at June 30, 2020:
Total									$	85,009	$	419	$	84,590	$	0
Liabilities at September 30, 2020:
Interest rate swaps	$	794	$	-	$	794	$	-	$	634	$	0	$	634	$	0
Total liabilities at fair value	$	794	$	-	$	794	$	-
Total									$	634	$	0	$	634	$	0
Assets at December 31, 2019:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	63,941	$	-	$	63,941	$	-	$	63,941	$	0	$	63,941	$	0
Obligations of states and political subdivisions		15,842		-		15,842		-		15,842		0		15,842		0
Total available for sale securities		79,783		-		79,783		-		79,783		0		79,783		0
Mutual funds		403		403		-		-		403		403		0		0
Total assets at fair value	$	80,186	$	403	$	79,783	$	-
Total									$	80,186	$	403	$	79,783	$	0
Liabilities at December 31, 2019:
Interest rate swaps		140	$	-	$	140	$	-		140	$	0	$	140	$	0
Total liabilities at fair value	$	140	$	-	$	140	$	-
Total									$	140	$	0	$	140	$	0

The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the Company in

determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements.

Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at lower of cost or market value. These loans currently consist of 1-4 family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). NaN nonrecurring fair value adjustments were recorded on mortgage loans held for sale during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. Net gains and losses on the sale of loans are recorded as a component of noninterest income on the consolidated statements of operations.

Impaired Loans: A loan is designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loans or the fair value of the collateral securing the loans, or the present value of the cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is in the process of construction or if an appraisal of the real estate property is more than ~~one year~~one-year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal of ~~one year~~one-year or less, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned: ~~OREO~~Other real estate owned is measured at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company considers ~~OREO~~other real estate owned as Level 3.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at ~~June~~September 30, 2020 and December 31, 2019.

	June 30, 2020								September 30, 2020
(In thousands)	Balance		Level 1		Level 2		Level 3		Balance		Level 1		Level 2		Level 3
Assets:
Mortgage loans held for sale									$	235	$	0	$	235	$	0
Impaired loans, net	$	1,220	$	-	$	-	$	1,220		1,220		0		0		1,220
Other real estate owned, net		1,356		-		-		1,356		1,356		0		0		1,356

	December 31, 2019								December 31, 2019
(In thousands)	Balance		Level 1		Level 2		Level 3		Balance		Level 1		Level 2		Level 3
Assets:
Mortgage loans held for sale	$	247	$	-	$	247	$	-	$	247	$	0	$	247	$	0
Impaired loans, net		1,570		-		-		1,570		1,570		0		0		1,570
Other real estate owned, net		1,356		-		-		1,356		1,356		0		0		1,356

The following table displays quantitative information about Level 3 fair value measurements at ~~June~~September 30, 2020 and December 31, 2019.

	June 30, 2020							September 30, 2020
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Weighted Average Discount			Fair Value		Valuation Technique	Unobservable Input	Weighted Average Discount
Impaired loans, net	$	1,220	Appraised values	Age of appraisal, current market conditions, experience within local market		10	%	$	1,220	Appraised values	Age of appraisal, current market conditions, experience within local market		5	%
Other real estate owned, net		1,356	Appraised values	Age of appraisal, current market conditions and selling costs		18	%		1,356	Appraised values	Age of appraisal, current market conditions and selling costs		18	%
Total	$	2,576						$	2,576

ASC 825, “Financial Instruments”, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows:

	June 30, 2020											September 30, 2020
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3			Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	79,539	$	79,539	$	-	$	-		$	79,539	$	73,673	$	73,673	$	0	$	0	$	73,673
Securities available for sale		78,250		-		78,250		-	��		78,250		84,590		0		84,590		0		84,590
Restricted investments		2,687		-		2,687		-			2,687		1,835		0		1,835		0		1,835
Mortgage loans held for sale													235		0		235		0		235
Loans, net		616,260		-		-		615,710			615,710		631,402		0		0		630,236		630,236
Accrued interest receivable		2,818		-		2,818		-			2,818		2,635		0		2,635		0		2,635
Mutual funds		417		417		-		-			417		419		419		0		0		419
Bank-owned life insurance		14,141		-		14,141		-			14,141		14,231		0		14,231		0		14,231
Total financial assets	$	794,112	$	79,956	$	97,896	$	615,710		$	793,562	$	809,020	$	74,092	$	103,526	$	630,236	$	807,854
Liabilities
Deposits	$	705,806	$	-	$	706,432	$	-		$	706,432	$	739,834	$	0	$	740,308	$	0	$	740,308
FHLB advances		32,651		-		33,223		-			33,223		12,629		0		13,199		0		13,199
Junior subordinated debt		4,124		-		4,124		-			4,124		4,124		0		4,058		0		4,058
Accrued interest payable		153		-		153		-			153		135		0		135		0		135
Interest rate swaps		794		-		794		-			794		634		0		634		0		634
Total financial liabilities	$	743,528	$	-	$	744,726	$	-		$	744,726	$	757,356	$	0	$	758,334	$	0	$	758,334

	December 31, 2019										December 31, 2019
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	46,341	$	46,341	$	-	$	-	$	46,341	$	46,341	$	46,341	$	0	$	0	$	46,341
Securities available for sale		79,783		-		79,783		-		79,783		79,783		0		79,783		0		79,783
Restricted investments		2,016		-		2,016		-		2,016		2,016		0		2,016		0		2,016
Mortgage loans held for sale		247				247		-		247		247				247		0		247
Loans, net		544,999		-		-		541,367		541,367		544,999		0		0		541,367		541,367
Accrued interest receivable		1,984		-		1,984		-		1,984		1,984		0		1,984		0		1,984
Mutual funds		403		403		-		-		403		403		403		0		0		403
Bank-owned life insurance		13,961		-		13,961		-		13,961		13,961		0		13,961		0		13,961
Total financial assets	$	689,734	$	46,744	$	97,991	$	541,367	$	686,102	$	689,734	$	46,744	$	97,991	$	541,367	$	686,102
Liabilities
Deposits	$	622,155	$	-	$	622,295	$	-	$	622,295	$	622,155	$	0	$	622,295	$	0	$	622,295
FHLB advances		16,695		-		16,724		-		16,724		16,695		0		16,724		0		16,724
Junior subordinated debt		4,124		-		4,446		-		4,446		4,124		0		4,446		0		4,446
Accrued interest payable		217		-		217		-		217		217		0		217		0		217
Interest rate swaps		140		-		140		-		140		140		0		140		0		140
Total financial liabilities	$	643,331	$	-	$	643,822	$	-	$	643,822	$	643,331	$	0	$	643,822	$	0	$	643,822

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change

may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Changes in accumulated other comprehensive income (loss), net of tax, for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 were:

(In thousands)	Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Available for Sale Securities			Supplemental Executive Retirement Plans		Total			Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Available for Sale Securities			Supplemental Executive Retirement Plans		Total
Balance, December 31, 2018	$	172		$	(850	)	$	140	$	(538	)	$	172		$	(850	)	$	140	$	(538	)
Other comprehensive income (loss) before reclassifications		(228	)		1,892			-		1,664			(369	)		2,266			-		1,897
Balance, June 30, 2019	$	(56	)	$	1,042		$	140	$	1,126
Balance, September 30, 2019												$	(197	)	$	1,416		$	140	$	1,359

Balance, December 31, 2019	$	(78	)	$	1,292		$	157	$	1,371		$	(78	)	$	1,292		$	157	$	1,371
Other comprehensive income (loss) before reclassifications		(393	)		2,181			-		1,788			(348	)		2,147			-		1,799
Balance, June 30, 2020	$	(471	)	$	3,473		$	157	$	3,159
Balance, September 30, 2020												$	(426	)	$	3,439		$	157	$	3,170

The Company invests in certain qualified affordable housing projects located in the Commonwealth of Virginia. The general purpose of these investments is to develop and preserve affordable housing for low income families through residential rental property projects. The Company exerts no control over the operating or financial policies of the partnerships. Return on these investments is through receipt of tax credits and other tax benefits which are subject to recapture by taxing authorities based on compliance features at the project level. The investments are due to expire by 2035. The Company accounts for the affordable housing investments using the equity method and has recorded ~~$4.0~~$3.9 million and $4.2 million in other assets at ~~June~~September 30, 2020 and December 31, 2019, respectively, and ~~$717,000~~$397,000 and $749,000 in other liabilities related to unfunded capital calls through 2023 at ~~June~~September 30, 2020 and December 31, 2019, respectively. The related federal tax credits, included in income tax expense in the consolidated statements of operations, for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 were ~~$234,000~~$350,000 and ~~$276,000,~~$414,000, respectively. There were ~~$123,100~~$89,000 and ~~$60,000~~$47,000 in flow-through losses recorded in noninterest income during the three months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~$228,400~~$317,000 and ~~$143,300~~$191,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The following tables present information about the Company’s leases at the dates indicated:

(Dollars in thousands)	June 30, 2020			September 30, 2020
Lease liability	$	4,823		$	4,697
Right-of-use asset	$	4,772		$	4,634
Weighted average remaining lease term	8.27 years			8.04 years
Weighted average discount rate		3.55	%		3.55	%

