UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


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

For the transition period from ___________ to ___________

Commission File Number: 001-40305

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Virginia	46-2331578
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
404 People Place
Charlottesville, Virginia	22911
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (434) 817-8621

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

VABK

The Nasdaq Capital Market

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

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

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

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of ~~November 8, 2021,~~August 10, 2022, the registrant had ~~5,308,335~~5,326,271 shares of common stock, $2.50 par value per share, outstanding.

VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS


Part I. Financial Information
Item 1 Financial Statements		Page 34
Consolidated Balance Sheets (unaudited)		Page 34
Consolidated Statements of Income (unaudited)		Page 45
Consolidated Statements of Comprehensive Income (Loss) (unaudited)		Page 56
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 67
Consolidated Statements of Cash Flows (unaudited)		Page 78
Notes to Consolidated Financial Statements (unaudited)		Page 89

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 36
Application of Critical Accounting Policies and Estimates		Page 3938
Financial Condition		Page 4038
Results of Operations		Page 4745

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 5552

Item 4 Controls and Procedures		Page 5552

Part II. Other Information
Item 1 Legal Proceedings		Page 5553
Item 1A Risk Factors		Page 5553
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 5553
Item 3 Defaults Upon Senior Securities		Page 5553
Item 4 Mine Safety Disclosures		Page 5553
Item 5 Other Information		Page 5553
Item 6 Exhibits		Page 5653

Signatures		Page 5754

Glossary of Acronyms and Defined Terms


2005 Plan	-	2005 Stock Incentive Plan
2014 Plan	-	2014 Stock Incentive Plan
2022 Plan	-	2022 Stock Incentive Plan
ACL	-	Allowance for credit losses
Acquired Loans	-	Loans acquired from Fauquier
AFS	-	Available for sale
ALLL	-	Allowance for loan and lease losses
ASC	-	Accounting Standards Codification
ASU	-	Accounting Standards Update
the Bank	-	Virginia National Bank
bps	-	Basis points
CDARS™	-	Certificates of Deposit Account Registry Service
CECL	-	Current expected credit losses
CMO	-	Collateralized mortgage obligation
the Company	-	Virginia National Bankshares Corporation and its subsidiaries
COVID-19	-	Novel coronavirus disease
EBA	-	Excess Balance Account
Effective Date	-	April 1, 2021
EPS	-	Earnings per share or net income per share
Exchange Act	-	Securities Exchange Act of 1934, as amended
Fauquier	-	Fauquier Bankshares, Inc. and its subsidiaries
FASB	-	Financial Accounting Standards Board
Federal Reserve	-	Board of Governors of the Federal Reserve System
Federal Reserve Bank or FRB	-	Federal Reserve Bank of Richmond
FFS		Federal funds sold, or fed funds sold
FHLB	-	Federal Home Loan Bank of Atlanta
Form 10-K	-	Annual Report on Form 10-K for the year ended December 31, 2021
FTE	-	Fully taxable equivalent
GAAP or U.S. GAAP	-	Accounting principles generally accepted in the United States
ICS®	-	Insured Cash Sweep®
LIBOR	-	London Interbank Offering Rate
Masonry Capital	-	Masonry Capital Management, LLC
Merger	-	Mergers of Fauquier Bankshares, Inc. and The Fauquier Bank with and into the Company and the Bank, respectively
Merger Agreement	-	Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger
NPA	-	Nonperforming assets
OCC	-	Office of the Comptroller of the Currency
OREO	-	Other real estate owned
OTTI	-	Other than temporary impairment
PCA	-	Prompt Corrective Action
PCI	-	Purchased credit impaired
PII	-	Personally identifiable information
the Plans	-	2005 Stock Incentive Plan, 2014 Stock Incentive Plan and 2022 Stock Incentive Plan
PPP	-	Paycheck Protection Program
ROAA	-	Return on Average Assets
ROAE	-	Return on Average Equity
SAB	-	Staff Accounting Bulletin
SBA	-	Small Business Administration
SEC	-	U.S. Securities and Exchange Commission
Securities Act	-	Securities Act of 1933, as amended
Sturman Wealth	-	Sturman Wealth Advisors
TDR	-	Troubled debt restructuring
TFB	-	The Fauquier Bank
VNBTrust	-	VNBTrust, National Association

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	September 30, 2021			December 31, 2020*			June 30, 2022			December 31, 2021 *
ASSETS	(Unaudited)						Unaudited
Cash and due from banks	$	18,919		$	8,116		$	17,631		$	20,345
Interest-bearing deposits in other banks		254,194			—			145,217			336,032
Federal funds sold		152,417			26,579			52,819			152,463
Securities:
Available for sale, at fair value		277,046			174,086			461,830			303,817
Restricted securities, at cost		2,610			3,010			5,138			4,950
Total securities		279,656			177,096			466,968			308,767
Loans		1,112,450			609,406
Loans, net of deferred fees and costs								960,192			1,061,211
Allowance for loan losses		(5,623	)		(5,455	)		(5,503	)		(5,984	)
Loans, net		1,106,827			603,951			954,689			1,055,227
Premises and equipment, net		25,239			5,238			19,193			25,093
Bank owned life insurance		31,033			16,849			38,046			31,234
Goodwill		8,898			372			8,140			8,140
Core deposit intangible, net		7,855			—			7,405			8,271
Other intangible assets, net		290			341			240			274
Other real estate, net		611			—
Other real estate owned, net								-			611
Right of use asset, net		7,970			3,527			7,343			7,583
Accrued interest receivable and other assets		17,916			6,341			27,249			18,144
Total assets	$	1,911,825		$	848,410		$	1,744,940		$	1,972,184
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	504,696		$	209,772		$	512,889		$	522,281
Interest-bearing		424,642			148,910			399,930			446,314
Money market and savings deposit accounts		642,788			272,980			535,958			665,530
Certificates of deposit and other time deposits		165,057			99,102			150,121			162,045
Total deposits		1,737,183			730,764			1,598,898			1,796,170
Advances from the FHLB		—			30,000
Junior subordinated debt		3,356			—
Junior subordinated debt, net								3,390			3,367
Lease liability		7,463			3,589			6,925			7,108
Accrued interest payable and other liabilities		3,913			1,459			1,511			3,552
Total liabilities		1,751,915			765,812			1,610,724			1,810,197

Commitments and contingent liabilities
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, 0 shares outstanding		—			—
Common stock, $2.50 par value, 10,000,000 shares authorized; 5,307,235 shares issued and outstanding as of September 30, 2021 (includes 35,911 nonvested), and 2,714,273 shares issued and outstanding as of December 31, 2020 (includes 25,268 nonvested)		13,178			6,722
Preferred stock, $2.50 par value								-			-
Common stock, $2.50 par value								13,201			13,178
Capital surplus		104,446			32,457			104,858			104,584
Retained earnings		42,746			41,959			53,852			46,436
Accumulated other comprehensive income (loss)		(460	)		1,460
Accumulated other comprehensive loss								(37,695	)		(2,211	)
Total shareholders' equity		159,910			82,598			134,216			161,987
Total liabilities and shareholders' equity	$	1,911,825		$	848,410		$	1,744,940		$	1,972,184
Common shares outstanding								5,326,271			5,308,335
Common shares authorized								10,000,000			10,000,000
Preferred shares outstanding								0			0
Preferred shares authorized								2,000,000			2,000,000

* Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	For the three months ended					For the nine months ended					For the three months ended						For the six months ended
	September 30, 2021			September 30, 2020		September 30, 2021			September 30, 2020		June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Interest and dividend income:
Loans, including fees	$	12,957		$	6,175	$	31,904		$	18,202	$	10,610		$	13,009		$	21,379		$	18,947
Federal funds sold		45			3		78			98		302			21			363			33
Other interest-bearing accounts		55			-		94			-
Other interest-bearing deposits												219			39			355			39
Investment securities:
Taxable		742			412		2,006			1,150		1,662			757			2,674			1,264
Tax exempt		280			159		729			326		308			273			612			449
Dividends		55			22		121			70		64			32			126			66
Total interest and dividend income		14,134			6,771		34,932			19,846		13,165			14,131			25,509			20,798

Interest expense:
Demand and savings deposits		673			383		1,598			1,468		498			548			1,174			925
Certificates and other time deposits		282			306		886			1,166		157			324			352			604
Borrowings		(325	)		35		(181	)		35		49			108			97			144
Total interest expense		630			724		2,303			2,669		704			980			1,623			1,673
Net interest income		13,504			6,047		32,629			17,177		12,461			13,151			23,886			19,125
Provision for loan losses		267			224		477			1,367
Net interest income after provision for loan losses		13,237			5,823		32,152			15,810
Provision for (recovery of) loan losses												(217	)		(141	)		(69	)		210
Net interest income after provision for (recovery of) loan losses												12,678			13,292			23,955			18,915

Noninterest income:
Wealth management fees		744			263		2,053			801		572			980			1,129			1,309
Advisory and brokerage income		358			175		908			516		210			359			426			550
Deposit account fees		396			162		982			484		458			426			923			586
Debit/credit card and ATM fees		808			144		1,561			435		779			599			1,486			753
Earnings/increase in value of bank owned life insurance		201			111		507			327
Gains on sales of securities		-			91		-			734
Loan swap fee income		24			344		59			977
Bank owned life insurance income												246			199			457			306
Resolution of commercial dispute												-			-			2,400			-
Gains on sale of assets												1,113			-			1,113			27
Other		947			135		1,367			446		268			357			499			428
Total noninterest income		3,478			1,425		7,437			4,720		3,646			2,920			8,433			3,959

Noninterest expense:
Salaries and employee benefits		4,562			2,322		11,705			7,004		4,086			4,741			8,817			7,143
Net occupancy		1,039			501		2,643			1,405		1,282			1,109			2,479			1,604
Equipment		205			134		661			401		254			340			537			456
ATM, debt and credit card		212			46		589			140
Bank franchise tax		320			161		922			487		304			429			608			602
Computer software		361			159		744			435		357			216			620			383
Data processing		1,114			302		2,397			968		699			994			1,437			1,283
FDIC deposit insurance assessment		349			61		594			89		125			182			351			245
Marketing, advertising and promotion		337			55		706			334		259			232			526			369
Merger and merger related expenses		1,935			549		8,087			549
Merger and merger-related expenses												-			5,874			-			6,152
Plastics expense												92			73			231			115
Professional fees		186			-		873			376		404			510			741			687
Core deposit intangible amortization		417			-		845			-		427			428			866			428
Other		1,787			645		2,832			1,694		1,153			865			2,324			1,307
Total noninterest expense		12,824			4,935		33,598			13,882		9,442			15,993			19,537			20,774

Income before income taxes		3,891			2,313		5,991			6,648		6,882			219			12,851			2,100
Provision for income taxes		753			443		1,201			1,286		1,197			72			2,242			448
Net income	$	3,138		$	1,870	$	4,790		$	5,362	$	5,685		$	147		$	10,609		$	1,652
Net income per common share, basic	$	0.59		$	0.69	$	1.08		$	1.98	$	1.07		$	0.03		$	1.99		$	0.41
Net income per common share, diluted	$	0.59		$	0.69	$	1.07		$	1.98	$	1.06		$	0.03		$	1.98		$	0.41
Weighted average common shares outstanding, basic												5,326,271			5,305,277			5,319,166			4,019,700
Weighted average common shares outstanding, diluted												5,347,008			5,320,290			5,345,242			4,031,301

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

For the three months ended

For the nine months ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Net income

$
3,138

$
1,870

$
4,790

$
5,362

Other comprehensive income (loss):

Unrealized gains (losses) on securities, net of tax of ($94) and ($488) for the three and nine months ended September 30, 2021; and net of tax of $81 and $484 for the three and nine months ended September 30, 2020, respectively

(352
)

309

(1,836
)

1,823

Reclassification adjustment for realized gains on sales of securities, net of tax of ($0) and ($0) for the three and nine months ended September 30, 2021; and net of tax of ($18) and ($154) for the three and nine months ended September 30, 2020, respectively

—

(73
)

—

(580
)
Unrealized gains (losses) on interest rate swaps, net of tax of $7 and ($22) for the three and nine months ended September 30, 2021; and net of tax of $0 and $0 for the three and nine months ended September 30, 2020, respectively

27

—

(84
)

—

Total other comprehensive income (loss)

(325
)

237

(1,920
)

1,243

Total comprehensive income

$
2,813

$
2,107

$
2,870

$
6,605


	For the three months ended						For the six months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net income	$	5,685		$	147		$	10,609		$	1,652
Other comprehensive income (loss):
Unrealized gains (losses) on securities, net of tax of ($4,308) and ($9,536) for the three and six months ended June 30, 2022; and net of tax of $506 and ($394) for the three and six months ended June 30, 2021, respectively		(16,214	)		1,903			(35,879	)		(1,484	)
Unrealized gains (losses) on interest rate swaps, net of tax of $42 and $104 for the three and six months ended June 30, 2022; and net of tax of ($30) and ($30) for the three and six months ended June 30, 2021, respectively		160			(111	)		395			(111	)
Total other comprehensive income (loss)		(16,054	)		1,792			(35,484	)		(1,595	)
Total comprehensive income (loss)	$	(10,369	)	$	1,939		$	(24,875	)	$	57

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 AND ~~2020~~2021

(Dollars in thousands, except per share data)

(Unaudited)


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2019	$	6,720	$	32,195		$	37,235		$	(43	)	$	76,107
Stock option expense		-		24			-			-			24
Restricted stock grant expense		-		15			-			-			15
Cash dividends declared ($0.30 per share)		-		-			(811	)		-			(811	)
Net income		-		-			1,404			-			1,404
Other comprehensive loss		-		-			-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234		$	37,828		$	(491	)	$	76,291
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		39			-			-			39
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			2,088			-			2,088
Other comprehensive income		-		-			-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307		$	39,102		$	963		$	79,092
Stock option expense		-		30			-			-			30
Restricted stock grant expense		-		42			-			-			42
Vested stock grants		2		(2	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,870			-			1,870
Other comprehensive income		-		-			-			237			237
Balance, September 30, 2020	$	6,722	$	32,377		$	40,158		$	1,200		$	80,457
															Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598		$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Exercise of stock options		1		14			-			-			15			1		14			-			-			15
Stock option expense		-		34			-			-			34			-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61			-		61			-			-			61
Vested stock grants		7		(7	)		-			-			-			7		(7	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)		-		-			(814	)		-			(814	)
Net income		-		-			1,505			-			1,505			-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			(3,387	)		(3,387	)		-		-			-			(3,387	)		(3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012		$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036			6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15			2		13			-			-			15
Stock option expense		-		31			-			-			31			-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165			-		165			-			-			165
Vested stock grants		16		(16	)		-			-			-			16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			147			-			147			-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792			-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602		$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602

Balance, December 31, 2021															$	13,178	$	104,584		$	46,436		$	(2,211	)	$	161,987
Stock option expense		-		31			-			-			31			-		41			-			-			41
Restricted stock grant expense		-		57			-			-			57			-		93			-			-			93
Vested stock grants		2		(2	)		-			-			-			12		(12	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,593	)		-			(1,593	)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			3,138			-			3,138			-		-			4,924			-			4,924
Other comprehensive loss		-		-			-			(325	)		(325	)		-		-			-			(19,430	)		(19,430	)
Balance, September 30, 2021	$	13,178	$	104,446		$	42,746		$	(460	)	$	159,910
Balance, March 31, 2022															$	13,190	$	104,706		$	49,764		$	(21,641	)	$	146,019
Stock option expense																-		42			-			-			42
Restricted stock grant expense																-		121			-			-			121
Vested stock grants																11		(11	)		-			-			-
Cash dividends declared ($0.30 per share)																-		-			(1,597	)		-			(1,597	)
Net income																-		-			5,685			-			5,685
Other comprehensive loss																-		-			-			(16,054	)		(16,054	)
Balance, June 30, 2022															$	13,201	$	104,858		$	53,852		$	(37,695	)	$	134,216

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~dollars~~Dollars in thousands)

(Unaudited)


	For the nine months ended						For the six months ended
	September 30, 2021			September 30, 2020			June 30, 2022			June 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,790		$	5,362		$	10,609		$	1,652
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		477			1,367
Provision for (recovery of) loan losses								(69	)		210
Net accretion of certain acquisition-related adjustments		(2,474	)		-			(1,023	)		(804	)
Amortization of intangible assets		896			74			900			462
Net amortization and accretion of securities		1,100			471			539			661
Net gains on sale of securities		-			(734	)
Net gains on sale of other assets		(65	)		-			(1,113	)		—
Earnings on bank owned life insurance		(507	)		(327	)		(457	)		(306	)
Deferred tax		25			-
Depreciation and other amortization		2,173			1,395			1,921			1,406
Stock option expense		96			88			83			65
Stock grant expense, restricted		283			96			214			226
Net change in:
Accrued interest receivable and other assets		(1,577	)		(1,117	)		94			(1,914	)
Accrued interest payable and other liabilities		1,882			(19	)		(2,032	)		2,808
Net cash provided by operating activities		7,099			6,656			9,666			4,466

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares		153,278			-			—			153,278
Net decrease (increase) in restricted investments		2,019			(1,753	)
Net (increase) decrease in restricted investments								(188	)		358
Purchases of available for sale securities		(36,127	)		(122,372	)		(216,525	)		(15,217	)
Proceeds from maturities, calls and principal payments of available for sale securities		22,876			34,821			12,558			12,923
Proceeds from sales of available for sale securities		—			62,184
Net decrease (increase) in loans		95,117			(97,644	)
Proceeds from sale of loans		6,126			—
Cash payment for wealth management book of business		-			(50	)
Net decrease in loans								101,621			46,452
Purchase of bank owned life insurance								(6,355	)		—
Proceeds from sale of premises and equipment		34			—			6,207			—
Proceeds from sale of other real estate owned								610			—
Purchase of bank premises and equipment		(1,055	)		(132	)		(334	)		(818	)
Net cash provided by (used in) investing activities		242,268			(124,946	)
Net cash (used in) provided by investing activities								(102,406	)		196,976

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and money market accounts		192,565			84,493
Net decrease in certificates of deposit and other time deposits		(3,728	)		(11,183	)
Net increase (decrease) in other borrowings		(42,582	)		40,000
Net (decrease) increase in demand deposits, interest checking accounts, and money market accounts								(185,348	)		78,892
Net (decrease) increase in certificates of deposit and other time deposits								(11,892	)		2,167
Net decrease in other borrowings								-			(23	)
Proceeds from stock options exercised		30			-			-			30
Cash dividends paid		(4,817	)		(2,433	)		(3,193	)		(3,224	)
Net cash provided by financing activities		141,468			110,877
NET INCREASE IN CASH AND CASH EQUIVALENTS	$	390,835		$	(7,413	)
Net cash (used in) provided by financing activities								(200,433	)		77,842
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS							$	(293,173	)	$	279,284

CASH AND CASH EQUIVALENTS:
Beginning of period	$	34,695		$	19,085		$	508,840		$	34,695
End of period	$	425,530		$	11,672		$	215,667		$	313,979

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest	$	2,289		$	2,788
Cash payments for taxes	$	1,042		$	1,991
Cash payments for:
Interest							$	1,664		$	1,611
Taxes							$	1,500		$	1,042

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized (losses) gains on available for sale securities	$	(2,324	)	$	1,573
Unrealized (losses) gains on interest rate swaps	$	(106	)	$	—
Unrealized losses on available for sale securities							$	(45,415	)	$	(1,878	)
Unrealized gains (losses) on interest rate swaps							$	499		$	(141	)
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	—		$	711		$	540		$	—
Assets acquired in business combination	$	909,736		$	—		$	—		$	910,494
Liabilities assumed in business combination	$	840,226		$	—		$	—		$	840,226
Change in goodwill	$	8,526		$	—		$	—		$	7,768

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~September~~June 30, ~~2021~~2022

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”)~~ for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021.

