Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Virginia Partners Bank (the “Bank”) is a commercial bank which was organized under the laws of the Commonwealth of Virginia and commenced regular operations on July 8, 2008. The Bank is chartered by the Commonwealth of Virginia Bureau of Financial Institutions (the “Bureau”) and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). In addition, the Bank is subject to the regulations of the Federal Reserve Bank of Richmond (the “FRB”). The Bank is headquartered in Fredericksburg, Virginia, which is also the location of an operations center. The Bank has three branches in Fredericksburg, Virginia. In Maryland, the Bank trades under the name Maryland Partners Bank (a division of Virginia Partners Bank), and operates a full service branch and commercial banking office in La Plata, Maryland and a Loan Production Office in Annapolis, Maryland. The Bank engages in the general banking business and provides financial services to the communities in and around Fredericksburg, Virginia and La Plata, Maryland, and through a Loan Production Office in Annapolis, Maryland.

The Bank has two wholly owned subsidiaries and one majority owned subsidiary. Bear Holdings, Inc. was established in 2011 for the purpose of holding properties acquired through foreclosure that are classified as other real estate owned. In 2012, 410 William Street, LLC was formed for the purpose of acquiring and holding an interest in the property at 410 William Street, which houses one of the Bank’s four branches, including the executive offices. On January 1, 2018, the Bank acquired a 51% ownership interest in Johnson Mortgage Company, LLC (“JMC”), which is a residential mortgage company headquartered in Newport News, Virginia, with branch offices in Fredericksburg and Williamsburg, Virginia. JMC is engaged in the mortgage banking business in which JMC originates, closes, and immediately sells mortgage loans and related servicing rights to permanent investors in the secondary market. The financial position and operating results of these subsidiaries are included in the Bank’s consolidated financial statements. For JMC, the Bank reflects the issued and outstanding interest not held by the Bank in its consolidated financial statements as noncontrolling interest.

On December 13, 2018, the Bank entered into a definitive agreement (the “Agreement”) pursuant to which the Bank will become a separate wholly owned subsidiary of Delmar Bancorp (“Delmar”) through an exchange of shares, in an all stock transaction. The transaction, which is expected to close in the second quarter of 2019, is subject to regulatory approvals and the approval of the shareholders of the Bank, as well as customary closing conditions.

On February 12, 2018, a private bank investor exercised 464,576 of the Bank’s Series A Common Stock Purchase Warrant (the “Series A Warrant”) and 14,576 of the Bank’s Series B Common Stock Purchase Warrant (the “Series B Warrant”) issued to him in connection with his $8.6 million investment in the Bank in 2016. A total of 479,152 Series A and B Warrants were exercised for shares of the Bank’s common stock, with gross proceeds to the Bank of approximately $4.5 million. Per the terms of the Series A and B Warrants, the exercise price equaled 90% of the Bank’s tangible common equity per share as of the most recent quarter-end preceding the date of exercise. The private bank investor still holds unexercised Series B Warrants for the purchase of an additional 450,000 shares of the Bank’s common stock. See Note 13—Capital Transaction for further information.

On June 15, 2017, the Bank’s common stock began trading on the OTCQX Best Market. The Bank’s common stock trades under the symbol “PTRS”.

On October 18, 2016, the Bank entered into a Securities Purchase Agreement (the “Purchase Agreement”) that raised $7.8 million in equity, net of transaction costs of $766 thousand, through the sale of 929,152 shares of the Bank’s common stock to a private bank investor. See Note 13—Capital Transaction for further information.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Bank and its subsidiaries, Bear Holdings, Inc., 410 William Street, LLC and JMC (net of noncontrolling interest). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank and its subsidiaries are together referred to as “the Bank.”

Significant Accounting Policies

The following is a description of the significant accounting policies and practices followed by the Bank, which conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and prevailing practices within the banking industry.

Use of Estimates

In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, other than temporary impairment of investment securities and the valuation of other real estate owned.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents include cash on hand, due from banks, and federal funds sold. Generally, federal funds are sold and purchased for one-day periods. The Bank is required to maintain average balances on hand or with the FRB. At December 31, 2018 and 2017, the minimum requirement was $894 thousand and $502 thousand, respectively.

Investment Securities

All of the Banks investment securities are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Gains or losses are recognized in earnings on the trade date using the specific investment security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the investment securities.