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019		2020		2019		2020		2019
Lease Expense
Operating lease expense	$	201	$	199	$	412	$	410	$	200	$	200	$	611	$	610
Short-term lease expense		4		3		9		6		7		5		16		11
Total lease expense	$	205	$	202	$	421	$	416	$	207	$	205	$	627	$	621

Cash paid for amounts included in lease liabilities	$	167	$	161	$	389	368		$	168	$	165	$	502	$	533

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability at ~~June~~September 30, 2020:

(In thousands)
Undiscounted Cash Flow	June 30, 2020			September 30, 2020
Six months ending December 31, 2020	$	281
Three months ending December 31, 2020				$	112
Twelve months ending December 31, 2021		682			682
Twelve months ending December 31, 2022		694			694
Twelve months ending December 31, 2023		707			707
Twelve months ending December 31, 2024		646			646
Thereafter		2,604			2,603
Total undiscounted cash flows	$	5,614		$	5,444
Less: Discount		(791	)		(747	)
Lease liability	$	4,823		$	4,697

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

~~As used in the following management’s discussion and analysis, the terms “Company,” “we,” “us” or “our” refer to~~Business Combination

On October 1, 2020, Fauquier Bankshares, Inc. (the “Company”, or “Fauquier”) and ~~our consolidated subsidiaries unless~~Virginia National Bankshares Corporation (“Virginia National”) announced a definitive agreement (the “Merger Agreement”) to combine in a strategic merger pursuant to which Fauquier will merge with and into Virginia National (the “Merger”) with Virginia National as the ~~context indicates that~~surviving company. As a result of the ~~reference~~Merger, the holders of shares of Fauquier’s common stock will receive 0.6750 shares of Virginia National common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to ~~our subsidiary bank, The Fauquier Bank, for which we also use~~be completed in the ~~term “Bank.”~~first quarter of 2021, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS~~Cautionary Note Regarding Forward-Looking Statements

~~In addition to the historical information contained herein, this~~This report contains forward-looking ~~statements. Forward-looking~~ statements ~~are based on certain assumptions and describe future plans, strategies, and expectations~~within the meaning of the ~~Company, and are generally identifiable by use~~Private Securities Litigation Reform Act of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will” or similar expressions. Although the Company believes its plans, intentions and expectations reflected in these1995. These forward-looking statements are reasonable, the Company can give no assurance that these plans, intentions or expectations will be achieved. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results could differ materially from those contemplated. Factors that could have a material adverse effect on the Company’s operations and future prospects include, but are not limited ~~to:~~to, statements about (i) the benefits, expenses and expected completion date of the merger between Virginia National and Fauquier; (ii) Fauquier’s plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts; and (iii) other statements identified by words such as “may”, “assumes”, “approximately”, “will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “targets”, “projects”, or words of similar meaning generally intended to identify forward-looking statements. These forward-looking statements are based upon the current beliefs and expectations of the management of Fauquier and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are subject to various risks, uncertainties and assumptions with respect to future business strategies and decisions that are subject to change and difficult to predict with regard to timing, extent, likelihood and degree of occurrence. As a result, although Fauquier believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, actual results may differ materially from any projected future results performance or achievements expressed or implied by such forward-looking statements.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the businesses of Virginia National and Fauquier may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; (2) the expected growth opportunities or cost savings from the Merger may not be fully realized or may take longer to realize than expected; (3) deposit attrition, operating costs, customer losses and business disruption following the Merger, including adverse effects on relationships with employees and customers, may be greater than expected; (4) the regulatory approvals required for the Merger may not be obtained on the proposed terms or on the anticipated schedule; (5) the shareholders of Virginia National or Fauquier may fail to approve the Merger; (6) economic, legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which Virginia National and Fauquier are engaged; (7) the interest rate environment may further compress margins and adversely affect net interest income; (8) results may be adversely affected by continued diversification of assets and adverse changes to credit quality; (9) competition from other financial services companies in Virginia National’s and Fauquier’s markets could adversely affect operations; (10) an economic slowdown could adversely affect credit quality and loan originations; (11) the novel coronavirus (“COVID-19”) pandemic ~~including its potential effects~~is adversely affecting Virginia National, Fauquier, and their respective customers, employees and third-party service providers; the adverse impacts of the pandemic on their respective business, financial position, operations and prospects have been material, and it is not possible to accurately predict the extent, severity or duration of the pandemic or when normal economic ~~environment, our clients~~ and ~~our operations, as well as any~~operation conditions will return; and (12) other factors that may affect future results of Virginia National and Fauquier, including: changes in asset quality and credit risk; the inability to ~~federal, state or local government laws, regulations or orders in connection with the pandemic;~~sustain revenue and earnings growth; changes in interest ~~rates;~~rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of ~~adverse economic conditions; the legislative/regulatory climate; monetary~~technological changes; capital management activities; and ~~fiscal policies~~other actions of the ~~U.S. Government, including policies of the U.S. Treasury~~bank regulatory agencies and the Board of Governors of the Federal Reserve System (the “Federal Reserve”); acts of war or terrorism; widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events; the quality or composition of the loan or investment portfolios; the value of the collateral securing loanslegislative and regulatory actions and reforms. Additional factors that could cause actual results to differ materially from those expressed in the ~~portfolio; demand for loan products; deposit flows; the level of net charge-offs on loans and the adequacy of the allowance for loan losses; competition;~~ ~~effectiveness of the Company’s credit processes and management of the Company’s credit risk;~~ demand for financial services in the Company’s market area; the Company’s plans to increase market share; mergers, acquisitions and dispositions; cybersecurity threats or attacks; and tax and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements are discussed in Fauquier’s reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the SEC and available on the SEC’s Internet site (http://www.sec.gov).

Readers are cautioned not to rely too heavily on the forward-looking statements contained in this ~~report and you should not place undue reliance on such~~report. Forward-looking statements ~~which reflect the Company’s position~~speak only as of the date they are made and Fauquier does not undertake any obligation to update, revise or clarify these forward-looking statements, whether as a result of ~~this report.~~new information, future events or otherwise.

The Company was incorporated under the laws of the Commonwealth of Virginia on January 13, 1984. The Company is a registered bank holding company and owns all of the shares of The Fauquier Bank (the “Bank”). The Company engages in its business through the Bank, a Virginia state-chartered bank that commenced operations in 1902. The Company has no significant operations other than owning the stock of the Bank. The Bank has 11 full-service branch offices located in the Virginia communities of Old Town-Warrenton, Warrenton, Catlett, The Plains, Sudley Road-Manassas, New Baltimore, Bealeton, Bristow, Haymarket, Gainesville, and Centreville Road-Manassas. The executive offices of the Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia 20186.

~~The Bank’s general market area principally includes Fauquier County, Prince William County, and neighboring communities and is located approximately 50 miles southwest of Washington, D.C.~~

The Bank provides a full range of financial services, including internet banking, mobile banking, commercial, retail, insurance, wealth management and financial planning services. Retail banking services to individuals and businesses include various types of interest and noninterest-bearing checking accounts, money market and savings accounts, and time deposits. In addition, the Bank provides secured and unsecured commercial and real estate loans, standby letters of credit, secured and unsecured lines of credit, personal loans, residential mortgages and home equity loans, and automobile and other types of consumer financing.

The Bank operates a Wealth Management Services (“WMS”) division that began with the granting of trust powers to the Bank in 1919. This division provides personalized services including investment management, financial planning, trust, estate settlement, retirement, insurance, and brokerage services.

The Bank, through its subsidiary Fauquier Bank Services, Inc., has equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company, and Bankers Title Shenandoah, LLC, a title insurance company, which are each

owned by a consortium of Virginia community banks. Fauquier Bank Services, Inc. previously had an equity ownership interest in Infinex Investments, Inc., a full-service broker/dealer, owned by banks and banking associations in various states, whose ownership was sold by Fauquier Bank Services, Inc. in January 2019.

The revenues of the Bank are primarily derived from interest on and fees received in connection with, real estate and other loans, and from interest and dividends from investment securities. The principal sources of funds for the Bank’s lending activities are its deposits, repayment of loans, maturity of investment securities, and borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”). Additional revenues are derived from fees for deposit related and WMS related services.

The Bank’s operations are influenced by general economic conditions and by related monetary and fiscal policies of regulatory agencies, including the Federal Reserve. As a Virginia-chartered bank and a member of the Federal Reserve, the Bank is supervised and examined by the Federal Reserve and the Virginia State Corporation Commission. Interest rates on competing investments and general market rates of interest influence deposit flows and costs of funds. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rate environment and its impact on local demand and the availability of funds. The Bank faces strong competition in the attraction of deposits, its primary source of lendable funds, and in the origination of loans.

GENERAL. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the Company’s statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors, including judgements made related to the effect of the COVID-19 pandemic, could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses in its estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company’s transactions would be the same, the timing of the recognition of the Company’s transactions could change.

ALLOWANCE FOR LOAN LOSSES. The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when it is believed that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses

inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the Annual Report on Form 10-K for the year ended December 31, 2019, provides additional information related to the allowance for loan losses.

The Company employs an independent outsourced loan review function, which annually substantiates and/or adjusts internally generated risk ratings. This independent review function reports directly to the Company’s Board of Directors’ audit committee, and the results of this review are factored into the calculation of the allowance for loan losses.

OTHER-THAN-TEMPORARY IMPAIRMENT (“OTTI”) FOR SECURITIES. Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no OTTI. If there is a credit loss, OTTI exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive ~~income (loss).~~income. For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold

the investment until recovery of fair value. OTTI of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for OTTI based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic as a result of the global spread of the illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders and strict social distancing.

To the extent the economic impacts of COVID-19 continue for a prolonged period and conditions stagnate or worsen, the Company’s provision for loan losses, net interest income and overall profitability may be adversely affected.

~~While COVID-19 continues to aggressively spread throughout the United States, the~~The Company remains committed to adhering to health and safety-related requirements and best practices across all ~~of our~~ locations by taking proactive and disciplined steps to promote safety and overall wellbeing of ~~our~~ employees, clients, shareholders and communities. ~~Through the~~The Company’s Enterprise Risk Management framework, which is governed by the Board of Directors, the Company’s Business Continuity Plan and the Bank’s Incident Response Plan remain integral parts of monitoring day to day business ~~activities, including the return of the Company’s workforce, on a phased-in approach, subject to certain mandates and restrictions. We have~~activities. The Company has not furloughed nor ~~do we~~does the Company expect to furlough any ~~of our~~ employees. Management continues to closely monitor business activities and has or will adjust accordingly as the health and safety of all constituents ~~remain our~~continues to be the priority.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19. The CARES Act included the creation of the PPP through the Small Business Administration (“SBA”). Loans provided by the Bank through the PPP may be forgiven based on the borrowers’ compliance with the terms of the program. The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans

within the allowance for loan loss calculation. The Company disbursed ~~$52.8~~$53.1 million in PPP loans to ~~543~~549 borrowers through ~~June~~September 30, 2020. There were no loans that were forgiven during the three and nine months ended ~~June~~September 30, ~~2020.~~2020, however as of October 26, 2020, approximately $600,000 of PPP loans have been forgiven.

	Three Months Ended			Three Months Ended			Nine Months Ended
(Dollars in thousands)	June 30, 2020			September 30, 2020			September 30, 2020
PPP loans outstanding	$	52,758
PPP loans originated				$	324		$	53,082
Average PPP loans outstanding	$	35,138		$	54,725		$	30,876
PPP average loan size	$	97		$	46		$	97
PPP interest income, net	$	295		$	330		$	500
PPP unearned fees	$	1,872
PPP weighted average processing fee		4.00	%		5.00	%		4.00	%
PPP average yield		3.38	%
Average yield on PPP loans					2.34	%		3.43	%

~~Participation in the PPP has impacted the Company’s financial metrics in the second quarter.~~Short-term Loan and deposit growth, earnings per share, and return on assets have all increased, to a certain extent, due to the PPP. Conversely, net interest margin, the allowance coverage ratio, and the leverage ratio have decreased. Since PPP loans are 100% guaranteed by the SBA, the Company’s common equity tier 1, tier 1 and total risk-based capital metrics were not impacted by PPP loan balances.Modifications

The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDR”) for a limited period of time to account for the effects of COVID-19. In response to ~~this guidance,~~COVID-19 and under the provisions of the CARES Act, the Company ~~granted~~established a short-term loan ~~modifications for~~modification program, allowing the deferral of

scheduled payments for a 90-day period beginning in April 2020. ~~At June~~Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief were not considered TDRs. Borrowers who were considered current were ones whose loans were less than 30 ~~2020,~~days past due on their contractual payments at the time the modification was entered. The Company ~~had~~ modified 194 loans totaling $92.8 million under this ~~guidance. The following table summarizes loans modified by category at June 30, 2020:~~

initial payment deferral program. As of ~~August 6,~~September 30, 2020, ~~approximately 40%~~94% of ~~the 90-day~~these deferments have ended and have returned to their normal payment ~~schedules. In addition, as of August 6, 2020, 13~~schedules, while subsequent deferments totaling $5.5 million have been granted to 7 borrowers, ~~have requested an additional deferment period,~~ consisting of 92 commercial and industrial loans, 1 commercial real estate loan, 1 construction and ~~4 consumer~~land loan, and 3 residential real estate loans. These additional deferrals remained within the CARES Act and the March 2020 interagency guidance and were not considered TDRs. The following table summarizes loans ~~with aggregate outstanding balances of $17.6 million.~~modified by category at September 30, 2020 and June 30, 2020.

Borrowers whose industries are expected to be stressed by COVID-19, include, but are not limited to, religious organizations, hospitality, childcare and restaurants. The following table summarizes these industries as it relates to the Company’s loan ~~portfolio:~~portfolio at September 30, 2020 and June 30, 2020:

(Dollars in thousands)	June 30, 2020										September 30, 2020
Loan Category	Balance		Percent of Total Loans			Loan Deferrals		Loan Deferrals as a Percent of Loan Category			Balance		Percent of Total Loans
Religious Organizations	$	25,450		4.09	%	$	13,546		53.23	%	$	25,842		4.05	%
Hospitality		13,373		2.15	%		5,393		40.33	%		14,532		2.28	%
Childcare		14,731		2.37	%		6,594		44.76	%		14,632		2.29	%
Restaurants		12,378		1.99	%		7,144		57.72	%		12,296		1.93	%
	$	65,932		10.59	%	$	32,677		49.56	%	$	67,302		10.55	%

Refer to Note 3 of the consolidated financial statements for additional disclosures related to TDRs as of ~~June~~September 30, 2020.

While net interest income has been significantly impacted by the lower interest rate environment during 2020, the Company’s interest income has benefited from PPP loans and related processing fees. PPP loans carry a fixed rate of 1.0% with a two-year contractual maturity. For the three and nine months ended ~~June~~September 30, 2020, PPP loans contributed ~~$295,000~~approximately $322,000 and $483,000, respectively to the Company’s net interest income, with the average yield of ~~3.38%,~~2.34% and ~~a weighted average processing fee of 4.0%. As of June~~3.43% for the three and nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, the Company ~~has~~ collected $2.1 million in processing fees, of which ~~$1.9~~$1.8 million remains unearned.

This discussion is intended to focus on certain financial information regarding the Company and the Bank and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of the Company’s financial statements. As such, this discussion should be read carefully in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report.

The Company strives to be a top performing community bank by providing financial services in its market with consistent, quality client service, premier technological support, value-added products, and a strong commitment to the community.

Net income ~~of $1.6~~was $1.5 million, or ~~$0.42~~$0.41 per diluted share for the ~~second~~third quarter, ~~was relatively unchanged when~~ compared with $2.1 million or $0.54 per diluted share for the ~~second~~third quarter of 2019. For the ~~six~~nine months ended ~~June~~September 30, 2020, net income was ~~$3.0~~$4.5 million, or ~~$0.78~~$1.19 per diluted share compared with ~~$3.2~~$5.2 million, or ~~$0.84~~$1.38 per diluted share for the ~~six~~nine months ended ~~June~~September 30, 2019.

For the quarter ended ~~June~~September 30, 2020, the Company’s return on average equity (“ROE”) and return on average assets (“ROA”) were ~~9.02%~~8.58% and ~~0.80%~~0.74%, respectively, compared to ~~9.94%~~12.46% and ~~0.89%~~1.14%, for the ~~second~~third quarter of 2019, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020, ROE and ROA were ~~8.62%~~8.60% and ~~0.79%~~0.77%, respectively, compared ~~with 10.38%~~to 11.10% and ~~0.92%~~1.00%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2019.

OPERATING RESULTS FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2020 AND 2019

Net interest income is the largest component of net income, and is the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from nonperforming assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for loans and deposits, and many other factors. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds.

The Federal Reserve decreased the targeted federal funds rate by a total of 75 basis points in the second half of 2019. In addition, in response to COVID-19, the Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2019 and 2020.

Net interest income increased ~~$300,000~~$103,000 or ~~4.93%~~1.66% to ~~$6.4~~$6.3 million for the ~~second~~third quarter of 2020 from ~~$6.1~~$6.2 million for the ~~second~~third quarter of 2019. Net interest income increased ~~$356,000~~$459,000 or ~~2.91%~~2.49% to ~~$12.6~~$18.9 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$12.2~~$18.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The net interest margin decreased to ~~3.49% in~~3.22% for the ~~second~~third quarter of 2020 from 3.73% infor the ~~second~~third quarter of 2019. The net interest margin decreased to ~~3.62%~~3.48% for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~3.81%~~3.78% for the ~~six~~nine months ended ~~June~~September 30, 2019. While the average loan balances increased from $545.3 million for the third quarter of 2019 to $624.7 million for the third quarter of 2020, the tax equivalent yield decreased 80 basis points to 4.04% for the third quarter of 2020, compared with 4.84% for the third quarter of 2019. Average balances for loans were $596.8 million and $545.3 million for the nine months ended September 30, 2020 and 2019, respectively, resulting in the tax equivalent yield of 4.32% and 4.85% for the nine months ended September 30, 2020 and 2019, respectively. Total average earning assets increased primarily from organic loan growth of $24.7 million and $20.6 million for the three and nine months ended September 30, 2020, respectively, when compared to the three and nine months ended September 30, 2020 and 2019 and from the origination of PPP ~~loans.~~loans of $54.7 million and $30.9 million for the three and nine months ended September 30, 2020, respectively. This, coupled with the decrease in funding costs contributed to the increase in net interest ~~income, however~~income. However as a result of the lower interest rate environment and the fixed rate of 1% on PPP loans, yields on investments and loans have declined during the three and ~~six~~nine months ended ~~June~~September 30, 2020, giving rise to a negative impact on the net interest margin. Given the current interest rate environment, w~~e expect that our~~ net interest income and the net interest margin could decrease in future periods.

Interest income decreased $271,000 or 3.72% to $7.0 million for the second quarter of 2020 from $7.3 million for the second quarter of 2019. The decrease in interest income was due to the 63 basis points decrease in the average yield on earning assets, from 4.46% during the second quarter of 2019 to 3.83% during the second quarter of 2020. Interest income decreased

~~$393,000 or 2.72% to $14.1 million for the six months ended June 30, 2020 from $14.5 million for the six months ended June 30, 2019.~~

~~While the average loan balances increasedfrom $545.2 million for the second quarter of 2019 to $610.8 million for the second quarter of 2020, t~~he tax equivalent yield decreased 56 basis points to 4.28% for the second quarter of 2020, compared with 4.84% for the second quarter of 2019. Excluding PPP loans, the tax equivalent yield was 4.34% for the second quarter of 2020, a decrease of 50 basis points compared to the second quarter of 2019. Average balances for loans were $582.6 million and $545.3 million for the six months ended June 30, 2020 and 2019, respectively, resulting in the tax equivalent yield of 4.48% and 4.86% for the six months ended June 30, 2020 and 2019, respectively. Excluding PPP loans, the tax equivalent yield was 3.0% for the six months ended June 30, 2020.

Average interest-bearing deposit balances increased ~~$40.2 million to $519.6~~from $477.7 million for the ~~second~~third quarter of ~~2020, from $479.4~~2019, to $542.6 million for the ~~second~~third quarter of ~~2019.~~2020. Interest expense decreased ~~$571,000~~$624,000 or ~~47.78%~~53.29% from $1.2 million for the ~~second~~third quarter of 2019 to ~~$624,000~~$547,000 for the ~~second~~third quarter of 2020. Cost of funds decreased to ~~0.35%~~0.28% for the ~~second~~third quarter of 2020 from ~~0.76%~~0.70% for the ~~second~~third quarter of 2019. Average interest-bearing deposit balances increased ~~$28.9 million~~ to ~~$507.0~~$519.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$478.1~~$478.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Interest expense decreased ~~$749,000~~$1.4 million or ~~33.42%~~40.26% from ~~$2.2~~$3.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$1.5~~$2.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020. Cost of funds were ~~0.45%~~0.37% and ~~0.72%~~0.70% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The increase in interest-bearing deposit balances is primarily the result of organic deposit growth from new and existing personal and business clients. ~~The funding of PPP loans into interest-bearing deposit accounts contributed significantly to this increase.~~ The decreases in the cost of funds is the result of the Company’s response to interest rate trends and the reduction of rates on certain interest-bearing transaction accounts, and lower funding costs on FHLB advances.

The following tables set forth information, for the periods indicated, relating to the Company’s average balance sheet which reflects the average yield on assets, average cost of liabilities and average yields and rates paid. These yields and costs are derived by dividing income or expense by the average daily balances of assets and liabilities, respectively.

	Three Months Ended June 30, 2020									Three Months Ended June 30, 2019									Three Months Ended September 30, 2020									Three Months Ended September 30, 2019
(Dollars in thousands)	Average			Income/			Average			Average			Income/			Average			Average			Income/			Average			Average			Income/			Average
Assets	Balances			Expense			Rate			Balances			Expense			Rate			Balances			Expense			Rate			Balances			Expense			Rate
Loans
Taxable	$	609,534		$	6,507			4.29	%	$	543,237		$	6,573			4.85	%	$	623,686		$	6,348			4.05	%	$	543,101		$	6,651			4.86	%
Nonaccrual ⁽¹⁾		1,235			-			-			1,929			-			-			1,015			-			-			2,188			-			-
Total loans		610,769			6,507			4.28	%		545,166			6,573			4.84	%		624,701			6,348			4.04	%		545,289			6,651			4.84	%
Securities
Taxable		66,768			391			2.35	%		60,317			397			2.63	%		65,887			367			2.25	%		61,138			412			2.72	%
Tax-exempt ⁽²⁾		16,004			126			3.15	%		12,999			108			3.31	%		18,143			136			2.99	%		14,010			113			3.21	%
Total securities		82,772			517			2.51	%		73,316			505			2.75	%		84,030			503			2.41	%		75,148			525			2.81	%
Deposits in other banks		44,096			10			0.10	%		38,404			224			2.35	%		72,773			19			0.10	%		41,539			210			2.00	%
Federal funds sold		14			-			0.29	%		14			-			2.32	%		14			-			0.06	%		14			-			2.15	%
Total earning assets		737,651			7,034			3.83	%		656,900			7,302			4.46	%		781,518			6,870			3.50	%		661,990			7,386			4.43	%
Less: Allowance for loan losses		(5,815	)								(5,345	)								(6,599	)								(5,550	)
Total nonearning assets		58,225									56,151									60,541									57,298
Total Assets	$	790,061								$	707,706								$	835,460								$	713,738
Liabilities and Shareholders’ Equity
Deposits
Demand	$	155,236								$	119,171								$	174,312								$	124,507
Interest-bearing
NOW		254,375		$	128			0.20	%		228,675		$	292			0.51	%		255,564		$	79			0.12	%		221,881		$	233			0.42	%
Money market		94,267			75			0.32	%		74,149			159			0.86	%		107,839			83			0.31	%		77,193			162			0.84	%
Savings		99,932			15			0.06	%		86,090			70			0.33	%		108,058			14			0.05	%		87,529			72			0.33	%
Time deposits		71,060			281			1.59	%		90,492			436			1.93	%		71,168			244			1.37	%		91,122			463			2.01	%
Total interest-bearing deposits		519,634			499			0.39	%		479,406			957			0.80	%		542,629			420			0.31	%		477,725			930			0.77	%
Federal funds purchased		-			-			-			1			-			2.74	%		1			-			0.70	%		-			-			-
FHLB advances		28,597			76			1.07	%		29,749			188			2.54	%		30,685			78			1.01	%		29,727			190			2.54	%
Junior subordinated debt		4,124			49			4.86	%		4,124			50			4.83	%		4,124			49			4.64	%		4,124			51			4.83	%
Total interest-bearing liabilities		552,355			624			0.45	%		513,280			1,195			0.93	%		577,439			547			0.38	%		511,576			1,171			0.91	%
Other liabilities		12,141									12,178									13,514									12,313
Shareholders’ equity		70,329									63,077									70,195									65,342
Total Liabilities & Shareholders’ Equity	$	790,061								$	707,706								$	835,460								$	713,738
Net interest income (tax-equivalent basis)				$	6,410			3.38	%				$	6,107			3.52	%				$	6,323			3.12	%				$	6,215			3.52	%
Less: tax-equivalent adjustment					(26	)								(23	)								(29	)								(24	)
Net interest income				$	6,384								$	6,084								$	6,294								$	6,191
Interest expense as a percent of average earning assets								0.34	%								0.73	%								0.28	%								0.70	%
Net interest margin								3.49	%								3.73	%								3.22	%								3.73	%

	For the Six Months Ended June 30, 2020									For the Six Months Ended June 30, 2019									For the Nine Months Ended September 30, 2020									For the Nine Months Ended September 30, 2019
(Dollars in thousands)	Average			Income/			Average			Average			Income/			Average			Average			Income/			Average			Average			Income/			Average
Assets	Balances			Expense			Rate			Balances			Expense			Rate			Balances			Expense			Rate			Balances			Expense			Rate
Loans
Taxable	$	581,528		$	12,974			4.48	%	$	543,323		$	13,144			4.88	%	$	595,684		$	19,322			4.33	%	$	543,248		$	19,795			4.87	%
Nonaccrual ⁽¹⁾		1,116			-			-			1,956			-			-			1,082			-			-			2,034			-			-
Total loans		582,644			12,974			4.48	%		545,279			13,144			4.86	%		596,766			19,322			4.32	%		545,282			19,795			4.85	%
Securities
Taxable		66,516			798			2.42	%		59,253			804			2.72	%		66,305			1,165			2.36	%		59,888			1,216			2.72	%
Tax-exempt ⁽²⁾		16,029			252			3.14	%		13,271			220			3.33	%		16,739			388			3.04	%		13,520			333			3.28	%
Total securities		82,545			1,050			2.56	%		72,524			1,024			2.83	%		83,044			1,553			2.50	%		73,408			1,549			2.82	%
Deposits in other banks		35,965			94			0.53	%		31,401			336			2.16	%		48,324			113			0.31	%		34,818			547			2.10	%
Federal funds sold		14			-			0.63	%		14			-			2.77	%		14			-			0.44	%		14			-			2.56	%
Total earning assets		701,168			14,118			4.05	%		649,218			14,504			4.50	%		728,148			20,988			3.85	%		653,522			21,891			4.48	%
Less: Allowance for loan losses		(5,583	)								(5,363	)								(5,925	)								(5,426	)
Total nonearning assets		57,624									56,529									58,603									56,788
Total Assets	$	753,209								$	700,384								$	780,826								$	704,884
Liabilities and Shareholders' Equity
Deposits
Demand	$	139,784								$	117,292								$	151,377								$	119,723
Interest-bearing
NOW		246,909		$	343			0.28	%		231,809		$	554			0.48	%		249,815		$	422			0.23	%		228,463		$	787			0.46	%
Money market		92,441			239			0.52	%		71,470			289			0.81	%		97,611			322			0.44	%		73,398			451			0.82	%
Savings		95,666			67			0.14	%		87,818			154			0.35	%		99,827			81			0.11	%		87,720			227			0.35	%
Time		71,985			597			1.67	%		87,026			799			1.85	%		71,711			841			1.56	%		88,407			1,262			1.91	%
Total interest-bearing deposits		507,001			1,246			0.49	%		478,123			1,796			0.76	%		518,964			1,666			0.43	%		477,988			2,727			0.76	%
Federal funds purchased		1			-			1.43	%		996			14			2.90	%		1			-			1.07	%		660			14			2.90	%
FHLB advances		20,993			147			1.41	%		25,543			332			2.63	%		24,247			225			1.23	%		26,953			523			2.59	%
Junior subordinated debt		4,124			99			4.85	%		4,124			99			4.83	%		4,124			148			4.77	%		4,124			149			4.83	%
Total interest-bearing liabilities		532,119			1,492			0.56	%		508,786			2,241			0.89	%		547,336			2,039			0.50	%		509,725			3,413			0.90	%
Other liabilities		11,921									12,206									10,318									12,243
Shareholders' equity		69,385									62,100									71,795									63,193
Total Liabilities & Shareholders' Equity	$	753,209								$	700,384								$	780,826								$	704,884
Net interest income (tax equivalent basis)				$	12,626			3.48	%				$	12,263			3.61	%				$	18,949			3.35	%				$	18,478			3.58	%
Less: tax equivalent adjustment					(53	)								(46	)								(82	)								(70	)
Net interest income				$	12,573								$	12,217								$	18,867								$	18,408
Interest expense as a percent of average earning assets								0.43	%								0.70	%								0.37	%								0.70	%
Net interest margin								3.62	%								3.81	%								3.48	%								3.78	%

The following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rates (change in rate multiplied by

old volume). Changes in rate and volume, which cannot be separately identified, are allocated proportionately between changes in rate and changes in volume.

	For the Three Months Ended June 30, 2020 Compared to June 30, 2019									For the Three Months Ended September 30, 2020 Compared to September 30, 2019
(In thousands)	Change			Due to Volume			Due to Rate			Change			Due to Volume			Due to Rate
Interest Income
Loans
Taxable	$	(66	)	$	802		$	(868	)	$	(303	)	$	986		$	(1,289	)
Securities
Taxable		(6	)		43			(49	)		(45	)		32			(77	)
Tax-exempt⁽¹⁾		18			25			(7	)		23			34			(11	)
Deposits in other banks		(214	)		32			(246	)		(191	)		158			(349	)
Total interest income		(268	)		902			(1,170	)		(516	)		1,210			(1,726	)
Interest Expense
NOW		(164	)		33			(197	)		(154	)		35			(189	)
Money market		(84	)		43			(127	)		(79	)		64			(143	)
Savings		(55	)		11			(66	)		(58	)		17			(75	)
Time deposits		(155	)		(92	)		(63	)		(219	)		(101	)		(118	)
Federal funds purchased		-			-			-
FHLB advances		(112	)		(7	)		(105	)		(112	)		6			(118	)
Junior subordinated debt		(1	)		-			(1	)		(2	)		-			(2	)
Total interest expense		(571	)		(12	)		(559	)		(624	)		21			(645	)
Net interest income	$	303		$	914		$	(611	)	$	108		$	1,189		$	(1,081	)

The provision for loan losses is charged to operations in order to maintain the allowance for loan losses at a level considered necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Company considers the overall risk characteristics of the loan portfolio, past and current loss experience, trends in the Bank’s delinquent and nonperforming loans, estimated values of collateral, and the impact of current economic conditions. The amount of the allowance is based on estimates and there can be no assurances, however, that future losses will not exceed estimated amounts, or that increased amounts in the provision for loan losses will not be required in future periods as more information becomes available or events change. The allowance for loan losses is assessed on a quarterly basis and provisions for loan losses are made in order to maintain the allowance.

The full impact of COVID-19 is unknown and rapidly changing. The pandemic has caused substantial disruption in the U.S. economy. The outbreak is having a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants. Due to COVID-19 and the economic impact it could have on the Company’s loan portfolio, additional details about exposures to these stressed industries is included in the above section titled “~~SIGNIFICANT DEVELOPMENTS – COVID-19 Update.~~IMPACT OF COVID-19.”

The Company recorded a provision for loan losses of ~~$911,000~~$345,000 for the ~~second~~third quarter of 2020 compared with ~~$205,000~~no provision for loan losses for the ~~second~~third quarter of 2019. The provision for loan losses was ~~$1.3~~$1.6 million and $255,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. ~~Approximately~~Of the provision for loan losses of $1.6 million for the nine months ended September 30, 2020, approximately $860,000 ofwas recognized during the second quarter ~~provision was~~of 2020 due to qualitative adjustments to the ~~change~~loan loss reserve in ~~economic conditions, which worsened significantly beginning in March 2020 as a result~~light of the COVID-19 pandemic and ~~the slow-down in~~its impact on economic and business ~~activity.~~conditions. The primary economic loss driver contributing to the increase in the provision for loan losses was the increased unemployment rate for the Commonwealth of Virginia. If economic conditions ~~continue to~~ worsen, the Company could recognize elevated levels of provision for loan losses in future periods.

Noninterest income decreased ~~$184,000~~$132,000 to ~~$1.2~~$1.5 million for the ~~second~~third quarter of 2020 from ~~$1.4~~$1.6 million for the ~~second~~third quarter of 2019. Noninterest income decreased ~~$322,000~~$451,000 to ~~$2.6~~$4.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$2.9~~$4.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019.

The following summarizes noninterest income for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:


	Three Months Ended June 30,					Increase (Decrease)						Six Months Ended June 30,					Increase (Decrease)						Three Months Ended September 30,						Increase (Decrease)						Nine Months Ended September 30,					Increase (Decrease)
(Dollars in thousands)	2020			2019		Amount			Percent			2020			2019		Amount			Percent			2020			2019			Amount			Percent			2020			2019		Amount			Percent
Noninterest income
Trust and estate fees	$	499		$	427	$	72			16.86	%	$	960		$	843	$	117			13.88	%	$	681		$	442		$	239			54.07	%	$	1,641		$	1,285	$	356			27.70	%
Brokerage fees		120			128		(8	)		(6.25	)%		266			218		48			22.02	%		127			115			12			10.43	%		393			333		60			18.02	%
Service charges on deposit accounts		220			378		(158	)		(41.80	)%		572			761		(189	)		(24.84	)%		259			382			(123	)		(32.20	)%		831			1,142		(311	)		(27.23	)%
Interchange fee income, net		297			313		(16	)		(5.11	)%		567			584		(17	)		(2.91	)%		333			394			(61	)		(15.48	)%		900			979		(79	)		(8.07	)%
Bank-owned life insurance		90			90		-			-			180			183		(3	)		(1.64	)%		90			92			(2	)		(2.17	)%		270			275		(5	)		(1.82	)%
Other income (loss)		(43	)		58		(101	)		(174.14	)%		(32	)		206		(238	)		(115.53	)%		(27	)		188			(215	)		(114.36	)%		(59	)		392		(451	)		(115.05	)%
Gain on sale/call of securities available for sale		-			-		-			-			-			79		(79	)		(100.00	)%		-			-			-			-			-			79		(79	)		(100.00	)%
Gain on sale of mortgage loans held for sale, net		33			6		27			450.00	%		45			6		39			650.00	%
Gain (loss) on sale of mortgage loans held for sale, net																								15			(3	)		18			(600.00	)%		60			2		58			2900.00	%
Total noninterest income	$	1,216		$	1,400	$	(184	)		(13.14	)%	$	2,558		$	2,880	$	(322	)		(11.18	)%	$	1,478		$	1,610		$	(132	)		(8.20	)%	$	4,036		$	4,487	$	(451	)		(10.05	)%

Noninterest expense ~~decreased $620,000~~increased $251,000 to ~~$4.9~~$5.7 million for the ~~second~~third quarter of 2020 from ~~$5.5~~$5.4 million for the ~~second~~third quarter of 2019. Noninterest expense decreased ~~$733,000~~$480,000 to ~~$10.5~~$16.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$11.2~~$16.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019.

The following summarizes noninterest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:

	Three Months Ended June 30,				Increase (Decrease)						Six Months Ended June 30,				Increase (Decrease)						Three Months Ended September 30,				Increase (Decrease)						Nine Months Ended September 30,				Increase (Decrease)
(Dollars in thousands)	2020		2019		Amount			Percent			2020		2019		Amount			Percent			2020		2019		Amount			Percent			2020		2019		Amount			Percent
Noninterest Expenses
Salaries and benefits	$	2,435	$	2,923	$	(488	)		(16.70	)%	$	5,387	$	5,935	$	(548	)		(9.23	)%	$	3,076	$	3,035	$	41			1.35	%	$	8,463	$	8,968	$	(505	)		(5.63	)%
Occupancy		579		604		(25	)		(4.14	)%		1,243		1,219		24			1.97	%		586		561		25			4.46	%		1,829		1,781		48			2.70	%
Furniture and equipment		190		275		(85	)		(30.91	)%		381		558		(177	)		(31.72	)%		196		269		(73	)		(27.14	)%		577		827		(250	)		(30.23	)%
Marketing and business development		107		171		(64	)		(37.43	)%		216		357		(141	)		(39.50	)%		114		129		(15	)		(11.63	)%		329		487		(158	)		(32.44	)%
Legal, audit and consulting		304		282		22			7.80	%		574		531		43			8.10	%		301		270		31			11.48	%		875		801		74			9.24	%
Data processing		361		325		36			11.08	%		736		679		57			8.39	%		338		353		(15	)		(4.25	)%		1,074		1,031		43			4.17	%
Federal Deposit Insurance Corporation assessment		81		93		(12	)		(12.90	)%		165		187		(22	)		(11.76	)%		95		-		95			-			260		187		73			39.04	%
Merger expenses																						43		-		43			-			43		-		43			-
Other operating expenses		832		836		(4	)		(0.48	)%		1,792		1,761		31			1.76	%		921		802		119			14.84	%		2,713		2,561		152			5.94	%
Total noninterest expenses	$	4,889	$	5,509	$	(620	)		(11.25	)%	$	10,494	$	11,227	$	(733	)		(6.53	)%	$	5,670	$	5,419	$	251			4.63	%	$	16,163	$	16,643	$	(480	)		(2.88	)%

Income tax expense was ~~$222,000~~$210,000 and ~~$206,000~~$330,000 for the ~~second~~third quarter of 2020 and 2019, respectively, resulting in an effective tax rate of ~~12.33%~~11.95% and ~~11.64%~~13.85%, respectively. Income tax expense was ~~$402,000~~$613,000 and ~~$419,000~~$749,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively, resulting in an effective tax rate of ~~11.91%~~11.94% and ~~11.59%~~12.49%, respectively. ~~The~~Income tax expense and the effective tax rate differed from the statutory federal income tax rate of 21% primarily due to the Bank’s investment in tax-exempt

securities, income from Bank-owned life insurance, ~~policies,~~ and community development tax credits. ~~The Company’s estimated tax credits were $234,000 and $276,000 for the six months ended June 30, 2020 and 2019, respectively.~~

Summary Balance Sheet	Summary Balance Sheet											Summary Balance Sheet
						Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)		June 30, 2020		December 31, 2019		Amount			Percent				September 30, 2020		December 31, 2019		Amount			Percent
Total cash and cash equivalents		$	79,539	$	46,341	$	33,198			71.64	%		$	73,673	$	46,341	$	27,332			58.98	%
Securities available for sale, at fair value			78,250		79,783		(1,533	)		(1.92	)%			84,590		79,783		4,807			6.03	%
Total loans			622,660		550,226		72,434			13.16	%			638,103		550,226		87,877			15.97	%
Allowance for loan losses			6,400		5,227		1,173			22.44	%			6,701		5,227		1,474			28.20	%
Total assets			825,553		722,171		103,382			14.32	%			840,286		722,171		118,115			16.36	%
Total deposits			705,806		622,155		83,651			13.45	%			739,834		622,155		117,679			18.91	%
Federal Home Loan Bank advances			32,651		16,695		15,956			95.57	%			12,629		16,695		(4,066	)		(24.35	)%
Total shareholders’ equity			71,088		67,122		3,966			5.91	%			72,207		67,122		5,085			7.58	%

Growth in assets is primarily attributable to the influx of PPP loans during the period and the increase in excess cash held at the Federal Reserve. Excess cash held at the Federal Reserve is primarily the result of core deposit growth in personal checking, savings and ~~one new FHLB advance taken~~money market accounts.

The increase in total loans is primarily attributable to the ~~second quarter in anticipation~~influx of PPP ~~loan funding. Deposit growth is from existing personal and business relationships, along with new business established from~~loans during the ~~PPP loan program.~~

~~Total loans were $622.7 million as of June 30, 2020 compared with $550.2 million as of December 31, 2019. Excluding $52.8 million in~~period. PPP loans ~~total loans were $569.8~~totaled $53.1 million ~~on June~~at September 30, ~~2020, representing growth of 3.58% over the prior year end.~~2020. As noted in the below table, the commercial and industrial loan segment contributed significantly to net loan growth during the ~~six months ended June 30, 2020. Excluding~~period, which is primarily from PPP loans, ~~from this category,~~while commercial real estate loans and ~~industrial~~residential real estate loans ~~were $34.3 million or 25.1%~~also contributed to the overall growth ~~over year end December 31, 2019. Our overall~~in the portfolio. Overall loan growth, excluding PPP loans, is in line with ~~our~~the Company’s expectations ~~as we anticipated~~of moderate loan growth as a result of COVID-19 and the related decline in economic conditions in ~~our~~the Company’s market areas.

Summary of Loans by Segment	Summary of Loans by Segment											Summary of Loans by Segment
						Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)		June 30, 2020		December 31, 2019		Amount			Percent				September 30, 2020		December 31, 2019		Amount
Commercial and industrial		$	87,044	$	27,404	$	59,640			217.63	%		$	88,982	$	27,404	$	61,578
Commercial real estate			187,004		181,898		5,106			2.81	%			199,773		181,898		17,875
Construction and land			73,701		65,231		8,470			12.98	%			72,465		65,231		7,234
Consumer			6,428		5,958		470			7.89	%			6,264		5,958		306
Student			7,832		8,151		(319	)		(3.91	)%			7,333		8,151		(818	)
Residential real estate			227,917		225,316		2,601			1.15	%			232,524		225,316		7,208
Home equity lines of credit			32,734		36,268		(3,534	)		(9.74	)%			30,762		36,268		(5,506	)
Total		$	622,660	$	550,226	$	72,434			13.16	%		$	638,103	$	550,226	$	87,877

Certain industry sectors will be more negatively impacted by the economic effects of COVID-19 and related governmental action than others. While ~~we believe our~~the Company believes the commercial portfolio is adequately diversified, ~~we believe~~ COVID-19 ~~will~~could have a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants. Additional details related to exposures to these stressed industries are included in the above section titled “~~SIGNIFICANT DEVELOPMENTS – COVID-19 Update.~~ We continue to monitor the level of concentrations within our loan portfolio, as a whole. We are also in ongoing conversations with our clients to assess the current and projected impacts of COVID-19 on their businesses.

The Company established a short-term loan modification program, allowing the deferral of scheduled payments for a 90-day period beginning in April 2020. Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief were not considered TDRs. Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time the modification was entered. The Company modified 194 loans totaling $92.8 million under this initial payment deferral program. As ~~described in further detail in the above section titled~~ ~~SIGNIFICANT DEVELOPMENTS – COVID-19 Update~~,~~under~~of September 30, 2020, 94% of these deferments have ended and have returned to their normal payment schedules, while subsequent deferments totaling $5.5 million have been granted to 7 borrowers, consisting of 2 commercial and industrial loans, 1 commercial real estate loan, 1 construction and land loan, and 3 residential real estate loans. These additional deferrals remained within the CARES Act and the ~~Company instituted a 90-day loan payment deferral program~~ ~~to qualified~~ ~~clients. None of these modifications were considered TDRs, in accordance with regulatory and accounting~~March 2020 interagency guidance and ~~none~~ were not considered ~~impaired.~~TDRs.

~~Nonperforming assets, which include~~The following table sets forth certain information with respect of the Company’s nonperforming ~~loans and other real estate owned, were $12.5 million at June 30, 2020 compared with $6.5 million at December 31, 2019 and $7.1 million at June 30, 2019.~~assets. The increase in nonperforming loans was primarily due to one commercial real estate relationship totaling $6.2 million that was ~~modified~~modified; (non-COVID-19 related modification); and is considered a performing TDR. Loans 90+ days past due ~~represent~~and accruing are largely related to student loans that ~~were 90+ days past due and accruing and~~ have a 98% guaranty by the U.S. Department of Education. We continue to monitor the performance of our entire loan portfolio for indications of stress, including identifying certain commercial loan industries that we believe are more susceptible to risk presented by the pandemic.

~~The following table sets forth certain information with respect of the Company’s nonperforming assets and related metrics:~~

(Dollars in thousands)	June 30, 2020			December 31, 2019			June 30, 2019			September 30, 2020			December 31, 2019			September 30, 2019
Nonaccrual loans	$	1,547		$	989		$	2,278		$	1,245		$	989		$	1,941
Restructured loans still accruing		8,613			2,471			2,979			8,389			2,471			2,518
Loans 90+ days past due and accruing		975			1,636			484			647			1,636			867
Total nonperforming loans		11,135			5,096			5,741			10,281			5,096			5,326
Other real estate owned, net		1,356			1,356			1,356			1,356			1,356			1,356
Total nonperforming assets	$	12,491		$	6,452		$	7,097		$	11,637		$	6,452		$	6,682

Allowance for loan losses	$	6,400		$	5,227		$	5,409		$	6,701		$	5,227		$	5,395
Allowance for loan losses to total loans		1.03	%		0.95	%		0.99	%		1.05	%		0.95	%		0.99	%
Nonaccrual loans to total loans		0.25	%		0.18	%		0.42	%		0.20	%		0.18	%		0.36	%
Allowance for loan losses to nonperforming loans		57.48	%		102.57	%		94.22	%		65.18	%		102.57	%		101.30	%
Nonperforming loans to total loans		1.79	%		0.93	%		1.06	%		1.61	%		0.93	%		0.98	%
Nonperforming assets to total assets		1.51	%		0.89	%		0.99	%		1.38	%		0.89	%		0.92	%

At ~~June~~September 30, 2020, the allowance for loan losses was ~~$6.4~~$6.7 million, or ~~1.03%~~1.05% of total loans, compared with $5.2 million, or 0.95% of total loans at December 31, 2019 and $5.4 million, or 0.99% of total loans on ~~June~~September 30, 2019. ~~Excluding PPP loans, the allowance for loan losses to total loans was 1.12% at June 30, 2020.~~ The increase in the allowance is due primarily to the increase in qualitative factors ~~of approximately $860,000 during the second quarter of 2020~~ related to COVID-19 and the current economic conditions, including, but not limited to, the increased unemployment rate for the Commonwealth of Virginia. The allowance for loan losses was not impacted by PPP loans due to the 100% SBA guaranty for loans funded under this program.

COVID-19 may have a continued adverse effect on the credit quality of ~~our~~the Company’s loan portfolio during the remainder of 2020. ~~Disruption to our clients~~Client disruption could result in increased loan delinquencies and defaults. Management believes impaired loans may also increase in the future as a result of the COVID-19 pandemic.

One of management’s strategic objectives is to continue to increase the Company’s shareholders’ return on equity while maintaining a strong capital base. The Company and the Bank are subject to various capital requirements administered by bank regulatory agencies. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company’s financial condition and results of operations.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. In addition to the regulatory risk-based capital, the Bank must maintain a capital

conservation buffer of additional total capital and common equity tier 1 capital as required by the Basel III capital framework as adopted by the Federal Reserve and the Federal Deposit Insurance Corporation. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. Under the small bank holding company policy statement of the Board of Governors of the Federal Reserve system, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements at the bank holding company level.

As a result of recent legislation, the federal banking agencies developed a Community Bank Leverage Ratio (“CBLR”), which is the ratio of a bank’s tangible equity capital to average total consolidated assets, for financial institutions with assets of less than $10.0 billion. A qualifying community bank that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and not more than 10%. Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and qualified community banks will have until January 1, 2022, before the CBLR requirement is re-established at greater than 9%. Pursuant to the CARES Act and related interim final rules, the CBLR will be 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. Management did not elect to be subject to the CLBR at ~~June~~September 30, 2020.

Management believes the Bank ~~satisfies~~satisfied all capital adequacy requirements to which it was subject as of ~~June~~September 30, 2020 and December 31, 2019 and is considered “well capitalized” as defined by the regulatory authorities. The following table provides information on the regulatory capital ratios for the Bank at ~~June~~September 30, 2020 and December 31, 2019.

(Dollars in thousands)	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Tier 1 Capital:
Common equity	$	74,334		$	70,312		$	75,542		$	70,312
Unrealized gain on securities available for sale, net		(3,475	)		(1,294	)		(3,442	)		(1,294	)
Unrealized benefit obligation for supplemental retirement plans		(155	)		(155	)		(155	)		(155	)
Total Common equity tier 1 capital		70,704			68,863			71,945			68,863
Tier 2 Capital:
Allowable allowance for loan losses		6,400			5,227			6,701			5,227
Total Capital	$	77,104		$	74,090		$	78,646		$	74,090
Risk Weighted Assets	$	571,932		$	547,202		$	577,026		$	547,202
Regulatory Capital Ratios:
Leverage Ratio		9.00	%		9.40	%		8.67	%		9.40	%
Common Equity Tier 1 Capital Ratio		12.36	%		12.58	%		12.47	%		12.58	%
Tier 1 Capital Ratio		12.36	%		12.58	%		12.47	%		12.58	%
Total Capital Ratio		13.48	%		13.54	%		13.63	%		13.54	%

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in other banks, federal funds sold, and unencumbered securities classified as available for sale. At ~~June~~September 30, 2020, liquid assets totaled ~~$139.7~~$140.3 million, or ~~16.9%~~16.7% of total assets and ~~18.5%~~18.3% of total liabilities.

Securities provide a constant source of liquidity through paydowns and maturities. The Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity and the Bank’s membership with the FHLB also provides a source of borrowings with numerous rate and term structures.

The Company believes there could be potential stresses on liquidity management as a direct result of ~~COVID-19.~~the COVID-19 pandemic. As clients manage their own liquidity stress, wethe Company could experience an increase in the utilization of existing lines of credit. The Federal Reserve and FHLB have established lending facilities that will allow banks to obtain funding specifically for loans that were

made under the PPP, and will allow ~~them~~banks to retain existing sources of liquidity for ~~our~~ traditional operations. The Bank did not choose to participate in these lending facilities during the ~~six~~nine months ended ~~June~~September 30, 2020. Additionally, on March 15, 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirements for insured depository institutions to 0.00%, which further increased the Bank’s available liquidity.

Management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meets the credit needs of its clients’ ~~as we move into a~~during this period of uncertain economic conditions related to ~~COVID-19.~~the COVID-19 pandemic. Management will continue to closely monitor the Company’s liquidity as these conditions change.

As of ~~June~~September 30, 2020, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in “Management’s Discussion and Analysis and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

As of ~~June~~September 30, 2020, there have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The consolidated financial statements and the accompanying notes presented elsewhere in this document have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Company and the Bank are monetary in nature. The impact of inflation is reflected in the increased cost of operations. As a result, interest rates have a greater impact on the Company’s performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 1 of the Notes to Consolidated Financial Statements contained herein.

There have been no material changes to the quantitative and qualitative disclosures made in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Company maintains disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the ~~design and operations of the~~ Company’s disclosure controls and procedures at the end of the period covered by this report was carried out under the supervision and with the participation of the management of Fauquier Bankshares, Inc., including ~~the~~our Chief Executive Officer and ~~the~~ Chief Financial Officer. Based on such an evaluation, the Chief Executive Officer and the Chief Financial Officer concluded the Company’s disclosure controls and procedures were effective as of the end of such period.

The Company regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There have not been any significant changes in the Company’s internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect, such controls during the quarter ended ~~June~~September 30, 2020.

There are no pending or threatened legal proceedings to which the Company or the Bank is a party or to which the property of either the Company or the Bank is subject to that, in the opinion of management, may materially impact the financial condition of either the Company or the Bank.

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in ~~our~~the Company’s Annual Report on Form 10- K for the year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, as filed with the Securities and Exchange Commission. Additional risks not presently known, ~~to us,~~ or that weare currently ~~deem~~deemed immaterial, may also adversely affect ~~our~~the Company’s business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause ~~our~~the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of ~~us.~~the Company.

Combining Virginia National and the Company may be more difficult, costly or time-consuming than expected.

The ~~economic impact~~success of the ~~COVID-19 outbreak~~Merger will depend, in part, on Virginia National’s ability to realize the anticipated benefits and cost savings from combining the businesses of Virginia National and the Company and to combine the businesses of Virginia National and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. If Virginia National is not able to achieve these objectives, the anticipated benefits and cost savings of the Merger may not be realized fully or at all or may take longer to realize than expected.

Virginia National and the Company have operated, and, until the completion of the Merger, will continue to operate, independently. To realize these anticipated benefits of the Merger, after the completion of the Merger, Virginia National expects to integrate the Company’s business into its own. The integration process in the Merger could result in the loss of key

employees, the disruption of each party’s ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the Merger. The loss of key employees could adversely affect ~~our~~Virginia National’s ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Virginia National’s financial ~~condition~~results and ~~results~~the value of ~~operations.~~

~~In December 2019, COVID-19 was reported in China, and, in March 2020,~~its common stock. If Virginia National experiences difficulties with the ~~World Health Organization declared it a pandemic. On March 12, 2020,~~integration process, the ~~President~~anticipated benefits of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businessesMerger may not be realized fully or at all, or may take longer to ~~close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more~~realize than 30 million people have filed claims for unemployment, and stock markets have declined in value and, in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark federal funds rate to a target rangeexpected. As with any merger of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions, ~~to prudently work with affected borrowers through the issuance of an interagency statement,~~there also may be disruptions that cause Virginia National and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused the Company to modify business practices, including branch operations, employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authoritieslose customers or ~~that we determine are in~~cause customers to withdraw their deposits from the ~~best interests of our employees, clients and business partners.~~

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

~~As the result of the COVID-19 pandemic and the related adverse local and national economic~~Company’s or Virginia National’s banking subsidiaries, or other unintended consequences ~~we could be subject to any of the following risks, any of which~~that could have a material adverse effect on ~~our business,~~Virginia National’s results of operations or financial condition ~~liquidity,~~after the Merger. These integration matters could have an adverse effect on the Company during this transition period and ~~results~~on Virginia National for an undetermined period after consummation of ~~operations:~~

~~Moreover, our future success~~Because the market price of Virginia National common stock will fluctuate, the value of the consideration to be received by the Company’s shareholders in the Merger may change.

Pursuant to the Merger Agreement, each share of the Company’s common stock, except for certain shares of the Company’s common stock owned by the Company or Virginia National, that is issued and ~~profitability substantially depends~~outstanding immediately prior to the effective time of the Merger will be converted into the right to receive 0.6750 shares of common stock of Virginia National. The closing price of Virginia National common stock on the date that the Merger is completed may vary from the closing price of Virginia National common stock on the date the Company and Virginia National announced the signing of the Merger Agreement. Because the Merger consideration is determined by a fixed exchange ratio, at the time of the Company’s special meeting, the Company’s shareholders will not know or be able to calculate the value of the shares of Virginia National common stock they will receive upon completion of the Merger. Any change in the market price of Virginia National common stock prior to completion of the Merger may affect the value of the Merger consideration that the Company’s shareholders will receive upon completion of the Merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies’ respective businesses, operations and prospects, and regulatory considerations, among other things. Many of these factors are beyond the control of the Company and Virginia National. The Company’s shareholders should obtain current market quotations for shares of Virginia National common stock and the Company’s common stock before voting their shares at the Company’s special meeting of shareholders.

The Merger may distract management ~~skills~~ of ~~our executive officers.~~ the Company from its other responsibilities.

The ~~unanticipated loss~~Merger could cause the management of the Company to focus its time and energies on matters related to the Merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company’s management, if significant, could affect its ability to service existing business and develop new business and may adversely affect the business and earnings of the Company before the Merger, or ~~unavailability~~the business and earnings of ~~key employees~~Virginia National after the Merger.

Each of the Company’s and Virginia National’s obligation to consummate the Merger remains subject to a number of conditions, and there can be no assurance that all of the conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the Merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the Merger is successfully completed within its expected timeframe. If the Merger Agreement is terminated, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the ~~outbreak~~focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could ~~harm our ability~~decline to ~~operate our business or execute our business strategy. We~~the extent that the current market prices reflect a market assumption that the Merger will be completed. If the Merger Agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by the Company's board of directors, the Company may ~~not~~ be ~~successful in finding and integrating suitable successors in the event~~required to pay to Virginia National a termination fee of ~~key employee loss or unavailability.~~$2.5 million.

~~Any one or a combination~~In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the ~~factors identified above could negatively impact our business, financial condition and results of operations and prospects.~~

~~As a participating lender in~~transactions contemplated by the ~~PPP,~~Merger Agreement. If the Merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, becauseexpected benefits of the ~~short timeframe between~~Merger. In addition, failure to consummate the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company and the Bank to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, the second round of PPP funding was signed into law and provides more than $320 billion in new funding for PPP.

Since the opening of the PPP, several large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both clients and non‑clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, itMerger also may result in ~~significant~~negative reactions from the financial ~~liability~~markets or ~~adversely affect~~from the Company’s ~~reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation~~customers, vendors and employees. If the Merger is not completed, these risks may materialize and could have a material adverse ~~impact~~effect on ~~our~~the Company’s stock price, business and cash flows, financial condition and results of operations.

The ~~Bank also has credit risk~~Merger Agreement limits the ability of the Company to pursue alternatives to the Merger.

The Merger Agreement contains “no-shop” provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the Merger Agreement is terminated and the Company, subject to certain restrictions, consummates a similar transaction other than the Merger, the Company must pay to Virginia National a fee of $2.5 million. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the Merger.

The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on ~~PPP loans if a determination~~employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is ~~made~~completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the ~~SBA that there~~Company may be challenging while the Merger is ~~a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such~~pending, as ~~an issue~~certain employees may experience uncertainty about their future roles with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company or the ~~Bank.~~combined company following the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company following the Merger, the Company’s business, or the business of the combined company following the Merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the Merger and from taking certain specified actions until the Merger occurs, and the merger agreement restricts the Company from taking other specified actions until the merger occurs without the consent of Virginia National. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

On January 16, 2020, the Company’s Board of Directors authorized the Company to repurchase up to 113,512 shares (3% of common stock outstanding on January 1, 2020) beginning January 16, 2020 and continuing until the next reset approved by the Board of Directors. During the ~~six month~~nine-month period ended ~~June~~September 30, 2020, 2,007 shares of common stock were repurchased at an average price of $20.99 per share. No shares were repurchased during the ~~second~~third quarter of 2020. Under the share repurchase program, the Company has the remaining authority to repurchase up to 111,505 shares of the Company’s common stock as of ~~June~~September 30, 2020.

Repurchases may be made through open market purchases or in privately negotiated transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual timing, number, and value of shares repurchased under the program will be determined by management.

The following exhibits are filed as part of this report and this list includes the Exhibit Index.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Part I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	2

	Consolidated Balance Sheets (Unaudited)	2

	Consolidated Statements of Operations (Unaudited)	3

	Consolidated Statements of Comprehensive Income (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	5

	Consolidated Statements of Cash Flows (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2526

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3941

Item 4.	Controls and Procedures	3941

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	4041

Item 1A.	Risk Factors	4041

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4243

Item 3.	Defaults Upon Senior Securities	4243

Item 4.	Mine Safety Disclosures	4243

Item 5.	Other Information	4243

Item 6.	Exhibits	4344

SIGNATURES		4445

10 Courthouse Square, Warrenton, Virginia		20186
(Address of principal executive offices)		(Zip Code)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

	For the Nine Months Ended September 30, 2020 Compared to September 30, 2019
				Due to			Due to
(In thousands)	Change			Volume			Rate
Interest Income
Loans
Taxable	$	(473	)	$	1,910		$	(2,383	)
Securities
Taxable		(51	)		130			(181	)
Tax-exempt⁽¹⁾		55			80			(25	)
Deposits in other banks		(434	)		212			(646	)
Total interest income		(903	)		2,332			(3,235	)
Interest Expense
NOW		(365	)		74			(439	)
Money market		(129	)		148			(277	)
Savings		(146	)		32			(178	)
Time		(421	)		(239	)		(182	)
Federal funds purchased		(14	)		(14	)		-
FHLB advances		(298	)		(52	)		(246	)
Junior subordinated debt		(1	)		-			(1	)
Total interest expense		(1,374	)		(51	)		(1,323	)
Net interest income	$	471		$	2,383		$	(1,912	)

	For the Six Months Ended June 30, 2020 Compared to June 30, 2019
				Due to			Due to
(In thousands)	Change			Volume			Rate
Interest Income
Loans
Taxable	$	(170	)	$	924		$	(1,094	)
Securities
Taxable		(6	)		99			(105	)
Tax-exempt⁽¹⁾		32			46			(14	)
Deposits in other banks		(242	)		48			(290	)
Total interest income		(386	)		1,117			(1,503	)
Interest Expense
NOW		(211	)		37			(248	)
Money market		(50	)		85			(135	)
Savings		(87	)		14			(101	)
Time		(202	)		(138	)		(64	)
Federal funds purchased		(14	)		(14	)		-
FHLB advances		(185	)		(59	)		(126	)
Junior subordinated debt		-			-			-
Total interest expense		(749	)		(75	)		(674	)
Net interest income	$	363		$	1,192		$	(829	)

Exhibit Number		Exhibit Description

2.1		Agreement and Plan of Reorganization, dated as of October 1, 2020, between Virginia National Bankshares Corporation and Fauquier Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on October 2, 2020).

3.1		Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference to Exhibit 3.1 to Form 10-K filed March 15, 2010.

3.2		Bylaws of Fauquier Bankshares, Inc., as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K filed April 7, 2020.

10.1		Employment Agreement, dated August 1, 2020, by and between Fauquier Bankshares, Inc., The Fauquier Bank and Christine E. Headly, incorporated by reference to Exhibit 10.1 to Form 8-K filed August 4, 2020.

99.1		Form of Affiliate Agreement, dated as of September 30, 2020, by and among Virginia National Bankshares Corporation, Fauquier Bankshares, Inc., and certain shareholders of Fauquier Bankshares, Inc, incorporated by reference to Exhibit 99.1 to Form 8-K filed August 4, 2020.

99.2		Form of Affiliate Agreement, dated as of September 30, 2020, by and among Virginia National Bankshares Corporation, Fauquier Bankshares, Inc., and certain shareholders of Virginia National Bankshares Corporation, incorporated by reference to Exhibit 99.2 to Form 8-K filed August 4, 2020.

31.1		Certification of CEO pursuant to Rule 13a-14(a).

31.2		Certification of CFO pursuant to Rule 13a-14(a).

32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350.

32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June~~September 30, 2020, formatted in inline XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to Consolidated Financial Statements.

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

FAUQUIER BANKSHARES, INC.
(Registrant)

By: /s/ Marc J. Bogan
Marc J. Bogan
President & Chief Executive Officer
(Principal Executive Officer)
Dated: ~~August 7,~~November 6, 2020

By: /s/ Christine E. Headly
Christine E. Headly
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: ~~August 7,~~November 6, 2020