Business Combination: On April 1, 2021, Virginia National Bankshares Corporation ~~(the “Company”)~~ completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations.

Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries Virginia National Bank ~~(the “Bank”)~~ and Masonry Capital Management, LLC, ~~(“Masonry Capital”),~~ a registered investment advisor. The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services and, in 2021, of TFB Trust and Investment Management. The Bank also offers, through its networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors and, in 2021, TFB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation: The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ~~allowance for loan losses,~~ALLL, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022.

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

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.

Smaller reporting companies, like the Company, who file with the U.S. Securities and Exchange Commission ~~(“SEC”), such as the Company,~~(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. The amendments of Topic 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption.

The Company ~~is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed~~established a cross-functional steering committee ~~including some members~~in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of ~~senior management, to provide governance~~evaluating appropriate portfolio segmentation and ~~guidance over~~modeling methods under the ~~project plan.~~standard. The Company has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under Topic 326. The Company has also engaged a vendor to assist in modeling expected lifetime losses under Topic 326, and is ~~capturing the additional loan data which is anticipated~~continuing to be needed for this calculation. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time.

~~Upon~~develop and refine an approach to estimating the Allowance for Credit Losses (ACL). The adoption ~~the impact~~of Topic 326 may result in significant changes to the ~~allowance for credit losses (currently allowance for loan losses)~~Company’s consolidated financial statements, which may include changes in the level of the ACL that will ~~have~~be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the ACL and expanded disclosures about the ACL. The Company has not yet determined an ~~offsetting one-time cumulative-effect adjustment~~estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to ~~retained earnings.~~the ACL.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ~~(“SAB”)~~ 119. SAB 119 updated portions of SEC interpretative guidance to align with ~~FASB Accounting Standards Codification (“ASC”)~~Topic 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

LIBOR and Other Reference Rates In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the ~~London Inter-bank Offered Rate (“LIBOR”)~~LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified all loans that are directly or indirectly impacted by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

~~Presentation of Financial Statements~~TDRs and Vintage Disclosures In ~~August 2021,~~March 2022, the FASB issued ASU ~~2021-06, “'Presentation of Financial Statements~~No. 2022-02, “Financial Instruments-Credit Losses (Topic ~~205)~~326), ~~Financial Services—Depository~~Troubled Debt Restructurings and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. ThisVintage Disclosures.” ASU ~~incorporates recent SEC rule changes into~~2022-02 addresses areas identified by the FASB ~~Codification, including SEC Final Rule Releases No. 33-10786, Amendments~~as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to ~~Financial Disclosures about Acquired~~disclose current-period gross write-offs for financing receivables and ~~Disposed Businesses,~~net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and ~~No. 33-10835, Update~~measurement of ~~Statistical Disclosures for Bank and Savings and Loan Registrants”. The~~TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective ~~upon addition~~for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the ~~FASB Codification.~~amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company ~~does not expect~~is currently assessing the ~~adoption of~~impact that ASU ~~2021-06 to~~2022-02 will have ~~a material impact~~ on its consolidated financial statements.

~~Recently Adopted Accounting Developments~~

~~CARES Act~~ In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and treatment of certain loan modifications related to the COVID-19 pandemic. The adoption of the CARES Act had no material impact on the Company’s consolidated financial statements. See further discussion of PPP loans and loan modifications in Notes 4 and 5 of the notes to the Consolidated Financial Statements.

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

910

Note 2. Business Combinations

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

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

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

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

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


	As Recorded					As Recorded
	by Fauquier		Fair Value			by Virginia National		As Recorded					As Recorded
	Bankshares, Inc.		Adjustment			Bankshares		by Fauquier		Fair Value			by Virginia National
								Bankshares, Inc.		Adjustment			Bankshares
Assets:
Cash and cash equivalents	$	153,282	$	-		$	153,282	$	153,282	$	-		$	153,282
Securities available for sale		93,133		-			93,133		93,133		-			93,133
Restricted securities									1,619		-			1,619
Loans, net		615,766		(13,123	)		602,643		615,766		(13,123	)		602,643
Premises and equipment		16,276		3,872			20,148		16,276		3,872			20,148
Other real estate owned		1,356		(745	)		611		1,356		(745	)		611
Bank-owned life insurance		13,677		-			13,677		13,677		-			13,677
Right-of-use assets		4,355		1,077			5,432		4,355		1,077			5,432
Core deposit intangible		-		8,700			8,700		-		9,660			9,660
Other assets		12,917		(807	)		12,110		11,298		(1,009	)		10,289
Total assets acquired	$	910,762	$	(1,026	)	$	909,736	$	910,762	$	(268	)	$	910,494

Liabilities:
Deposits		817,499		191			817,690		817,499		191			817,690
Short-term borrowings		12,582		473			13,055		12,582		473			13,055
Junior subordinated debt		4,124		(790	)		3,334		4,124		(790	)		3,334
Lease liability		4,440		352			4,792		4,440		352			4,792
Other liabilities		1,355		-			1,355		1,355		-			1,355
Total liabilities assumed	$	840,000	$	226		$	840,226	$	840,000	$	226		$	840,226
Net assets acquired						$	69,510						$	70,268
Total consideration paid							78,036							78,036
Goodwill						$	8,526						$	7,768

In connection with the Merger, the Company recorded approximately $~~8.5~~7.8 million of goodwill and $~~8.7~~9.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset ~~(“CDI”)~~ will be amortized over a period of seven years using the sum of years digits method.

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

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

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


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

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

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

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

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

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

Other real estate owned: Other real estate owned was recorded at fair value based on an existing purchase contract, less estimated selling costs. (Note that the OREO was sold during the second quarter of 2022.)

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

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

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $~~8.7~~9.7 million or ~~1.2~~1.3% of non-maturity deposits.

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

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

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

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

12There were

~~Merger~~merger and ~~merger related~~merger-related expenses ~~were~~incurred during the three and six months ended June 30, 2022 and $~~1.9~~5.9 million ($~~1.5~~ ~~million after taxes) for the three months ended September 30, 2021~~ and $~~8.1~~ ~~million ($~~6.2 million after taxes) for the nine months ended September 30, 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments, severance and stay-put bonuses and legal and consulting expenses, which have been expensed as incurred. $~~549~~ ~~thousand ($324~~ ~~thousand after taxes) of merger and merger related expenses were recognized~~incurred during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~ 2021, respectively, primarily consisting of personnel and legal expenses.

Note 3. Securities

The amortized cost and fair values of securities available for sale as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows (dollars in thousands):


September 30, 2021			Gross		Gross
June 30, 2022												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government treasuries										$	162,019	$	-	$	(1,010	)	$	161,009
U.S. Government agencies	$	33,014	$	54	$	(530	)	$	32,538		35,313		-		(4,781	)		30,532
Mortgage-backed securities/CMOs		146,409		655		(1,066	)		145,998		197,121		19		(21,177	)		175,962
Corporate bonds											11,483		4		(334	)		11,154
Municipal bonds		98,099		1,244		(833	)		98,510		104,027		7		(20,861	)		83,173
Total Securities Available for Sale	$	277,522	$	1,953	$	(2,429	)	$	277,046	$	509,963	$	30	$	(48,163	)	$	461,830


December 31, 2020			Gross		Gross
December 31, 2021												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	25,496	$	7	$	(198	)	$	25,305	$	32,424	$	24	$	(867	)	$	31,581
Mortgage-backed securities/CMOs		77,438		844		(182	)		78,100		172,975		248		(2,259	)		170,964
Municipal bonds		69,303		1,499		(121	)		70,681		101,136		1,162		(1,026	)		101,272
Total Securities Available for Sale	$	172,237	$	2,350	$	(501	)	$	174,086	$	306,535	$	1,434	$	(4,152	)	$	303,817

As of ~~September~~June 30, ~~2021,~~2022, there were $~~160.3~~455.5 million, or ~~104~~278 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $~~2.4~~48.2 million and ~~consisted~~consist of 53117 mortgage-backed/collateralized mortgage obligations, ~~(“CMOs”),~~ 35124 municipal bonds, ~~and~~ 1620 agency bonds, 11 treasury bonds and 6 corporate bonds.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position at ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020~~2021 (dollars in thousands):


September 30, 2021
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Less than 12 Months					12 Months or More					Total
June 30, 2022																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
																Value		Losses			Value		Losses			Value		Losses
U.S. Government treasuries																$	161,009	$	(1,010	)	$	—	$	—		$	161,009	$	(1,010	)
U.S. Government agencies	$	18,067	$	(319	)	$	9,539	$	(211	)	$	27,606	$	(530	)		11,960		(1,207	)		18,572		(3,574	)		30,532		(4,781	)
Mortgage-backed/CMOs		86,639		(1,043	)		1,198		(23	)		87,837		(1,066	)		133,182		(15,276	)		39,881		(5,901	)		173,063		(21,177	)
Corporate bonds																	9,152		(334	)		—		—			9,152		(334	)
Municipal bonds		37,700		(658	)		7,202		(175	)		44,902		(833	)		67,453		(16,097	)		14,277		(4,764	)		81,730		(20,861	)
	$	142,406	$	(2,020	)	$	17,939	$	(409	)	$	160,345	$	(2,429	)	$	382,756	$	(33,924	)	$	72,730	$	(14,239	)	$	455,486	$	(48,163	)


December 31, 2020
	Less than 12 Months					12 Months or more				Total
			Unrealized					Unrealized				Unrealized
															Less than 12 Months					12 Months or More					Total
December 31, 2021															Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	19,298	$	(198	)	$	—	$	—	$	19,298	$	(198	)	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)
Mortgage-backed/CMOs		24,523		(182	)		—		—		24,523		(182	)		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)
Municipal bonds		21,501		(121	)		—		—		21,501		(121	)		40,352		(722	)		10,409		(304	)		50,761		(1,026	)
	$	65,322	$	(501	)	$	—	$	—	$	65,322	$	(501	)	$	186,671	$	(2,797	)	$	40,821	$	(1,355	)	$	227,492	$	(4,152	)

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

any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of ~~September~~June 30, ~~2021,~~2022, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” ~~(“OTTI”)~~ is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of ~~September~~June 30, ~~2021,~~2022, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $~~12.8~~5.4 million at ~~September~~June 30, ~~2021~~2022 were pledged as collateral to secure deposits ~~and for other purposes~~ and facilitate borrowing from the Federal Reserve Bank of ~~Richmond (“FRB”).~~Richmond. At December 31, ~~2020,~~2021, securities having carrying values of $~~6.0~~12.7 million were similarly pledged.

For the three and ~~nine~~six months ended ~~September~~June 30, 2022 and June 30, 2021, there were 0 sales of securities. ~~For the three months ended September 30, 2020, proceeds from the sales of securities amounted to $16.1~~ ~~million, with realized gains of $234~~ ~~thousand and realized losses of $143~~ ~~thousand. For the nine months ended September 30, 2020, proceeds from the sales of securities amounted to $62.2~~ ~~million, with realized gains of $881~~ ~~thousand and realized losses of $147~~ ~~thousand.~~

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta, ~~(“FHLB”),~~ CBB Financial Corporation ~~the~~(the holding company for Community Bankers ~~Bank,~~Bank) and an investment in an SBA loan fund. These restricted securities, totaling $~~2.6~~5.1 million and $~~3.0~~5.0 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, are carried at cost.

The amortized cost and fair value of AFS debt securities at June 30, 2022 are presented below based upon contractual maturities, by major investment categories (dollars in thousands). Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.


	Amortized Cost		Fair Value
U.S. Government treasuries
One year or less	$	69,543	$	69,071
After one year to five years		92,476		91,938
	$	162,019	$	161,009
U.S. Government agencies
After one year to five years	$	649	$	584
After five years to ten years		28,664		25,088
Ten years or more		6,000		4,860
	$	35,313	$	30,532
Mortgage-backed securities/CMOs
After one year to five years	$	11,389	$	10,897
After five years to ten years		3,211		2,971
Ten years or more		182,521		162,094
	$	197,121	$	175,962
Corporate bonds
After one year to five years	$	5,848	$	5,798
After five years to ten years		5,635		5,356
	$	11,483	$	11,154
Municipal bonds
One year or less	$	502	$	502
After one year to five years		610		601
After five years to ten years		17,259		16,039
Ten years or more		85,656		66,031
	$	104,027	$	83,173

Total Debt Securities Available for Sale	$	509,963	$	461,830

Note 4. Loans

The composition of the loan portfolio by major loan classifications at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 appears below (dollars in thousands).


	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Commercial	$	119,959		$	118,688		$	77,599		$	96,696
Real estate construction and land		92,082			22,509			55,140			79,331
1-4 family residential mortgages		372,474			132,966			329,920			358,148
Commercial mortgages		464,866			277,109			446,282			473,632
Consumer		63,069			58,134			51,251			53,404
Total loans		1,112,450			609,406			960,192			1,061,211
Less: Allowance for loan losses		(5,623	)		(5,455	)		(5,503	)		(5,984	)
Net loans	$	1,106,827		$	603,951		$	954,689		$	1,055,227

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company and Fauquier, prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $207.5 million of ~~Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)~~SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of ~~September~~June 30, ~~2021,~~2022, the Company had PPP loans of $~~36.7~~1.9 million outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs ~~(fees) on PPP loans~~ and ~~loans purchased prior to the Merger.~~fees. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, unamortized premiums on loans purchased prior to the Merger were $~~1.2~~811 ~~million~~thousand and $~~1.8~~1.1 million, respectively. Net deferred loan ~~costs (fees)~~fees totaled $($~~1.1~~504~~) million~~ thousand and $($~~931~~865) thousand as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The deferred fees ~~increased~~include $~~184~~46 thousand ~~due to the~~in remaining fees collected from the SBA for the ~~additional~~ PPP loans ~~funded during the nine months ended September 30, 2021. Net deferred fees on PPP loans and loans purchased prior to the~~

~~Merger~~that are being amortized over the contractual life of the underlying ~~loans.~~loans, most which are over a 60-month period. As loans are forgiven by the SBA, accounting principles allow for the accelerated recognition of unamortized fees at that time.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The table above includes a net fair value mark of $12.3 million on the purchased impaired loans and $~~7.1~~5.3 million on the purchased performing loans as of ~~September~~June 30, ~~2021~~2022 on the Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

The outstanding principal balance and the carrying amount at ~~September~~June 30, ~~2021~~2022 on these Acquired Loans were as ~~follows:~~follows (dollars in thousands):


	September 30, 2021						June 30, 2022						December 31, 2021
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	80,308	$	424,070	$	504,378	$	56,178	$	315,349	$	371,527	$	76,608	$	372,172	$	448,780
Carrying amount:
Commercial	$	1,775	$	41,551	$	43,326	$	702	$	16,273	$	16,975	$	994	$	28,065	$	29,059
Real estate construction and land		24,148		29,404		53,552		6,539		9,133		15,672		18,576		14,297		32,873
1-4 family residential mortgages		17,757		205,724		223,481		11,900		173,134		185,034		16,020		194,708		210,728
Commercial mortgages		24,214		136,949		161,163		24,694		109,880		134,574		28,675		126,638		155,313
Consumer		150		3,379		3,529		91		1,678		1,769		118		2,224		2,342
Total acquired loans	$	68,044	$	417,007	$	485,051	$	43,926	$	310,098	$	354,024	$	64,383	$	365,932	$	430,315

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


	Three months ended			Nine months ended
	September 30, 2021			September 30, 2021			Three Months Ended June 30,						Six Months Ended June 30,
							2022			2021			2022			2021
Accretable yield, beginning of period	$	14,641		$	—		$	12,428		$	—		$	13,742		$	—
Additions		—			15,499			—			15,499			—			15,499
Accretion		(773	)		(1,631	)		(761	)		(858	)		(1,500	)		(858	)
Reclassification from (to) nonaccretable difference								—			—			2,193			—
Other changes, net								—			—			(2,768	)		—
Accretable yield, end of period	$	13,868		$	13,868		$	11,667		$	14,641		$	11,667		$	14,641

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

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding Acquired Loans, ~~that are not impaired,~~ as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 or the twelve months ended December 31, ~~2020.~~2021. Interest income recognized is for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 or the twelve months ended December 31, ~~2020~~2021 (dollars in thousands).


June 30, 2022	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
1-4 family residential mortgages	$	604	$	626	$	-	$	613	$	2
Total impaired loans without a valuation allowance		604		626		-		613		2

Impaired loans with a valuation allowance
Consumer		835		835		9		840		26
Total impaired loans with a valuation allowance		835		835		9		840		26
Total impaired loans	$	1,439	$	1,461	$	9	$	1,453	$	28


December 31, 2021	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Real estate construction and land	$	-	$	37	$	-	$	2	$	-
1-4 family residential mortgages		594		600		-		269		24
Total impaired loans without a valuation allowance		594		637		-		271		24

Impaired loans with a valuation allowance
Consumer		935		935		6		974		54
Total impaired loans with a valuation allowance		935		935		6		974		54
Total impaired loans	$	1,529	$	1,572	$	6	$	1,245	$	78

September 30, 2021

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

Impaired loans without a valuation allowance:

Real estate construction and land

$
—

$
40

$
-

$
2

$
-

1-4 family residential mortgages

602

602

-

160

23

Total impaired loans without a valuation
allowance

602

642

-

162

23

Impaired loans with a valuation allowance

Consumer

952

952

5

987

41

Total impaired loans with a valuation
allowance

952

952

5

987

41

Total impaired loans

$
1,554

$
1,594

$
5

$
1,149

$
64

December 31, 2020

Recorded
Investment

Unpaid
Principal
Balance

Associated
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

Impaired loans without a valuation allowance:

Real estate construction and land

$
8

$
55

$
-

$
97

$
-

1-4 family residential mortgages

109

109

-

113

6

Commercial real estate

-

-

-

781

48

Total impaired loans without a valuation
allowance

117

164

-

991

54

Impaired loans with a valuation allowance

Consumer

1,156

1,156

4

1,145

70

Total impaired loans with a valuation
allowance

1,156

1,156

4

1,145

70

Total impaired loans

$
1,273

$
1,320

$
4

$
2,136

$
124

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


	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Real estate construction and land	$	—	$	8
1-4 family residential mortgages		777		—	$	511	$	495
Total non-accrual loans	$	777	$	8	$	511	$	495

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

In accordance with regulatory guidance, the Company approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. ~~Loan~~COVID-19 related loan deferrals declined to0 as of June 30, 2022, from $1.2 million as of ~~September 30,~~December 31, 2021 ~~from~~and $~~9.4~~2.0 million as of ~~September~~June 30, ~~2020. Only~~ 2021.3 ~~loans remain in deferral status as of September 30, 2021, and only $~~28 ~~thousand of this balance is not government guaranteed.~~

Based on regulatory guidance on student lending, the Company has classified 5756 of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $~~952~~835 thousand as of ~~September~~June 30, ~~2021. (Note that this excludes the student loans acquired from Fauquier that were~~ 98~~% guaranteed by the U. S. Government (the “Acquired Student Loans”),~~ 97~~% of which were sold to a third party during the three months ended September 30, 2021.)~~2022. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. ~~Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated~~Management evaluates these loans individually for impairment and ~~included~~includes any expected loss in the ~~allowance for loan losses;~~ALLL; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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


Troubled debt restructurings	September 30, 2021				December 31, 2020				June 30, 2022				December 31, 2021
	No. of		Recorded		No. of		Recorded		No. of		Recorded		No. of		Recorded
	Loans		Investment		Loans		Investment		Loans		Investment		Loans		Investment
Performing TDRs
1-4 family residential mortgages		1	$	101		1	$	109		1	$	93		1	$	99
Consumer		53		828		75		1,156		56		835		58		935
Total performing TDRs		54	$	929		76	$	1,265		57	$	928		59	$	1,034

Nonperforming TDRs
Real estate construction and land development		0	$	-		1	$	8
1-4 family residential mortgages		1		501		0		—		2		511		1		495
Consumer		4		124		0		—
Total nonperforming TDRs		5	$	625		1	$	8		2	$	511		1	$	495
Total TDRs		59	$	1,554		77	$	1,273		59	$	1,439		60	$	1,529

17NaN

loans were modified under the terms of a TDR during the three months ended June 30, 2022 or 2021.

A summary of loans shown above that were modified under the terms of a TDR during the ~~three and nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.


	For the six months ended						For the six months ended
	June 30, 2022						June 30, 2021
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance

Consumer	--		$	—	$	—		6	$	63	$	63
1-4 family residential mortgages		1		54		54	--			—		—
Total loans modified during the period		1	$	54	$	54		6	$	63	$	63

For the three months ended

For the three months ended

September 30, 2021

September 30, 2020

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Consumer

0

$
—

$
—

9

$
119

$
119

1-4 family residential mortgages

1

501

501

0

—

—

Total loans modified
during the period

1

$
501

$
501

9

$
119

$
119

For the nine months ended

For the nine months ended

September 30, 2021

September 30, 2020

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Consumer

6

$
63

$
63

15

$
168

$
168

1-4 family residential mortgages

1

501

501

0

—

—

Total loans modified
during the period

7

$
564

$
564

15

$
168

$
168

During the ~~nine~~three and six months ended ~~September~~June 30, ~~2021,~~2022, there were 3no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. ~~These student loans had balances of $~~22 ~~thousand prior to being charged off.~~ There were 5 loans modified as a TDR that subsequently defaulted during the year ended December 31, ~~2020~~2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $4856 thousand prior to being charged off.

There were 0 loans secured by 1-4 family residential property that were in the process of foreclosure at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

Note 5. Allowance for Loan Losses

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

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

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

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

•

All pools with a risk classification of excellent or good, as noted in the Risk Ratings and Historical Loss Factor Assigned section as follows.

•

Student loans purchased ~~(excluding Acquired Student Loans)~~ - ~~On June 27, 2018, the Company was notified that ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds~~The loss rate methodology for the student loan pools, was placed into liquidation due to insolvency. As such, the historical charge-off rate on this portfolio is determined by using the Company’s own losses/charge-offs since July 1, 2018 together with prior insurance claim history. For reporting periods prior to June 30, 2018, the Company did not charge off student loans asis based on the ~~insurance covered~~average historical loss rate for each tranche of loans, using a twelve-quarter lookback period. Due to the ~~past due loans, but the Company did apply~~declining balances in these pools, a balance weighted loss rate weight is used. In addition, qualitative factors ~~to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.~~are applied.

•

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

•

Minute Lender Loans – Commercial and Consumer - Minute Lender loans were acquired in the Merger and were historically assigned a loss rate of 4%, which was a recommendation of the vendor that administers the program. A 4% loss rate will be utilized until such time that a historical loss rate is available.

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

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

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

Risk Ratings and Historical Loss Factor Assigned

Excellent

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

Good

~~A 0% historical loss factor is applied, as these~~These loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve of 0.15% is applied to these loans. The Company has never experienced a loss within this category.

Pass

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

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

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

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

Watch

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

Special Mention

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

Substandard

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

Doubtful

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

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.


September 30, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
June 30, 2022															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	63,273	$	15,753	$	38,679	$	34	$	1,836	$	384	$	119,959	$	30,684	$	14,136	$	30,445	$	1,291	$	110	$	933	$	77,599
Real estate construction and land		-		-		81,783		7,507		2,159		633		92,082		-		-		47,821		342		1,446		5,531		55,140
1-4 family residential mortgages		-		-		359,304		2,644		627		9,899		372,474		-		-		314,514		6,953		839		7,614		329,920
Commercial mortgages		-		-		442,978		5,742		845		15,301		464,866		-		-		383,299		45,396		7,416		10,171		446,282
Consumer		495		25,442		35,734		1,228		119		51		63,069		470		20,417		29,237		960		101		66		51,251
Total Loans	$	63,768	$	41,195	$	958,478	$	17,155	$	5,586	$	26,268	$	1,112,450	$	31,154	$	34,553	$	805,316	$	54,942	$	9,912	$	24,315	$	960,192


December 31, 2020	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
December 31, 2021															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	87,014	$	14,336	$	16,126	$	485	$	-	$	727	$	118,688	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696
Real estate construction and land		-		-		22,305		-		-		204		22,509		-		-		51,098		7,360		2,849		18,024		79,331
1-4 family residential mortgages		-		-		126,910		3,634		1,357		1,065		132,966		-		2,030		334,300		5,013		1,520		15,285		358,148
Commercial mortgages		-		-		261,663		5,854		-		9,592		277,109		-		-		382,108		61,563		8,530		21,431		473,632
Consumer		1,012		18,929		36,573		1,373		64		183		58,134		524		18,535		32,821		1,225		179		120		53,404
Total Loans	$	88,026	$	33,265	$	463,577	$	11,346	$	1,421	$	11,771	$	609,406	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211

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

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

Changes in the value of underlying collateral;

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

Changes in volume of delinquent loans;

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

Changes in lending policies and procedures, including underwriting standards;

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

Changes in the level of policy exceptions.

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

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

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

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $~~1.6~~1.4 million at ~~September~~June 30, ~~2021,~~2022, a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $59 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of ~~September~~June 30, ~~2021 due to the loss of the insurance on this portfolio as discussed previously.~~2022.

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and the year ended December 31, ~~2020~~2021 appears below (dollars in thousands):


As of and for the period ended September 30, 2021
As of and for the period ended June 30, 2022														As of and for the period ended June 30, 2022
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total				Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages			Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	209		$	160	$	3,897	$	1,189		$	5,455			$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		(91	)		—		—		(514	)		(605	)			(243	)		-			-			(421	)		(664	)
Recoveries		185			7		4		100			296				136			8			4			104			252
Provision for (recovery of) loan losses		(134	)		128		291		192			477				110			(51	)		(300	)		172			(69	)
Ending Balance	$	169		$	295	$	4,192	$	967		$	5,623			$	255		$	356		$	4,182		$	710		$	5,503

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	5		$	5			$	-		$	-		$	-		$	9		$	9
Collectively evaluated for impairment		169			295		4,192		962			5,618				255			356			4,182			701			5,494
Acquired loans - purchased credit impaired		-			-		-		-			-				-			-			-			-			-

Loans:
Individually evaluated for impairment		-			-		602		952			1,554			$	-		$	-		$	604		$	835		$	1,439
Collectively evaluated for impairment		118,184			67,934		794,767		61,967			1,042,852				76,897			48,601			739,004			50,325			914,827
Acquired loans - purchased credit impaired		1,775			24,148		41,971		150			68,044				702			6,539			36,594			91			43,926
Ending Balance	$	119,959		$	92,082	$	837,340	$	63,069			1,112,450			$	77,599		$	55,140		$	776,202		$	51,251		$	960,192


As of and for the period ended December 31, 2020
As of and for the period ended December 31, 2021														As of and for the period ended December 31, 2021
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total				Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	302		$	109	$	2,684	$	1,114		$	4,209			$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs		—			—		—		(805	)		(805	)			(147	)		-		-		(688	)		(835	)
Recoveries		28			-		1		400			429				191			12		6		141			350
Provision for (recovery of) loan losses		(121	)		51		1,212		480			1,622				(1	)		227		575		213			1,014
Ending Balance	$	209		$	160	$	3,897	$	1,189		$	5,455			$	252		$	399	$	4,478	$	855		$	5,984

Ending Balance:
Individually evaluated for impairment	$	—		$	—	$	—	$	4		$	4			$	-		$	-	$	-	$	6		$	6
Collectively evaluated for impairment		209			160		3,897		1,185			5,451				252			399		4,478		849			5,978
Acquired loans - purchased credit impaired																-			-		-		-			-

Loans:
Individually evaluated for impairment	$	—		$	8	$	109	$	1,156		$	1,273			$	-		$	-	$	594	$	935		$	1,529
Collectively evaluated for impairment		118,688			22,501		409,966		56,978			608,133				95,702			60,755		786,491		52,351			995,299
Acquired loans - purchased credit impaired																994			18,576		44,695		118			64,383
Ending Balance	$	118,688		$	22,509	$	410,075	$	58,134		$	609,406			$	96,696		$	79,331	$	831,780	$	53,404		$	1,061,211

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ~~allowance for loan losses~~ALLL is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum

payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands).

Past Due Aging as of
September 30, 2021

30-59
Days Past
Due

60-89
Days Past
Due

90 Days or
More Past
Due

Total Past
Due

PCI

Current

Total
Loans

90 Days
Past Due
and Still
Accruing

Commercial

$
240

$
-

$
641

$
881

$
1,775

$
117,303

$
119,959

$
641

Real estate
   construction
   and land

8

-

-

8

24,148

67,926

92,082

-

1-4 family
   residential
   mortgages

1,092

-

777

1,869

17,757

352,848

372,474

-

Commercial
   mortgages

-

-

-

-

24,214

440,652

464,866

-

Consumer
   loans

278

155

37

470

150

62,449

63,069

37

Total Loans

$
1,618

$
155

$
1,455

$
3,228

$
68,044

$
1,041,178

$
1,112,450

$
678


Past Due Aging as of June 30, 2022	30-59 Days		60-89 Days		90 Days or More		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	762	$	235	$	596	$	1,593	$	702	$	75,304	$	77,599	$	596
Real estate construction and land		-		206		-		206		6,539		48,395		55,140		-
1-4 family residential mortgages		1,350		-		-		1,350		11,900		316,670		329,920		-
Commercial mortgages		-		154		-		154		24,694		421,434		446,282		-
Consumer loans		207		102		30		339		91		50,821		51,251		30
Total Loans	$	2,319	$	697	$	626	$	3,642	$	43,926	$	912,624	$	960,192	$	626


Past Due Aging as of December 31, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
Past Due Aging as of December 31, 2021															30-59 Days		60-89 Days		90 Days or More		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	1,130	$	470	$	-	$	1,600	$	117,088	$	118,688	$	-	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718
Real estate construction and land		-		-		-		-		22,509		22,509		-		873		1,283		-		2,156		18,576		58,599		79,331		-
1-4 family residential mortgages		501		-		-		501		132,465		132,966		-		1,508		100		495		2,103		16,020		340,025		358,148		-
Commercial mortgages		46		-		-		46		277,063		277,109		-		-		-		-		-		28,675		444,957		473,632		-
Consumer loans		298		66		137		501		57,633		58,134		137		345		196		83		624		118		52,662		53,404		83
Total Loans	$	1,975	$	536	$	137	$	2,648	$	606,758	$	609,406	$	137	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801

~~NOTE 6:~~Note 6. Goodwill and Other Intangible Assets

The carrying amount of goodwill was $~~8.9~~8.1 million at June 30, 2022 and December 31, 2021.

The Company had $7.6 million, $8.5 million and $~~372~~ ~~thousand at September 30, 2021 and December 31, 2020, respectively.~~ ~~The following table presents the changes in goodwill during the nine months ended September 30, 2021. There were~~ 0 ~~changes in the recorded balance of goodwill during the three and nine months ended September 30, 2020.~~

Sturman Wealth Advisors

Fauquier

Total

Balance as of January 1, 2021

$
372

$
-

$
372

Acquisition of Fauquier

-

8,526

8,526

Balance at September 30, 2021

$
372

$
8,526

$
8,898

~~The Corporation had $8.1~~8.6 million ~~and $341~~ ~~thousand~~ of other intangible assets as of ~~September~~June 30, 2022, December 31, 2021 and ~~December 31, 2020,~~June 30, 2021, respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to as Sturman Wealth

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


	September 30, 2021					December 31, 2020					June 30, 2022					December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	8,700	$	(845	)	$	-	$	-		$	9,660	$	(2,255	)	$	9,660	$	(1,389	)
Customer relationships intangible		773		(483	)		773		(432	)		773		(533	)		773		(499	)
Total	$	9,473	$	(1,328	)	$	773	$	(432	)	$	10,433	$	(2,788	)	$	10,433	$	(1,888	)

Amortization expense was $~~434~~444 thousand and $18445 thousand for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively and $~~896~~900 thousand and $74462 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Estimated future amortization expense as of ~~September~~June 30, ~~2021~~2022 is as follows (dollars in thousands):


	Core		Customer		Core		Customer
	Deposit		Relationships		Deposit		Relationships
	Intangible		Intangible		Intangible		Intangible
For the three months ending December 31, 2021	$	406	$	17
For the year ending December 31, 2022		1,517		67
For the six months ending December 31, 2022					$	819	$	33
For the year ending December 31, 2023		1,345		67		1,493		67
For the year ending December 31, 2024		1,172		67		1,301		67
For the year ending December 31, 2025		999		67		1,110		67
For the year ending December 31, 2026						918		6
Thereafter		2,416		5		1,764		-
Total	$	7,855	$	290	$	7,405	$	240

Note 7. Leases

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

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

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

The following tables present information about the Company’s leases (dollars in thousands):


	June 30, 2022			June 30, 2021
Lease liability	$	6,925		$	7,833
Right-of-use asset	$	7,343		$	8,371
Weighted average remaining lease term	5.84 years			6.37 years
Weighted average discount rate		1.97	%		1.98	%


	Three Months Ended June 30,				Six Months Ended June 30,
Lease Expense:	2022		2021		2022		2021
Operating lease expense	$	449	$	427	$	894	$	649
Short-term lease expense		139		32		191		61
Total lease expense	$	588	$	459	$	1,085	$	710
Cash paid for amounts included in lease liabilities	$	418	$	389	$	832	$	608

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):


Undiscounted Cash Flow	June 30, 2022
Six months ending December 31, 2022	$	817
Twelve months ending December 31, 2023		1,567
Twelve months ending December 31, 2024		1,296
Twelve months ending December 31, 2025		1,091
Twelve months ending December 31, 2026		748
Twelve months ending December 31, 2027		650
Thereafter		1,141
Total undiscounted cash flows	$	7,310
Less: Discount		(385	)
Lease liability	$	6,925

Note 7.8. Net Income Per Share

The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive. The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as ~~noted in the Consolidated Balance Sheets as~~ of ~~September~~June 30, 2022 and June 30, 2021 ~~and September 30, 2020~~ is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).


Three Months Ended	September 30, 2021							September 30, 2020						June 30, 2022							June 30, 2021
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	3,138		5,306,370	$	0.59		$	1,870		2,714,273	$	0.69	$	5,685		5,326,271	$	1.07		$	147		5,305,277	$	0.03
Effect of dilutive stock options		-		32,502		-			-		624		-		-		20,737		(0.01	)		-		15,013		-
Diluted net income per share	$	3,138		5,338,872	$	0.59		$	1,870		2,714,897	$	0.69	$	5,685		5,347,008	$	1.06		$	147		5,320,290	$	0.03

Nine Months Ended	September 30, 2021							September 30, 2020
Six Months Ended														June 30, 2022							June 30, 2021
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	4,790		4,453,303	$	1.08		$	5,362		2,705,730	$	1.98	$	10,609		5,319,166	$	1.99		$	1,652		4,019,700	$	0.41
Effect of dilutive stock options		-		25,476		(0.01	)		-		708		-		-		26,076		(0.01	)		-		11,601		-
Diluted net income per share	$	4,790	$	4,478,779	$	1.07		$	5,362	$	2,706,438	$	1.98	$	10,609	$	5,345,242	$	1.98		$	1,652		4,031,301	$	0.41

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, there were ~~91,501~~101,901 option shares considered anti-dilutive and excluded from this calculation. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, there were ~~145,404~~78,301 option shares considered anti-dilutive and excluded from this calculation.

Note 8.9. Stock Incentive Plans

At the Annual Shareholders Meeting on ~~May 21, 2014,~~June 23, 2022, shareholders approved the Virginia National Bankshares Corporation ~~2014~~2022 Stock Incentive Plan. The 2022 Plan ~~(“2014 Plan”).~~made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan ~~makes~~made available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2022 Plan and the 2014 Plan ~~provides~~provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. NaN new grants ~~will~~can be issued under the 2005 Stock Incentive Plan ~~(“2005 Plan”)~~ as this plan has expired.

For the 2022 Plan, the option price for any stock options cannot be less that the fair value of the Company’s stock on the grant date. In addition, 95% of the common stock authorized for issuance must have a vesting or exercise schedule of at least one year. For the 2014 Plan and the 2005 Plan, ~~(the “Plans”),~~ the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is ~~granted. Nonqualified~~granted and nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of ~~September~~June 30, ~~2021.~~2022. Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends. Although the 2005 Plan has expired and 0 new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.NaN grants have been issued under the 2022 Plan.


	2005 Plan			2014 Plan			2022 Plan		2014 Plan			2005 Plan
Aggregate shares issuable		253,575			275,625			150,000		275,625			253,575
Options issued, net of forfeited and expired options		(59,870	)		(164,106	)		—		(170,106	)		(59,870	)
Unrestricted stock issued		0			(11,535	)		—		(11,635	)		—
Restricted stock grants issued		0			(46,917	)
Restricted stock grants issued, net of forfeited								—		(65,853	)		—
Cancelled due to Plan expiration		(193,705	)		0			—		0			(193,705	)
Remaining available for grant		0			53,067			150,000		28,031			-

Stock grants issued and outstanding:
Total vested and unvested shares		0			58,452			—		77,488			—
Fully vested shares		0			22,541			—		31,764			—

Option grants issued and outstanding:
Total vested and unvested shares		1,379			161,901			—		167,901			1,379
Fully vested shares		1,379			55,293			—		76,148			1,379

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

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.

2526

Stock Options

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


	September 30, 2021								June 30, 2022
	Number of Options			Weighted Average Exercise Price			Aggregate Intrinsic Value		Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2021		146,783		$	33.51		$	-
Outstanding at January 1, 2022										169,280	$	33.89	$	962
Issued		17,600			36.14					0		—
Exercised		(1,103	)		(27.39	)				—		—
Expired		—			—					—		—
Outstanding at September 30, 2021		163,280		$	33.84		$	790
Outstanding at June 30, 2022										169,280	$	33.89	$	477

Options exercisable at September 30, 2021		56,672		$	37.21		$	183
Options exercisable at June 30, 2022										77,527	$	37.31	$	144

For the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized $9642 thousand and $8831 thousand, respectively, in compensation expense for stock options. For the six months ended June 30, 2022 and 2021, the Company recognized $83 thousand and $65 thousand, respectively, in compensation expense for stock options. As of ~~September~~June 30, ~~2021,~~2022, there was $~~395~~304 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through ~~2025~~2026. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were ~~17,600~~0 stock option grants ~~were~~ issued during the three and six months ended ~~September~~June 30, ~~2021,~~2022 and 2021.~~40,000~~ ~~stock option grants were issued during the three months ended September 30, 2020.~~ ~~17,600~~ ~~stock option grants were issued in the nine months ended September 30, 2021 and~~ ~~66,000~~ ~~stock options grants were issued during the nine months ended September 30, 2020.~~

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

For the nine months ended

September 30, 2021

September 30, 2020
Expected volatility1

25.16%

22.97%
Expected dividends2

3.32%

4.75%
Expected term (in years)3

6.25

6.50
Risk-free rate4

1.19%

0.68%

~~Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.~~

~~Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.~~

~~Based on the average of the contractual life and vesting period for the respective option.~~

~~Based upon an interpolated U.S. Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.~~

Summary information pertaining to options outstanding at ~~September~~June 30, ~~2021~~2022 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.


	Options Outstanding					Options Exercisable				Options Outstanding					Options Exercisable
Exercise Price	Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price		Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$13.69 to $20.00		1,379	1.4 Years	$	13.69		1,379	$	13.69		1,379	0.6 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		66,000	8.8 Years		24.64		13,200		24.64		66,000	8.0 Years		24.64		18,400		25.02
$30.01 to $40.00		38,420	8.6 Years		37.23		7,608		38.73		44,420	8.1 Years		36.97		11,772		38.52
$40.01 to $42.62		57,481	6.6 Years		42.62		34,485		42.62		57,481	5.9 Years		42.62		45,976		42.62
Total		163,280	7.9 Years	$	33.84		56,672	$	37.21		169,280	7.3 Years	$	33.89		77,527	$	37.31

Stock Grants

Unrestricted stock grant - During the six months ended June 30, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $3 thousand. NaN unrestricted stock grants were awarded during the three months ended June 30, 2022 or during the year ended December 31, 2021.

Restricted stock grants – During the ~~three and nine~~six months ended ~~September~~June 30, ~~2021,~~2022, ~~1,416~~5,580 and ~~20,649~~12,856 restricted shares, ~~respectively,~~ were granted to employees and non-employee directors, respectively, vesting over a ~~four- or~~ ~~five-year~~four-year or five-year period. (Note that all such shares were granted during the first quarter of 2022 with no shares granted during the second quarter of 2022.) During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, 05,730 and ~~22,268~~19,233 restricted shares, respectively, were granted. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, $57121 thousand and $~~283~~214 thousand, respectively, was expensed as a result of restricted stock grants. ~~For the three and nine months ended September 30, 2020, $~~42 ~~thousand and $~~96 ~~thousand, respectively, in expense was incurred.~~ As of ~~September~~June 30, ~~2021,~~2022, there was $~~861~~1.3 ~~thousand~~million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2026.

Changes in the restricted stock grants outstanding during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are summarized below (dollars in thousands except per share data):


	September 30, 2021									June 30, 2022
	Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value			Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value
Nonvested as of January 1, 2021		25,268		$	26.60		$	913
Nonvested as of January 1, 2022											37,011		$	28.98		$	1,165
Issued		20,649			29.22		746				18,536			35.62		584
Vested		(10,006	)		(27.01	)		(362	)		(9,223	)		(27.38	)		(290	)
Nonvested at September 30, 2021		35,911		$	28.00		$	1,297
Forfeited											(600	)		(33.74	)		(19	)
Nonvested at June 30, 2022											45,724		$	31.94		$	1,440

Note 9.10. Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple

valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair ~~value.~~value:


	Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.

	Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

	Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale

Securities ~~available for sale~~AFS are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Interest rate swaps

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

The following tables present the balances measured at fair value on a recurring basis as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


			Fair Value Measurements at September 30, 2021 Using:								Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government treasuries									$	161,009	$	-	$	161,009	$	-
U.S. Government agencies	$	32,538	$	-	$	32,538	$	-		30,532		-		30,532		-
Mortgage-backed securities/CMOs		145,998		-		145,998		-		175,962		-		175,962		-
Corporate bonds										11,154		-		11,154		-
Municipal bonds		98,510		-		98,510		-		83,173		-		83,173		-
Total securities available for sale	$	277,046	$	-	$	277,046	$	-	$	461,830	$	-	$	461,830	$	-

Liabilities:
Interest rate swaps	$	241			$	241
Total liabilities at fair value	$	241	$	-	$	241	$	-
Interest rate swap asset										310		-		310		-
Total assets at fair value									$	462,140	$	-	$	462,140	$	-


			Fair Value Measurements at December 31, 2020 Using:								Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	25,305	$	-	$	25,305	$	-	$	31,581	$	-	$	31,581	$	-
Mortgage-backed securities/CMOs		78,100		-		78,100		-		170,964		-		170,964		-
Municipal bonds		70,681		-		70,681		-		101,272		-		101,272		-
Total securities available for sale	$	174,086	$	-	$	174,086	$	-	$	303,817	$	-	$	303,817	$	-

Liabilities:
Interest rate swap liabilities									$	197	$	-	$	197	$	-
Total liabilities at fair value									$	197	$	-	$	197	$	-

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned ~~(“OREO”)~~ is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the ~~Allowance for Loan Losses.~~ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of ~~September 30,~~December 31, 2021, the Company had 1 OREO property acquired through the Merger which iswas carried at a fair value of $611 thousand. ~~As of December 31, 2020,~~The Company sold this OREO property during the ~~Company~~current quarter and therefore had a 0 balance in OREO ~~property.~~as of June 30, 2022.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price

of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the ~~Allowance for Loan Losses~~ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans, excluding PCI loans, of $~~1.6~~1.4 million as of ~~September~~June 30, ~~2021~~2022 and $~~1.3~~1.5 million as of December 31, ~~2020.~~2021. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted ~~above.~~above.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of ~~September 30,~~December 31, 2021. There were 0 such assets to report as of ~~December 31, 2020.~~June 30, 2022.

Fair Value Measurements at September 30, 2021 Using:

Quoted Prices
in Active
Markets for
Identical Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Other Real Estate Owned

$
611

$
—

$
—

$
611


			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
Other Real Estate Owned	$	611	$	-	$	-		61100.0	%

For the assets measured at fair value on a nonrecurring basis as of ~~September 30,~~December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands):. There were 0 such assets to report as of June 30, 2022.

Description

Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

Assets:

Other Real Estate Owned

611

Market comparables

Discount applied to bonafide offer *

6.0

611

Market comparables

Discount applied to bonafide offer

6.0

* A discount percentage is applied based on age of independent appraisals, current market conditions, and cost to sell.

* A discount percentage is applied based on estimated cost to sell.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

3031

The carrying values and estimated fair values of the Company's financial instruments as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows (dollars in thousands):


			Fair Value Measurements at September 30, 2021 Using:										Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	425,530	$	425,530	$	-	$	-	$	425,530	$	215,667	$	215,667	$	-	$	-	$	215,667
Available for sale securities		277,046		-		277,046		-		277,046		461,830		-		461,830		-		461,830
Loans, net		1,106,827		-		-		1,121,177		1,121,177		954,689		-		-		929,045		929,045
Bank owned life insurance		31,033		-		31,033		-		31,033		38,046		-		38,046		-		38,046
Other real estate, net		611		-		-		611		611
Accrued interest receivable		3,690		-		1,017		2,673		3,690		4,229		-		2,055		2,174		4,229
Interest rate swap asset												310		-		310		-		310

Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts	$	1,572,126	$	-	$	1,572,126	$	-	$	1,572,126
Certificates of deposit and other time deposits		165,057		-		165,357		-		165,357
Junior subordinated debt		3,356		-		-		3,356		3,356
Demand deposits and interest-bearing transaction and money market accounts											$	1,448,777	$	-	$	1,448,777	$	-	$	1,448,777
Certificates of deposit												150,121		-		144,556		-		144,556
Junior subordinated debt, net												3,390		-		3,459		-		3,459
Accrued interest payable		173		-		173		-		173		134		-		134		-		134
Interest rate swaps		241				241


			Fair Value Measurements at December 31, 2020 Using:										Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	34,695	$	34,695	$	-	$	-	$	34,695	$	508,840	$	508,840	$	-	$	-	$	508,840
Available for sale securities		174,086		-		174,086		-		174,086		303,817		-		303,817		-		303,817
Loans, net		603,951		-		-		602,859		602,859		1,055,227		-		-		1,059,650		1,059,650
Bank owned life insurance		16,849		-		16,849		-		16,849		31,234		-		31,234		-		31,234
Other real estate owned, net												611		-		-		611		611
Accrued interest receivable		2,904		-		729		2,175		2,904		3,778		-		1,252		2,526		3,778

Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts	$	631,662	$	-	$	631,662	$	-	$	631,662
Certificates of deposit and other time deposits		99,102		-		99,580		-		99,580
Borrowings		30,000		-		30,000		-		30,000
Demand deposits and interest-bearing transaction and money market accounts											$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125
Certificates of deposit												162,045		-		161,850		-		161,850
Junior subordinated debt												3,367		-		3,367		-		3,367
Accrued interest payable		159		-		159		-		159		174		-		174		-		174
Interest rate swap liabilities												197		-		197		-		197

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate

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

Note ~~10.~~11. Other Comprehensive Income (Loss)

A component of the Company’s other comprehensive income (loss), in addition to net income from operations, is the recognition of the unrealized gains and losses on ~~available for sale~~AFS securities, net of income taxes. Reclassifications of realized gains and losses on ~~available for sale~~AFS securities are reported in the income statement as “Gains on sales of securities” with the corresponding

income tax effect reflected as a component of income tax expense. There were 0 sales of securities in the ~~first three quarters of 2021. Amounts reclassified out of accumulated other comprehensive income are presented below for the~~ three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020 (dollars in thousands).~~2021.

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Available for sale securities

Realized gains on sales of securities

$
—

$
91

$
—

$
734

Tax effect

---

(18
)

---

(154
)
Realized gains, net of tax

$
—

$
73

$
—

$
580

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $($~~122~~7.9 ~~thousand~~) million and ($~~389~~464) thousand, as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively (dollars in thousands).

September 30, 2021

December 31, 2020

Accumulated other comprehensive income (loss) on securities

$
(376
)

$
1,460

Accumulated other comprehensive loss on interest rate swap

(84
)

---

Total accumulated other comprehensive income (loss)

$
(460
)

$
1,460


	June 30, 2022			December 31, 2021
Accumulated other comprehensive loss on securities	$	(38,026	)	$	(2,164	)
Accumulated other comprehensive income (loss) on interest rate swap		331			(47	)
Total accumulated other comprehensive loss	$	(37,695	)	$	(2,211	)

Note 12.Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Customer accommodation loan swaps are derivative contracts that are not designated in a qualifying hedging relationship.

Cash flow hedges. The Company designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company’s junior subordinated debt. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Company’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of June 30, 2022 and December 31, 2021, the Company had designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings through 2036.

Unrealized gains or losses recorded in other comprehensive income (loss) related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Cash collateral held at other banks for swaps was $570 thousand as of June 30, 2022 and December 31, 2021. Collateral is dependent on the market valuation of the underlying hedges.

The follow table summarizes the Company’s derivative instruments as of June 30, 2022 and December 31, 2021 (dollars in thousands):


	June 30, 2022
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	310		Other Liabilities	6/15/2031

	December 31, 2021
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(197	)	Other Liabilities	6/15/2031
Interest rate swap - fair value	$	3,940	$	(8	)	Other Liabilities	2/12/2022

Note ~~11.~~13. Segment Reporting

The Company has 4 reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

The 4 reportable segments are:

•

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

•

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.

•

VNB Trust & Estate Services – – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under ~~Management and, prior to 2020, incentive income that was based on the investment returns generated on performance-based Assets Under~~ Management. Investment management services currently are offered through in-house and third-party managers. ~~In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More~~

information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2020.

•

Masonry Capital - - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business. For both the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, management fees totaling $7550 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.

Three months ended September 30, 2021

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
13,504

$
-

$
-

$
-

$
13,504

Provision for (recovery of) loan
losses

267

-

-

-

267

Noninterest income

2,890

209

203

176

3,478

Noninterest expense

12,183

163

315

163

12,824

Income (loss) before income taxes

3,944

46

(112
)

13

3,891

Provision for (benefit from) income
taxes

763

10

(23
)

3

753

Net income (loss)

$
3,181

$
36

$
(89
)

$
10

$
3,138

Nine months ended September 30, 2021

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
32,629

$
-

$
-

$
-

$
32,629

Provision for loan losses

477

-

-

-

477

Noninterest income

5,760

602

607

468

7,437

Noninterest expense

31,854

490

736

518

33,598

Income (loss) before income taxes

6,058

112

(129
)

(50
)

5,991

Provision for income taxes

1,214

24

(27
)

(10
)

1,201

Net income (loss)

$
4,844

$
88

$
(102
)

$
(40
)

$
4,790

Three months ended September 30, 2020

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
6,047

$
-

$
-

$
-

$
6,047

Provision for loan losses

224

-

-

-

224

Noninterest income

970

176

192

87

1,425

Noninterest expense

4,373

155

196

211

4,935

Income (loss) before income taxes

2,420

21

(4
)

(124
)

2,313

Provision for (benefit from) income
taxes

466

4

(1
)

(26
)

443

Net income (loss)

$
1,954

$
17

$
(3
)

$
(98
)

$
1,870

Nine months ended September 30, 2020

Bank

Sturman Wealth Advisors

VNB Trust &
Estate
Services

Masonry
Capital

Consolidated

Net interest income

$
17,177

$
-

$
-

$
-

$
17,177

Provision for loan losses

1,367

-

-

-

1,367

Noninterest income

3,316

516

625

263

4,720

Noninterest expense

12,147

483

668

584

13,882

Income (loss) before income taxes

6,979

33

(43
)

(321
)

6,648

Provision for income taxes

1,355

7

(9
)

(67
)

1,286

Net income (loss)

$
5,624

$
26

$
(34
)

$
(254
)

$
5,362

~~Note 12. Leases~~

~~The following tables present information about the Company’s leases (dollars in thousands):~~

September 30, 2021

September 30, 2020

Lease liability

$
7,463

$
3,783

Right-of-use asset

$
7,970

$
3,725

Weighted average remaining lease term

6.19 years

5.35 years

Weighted average discount rate

1.98
%

2.55
%


Three months ended June 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	12,461		$	-	$	-		$	-	$	12,461
Provision for (recovery of) loan losses		(217	)		-		-			-	$	(217	)
Noninterest income		2,851			210		365			220	$	3,646
Noninterest expense		8,717			161		376			188	$	9,442
Income (loss) before income taxes		6,812			49		(11	)		32		6,882
Provision for (benefit from) income taxes		1,181			11		(2	)		7		1,197
Net income (loss)	$	5,631		$	38	$	(9	)	$	25	$	5,685


Six months ended June 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	23,886		$	-	$	-		$	-	$	23,886
Provision for (recovery of) loan losses		(69	)		-		-			-		(69	)
Noninterest income		4,385			426		3,196			426		8,433
Noninterest expense		17,538			327		1,298			374		19,537
Income before income taxes		10,802			99		1,898			52		12,851
Provision for income taxes		1,811			21		399			11		2,242
Net income	$	8,991		$	78	$	1,499		$	41	$	10,609

Three Months Ended September 30,

Nine Months Ended September 30,

Lease Expense

2021

2020

2021

2020

Operating lease expense

$
420

$
228

$
1,069

$
636

Short-term lease expense

127

28

188

85

Total lease expense

$
547

$
256

$
1,257

$
721

Cash paid for amounts included in
lease liabilities

$
390

$
199

$
998

$
597

~~A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):~~

Undiscounted Cash Flow

September 30, 2021

Three months ending December 31, 2021

$
391

Twelve months ending December 31, 2022

1,534

Twelve months ending December 31, 2023

1,462

Twelve months ending December 31, 2024

1,175

Twelve months ending December 31, 2025

968

Twelve months ending December 31, 2026

622

Thereafter

1,771

Total undiscounted cash flows

$
7,923

Less: Discount

(460
)
Lease liability

$
7,463


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

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

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

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation ~~(the “Company”)~~ included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are not necessarily indicative of the results for the year ending December 31, ~~2021~~2022 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

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

MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK

On April 1, 2021, the Company completed its ~~merger~~Merger with Fauquier. The ~~merger~~Merger of Fauquier with and into the Company ~~(the “Merger”)~~ was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of ~~Merger (together, the “Merger Agreement”).~~Merger. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank, ~~(the “Bank”),~~ the Company’s wholly-owned bank subsidiary.

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

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

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, ~~(ROAA),~~ 2) return on average equity, ~~(ROAE),~~ and 3) net income per ~~share (EPS).~~share. (Refer to Reconcilement of Non-GAAP Measures within the Non-GAAP presentations section for further detail and calculation of amounts labeled as "Non-GAAP.")

•

~~Return on average assets (“ROAA”)~~ROAA for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~0.65%~~1.27% compared to ~~0.89%~~0.03% (1.02% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior ~~year. ROAA excluding~~year, as the ~~impact of~~increase in net income was significantly higher in the current period and no merger ~~and merger related~~or merger-related expenses ~~(a non-GAAP financial measure) would have been 0.96% for~~were incurred in the ~~three months ended September 30, 2021 and 1.08% for the three months ended September 30, 2020.~~current period. ROAA for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~0.41%~~1.15% compared to ~~0.92%~~0.24% (0.93% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year. ROAA excluding the impact of merger and merger related expenses (a non-GAAP financial measure) would have been 0.95% for the nine months ended September 30, 2021, 2 basis points ("bps") less than the ROAA for the prior comparable period of 0.97% excluding the impact of merger and merger related expenses (a non-GAAP financial measure).

•

~~Return on average equity (“ROAE”)~~ROAE for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~7.70%~~16.20% compared to ~~9.20%~~0.37% (11.88% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year. ROAE ~~excluding~~for the ~~impact of~~six months ended June 30, 2022 was 14.26% compared to 2.76% (10.66% excluding merger and ~~merger related~~merger-related expenses, (aa non-GAAP ~~financial~~ measure) ~~would have been 11.30%~~realized in same period in the prior year.

•

Net income per diluted share was $1.06 for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~11.12%~~$0.03 ($0.89 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior ~~year. ROAE for~~year, due to the ~~nine months ended September 30, 2021 was 4.80% compared to 9.05% realized in same period in the prior year. ROAE excluding the impact~~increase of merger and merger related expenses (a non-GAAP financial measure) would have been 11.01% for the nine months ended September 30, 2021, exceeding the ROAE from the comparable period in the prior year of 9.60% excluding the impact of merger and merger related expenses (a non-GAAP financial measure).



~~The Company incurred $1.9~~$5.5 million in merger and merger related expenses during the three months ended September 30, 2021, compared to $549 thousand during the nine months ended September 30, 2020, related to the combination with Fauquier, which closed on April 1, 2021. The majority of such merger and merger related expenses during the current period related to a change-of-control payment, severance and stay-put bonuses, while the prior year expense related primarily to legal expenses. The post-tax expense of $1.4 million represents $0.27 per diluted share for the three months ended September 30, 2021. The Company incurred $8.1 million in merger and merger related expenses during the nine months ended September 30, 2021, compared to $549 thousand during the nine months ended September 30, 2020.



net income. Net income per diluted share was ~~$0.59~~$1.98 for the ~~three~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$0.69~~$0.41 ($1.33 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior ~~year. Net income per diluted share, excluding merger and merger related expenses (a non-GAAP financial measure), would have been $0.86~~year, due to the increase of $9.0 million in ~~the current quarter, exceeding the~~ net income per diluted share of the comparable prior period, excluding merger and merger related expenses, of $0.83. Net income per diluted share was $1.07 for the nine months ended September 30, 2021, compared to $1.98 for the same period in the prior year. Net income per diluted share, excluding merger and merger related expenses (a non-GAAP financial measure), would have been $2.45 for the nine months ended September 30, 2021, exceeding the net income per diluted share, excluding merger and merger related expenses, of the comparable prior period of $2.10.income.

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

IMPACT OF COVID-19

The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. While more than 75% of adults in the U.S. and in Virginia are fully vaccinated against COVID-19, the rate of vaccinations appears to have peaked, and the Delta variant has shown that there remains a threat of a resurgence of cases. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

Management ~~continues to~~will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.

~~Financial Condition and Results of Operations~~

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

~~During the year ended December 31, 2020, we provided an additional $1.6 million for~~ There were no COVID-19 related loan losses primarily by downgrading the qualitative economic factors within the ALLL model in light of the effects of COVID-19 on the economy. At the end of the second quarter of 2021, credit deterioration since the onset of the COVID-19 pandemic had not been experienced to the extent previously anticipated, and therefore, during the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses. The Company continues to maintain reserves for loan losses at September 30, 2021 related to the pandemic and believe that our allowance for loan losses will be adequate to absorb probable losses that are inherent in our loan portfolio. If loan losses ultimately are not realized to the extent of the reserves provided for during the pandemic, our allowance for loan losses may be reduced in future periods through further reversals of provision for loan losses, which could benefit our results of operations for any such future period. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus that threaten to disrupt economic activity, additional provision for loan losses may be required in future periods.

Interest income could be reduced due to the economic impact of COVID-19. In accordance with guidance from regulators, the Company is working with borrowers who were adversely affected by COVID-19 to defer principal only, or principal and interest. Loan deferrals as of ~~September~~June 30, 2021 amount to $1.2 million and consist of only three loans. 99% of this balance is 100% government-guaranteed for which the deferrals were approved by the United States Department of Agriculture; and $28 thousand, or less than 1%, are student loans, which are private student loans not subject to potential federal forgiveness. In accordance with interagency guidance issued in March 2020 and the CARES Act, these short-term deferrals are not considered troubled debt restructurings (“TDRs”).

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll. In total, the Company, including Virginia National Bank and The Fauquier Bank, funded $207.5 million in PPP loans, with average origination fees of 3.9%, assisting many nonprofits and local businesses through this program. As of September 30, 2021, 82.3% of the total dollars of PPP loans had been forgiven by the SBA, with $36.7 million outstanding. Loans funded through the PPP are fully guaranteed by the U.S. government. The Company believes that it performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination is made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.2022.

~~Capital and Liquidity~~

As of ~~September~~June 30, ~~2021,~~2022, capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity. Management ~~has~~ also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate ~~how~~that the Company can react effectively to ~~the~~an economic ~~downturn caused by this pandemic.~~downturn.

~~Goodwill~~

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

3837

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

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app. The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a temporary schedule whereby most staff members ~~would be working~~worked remotely, ~~at any given time,~~ allowing the remaining essential staff to create more distance between each other within the offices. We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking. The client service center was also ~~temporarily~~ moved on a short-term basis to a larger location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. ~~Beginning mid-July~~The Bank remains very focused on the safety and well-being of ~~2020, the Company took steps~~its employees and customers during COVID-19 and is committed to ~~resume normal branch activities with specific guidelines in place~~safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to ~~continue protecting our customers and employees.~~normal.

The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19. Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s ~~2020~~2021 Form 10-K. ~~The only~~There have been no significant changes in the Company’s application of critical accounting policies since December 31, ~~2020 relates to loans acquired in a business combination, as follows.~~

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

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

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

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the Acquired Loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.2021.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of ~~September~~June 30, ~~2021~~2022 were ~~$1.9~~$1.7 billion. This is a ~~$1.1 billion,~~$227 million, or ~~125.5%~~11.5%, ~~increase~~decrease from ~~the $848.4 million~~ total assets reported at December 31, ~~2020~~2021 and a ~~$1.1 billion,~~$102 million, or ~~133.0%~~5.5%, ~~increase~~decrease from ~~the $821.0 million~~total assets reported at ~~September~~June 30, ~~2020. These increases~~2021. The decreases were substantially within gross loans, as SBA PPP loans were forgiven, legacy organic loan balances declined due to business sales, property sales and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, and other curtailments (see more detail in the ~~acquisition of Fauquier, which became effective April 1, 2021.~~Loan portfolio section following).

Interest-bearing deposits in other banks

The Company had ~~$254.2~~$145.2 million of interest-bearing deposits in other banks as of ~~September~~June 30, ~~2021,~~2022, compared to ~~zero~~$336.0 million as of December 31, ~~2020~~2021 and ~~September~~$177.8 million as of June 30, ~~2020, as~~2021. Significant excess liquidity has been deployed into short-term investment securities in the ~~current balance included accounts held by Fauquier, primarily at the Federal Reserve Bank of Richmond.~~six months ended June 30, 2022 to earn a higher yield.

Federal funds sold

The Company had overnight federal funds sold of ~~$152.4~~$52.8 million as of ~~September~~June 30, ~~2021, compared to $26.6~~2022, $152.5 million as of December 31, ~~2020~~2021 and ~~$273 thousand~~$106.6 million as of ~~September~~June 30, ~~2020.~~2021. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

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

Securities

The Company’s investment securities portfolio as of ~~September~~June 30, ~~2021~~2022 totaled ~~$279.7~~$467.0 million, an increase of ~~$102.6~~$158.2 million compared with the ~~$177.1~~$308.8 million reported at December 31, ~~2020~~2021 and an increase of ~~$135.5~~$195.7 million from the ~~$144.7~~$271.2 million reported at ~~September~~June 30, ~~2020.~~2021. The ~~increases are primarily due to~~increase from year-end and the ~~inclusion~~same period in the prior year is the result of ~~the investment securities portfolio of Fauquier upon effective date of the Merger as of April 1, 2021.~~deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the investment securities holdings represented ~~14.6%~~26.8% and ~~20.9%~~15.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling ~~$2.6~~$5.1 million as of ~~September~~June 30, ~~2021,~~2022, compared to ~~$3.0~~$5.0 million as of December 31, ~~2020~~2021 and ~~$3.4~~$4.3 million as of ~~September~~June 30, ~~2020.~~2021. These securities represent stock in the FRB, the ~~Federal Home Loan Bank of Atlanta (“FHLB”),~~FHLB, CBB Financial Corporation ~~the~~(the holding company for Community Bankers ~~Bank,~~Bank), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the ~~Board of Governors of the Federal~~

~~Reserve System (“~~Federal ~~Reserve”)~~Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At ~~September~~June 30, ~~2021,~~2022, the unrestricted securities portfolio totaled ~~$277.0~~$461.8 million. The following table summarizes the Company's ~~available for sale~~AFS securities by type as of ~~September~~June 30, ~~2021,~~2022, December 31, ~~2020,~~2021, and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):


	September 30, 2021					December 31, 2020					September 30, 2020					June 30, 2022					December 31, 2021					June 30, 2021
			Percent					Percent					Percent					% of					% of					% of
	Balance		of Total			Balance		of Total			Balance		of Total			Balance		Total			Balance		Total			Balance		Total
U.S. Government treasuries																$	161,009		34.9	%	$	—		—		$	—		—
U.S. Government agencies	$	32,538		11.7	%	$	25,305		14.5	%	$	19,840		14.1	%		30,532		6.6	%		31,581		10.4	%		35,228		13.2	%
Mortgage-backed securities/CMOs		145,998		52.7	%		78,100		44.9	%		64,158		45.4	%		175,962		38.1	%		170,964		56.3	%		136,418		51.1	%
Corporate bonds																	11,154		2.4	%		—		—			—		—
Municipal bonds		98,510		35.6	%		70,681		40.6	%		57,247		40.5	%		83,173		18.0	%		101,272		33.3	%		95,327		35.7	%
Total available for sale securities	$	277,046		100.0	%	$	174,086		100.0	%	$	141,245		100.0	%	$	461,830		100.0	%	$	303,817		100.0	%	$	266,973		100.0	%

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The ~~predominant market~~Company's geographical trade area ~~for~~includes localities in Virginia, Maryland and the ~~loans shown below includes the cities~~District of ~~Charlottesville, Winchester and Richmond, the counties of Albemarle, Fauquier, Prince William and Frederick, and areas in the Commonwealth of Virginia~~Columbia that are within a ~~75-mile~~100-mile radius of any office of the Company.

As of ~~September~~June 30, ~~2021,~~2022, total loans were ~~$1.1 billion,~~$960.2 million, compared to ~~$609.4 million~~$1.1 billion as of December 31, ~~2020~~2021 and ~~$636.9 million~~$1.2 billion at ~~September~~June 30, ~~2020.~~2021. Loans as a percentage of total assets at ~~September~~June 30, ~~2021~~2022 were ~~58.2%~~55.0%, compared to ~~77.6%~~63.1% as of ~~September~~June 30, ~~2020.~~2021. Loans as a percentage of deposits at ~~September~~June 30, ~~2021~~2022 were ~~64.0%~~60.1%, compared to ~~91.7%~~71.6% as of ~~September~~June 30, ~~2020.~~2021.

The following table summarizes the Company's loan portfolio by type of loan as of ~~September~~June 30, ~~2021,~~2022, December 31, ~~2020,~~2021, and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):


Categories changed	September 30, 2021					December 31, 2020					September 30, 2020
	Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			June 30, 2022					December 31, 2021					June 30, 2021
																Balance		% of Total			Balance		% of Total			Balance		% of Total
Commercial loans																$	77,599		8.1	%	$	96,696		9.1	%	$	160,473		13.8	%
Real estate mortgage:
Construction and land																	55,140		5.7	%		79,331		7.5	%		96,421		8.3	%
1-4 family residential mortgages																	329,920		34.4	%		358,148		33.8	%		381,801		32.7	%
Commercial	$	119,959		10.8	%	$	118,688		19.5	%	$	156,477		24.6	%		446,282		46.5	%		473,632		44.6	%		455,795		39.1	%
Real estate construction and land		92,082		8.3	%		22,509		3.7	%		23,753		3.7	%
1-4 family residential mortgages		372,474		33.5	%		132,966		21.8	%		131,078		20.6	%
Commercial mortgages		464,866		41.8	%		277,109		45.5	%		263,331		41.3	%
Total real estate mortgage																	831,342		86.6	%		911,111		85.9	%		934,017		80.1	%
Consumer		63,069		5.6	%		58,134		9.5	%		62,296		9.8	%		51,251		5.3	%		53,404		5.0	%		71,671		6.1	%
Total loans	$	1,112,450		100.0	%	$	609,406		100.0	%	$	636,935		100.0	%	$	960,192		100.0	%	$	1,061,211		100.0	%	$	1,166,161		100.0	%

~~Loan~~The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loan balances ~~increased $503.0 million, or 82.5%, since~~from June 30, 2021 and December 31, ~~2020 and increased $475.5 million, or 74.7%,~~2021 to June 30, 2022. The decrease from September 30, 2020. The increases are primarily due to the inclusion of Fauquier’s loans of $602.6 million, net of the fair value mark, as of the effective date of the Merger of April 1, 2021, for which the carrying amount as of SeptemberJune 30, 2021 ~~amounts to $485.1 million. The increase from~~is due predominantly to: 1) the ~~same period~~forgiveness of SBA PPP loans in the ~~prior year was offset by the decline in PPP~~amount of $71.9 million, 2) paydowns of legacy organic loans due mainly to business sales, property sales and participation fluctuations of ~~$50.3~~$53.8 million, ~~due to loan forgiveness.~~and 3) workouts and paydowns of Acquired Loans of $50.4 million. As of ~~September~~June 30, ~~2021, 81% of the total dollars~~2022, less than $1.9 million of PPP loans ~~had been forgiven by~~remain outstanding on the ~~SBA, with $36.7 million outstanding.~~

Bank's balance sheet.

Loan quality

Non-accrual loans, comprised of only two loans to one borrower, totaled ~~$777~~$511 thousand at ~~September~~June 30, ~~2021,~~2022, compared to ~~the $8~~balances of $495 thousand and $9$17 thousand reported at December 31, ~~2020~~2021 and ~~September~~June 30, ~~2020,~~2021, respectively. Acquired Loans which otherwise would be in non-accrual status are not included in ~~this figure,~~the balances, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling ~~$678~~$626 thousand, ~~$137~~$801 thousand and ~~$61 thousand,~~$2.8 million, as of ~~September~~June 30, ~~2021,~~2022, December 31, ~~2020~~2021 and ~~September~~June 30, ~~2020,~~2021, respectively, that were 90 or more days past due ~~with all such loans~~and still accruing interest as the Company deemed them to be collectible. The balance as of ~~September~~June 30, ~~2021~~2022 includes a government-guaranteed loan in the amount of $548 thousand. The portfolio ~~only~~ includes ~~three~~four non-insured student loans that are 90 days or more past due and still accruing interest, amounting to ~~$31~~$30 thousand. Two loans acquired from TFB which are greater than 90 days past due and still accruing interest, totaling $366 thousand, are not included in this figure, as PCI loans are tracked and reported upon separately.

~~At September 30, 2021, the~~40

The Company had loans classified as impaired loans in the amount of ~~$1.6~~$1.4 million ~~compared to $1.3~~as of June 30, 2022, $1.5 million as of December 31, 2021, and $1.1 million at ~~December 31, 2020 and $2.2 million at September~~June 30, ~~2020.~~2021. Based on regulatory guidance on student lending, the Company has classified 5756 of its Purchased Student Loans as TDRs for a total of ~~$952~~$835 thousand as of ~~September~~June 30, ~~2021.~~2022. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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

Allowance for loan losses

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

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

Changes in the value of underlying collateral;

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

Changes in volume of delinquent loans;

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

Changes in lending policies and procedures, including underwriting standards;

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

Changes in the level of policy exceptions.

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

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

September 30,
2021

December 31,
2020

September 30,
2020

Loans held for investment at period-end

$
1,112,450

$
609,406

$
636,935

Allowance for loan losses

$
5,623

$
5,455

$
5,334

Allowance as a percent of period-end loans

0.51
%

0.90
%

0.84
%


	June 30, 2022			December 31, 2021			June 30, 2021
Total loans	$	960,192		$	1,061,211		$	1,166,161
Nonaccrual loans	$	511		$	495		$	17
Allowance for loan losses	$	5,503		$	5,984		$	5,522
Nonaccrual loans to total loans		0.05	%		0.05	%		0.00	%
ALLL to total loans		0.57	%		0.56	%		0.47	%
ALLL to nonaccrual loans		1076.91	%		1208.89	%		32482.35	%

The ALLL as a percentage of loans was ~~0.51%~~0.57% as of ~~September~~June 30, ~~2021, 0.90%~~2022, 0.56% as of December 31, ~~2020,~~2021, and ~~0.84%~~0.47% as of ~~September~~June 30, ~~2020. The percentage decrease as compared to year-end and the same period in the prior year relate to the elimination of Fauquier’s ALLL as the Acquired Loans were recorded at fair value.~~2021. The ALLL as a percentage of gross loans, excluding the impact of ~~Acquired Loans~~the acquired loans and ~~the~~ fair value mark (a non-GAAP financial measure), would have been ~~0.90%~~0.91% as of ~~September~~June 30, 2022, compared to 0.88% as of June 30, 2021. ~~Refer~~The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.39% as of June 30, 2022, compared to 2.23% as of June 30, 2021. The fair value mark that was allocated to the ~~Reconciliation~~acquired loans was $21.3 million as of the Effective Date, with a remaining balance of $17.5 million as of June 30, 2022. Refer to

the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.

~~Provisions~~A recovery of provision for loan losses totaling ~~$477~~$69 thousand and ~~$1.4 million were~~a provision for loan losses totaling $210 thousand was recorded in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The following is a summary of the changes in the ALLL for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (dollars in thousands):


	2021			2020			2022			2021
Allowance for loan losses, January 1	$	5,455		$	4,209		$	5,984		$	5,455
Charge-offs		(605	)		(643	)		(664	)		(397	)
Recoveries		296			401			252			254
Provision for loan losses		477			1,367
Allowance for loan losses, September 30	$	5,623		$	5,334
Provision for (recovery of) loan losses								(69	)		210
Allowance for loan losses, June 30							$	5,503		$	5,522

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

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of ~~September~~June 30, ~~2021~~2022 and acknowledges that the ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of ~~September~~June 30, ~~2021~~2022 totaled ~~$25.2~~$19.2 million compared to ~~$5.2~~$25.1 million as of December 31, ~~2020~~2021 and ~~$5.4~~$25.4 million as of ~~September~~June 30, ~~2020, with the increases~~2021, decreasing due to the ~~inclusion~~sale of ~~Fauquier’s land and~~two buildings ~~at fair value effective April 1, 2021.~~during the current quarter. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of ~~September~~June 30, ~~2021,~~2022, the Company occupied sixteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, ~~Virginia~~Virginia.. The Company entered into a lease for branch and office space in Richmond, Virginia during the first quarter of 2020 and, after delays related to construction and COVID-19, anticipates opening the office during the fourth quarter of 2021.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters, operations center, and offices of both Masonry Capital and Sturman Wealth Advisors. VNB Trust & Estate Services is located at ~~112~~103 Third Street, SE, Charlottesville, Virginia, which is part of the same leased space that the Company uses to operate the drive-through location at 301 East Water Street, Charlottesville, Virginia. TFB Wealth Management is located at 10 Courthouse Square, Warrenton, Virginia.

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

Leases

As of ~~September~~June 30, ~~2021,~~2022, the Company has recorded ~~$8.0~~$7.3 million of right-of-use assets and ~~$7.5~~$6.9 million of lease liabilities, in accordance with ~~Accounting Standards Update~~ASU 2016-02 “Leases” (Topic 842). As of December 31, ~~2020, $3.5~~2021, $7.6 million of right-of-use assets and ~~$3.6~~$7.1 million of lease liabilities were included on the balance sheet. ~~The increase is due to the inclusion of Fauquier’s leases effective April 1, 2021, at fair value.~~ Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.

Deposits

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

Total deposits as of ~~September~~June 30, 2022 were $1.6 billion, a decrease of $197 million compared to December 31, 2021, and a decrease of $30.6 million compared to June 30, 2021 were $1.7 billion, an increase of $1.0 billion compared to the balances of $730.8 million at December 31, 2020, and an increase of $1.0 billion compared to the $694.5 million total as of September 30, 2020. The primary reason for the increases(dollars in the periodic comparisons is the inclusion of Fauquier’s deposits of $817.7 million, at fair value, effective upon the Merger date of April 1, 2021, as well as increased balances in PPP customer accounts.thousands).

Deposit accounts

(dollars in thousands)

September 30, 2021

December 31, 2020

September 30, 2020

Balance

% of Total
Deposits

Balance

% of Total
Deposits

Balance

% of Total
Deposits

No cost and low cost
   deposits:

Noninterest demand deposits

$
504,696

29.1
%

$
209,772

28.71
%

$
190,204

27.4
%
Interest checking accounts

424,642

24.4
%

148,910

20.37
%

135,569

19.5
%
Money market and savings
   deposit accounts

642,788

37.0
%

272,980

37.36
%

270,653

39.0
%

Total noninterest and low
   cost deposit accounts

1,572,126

90.5
%

631,662

86.4
%

596,426

85.9
%

Time deposit accounts:

Certificates of deposit

158,113

9.1
%

90,615

12.4
%

89,596

12.9
%
CDARS deposits

6,944

0.4
%

8,487

1.2
%

8,499

1.2
%
Total certificates of
   deposit and other time
   deposits

165,057

9.5
%

99,102

13.6
%

98,095

14.1
%

Total deposit account
   balances

$
1,737,183

100.0
%

$
730,764

100.0
%

$
694,521

100.0
%


	June 30, 2022					December 31, 2021					June 30, 2021
			% of					% of					% of
	Balance		Total			Balance		Total			Balance		Total
No cost and low cost deposits:
Noninterest demand deposits	$	512,889		32.1	%	$	522,281		29.1	%	$	449,483		27.6	%
Interest checking accounts		399,930		25.0	%		446,314		24.8	%		431,556		26.5	%
Money market and savings deposit accounts		535,958		33.5	%		665,530		37.1	%		577,414		35.4	%

Total noninterest and low cost deposit accounts		1,448,777		90.6	%		1,634,125		91.0	%		1,458,453		89.5	%

Time deposit accounts:
Certificates of deposit		144,913		9.1	%		155,901		8.7	%		162,217		10.0	%
CDARS deposits		5,208		0.3	%		6,144		0.3	%		8,778		0.5	%
Total certificates of deposit and other time deposits		150,121		9.4	%		162,045		9.0	%		170,995		10.5	%

Total deposit account balances	$	1,598,898		100.0	%	$	1,796,170		100.0	%	$	1,629,448		100.0	%

Noninterest-bearing demand deposits on ~~September~~June 30, ~~2021~~2022 were ~~$504.7~~$512.9 million, representing ~~29.1%~~32.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$1.1 billion,~~$935.9 million, and represented ~~61.4%~~58.5% of total deposits at ~~September~~June 30, ~~2021.~~2022. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~90.5%~~90.6% of total deposit accounts at ~~September~~June 30, ~~2021.~~2022. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep ~~(“ICS~~®”) deposit products. ICS® deposit balances of ~~$38.3~~$28.8 million and ~~$179.2~~$128.6 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of ~~September~~June 30, ~~2021.~~2022. As of December 31, ~~2020,~~2021, ICS® deposit balances of ~~$28.0~~$39.2 million and ~~$81.1~~$225.9 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively. All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining ~~9.5% and 13.6%~~9.4% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$165.1 million and $99.1~~$150.1 million at ~~September~~June 30, ~~2021 and December 31, 2020, respectively.~~2022. Included in these deposit totals are ~~Certificate of Deposit Account Registry Service CDs, known as~~ CDARSTM, whereby depositors can obtain ~~Federal Deposit Insurance Corporation (“FDIC”)~~FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled ~~$6.9~~$5.2 million as of ~~September~~June 30, ~~2021~~2022 and ~~$ 8.5~~$6.1 million as of December 31, ~~2020,~~2021, all of which were reciprocal balances for the Company’s customers.

4543

Borrowings

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

The Company has a collateral dependent line of credit with the ~~FHLB. During the three months ended September 30, 2021, the Company prepaid 100% of its~~FHLB, with no outstanding FHLB advances, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such acquired Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand. Due to this repayment,borrowings as of ~~September~~June 30, ~~2021, the Company had no outstanding balances from FHLB advances. As of~~2022 or December 31, ~~2020, the Company had $30 million in outstanding balances from FHLB advances, and as of September 30, 2020, the Company had no outstanding balances from FHLB advances.~~2021. The Company ~~had~~has an ~~outstanding~~off-balance sheet letter of credit ~~which is off-balance sheet,~~ in the amount of $60 million as of ~~September~~June 30, ~~2021.~~2022 and December 31, 2021, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. This letter of credit is secured by commercial mortgages.

Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of ~~September~~June 30, ~~2021,~~2022, December 31, ~~2020~~2021 or ~~September~~June 30, ~~2020.~~2021.

Junior Subordinated Debt

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of June 30, 2022 and December 31, 2021, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR.

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.

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


Equity, December 31, 2020	$	82,598
Equity, December 31, 2021				$	161,987
Net income		4,790			10,609
Acquisition of Fauquier Bankshares, Inc.		78,036
Other comprehensive loss		(1,920	)		(35,484	)
Cash dividends declared		(4,003	)		(3,193	)
Equity increase due to exercise of stock options		30
Equity increase due to expensing of stock options		96			83
Equity increase due to expensing of restricted stock		283			214
Equity, September 30, 2021	$	159,910
Equity, June 30, 2022				$	134,216

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

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~13.22%~~15.95%, ~~13.22%~~15.95%, ~~13.74%~~16.50% and ~~7.59%~~8.79%, respectively, as of ~~September~~June 30, ~~2021,~~2022, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~13.47%~~15.69%, ~~13.47%~~15.69%, ~~13.99%~~16.24% and ~~7.75%~~8.65%, respectively, as of ~~September~~June 30, ~~2021,~~2022, also exceeding the minimum requirements.

As of ~~September~~June 30, ~~2021,~~2022, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the ~~“prompt corrective action”~~PCA regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

RESULTS OF OPERATIONS

Non-GAAP presentations

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in ~~referring~~the banking industry. However, certain non-GAAP measures are used by management to ~~its~~supplement the evaluation of the Company’s performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income ~~is referring~~on loans and investments for which no income taxes are paid to the equivalent yield as if income ~~computed in accordance with GAAP, unless otherwise noted. Management’s Discussion and Analysis~~taxes were paid) using the federal corporate income tax rate of ~~Consolidated Financial Condition and Results of Operations also refer to various calculations~~21 percent that ~~are non-GAAP presentations. They include:~~was applicable for all periods presented.



~~Performance measures~~ exclude nonrecurring merger and merger related expenses, which were incurred in connection with change-in-control, severance, due diligence, legal, and other professional fees associated with the merger with Fauquier. Management believes that the ~~exclusion~~use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the significant one-time effect of merger and merger related expenses provides users of the Company’s financial information a presentation of the Company’s financial results that is representative of its ongoing operations. In this non-GAAP presentation, the merger and merger related expenses incurred is addedALLL to ~~the Company’s net income.~~



~~Fully taxable-equivalent (“FTE”) adjustments~~– Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis. This is a non-GAAP presentation. The FTE basis adjusts for the tax-exempt status of net interest income from certain investments using a federal tax rate of 21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.



~~Efficiency ratio –~~ One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base,total loans, such as well as to align presentation of this financial measure with peers in the industry. The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with FDIC studies.



~~Net interest margin~~– Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets. The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.



~~The ALLL as a percentage of loans, excluding~~ the impact of ~~loans acquired from Fauquier (the "Acquired Loans") and the related~~ fair value ~~mark~~ on the Acquired Loans. Management believes that the exclusion of the Acquired Loans provides users of the Company’s financial information a presentation of the Company’s ALLL percentage that is representative of its ongoing operations.



~~Tangible book value per share~~ ~~excludes the impact of the~~adjustment, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other ~~intangibles. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, to evaluate use of equity, financial condition~~banks and ~~capital strength.~~

~~Management uses~~bank holding companies may define or calculate these ~~non-GAAP~~or similar measures ~~to evaluate the Company’s operating performance on a basis comparable to other financial periods.~~differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

4745

~~The~~A reconcilement ~~below shows how these~~of the non-GAAP financial measures ~~are computed from their respective~~used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands):


Reconcilement of Non-GAAP Measures:	As of or for the Three Months Ended						For the Nine Months Ended
													As of or for the Three Months Ended						For the Six Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Performance measures
Return on average assets ("ROAA")		0.65	%		0.89	%		0.41	%		0.92	%		1.27	%		0.03	%		1.15	%		0.24	%
Impact of merger and merger related expenses, net of tax		0.31	%		0.19	%		0.53	%		0.06	%		0.00	%		0.99	%		0.00	%		0.69	%
ROAA, excluding merger and merger related expenses (non-GAAP)		0.96	%		1.08	%		0.95	%		0.97	%		1.27	%		1.02	%		1.15	%		0.93	%

Return on average equity ("ROAE")		7.70	%		9.20	%		4.80	%		9.05	%		16.20	%		0.37	%		14.26	%		2.76	%
Impact of merger and merger related expenses, net of tax		3.59	%		1.92	%		6.20	%		0.55	%		0.00	%		11.51	%		0.00	%		7.90	%
ROAE, excluding merger and merger related expenses (non-GAAP)		11.30	%		11.12	%		11.01	%		9.60	%		16.20	%		11.88	%		14.26	%		10.66	%

Net income	$	3,138		$	1,870		$	4,790		$	5,362		$	5,685		$	147		$	10,609		$	1,652
Impact of merger and merger related expenses, net of tax		1,465			391			6,188			324			-			4,553			-			4,722
Net income, excluding merger and merger related expenses (non-GAAP)	$	4,603		$	2,261		$	10,978		$	5,686		$	5,685		$	4,700		$	10,609		$	6,374

Net income per share, diluted	$	0.59		$	0.69		$	1.07		$	1.98		$	1.06		$	0.03		$	1.98		$	0.41
Impact of merger and merger related expenses, net of tax		0.27			0.14			1.38			0.12			-			0.86			-			0.92
Net income per share, excluding merger and merger related expenses (non-GAAP), diluted	$	0.86		$	0.83		$	2.45		$	2.10		$	1.06		$	0.89		$	1.98		$	1.33

Fully tax-equivalent measures
Net interest income	$	13,504		$	6,047		$	32,629		$	17,177		$	12,461		$	13,151		$	23,886		$	19,125
Fully tax-equivalent adjustment		77			42			194			87			82			73			163			120
Net interest income (FTE)	$	13,581		$	6,089		$	32,823		$	17,264		$	12,543		$	13,224		$	24,049		$	19,245

Efficiency ratio		75.5	%		66.0	%		83.9	%		63.4	%		58.6	%		99.5	%		60.0	%		90.0	%
Fully tax-equivalent adjustment		-0.3	%		-0.3	%		-0.4	%		-0.3	%		-0.3	%		-0.4	%		0.1	%		-0.5	%
Efficiency ratio (FTE)		75.2	%		65.7	%		83.5	%		63.1	%		58.3	%		99.1	%		60.1	%		89.5	%

Net interest margin		3.06	%		3.03	%		3.01	%		3.10	%		3.00	%		3.03	%		2.76	%		2.98	%
Fully tax-equivalent adjustment		0.02	%		0.02	%		0.02	%		0.02	%		0.02	%		0.02	%		0.02	%		0.02	%
Net interest margin (FTE)		3.08	%		3.05	%		3.03	%		3.12	%		3.02	%		3.05	%		2.78	%		3.00	%

Other financial measures
ALLL to total loans		0.51	%		0.84	%								0.57	%		0.47	%
Impact of acquired loans and fair value mark		0.39	%		0.00	%								0.34	%		0.41	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.90	%		0.84	%								0.91	%		0.88	%

ALLL to total loans														0.57	%		0.47	%
Fair value mark to total loans														1.82	%		1.76	%
ALLL + fair value mark to total loans (non-GAAP)														2.39	%		2.23	%

Book value per share	$	30.13		$	29.64								$	25.20		$	29.89
Impact of intangible assets		(3.21	)		(0.27	)								(2.96	)		(3.29	)
Tangible book value per share (non-GAAP)	$	26.92		$	29.37								$	22.24		$	26.60

Total equity	$	159,910		$	80,457								$	134,216		$	158,602
Impact of intangible assets		(17,043	)		(729	)								(15,785	)		(17,477	)
Tangible equity	$	142,867		$	79,728								$	118,431		$	141,125

Net income

Net income for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$3.1~~$5.7 million, a ~~$1.3~~$5.5 million ~~or 68%~~ increase compared to net income reported for the three months ended ~~September~~June 30, ~~2020.~~2021. Net income per diluted share was ~~$0.59~~$1.06 for the quarter ended ~~September~~June 30, ~~2021~~2022 compared to ~~$0.69~~$0.03 per diluted share for the same quarter in the prior year. ~~Note that~~

Net income for the ~~decline in net~~six months ended June 30, 2022 was $10.6 million, compared to $1.6 million for the six months ended June 30, 2021. Net income per diluted share was $1.98 for ~~periods noted was driven by~~ the increase in number of shares outstanding as a result of the merger. Excluding merger and merger related costs, the Company would have posted net income of $4.6 million, or $0.86 per diluted share (a non-GAAP financial measure), six months ended June 30, 2022,compared to ~~$2.3 million, or $0.83~~$0.41 per diluted share for the ~~three months ended September 30, 2020.~~same period in the prior year.

Net interest income

Net interest income (FTE) for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$13.6~~$12.5 million, a ~~$7.5 million or 123.0% increase~~$681 thousand decrease compared to net interest income (FTE) of ~~$6.1~~$13.2 million for the three months ended ~~September~~June 30, ~~2020. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the current quarter, as the Merger was effective April 1,~~ 2021. Net interest income (FTE) ~~was positively impacted by~~decreased primarily due to the ~~$94 thousand decline in interest expense, as described below. The increased~~decreased volume of loans, ~~also a result of the Merger, increasing~~declining from an average of ~~$630.7~~$1.2 billion in the three months ended June 30, 2021 to $984.9 million in the three months ended ~~September~~June 30, ~~2020 to $1.1 billion in the three months ended September 30, 2021, positively impacted~~2022, negatively impacting interest income by ~~$5.7 million. The higher average yield earned on loans, increasing to 4.51% from 3.89% for the periods noted, positively impacted interest income by $1.1~~$2.5 million. The fair value accretion on Acquired Loans positively impacted net interest income by ~~27 basis points~~12 bps during the three months ended ~~September~~June 30, ~~2021.~~2022. The increase in volume of securities held, ~~primarily as the result of the Merger,~~ from an average balance of ~~$146.0~~$270.2 million for the three months ended ~~September~~June 30, ~~2020~~2021 to ~~$274.1~~$391.2 million for the three months ended ~~September~~June 30, ~~2021,~~2022, positively impacted net interest income by ~~$555~~$567 thousand, ~~while~~and the ~~decline~~increase in yield earned on such securities ~~decreased~~increased from ~~1.74%~~1.68% to ~~1.68%~~2.16% for the periods noted, ~~negatively~~positively impacted net interest income by ~~$38~~$411 thousand.

~~Net~~ FFS and interest ~~income (FTE) for the nine months ended September 30, 2021 was $32.8 million, a $15.5 million or 90.1% increase compared~~bearing deposits in other banks contributed an additional $281 thousand and $183 thousand, respectively, to ~~net interest income (FTE) of $17.3 million for the nine months ended September 30, 2020. Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s~~ net interest income (FTE) for the ~~nine~~three months ended ~~September~~June 30, ~~2021,as~~2022 compared to the ~~merger was effective April 1,~~three months ended June 30, 2021. Net interest income (FTE) was positively impacted by the ~~$366~~$276 thousand ~~decline~~decrease in interest expense, as described below. ~~The~~

Net interest income (FTE) for the six months ended June 30, 2022 was $24.0 million, a $4.8 million increase compared to net interest income (FTE) of $19.2 million for the six months ended June 30, 2021. Net interest income (FTE) increased primarily due to the increased volume of loans ~~also~~as a result of the Merger, increasing from an average of ~~$595.0~~$910.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 to ~~$995.5 million~~$1.0 billion in the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022. This increase in volume of loans positively impacted interest income by ~~$12.8~~$1.9 million. The increase in yield on loans, increasing from 4.20% for the six months ended June 30, 2021 to 4.28% for the six months ended June 30, 2022 positively impacted net interest income by $489 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by ~~52 basis points~~24 bps during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The increase in volume of securities held, ~~primarily as the result of the Merger,~~ from an average balance of ~~$109.8~~$222.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 to ~~$239.8~~$352.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, positively impacted net interest income by ~~$1.7~~$1.2 million, ~~while~~and the ~~decline~~increase in yield earned on such securities ~~decreased~~increased from ~~1.98%~~1.65% to ~~1.70%~~2.03% for the periods noted, ~~negatively impacted~~positively impacting net interest income by ~~$315~~$531 thousand. FFS and interest bearing deposits in other banks contributed and additional $291 thousand and $290 thousand, respectively, to net interest income (FTE) for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Net interest income (FTE) was positively impacted by the $49 thousand decrease in interest expense, as described below.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of ~~3.08%~~3.02% for the three months ended ~~September~~June 30, ~~2021~~2022 was 3 ~~basis points higher~~bps lower than the 3.05% for the three months ended ~~September~~June 30, ~~2020.~~2021. The net interest margin (FTE) of ~~3.03%~~2.78% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~9 basis points~~22 bps lower than the ~~3.12%~~3.00% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Interest expense decreased ~~$94~~$276 thousand for the three months ended ~~September~~June 30, ~~2021~~2022 compared to the same period in the prior year, due to ~~increased~~decreased volume of deposits, ~~from the Merger,~~ as average interest-bearing deposits ~~increased $684.8~~decreased $54.2 million for the period noted, ~~negatively~~positively impacting interest expense by ~~$555~~$44 thousand, ~~offset by~~coupled with lower rates paid on deposits, positively impacting interest expense by ~~$289~~$173 thousand. The rate paid on interest-bearing deposits averaged ~~31 basis points~~24 bps in the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~53 basis points~~30 bps for the three months ended ~~September~~June 30, ~~2020. During~~2021. Also during the three months ended ~~September~~June 30, 2021, the ~~Company prepaid 100%~~Bank had average outstanding borrowing with the FHLB of ~~its outstanding FHLB advances, which positively impacted~~$43.0 million, with an interest expense ~~by $416 thousand as a result~~ of ~~accelerating~~$59 thousand. No such borrowings were outstanding during the fair value accretion on such Fauquier debt. A prepayment penalty in the amount of $243 thousand was incurred and is reported in noninterest expense, netting to an overall gain on the transaction of $173 thousand.three month period ending June 30, 2022.

Interest expense decreased ~~$366~~$49 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the same period in the prior year, primarily due ~~primarily~~ to the ~~lower~~elimination of borrowings from the FHLB, which caused a decline in interest expense period over period of $95 thousand. The impact to interest expense from the increase in the volume of interest-bearing deposits, increasing interest expense by $448 thousand, was completely offset by the decline in rates paid on deposits, ~~positively impacting~~decreasing interest expense by ~~$1.5 million,~~$451 thousand when comparing the six months ended June 30, 2021 to the six months ended June 30, 2022.

offset by the increased volume of deposits from the Merger, as average interest-bearing deposits increased $477.9 million for the period noted, negatively impacting interest expense by $1.4 million. The rate paid on interest-bearing deposits averaged 34 basis points in the nine months ended September 30, 2021, compared to 72 basis points for the nine months ended September 30, 2020. The prepayment of debt during the nine months ended September 30, 2021, as noted above, positively impacted net interest income by $280 thousand.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income


	For the Three Months Ended
	June 30, 2022			June 30, 2021			Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/
		Expense			Expense				(Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities	$325,833	$1,726	2.12%	$211,827	$792	1.50%	$526	$408	$934
Tax Exempt Securities 1	65,352	390	2.39%	58,398	346	2.37%	41	3	44
Total Securities 1	391,185	2,116	2.16%	270,225	1,138	1.68%	567	411	978
Loans:
Real Estate	847,661	8,988	4.25%	997,446	10,175	4.09%	(1,576)	389	(1,187)
Commercial	86,394	995	4.62%	144,209	1,967	5.47%	(700)	(272)	(972)
Consumer	50,828	627	4.95%	72,468	867	4.80%	(266)	26	(240)
Total Loans	984,883	10,610	4.32%	1,214,123	13,009	4.30%	(2,542)	143	(2,399)
Fed Funds Sold	150,393	302	0.81%	106,934	21	0.08%	12	269	281
Other interest-bearing deposits	142,010	219	0.62%	149,056	36	0.10%	(2)	185	183
Total Earning Assets	1,668,471	13,247	3.18%	1,740,338	14,204	3.27%	(1,965)	1,008	(957)
Less: Allowance for Loan Losses	(5,866)			(5,732)
Total Non-Earning Assets	133,526			124,287
Total Assets	$1,796,131			$1,858,893

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$411,374	$58	0.06%	$437,611	$93	0.09%	$(5)	$(30)	$(35)
Money Market and Savings Deposits	550,883	440	0.32%	561,940	455	0.32%	(9)	(6)	(15)
Time Deposits	152,695	157	0.41%	169,556	324	0.77%	(30)	(137)	(167)
Total Interest-Bearing Deposits	1,114,952	655	0.24%	1,169,107	872	0.30%	(44)	(173)	(217)
Borrowings	—	—	—	43,030	59	0.55%	(59)	—	(59)
Junior subordinated debt	3,383	49	5.81%	3,334	49	—	—	—	—
Total Interest-Bearing Liabilities	1,118,335	704	0.25%	1,215,471	980	0.32%	(103)	(173)	(276)
Non-Interest-Bearing Liabilities:
Demand deposits	527,008			471,078
Other liabilities	10,067			14,109
Total Liabilities	1,655,410			1,700,658
Shareholders' Equity	140,721			158,235
Total Liabilities & Shareholders' Equity	$1,796,131			$1,858,893
Net Interest Income (FTE)		$12,543			$13,224		$(1,862)	$1,181	$(681)
Interest Rate Spread 2			2.93%			2.95%
Cost of Funds			0.17%			0.23%
Interest Expense as a Percentage of Average Earning Assets			0.17%			0.23%
Net Interest Margin (FTE) 3			3.02%			3.05%

For the three months ended

September 30, 2021

September 30, 2020

Change in Interest Income/ Expense

Average

Interest

Average

Average

Interest

Average

Change Due to : 4

Total

Balance

Income/

Yield/Cost

Balance

Income/

Yield/Cost

Volume

Rate

Increase/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities

Taxable Securities

$
214,194

$
797

1.49
%

$
118,557

$
433

1.46
%

$
356

$
8

$
364

Tax Exempt Securities 1

59,869

355

2.37
%

27,473

202

2.94
%

199

(46
)

153

Total Securities 1

274,063

1,152

1.68
%

146,030

635

1.74
%

555

(38
)

517

Total Loans

1,140,281

12,959

4.51
%

630,704

6,175

3.89
%

5,658

1,126

6,784

Fed Funds Sold

137,472

45

0.13
%

16,980

3

37

5

42

Other interest-bearing deposits

198,983

55

0.11
%

—

—

—

55

—

55

Total Earning Assets

1,750,799

14,211

3.22
%

793,714

6,813

3.41
%

6,305

1,093

7,398

Less: Allowance for Loan Losses

(5,607
)

(5,141
)

Total Non-Earning Assets

159,106

47,736

Total Assets

$
1,904,298

$
836,309

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
410,504

$
72

0.07
%

$
139,698

$
40

0.11
%

$
52

$
(20
)

$
32

Money Market and Savings Deposits

621,211

601

0.38
%

281,161

343

0.49
%

340

(82
)

258

Time Deposits

171,256

282

0.65
%

97,300

306

1.25
%

163

(187
)

(24
)
Total Interest-Bearing Deposits

1,202,971

955

0.31
%

518,159

689

0.53
%

555

(289
)

266

Short term borrowings

22,260

(375
)

-6.68
%

28,620

35

0.49
%

(5
)

(405
)

(410
)
Junior subordinated debt

3,349

50

5.92
%

—

—

—

50

—

50

Total Interest-Bearing Liabilities

1,228,580

630

0.20
%

546,779

724

0.53
%

600

(694
)

(94
)
Non-Interest-Bearing Liabilities:

Demand deposits

499,068

203,798

Other liabilities

15,003

4,870

Total Liabilities

1,742,651

755,447

Shareholders' Equity

161,647

80,862

Total Liabilities & Shareholders' Equity

$
1,904,298

$
836,309

Net Interest Income (FTE)

$
13,581

$
6,089

$
5,705

$
1,787

$
7,492

Interest Rate Spread 2

3.02
%

2.89
%

Interest Expense as a Percentage of Average
Earning Assets

0.14
%

0.36
%

Net Interest Margin (FTE) 3

3.08
%

3.05
%

(1)

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

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

5048

Consolidated Average Balance Sheet and Analysis of Net Interest Income

For the Nine Months Ended

September 30, 2021

September 30, 2020

Change in Interest Income/ Expense

Average

Interest

Average

Average

Interest

Average

Change Due to : 4

Total

Balance

Income/

Yield/Cost

Balance

Income/

Yield/Cost

Volume

Rate

Increase/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities

Taxable Securities

$
189,250

$
2,127

1.50
%

$
91,863

$
1,220

1.77
%

$
1,120

$
(213
)

$
907

Tax Exempt Securities (1)

50,559

923

2.43
%

17,933

413

3.07
%

612

(102
)

510

Total Securities (1)

239,809

3,050

1.70
%

109,796

1,633

1.98
%

1,732

(315
)

1,417

Total Loans

995,524

31,904

4.28
%

594,998

18,202

4.09
%

12,797

905

13,702

Fed Funds Sold

94,502

78

0.11
%

34,535

98

0.38
%

84

(104
)

(20
)
Other interest-bearing deposits

118,331

94

0.11
%

—

—

—

94

—

94

Total Earning Assets

1,448,166

35,126

3.24
%

739,329

19,933

3.60
%

14,707

486

15,193

Less: Allowance for Loan Losses

(5,618
)

(4,731
)

Total Non-Earning Assets

104,539

46,995

Total Assets

$
1,547,087

$
781,593

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
333,193

$
191

0.08
%

$
131,281

$
96

0.10
%

$
120

$
(25
)

$
95

Money Market and Savings Deposits

484,742

1,407

0.39
%

255,837

1,372

0.72
%

855

(820
)

35

Time Deposits

148,715

886

0.80
%

101,651

1,166

1.53
%

413

(693
)

(280
)
Total Interest-Bearing Deposits

966,650

2,484

0.34
%

488,769

2,634

0.72
%

1,388

(1,538
)

(150
)
Short term borrowings

31,967

(280
)

-1.17
%

9,610

35

0.49
%

(32
)

(283
)

(315
)
Junior subordinated debt

2,324

99

5.70
%

—

—

—

99

—

99

Total Interest-Bearing Liabilities

1,000,941

2,303

0.31
%

498,379

2,669

0.72
%

1,455

(1,821
)

(366
)
Non-Interest-Bearing Liabilities:

Demand deposits

402,163

199,490

Other liabilities

10,617

4,607

Total Liabilities

1,413,721

702,476

Shareholders' Equity

133,366

79,117

Total Liabilities & Shareholders' Equity

$
1,547,087

$
781,593

Net Interest Income (FTE)

$
32,823

$
17,264

$
13,252

$
2,307

$
15,559

Interest Rate Spread 2

2.94
%

2.89
%

Interest Expense as a Percentage of Average
Earning Assets

0.21
%

0.48
%

Net Interest Margin (FTE) 3

3.03
%

3.12
%


	For the Six Months Ended
	June 30, 2022			June 30, 2021			Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/
		Expense			Expense				(Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities	$287,241	$2,800	1.95%	$176,151	$1,264	1.44%	$979	$557	$1,536
Tax Exempt Securities 1	65,249	775	2.38%	45,818	569	2.48%	232	(26)	206
Total Securities 1	352,490	3,575	2.03%	221,969	1,833	1.65%	1,211	531	1,742
Loans:
Real Estate	866,863	18,082	4.21%	679,951	14,282	4.24%	3,899	(99)	3,800
Commercial	89,944	2,084	4.67%	166,941	3,156	3.81%	(1,676)	604	(1,072)
Consumer	51,302	1,213	4.77%	63,148	1,509	4.82%	(280)	(16)	(296)
Total Loans	1,008,109	21,379	4.28%	910,040	18,947	4.20%	1,943	489	2,432
Fed Funds Sold	151,429	363	0.48%	87,276	72	0.17%	81	210	291
Other interest-bearing deposits	235,418	356	0.30%	74,475	66	0.18%	219	71	290
Total Earning Assets	1,747,446	25,673	2.96%	1,293,760	20,918	3.26%	3,454	1,301	4,755
Less: Allowance for Loan Losses	(5,946)			(5,624)
Total Non-Earning Assets	124,851			84,069
Total Assets	$1,866,351			$1,372,205

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$416,393	$119	0.06%	$291,025	$119	0.08%	$42	$(42)	$0
Money Market and Savings Deposits	603,259	1,055	0.35%	422,048	806	0.39%	322	(73)	249
Time Deposits	155,544	352	0.46%	134,355	604	0.91%	84	(336)	(252)
Total Interest-Bearing Deposits	1,175,196	1,526	0.26%	847,428	1,529	0.36%	448	(451)	(3)
Borrowings	—	—	—	36,551	95	0.52%	(95)	—	(95)
Junior subordinated debt	3,377	98	5.85%	1,255	49	—	64	(15)	49
Total Interest-Bearing Liabilities	1,178,573	1,624	0.28%	885,234	1,673	0.38%	417	(466)	(49)
Non-Interest-Bearing Liabilities:
Demand deposits	527,049			363,709
Other liabilities	10,704			2,877
Total Liabilities	1,716,326			1,251,820
Shareholders' Equity	150,025			120,385
Total Liabilities & Shareholders' Equity	$1,866,351			$1,372,205
Net Interest Income (FTE)		$24,049			$19,245		$3,037	$1,767	$4,804
Interest Rate Spread 2			2.68%			2.88%
Cost of Funds			0.19%			0.27%
Interest Expense as a Percentage of Average Earning Assets			0.38%			0.26%
Net Interest Margin (FTE) 3			2.78%			3.00%

(1)

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

5149

Provision for loan losses

A recovery of provision for loan losses of ~~$267~~$217 thousand was recognized during the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$224~~$141 thousand recognized during the three months ended ~~September~~June 30, ~~2020, and~~2021. A recovery of provision for loan losses of $69 thousand was recognized during the six months ended June 30, 2022 compared to a provision for loan losses recognized of ~~$477~~$210 thousand ~~was recognized~~ during the ~~nine~~six months ended ~~September~~June 30, 2021, compared to $1.4 million recognized during the nine months ended September 30, 2020. During the first two quarters of 2020, the Company increased the economic qualitative factors in the ALLL calculation due to the deterioration in the economic outlook resulting from the impact of COVID-19. During the second quarter of 2021, the Company released of a portion of the reserves that were added during 2020 since the credit deterioration has so far not been experienced to the extent previously anticipated. No further changes were made to the economic qualitative factors in the third quarter of 2021.

The period-end ALLL as a percentage of ~~assets~~total loans was ~~0.51%~~0.57% as of ~~September~~June 30, ~~2021, 0.90%~~2022, 0.56% as of December 31, ~~2020~~2021 and ~~0.84%~~0.47% as of ~~September~~June 30, 2020. The percentage decrease as compared to the prior year end and the same period in the prior year was due to the addition of Acquired Loans effective with the Merger, and the elimination of their ALLL as the loans were acquired and booked at fair value. The ALLL as of September 30, 2021, excluding the impact of the Acquired Loans and the fair value mark, would have been 0.90%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to Non-GAAP ALLL.2021.

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 5 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at ~~September~~June 30, ~~2021.~~2022. The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

Noninterest income

The components of noninterest income for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are shown below (dollars in thousands):


	For the three months ended				Variance						For the Three Months Ended				Variance
	September 30, 2021		September 30, 2020		$			%			June 30, 2022		June 30, 2021		$			%
Noninterest income:
Wealth management fees	$	744	$	263	$	481			182.9	%	$	572	$	980	$	(408	)		-41.6	%
Advisory and brokerage income		358		175		183			104.6	%		210		359		(149	)		-41.5	%
Deposit account fees		396		162		234			144.4	%		458		426		32			7.5	%
Debit/credit card and ATM fees		808		144		664			461.1	%		779		599		180			30.1	%
Earnings/increase in value of bank owned life insurance		201		111		90			81.1	%
Gains on sales of securities		-		91		(91	)		-100.0	%
Loan swap fee income		24		344		(320	)		-93.0	%
Bank owned life insurance income												246		199		47			23.6	%
Gains on sale of assets												1,113	-			1,113			100.0	%
Other		947		135		812			601.5	%		268		357		(89	)		-24.9	%
Total noninterest income	$	3,478	$	1,425	$	2,053			144.1	%	$	3,646	$	2,920	$	726			24.9	%

Noninterest income for the three months ended ~~September~~June 30, ~~2021~~2022 of ~~$3.5~~$3.6 million was ~~$2.1 million~~$726 thousand or ~~144.1%~~24.9% higher than the amount recorded for the three months ended ~~September~~June 30, ~~2020.~~2021. Noninterest income increased predominantly due to the ~~inclusion~~gain on the sale of ~~Fauquier’s accounts, contributing to~~two buildings in the ~~increase~~amount of $1.1 million, offset by a decrease in ~~debit card income of $664 thousand,~~ wealth management fees of ~~$481~~$408 thousand deposit fees of $234 thousand, and advisory and brokerage income of $183 thousand. Swap fee income declined $320 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment, and gains on sales of securities declined from the same quarter of the prior year by $91 thousand, as no securities were sold during the current quarter. Other income increased quarter over quarter by $812 thousand, primarily due to ~~the following: (i) realization of~~ a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.reduction in accounts.

The components of noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are shown below (dollars in thousands):


	For the Nine Months Ended				Variance						For the Six Months Ended				Variance
	September 30, 2021		September 30, 2020		$			%			June 30, 2022		June 30, 2021		$			%
Noninterest income:
Wealth management fees	$	2,053	$	801	$	1,252			156.3	%	$	1,129	$	1,309	$	(180	)		-13.8	%
Advisory and brokerage income		908		516		392			76.0	%		426		550		(124	)		-22.5	%
Deposit account fees		982		484		498			102.9	%		923		586		337			57.5	%
Debit/credit card and ATM fees		1,561		435		1,126			258.9	%		1,486		753		733			97.3	%
Earnings/increase in value of bank owned life insurance		507		327		180			55.0	%
Gains on sales of securities		-		734		(734	)		-100.0	%
Loan swap fee income		59		977		(918	)		-94.0	%
Bank owned life insurance income												457		306		151			49.3	%
Resolution of commercial dispute												2,400		-		2,400		N/A
Gain on sale of assets												1,113		27		1,086			4022.2	%
Other		1,367		446		921			206.5	%		499		428		71			16.6	%
Total noninterest income	$	7,437	$	4,720	$	2,717			57.6	%	$	8,433	$	3,959	$	4,474			113.0	%

Noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 of ~~$7.4~~$8.4 million was ~~$2.7~~$4.5 million or ~~57.6%~~113.0% higher than the amount recorded for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Noninterest income increased predominantly due to the ~~inclusion~~receipt and recognition of ~~Fauquier’s accounts, contributing~~a $2.4 million one-time payment to resolve a commercial dispute, the ~~increase in wealth management fees of $1.3 million, debit card income of~~ $1.1 million ~~deposit fees~~gain on the sale of ~~$498~~two buildings and an increase of $733 thousand ~~and advisory and brokerage~~of plastics income due to increased number of ~~$392 thousand. Gains on sales of securities declined from the same quarter~~retail accounts as a result of the prior year by $734 thousand, as no securities were sold and swap fee income declined $918 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment. As noted above, other income increased period over period, primarily due to the following: (i) realization of a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio, and (ii) recovery of $312 thousand from Fauquier loans that were charged off prior to April 1, 2021 and therefore had acquired fair values of zero.Merger.

Noninterest expense

The components of noninterest expense for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are shown below (dollars in thousands):


	For the Three Months Ended				Variance
	June 30, 2022		June 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	4,086	$	4,741	$	(655	)		-13.8	%
Net occupancy		1,282		1,109		173			15.6	%
Equipment		254		340		(86	)		-25.3	%
Bank franchise tax		304		429		(125	)		-29.1	%
Computer software		357		216		141			65.3	%
Data processing		699		994		(295	)		-29.7	%
FDIC deposit insurance assessment		125		182		(57	)		-31.3	%
Marketing, advertising and promotion		259		232		27			11.6	%
Merger and merger-related expenses		-		5,874		(5,874	)		-100.0	%
Plastics expense		92		73		19			26.0	%
Professional fees		404		510		(106	)		-20.8	%
Core deposit intangible amortization		427		428		(1	)		-0.2	%
Other		1,153		865		288			33.3	%
Total noninterest expense	$	9,442	$	15,993	$	(6,551	)		-41.0	%

For the three months ended

Variance

September 30,
2021

September 30,
2020

$

%

Noninterest expense:

Salaries and employee benefits

$
4,562

$
2,322

$
2,240

96.5
%
Net occupancy

1,039

501

538

107.4
%
Equipment

205

134

71

53.0
%
ATM, debit and credit card

212

46

166

360.9
%
Bank franchise tax

320

161

159

98.8
%
Computer software

361

159

202

127.0
%
Data processing

1,114

302

812

268.9
%
FDIC deposit insurance assessment

349

61

288

472.1
%
Marketing, advertising and promotion

337

55

282

512.7
%
Merger and merger related expenses

1,935

549

1,386

252.5
%
Professional fees

186

-

186

N/A

Core deposit intangible amortization

417

-

417

N/A

Other

1,787

645

1,142

177.1
%
Total noninterest expense

$
12,824

$
4,935

$
7,889

159.9
%

Noninterest expense for the quarter ended ~~September~~June 30, ~~2021~~2022 of ~~$12.8~~$9.4 million was ~~$7.9~~$6.6 million or ~~159.9% higher~~41.0% lower than the quarter ended ~~September~~June 30, ~~2020. The predominant reason for the increase was that the current year figures include the expenses of the merged company. In addition, the Company incurred $1.9 million in~~2021. This decrease is due to merger and ~~merger related~~merger-related expenses incurred during the ~~three~~six months ended ~~September~~June 30, 2021 ~~which was $1.4~~of $5.9 million, ~~higher than~~a reduction in salaries and employee benefits of $655 thousand as a result of reduced headcount and a $295 thousand reduction in data processing costs as a result of efficiencies gained in connection with the ~~amount of merger and merger related expenses incurred in the same quarter of the prior year.~~Merger.

The components of noninterest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are shown below (dollars in thousands):


	For the Nine Months Ended				Variance					For the Six Months Ended				Variance
	September 30, 2021		September 30, 2020		$		%			June 30, 2022		June 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	11,705	$	7,004	$	4,701		67.1	%	$	8,817	$	7,143	$	1,674			23.4	%
Net occupancy		2,643		1,405		1,238		88.1	%		2,479		1,604		875			54.6	%
Equipment		661		401		260		64.8	%		537		456		81			17.8	%
ATM, debit and credit card		589		140		449		320.7	%
Bank franchise tax		922		487		435		89.3	%		608		602		6			1.0	%
Computer software		744		435		309		71.0	%		620		383		237			61.9	%
Data processing		2,397		968		1,429		147.6	%		1,437		1,283		154			12.0	%
FDIC deposit insurance assessment		594		89		505		567.4	%		351		245		106			43.3	%
Marketing, advertising and promotion		706		334		372		111.4	%		526		369		157			42.5	%
Merger and merger related expenses		8,087		549		7,538		1373.0	%
Merger and merger-related expenses											-		6,152		(6,152	)		-100.0	%
Plastics expense											231		115		116			100.9	%
Professional fees		873		376		497		132.2	%		741		687		54			7.9	%
Core deposit intangible amortization		845		-		845	N/A				866		428		438			102.3	%
Other		2,832		1,694		1,138		67.2	%		2,324		1,307		1,017			77.8	%
Total noninterest expense	$	33,598	$	13,882	$	19,716		142.0	%	$	19,537	$	20,774	$	(1,237	)		-6.0	%

Noninterest expense for the ~~nine~~six months ended ~~September~~June 30, 2022 of $19.5 million was $1.2 million or 6.0% lower than the six months ended June 30, 2021. This decrease is due to merger and merger-related expenses incurred during the six months ended June 30, 2021 of ~~$33.6~~$6.2 million, ~~was $19.7~~offset by increases the following areas due to the Merger being effective April 1, 2021: 1) salaries and employee benefits increased $1.7 million, ~~or 142.0% higher than the nine months ended September 30, 2020. The predominant reason for the increase was that~~2) net occupancy increased $875 thousand, and 3) core deposit intangible amortization increased $438 thousand. In addition, the Company incurred ~~$8.1 million~~$685 thousand in ~~merger and merger related~~ expenses ~~during the nine months ended September 30, 2021, which was $7.5 million higher than the amount of merger and merger related expenses incurred~~ in the ~~same period~~first quarter of 2022, included in noninterest expense, related to the ~~prior year. Additionally,~~one-time payment to resolve a commercial dispute noted in the ~~first nine months of 2021 includes the salaries of the employees of the combined company for two quarters, as the Merger was effective April 1, 2021.~~Noninterest income section earlier.

The efficiency ratio (FTE) of ~~75.2%~~58.3% for the three months ended ~~September~~June 30, ~~2021 was elevated~~2022 compared favorably to the ~~65.7%~~99.1% for the same quarter of ~~2020,~~2021, due ~~primarily~~ to the increase in noninterest income and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of ~~83.5%~~60.1 for the ~~nine~~six months ended ~~September~~June 30, ~~2021 was elevated~~2022 also compared favorably to the ~~63.1%~~89.5% for the six months ended June 30, 2021 for the same ~~period of 2020, also due to the increase in noninterest expense, as described above.~~reasons. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company provided ~~$753 thousand~~$1.2 million and ~~$443~~$72 thousand for Federal income taxes, respectively, resulting in an effective income tax ~~rate~~rates of ~~19.4%~~17.4% and ~~19.2%~~32.9%, respectively. The effective income tax rate for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~higher~~lower than the prior year, asdue to the recognition of low-income housing tax credits in the current period and the inflated effective rate in 2021 due to the non-deductibility of certain merger and ~~merger related expenses are non-deductible for tax purposes.~~merger-related expenses. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company provided ~~$1.2~~$2.2 million and ~~$1.3 million~~$448 thousand for Federal income taxes, respectively, resulting in an effective income tax ~~rate~~rates of ~~20.0%~~17.4% and ~~19.3%~~21.9%, respectively. ~~The effective income tax rate for the nine months ended September 30, 2021 was higher than the prior year, as certain merger and merger related expenses are non-deductible for tax purposes.~~ For all periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds.

OTHER SIGNIFICANT EVENTS

None

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4. CONTROLS AND PROCEDURES

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

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

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended ~~September~~June 30, ~~2021~~2022 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 1A. RISK FACTORS.

~~There~~During the quarter ended June 30, 2022, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.

(a)

Required 8-K disclosures.

None

(b)

Changes in procedures for director nominations by security holders.

None

ITEM 6. EXHIBITS.


Exhibit Number		Description of Exhibit


31.1		302 Certification of Principal Executive Officer

31.2		302 Certification of Principal Financial Officer

32.1		906 Certification

101		The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021,~~2022, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of ~~Stockholders'~~Shareholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021,~~2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

5653

SIGNATURES

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


VIRGINIA NATIONAL BANKSHARES CORPORATION
(Registrant)

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

Date:		~~November~~August 12, ~~2021~~2022

By:		/s/ Tara Y. Harrison
		Tara Y. Harrison
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Date:		~~November~~August 12, ~~2021~~2022

5754


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

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


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


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


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

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


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


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


Deposit accounts
(dollars in thousands)	September 30, 2021					December 31, 2020					September 30, 2020
	Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits
No cost and low cost deposits:
Noninterest demand deposits	$	504,696		29.1	%	$	209,772		28.71	%	$	190,204		27.4	%
Interest checking accounts		424,642		24.4	%		148,910		20.37	%		135,569		19.5	%
Money market and savings deposit accounts		642,788		37.0	%		272,980		37.36	%		270,653		39.0	%

Total noninterest and low cost deposit accounts		1,572,126		90.5	%		631,662		86.4	%		596,426		85.9	%

Time deposit accounts:
Certificates of deposit		158,113		9.1	%		90,615		12.4	%		89,596		12.9	%
CDARS deposits		6,944		0.4	%		8,487		1.2	%		8,499		1.2	%
Total certificates of deposit and other time deposits		165,057		9.5	%		99,102		13.6	%		98,095		14.1	%

Total deposit account balances	$	1,737,183		100.0	%	$	730,764		100.0	%	$	694,521		100.0	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company