Impairment of investment securities occurs when the fair value of an investment security is less than its amortized cost. For debt investment securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Bank intends to sell the investment security or (ii) it is more likely than not that the Bank will be required to sell the investment security before recovery of its amortized cost basis. If, however, the Bank does not intend to sell the investment security and it is not more than likely that the Bank will be required to sell the investment security before recovery, management must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the investment security exceeds the present value of the cash flows expected to be collected from the investment security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment 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).

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Restricted Stock

As a requirement for membership, the Bank invests in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and the FRB. The Bank also holds stock in (i) Community Bankers Bank (“CBB”), a Virginia-based bankers bank serving member institutions in Virginia, West Virginia, North Carolina, South Carolina, Maryland and the District of Columbia and (ii) Maryland Financial Bank (“MFB”), a Maryland-based bankers bank, which is currently going through an orderly liquidation. These investments are carried at cost.

Loans

The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the Fredericksburg, Virginia area. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their recorded investment, which represents their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on all loans is discontinued at the time the loan becomes 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Held For Sale

These loans consist of loans made through the Bank’s majority owned subsidiary JMC.

JMC is engaged in the mortgage brokerage business in which JMC originates, closes, and immediately sells mortgage loans and related servicing rights to permanent investors in the secondary market. JMC has written commitments from several permanent investors (large financial institutions) and only closes loans that meet the lending requirements of the permanent investors. Loans are made in connection with the purchase or refinancing of existing and new one-to-four family residences primarily in southeastern and northern Virginia. Loans are initially funded primarily by JMC’s warehouse lines of credit. With the concurrent sale and delivery of mortgage loans to the permanent investors, JMC records receivables for mortgage loans sold and recognizes the related gains and losses on such sales. The receivables for mortgage loans sold are usually satisfied within 30 days of sale, whereupon the related borrowings on the warehouse lines of credit are repaid. Because of the short holding period, these loans are carried at the lower of cost or market and no market adjustments were deemed necessary in 2018. JMC’s agreements with its permanent investors include provisions that could require JMC to repurchase loans under certain circumstances, and also provide for the assessment of fees if loans go into default or are refinanced within specified periods of time. JMC has never been required to repurchase a loan and no allowance has been made as of December 31, 2018 for possible repurchases. Fees for early defaults and refinancing amounted to approximately $10 thousand in 2018. No provision for early default or refinancing costs is deemed necessary at December 31, 2018.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

JMC enters into commitments with its customers to originate loans where the interest rate on the loan is determined (locked) prior to funding. While this subjects JMC to the risk interest rates may change from the commitment date to the funding date, JMC simultaneously enters into financial agreements (best efforts forward sales commitments) with its permanent investors giving JMC the right to deliver (put) loans to the investors at specified yields, thus enabling JMC to manage its exposure to changes in interest rates such that JMC is not subject to fluctuations in fair values of these agreements due to changes in interest rates. However, a default by a permanent investor required to purchase loans under such an agreement would expose JMC to potential fluctuations in selling prices of loans due to changes in interest rates. The fair value of rate lock commitments and forward sales commitments was considered immaterial at December 31, 2018. Gains and losses on the sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are included in “Mortgage banking income” on the Bank’s consolidated income statement.

Purchased Credit Impaired Loans

On April 21, 2015, the Bank purchased loans totaling $12.2 million at a fair value discount of $554 thousand. The estimated fair value of the performing portfolio was $9.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20.

Certain loans, those for which specific credit-related deterioration since origination was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on reasonable expectations about the timing and amount of cash flows to be collected. All of these loans are in the commercial segment of the Bank’s loan portfolio.

The following table details the acquired loans that are accounted for in accordance with FASB ASC 310-30 as of April 21, 2015:

Because there is no initial credit valuation allowance recorded, the Bank will establish a post-acquisition allowance for loan losses which subsequently arise on the acquired loans. The Bank did not increase the allowance for loan losses during the years ended December 31, 2018 or 2017 for the purchased loans above.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

During these evaluations, particular characteristics associated with a segment of the loan portfolio are also considered. These characteristics are detailed below:

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

The allowance for loan losses consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for loan losses for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or internal risk rating data. These qualitative factors include such items as regional and national economic conditions, interest rates and unemployment rates, management’s ongoing review and grading of the loan portfolio, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, changes in lending personnel, changes in underwriting policies, concentrations of loans to specific borrowers or industries, and other qualitative and quantitative factors which could affect potential credit losses.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

The Bank uses a risk grading system for real estate (including construction, residential, non-residential and home equity loans), commercial, and consumer loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

Special Mention

Classified Grades

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). Management strives to identify borrowers in financial difficulty early and works with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include interest rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank—put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Premises and Equipment

Furniture, equipment and leasehold improvements are carried at cost less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Land is carried at cost.

Depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.

Bank Owned Life Insurance

The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than fifty percent (50%) likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Bank did not recognize any uncertain tax positions at December 31, 2018 and 2017.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Interest and penalties associated with unrecognized tax benefits, if any, are classified as additional income taxes in the statement of income.

The Bank’s results for the years ended December 31, 2018 and 2017 include the effect of the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017. Among other things, the Tax Act permanently lowered the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%, effective January 1, 2018. As a result of the federal corporate income tax rate, U.S. GAAP required companies to re-measure their deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income (loss), as of the date of the Tax Act’s enactment and record the corresponding effects in income tax expense in the fourth quarter of 2017. As a result of the permanent reduction in the corporate income tax rate, the Bank recognized a reduction in the value of its net deferred tax asset and recorded a corresponding incremental increase of $708 thousand of income tax expense in the Bank’s consolidated statement of income for the year ended December 31, 2017. The Bank’s evaluation of the effect of the Tax Act is considered a preliminary estimate and is subject to refinement for up to one year. No material adjustments were recorded during the year ended December 31, 2018.

Other Real Estate Owned

Other real estate owned consists of properties acquired through foreclosure. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These properties are initially recorded and carried at fair value less estimated costs to sell, establishing a new cost basis. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged to expense. Operating costs after acquisition are expensed. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of sale. At December 31, 2018 and 2017, the Bank did not have any other real estate owned. At December 31, 2018 and 2017, there were no residential real estate mortgages in the process of foreclosure.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs totaled $145 thousand and $132 thousand for the years ended December 31, 2018 and 2017, respectively.

Comprehensive Income

U.S. GAAP generally requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on investment securities available for sale, are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 14—Fair Value Measurements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.

Earnings Per Share

Basic earnings per common share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Bank are related solely to outstanding stock options and stock warrants, and are determined using the treasury stock method.

Stock Compensation Plan

At December 31, 2018 and 2017, the Bank had a stock compensation plan. The Bank accounts for this plan under the recognition and measurement principles of accounting guidance which requires the cost of employee services received in exchange for an award of equity instruments be recognized in the financial statements over the period the employee is required to perform services (usually the vesting period).

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Adoption of New Accounting Standards

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases.”) and ASU 2018-11 (“Leases (Topic 842): Targeted Improvements.”) Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current U.S. GAAP (Topic 840, Leases). The effect of adopting this standard on January 1, 2019 was an approximate $3.8 million increase in assets and liabilities on the Bank’s consolidated balance sheet.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available for sale debt investment securities and purchased financial assets with credit deterioration. For public companies that are not Securities and Exchange Commission (“SEC”) filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Bank is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Bank is currently working with a third party vendor that uses the discounted cash flow method and will provide vintage analysis disclosures for financial reporting. The Bank provides a database of proprietary historic portfolio data to assist the third party vendor. The Bank also participates in several professional roundtable groups to share and collect information on best practices.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Bank does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Bank is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Bank does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Bank does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

The amortized cost and fair value of investment securities available for sale as of December 31, 2018 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.

For the years ended December 31, 2018 and 2017, proceeds from sales of investment securities available for sale were $0 and $26.6 million, respectively. For the years ended December 31, 2018 and 2017, gross realized gains were $0 and $69 thousand, respectively, on the sale of investment securities available for sale. For the years ended December 31, 2018 and 2017, gross realized losses were $0 and $174 thousand, respectively, on the sale of investment securities available for sale.

The tables above provide summaries of investment securities available for sale which were in an unrealized loss position deemed not to be other-than-temporarily impaired at December 31, 2018 and 2017. The Bank had 45 investment securities available for sale with a fair value of $71.7 million that were temporarily impaired at December 31, 2018. The total unrealized loss on these investment securities available for sale was $1.8 million. Of the temporarily impaired total, 41 investment securities available for sale with a fair value of $54.6 million had an unrealized loss of $1.7 million that have been in a continuous loss position for twelve months or more. The Bank has determined that these investment securities available for sale are temporarily impaired at December 31, 2018 for the reasons set out below.

U.S. government and Federal agencies. The unrealized losses of $101 thousand on U.S. government and Federal agency investment securities stemmed from 2 investment securities with a fair value of $2.9 million. The unrealized losses were caused by interest rate and market fluctuations. The contractual term of the instrument does not permit the issuer to settle the security at a price less than the cost basis of the investment. The Bank is monitoring bond market trends to develop strategies to address unrealized losses. Because the Bank does not intend to sell the investment securities and it is not likely that the Bank will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity, the Bank does not consider the investment securities to be other-than-temporarily impaired.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 2. Investment Securities (Continued)

U.S. Government Issued Mortgage-Backed Securities. The unrealized losses of $1.3 million on U.S. Government issued mortgage-backed securities stemmed from 22 investment securities with a fair value of $43.7 million. The unrealized losses were caused by interest rate and market fluctuations. The contractual term of the instrument does not permit the issuer to settle the security at a price less than the cost basis of the investment. The Bank is monitoring bond market trends to develop strategies to address unrealized losses. Because the Bank does not intend to sell the investment securities and it is not likely that the Bank will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity, the Bank does not consider the investment securities to be other-than-temporarily impaired.

State and political subdivisions. This category exhibits unrealized losses of $246 thousand on 17 investment securities with a fair value of $8.0 million. The Bank reviewed financial statements and cash flows for the each of the investment securities in a continuous loss position for more than 12 months. The Bank’s analysis determined that the unrealized losses are primarily the result of interest rate and market fluctuations and not associated with impaired financial status. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Bank does not intend to sell any of the investment securities and it is not likely that the Bank will be required to sell any of the investment securities before recovery of their amortized cost basis, which may be at maturity, the Bank does not consider the investment securities to be other-than-temporarily impaired.

As of December 31, 2017, there were 26 investment securities available for sale with a fair value of $23.2 million and an unrealized loss of $594 thousand that have been in a continuous loss position for twelve months or more.

An impairment is considered “other-than-temporary” if any of the following conditions are met: the Bank intends to sell the investment security, it is more likely than not that the Bank will be required to sell the investment security before recovery of its amortized cost basis, or the Bank does not expect to recover the investment securities entire amortized cost (even if the Bank does not intend to sell). Based on the Bank’s evaluation, management does not believe any unrealized loss at December 31, 2018, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, and are not attributable to credit deterioration. The Bank does not intend to sell any investment security before recovery of its amortized cost basis, and the Bank expects to recover its investment securities’ entire amortized cost basis. None of the investment securities in the Bank’s investment securities portfolio are considered other-than-temporarily impaired at December 31, 2018 or 2017.

The Bank pledges investment securities available for sale to secure public deposits and to collateralize its borrowing capacity with the FRB. Investment securities available for sale with an aggregate fair value of $4.5 million and $5.0 million were pledged at December 31, 2018 and 2017, respectively.

Overdrafts totaling $8 thousand and $9 thousand at December 31, 2018 and 2017 were reclassified from deposits to loans. Net deferred loan fees included above totaled $788 thousand and $635 thousand at December 31, 2018 and 2017, respectively.

Loans held for sale consists of loans originated by JMC for sale in the secondary market. Loans held for sale as of December 31, 2018 and 2017 were $2.9 million and $0, respectively.

Included in the loans purchased during 2015 were certain loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of these loans as of December 31, 2018 and 2017 is as follows:

The Bank did not increase the allowance for loan losses during the years ended December 31, 2018 or 2017 for the purchased credit impaired loans above. No allowance for loan losses were reversed related to purchased loans during the years ended December 31, 2018 or 2017.

Information on impaired loans, excluding purchased credit impaired loans, at December 31, 2018 is included in the following table:

Information on past due and nonaccrual status loans at December 31, 2018 is included in the following table:

Information on past due and nonaccrual status loans at December 31, 2017 is included in the following table:

If interest on nonaccrual loans had been accrued, such income would have approximated $12 thousand and $4 thousand for the years ended December 31, 2018 and 2017, respectively.

VIRGINIA PARTNERS BANK AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 3. Loans and Allowance for Loan Losses (Continued)

The Bank had no TDRs as of December 31, 2018 or 2017. No loans identified as TDRs subsequently defaulted in the years ending December 31, 2018 or 2017.

When a loan is identified as a TDR, it is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on nonaccrual status at the time of restructuring.

The following is a summary of information pertaining to loans by internal risk grade as of December 31, 2018 and 2017: