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 ~~March 31,~~September 30, 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 ~~May 10,~~October 31, 2022, the registrant had ~~5,326,271~~5,327,271 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 4
Consolidated Balance Sheets (unaudited)		Page 4
Consolidated Statements of Income (unaudited)		Page 5
Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) (unaudited)		Page 6
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 7
Consolidated Statements of Cash Flows (unaudited)		Page 8
Notes to Consolidated Financial Statements (unaudited)		Page 9

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 3536
Application of Critical Accounting Policies and Estimates		Page 3738
Financial Condition		Page 3738
Results of Operations		Page 4445

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 4853

Item 4 Controls and Procedures		Page 4953

Part II. Other Information
Item 1 Legal Proceedings		Page 4954
Item 1A Risk Factors		Page 4954
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 4954
Item 3 Defaults Upon Senior Securities		Page 4954
Item 4 Mine Safety Disclosures		Page 4954
Item 5 Other Information		Page 4954
Item 6 Exhibits		Page 5054

Signatures		Page 5155

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 ~~2014~~2022 Stock Incentive Plan
PPP	-	Paycheck Protection Program
~~Reliamax Surety~~	-	~~Reliamax Surety Company~~
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)


	March 31, 2022			December 31, 2021 *			September 30, 2022			December 31, 2021 *
ASSETS	Unaudited						Unaudited
Cash and due from banks	$	16,539		$	20,345		$	15,773		$	20,345
Interest-bearing deposits in other banks		311,546			336,032			76,194			336,032
Federal funds sold		152,523			152,463			53,118			152,463
Securities:
Available for sale, at fair value		341,361			303,817			538,459			303,817
Restricted securities, at cost		5,137			4,950			5,138			4,950
Total securities		346,498			308,767			543,597			308,767
Loans, net of deferred fees and costs		1,006,962			1,061,211			942,347			1,061,211
Allowance for loan losses		(5,834	)		(5,984	)		(5,485	)		(5,984	)
Loans, net		1,001,128			1,055,227			936,862			1,055,227
Premises and equipment, net		24,680			25,093			18,817			25,093
Bank owned life insurance		36,987			31,234			38,298			31,234
Goodwill		8,140			8,140			8,140			8,140
Core deposit intangible, net		7,832			8,271			6,990			8,271
Other intangible assets, net		257			274			223			274
Other real estate owned, net		611			611			-			611
Right of use asset, net		7,744			7,583			6,941			7,583
Accrued interest receivable and other assets		20,722			18,144			28,803			18,144
Total assets	$	1,935,207		$	1,972,184		$	1,733,756		$	1,972,184
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	523,189		$	522,281		$	539,134		$	522,281
Interest-bearing		451,339			446,314			417,530			446,314
Money market and savings deposit accounts		644,418			665,530			505,733			665,530
Certificates of deposit and other time deposits		155,402			162,045			134,250			162,045
Total deposits		1,774,348			1,796,170			1,596,647			1,796,170
Junior subordinated debt, net		3,379			3,367			3,401			3,367
Lease liability		7,295			7,108			6,551			7,108
Accrued interest payable and other liabilities		4,166			3,552			1,183			3,552
Total liabilities		1,789,188			1,810,197			1,607,782			1,810,197
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value		-			-			-			-
Common stock, $2.50 par value		13,190			13,178			13,214			13,178
Capital surplus		104,706			104,584			105,095			104,584
Retained earnings		49,764			46,436			58,026			46,436
Accumulated other comprehensive loss		(21,641	)		(2,211	)		(50,361	)		(2,211	)
Total shareholders' equity		146,019			161,987			125,974			161,987
Total liabilities and shareholders' equity	$	1,935,207		$	1,972,184		$	1,733,756		$	1,972,184
Common shares outstanding		5,326,271			5,308,335			5,327,271			5,308,335
Common shares authorized		10,000,000			10,000,000			10,000,000			10,000,000
Preferred shares outstanding		0			0			-			-
Preferred shares authorized		2,000,000			2,000,000			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 three months ended					For the nine months ended
	March 31, 2022		March 31, 2021		September 30, 2022		September 30, 2021			September 30, 2022			September 30, 2021
Interest and dividend income:
Loans, including fees	$	10,769	$	5,938	$	11,024	$	12,957		$	32,403		$	31,904
Federal funds sold		61		12		299		45			662			78
Other interest-bearing deposits		136		-		618		55			973			94
Investment securities:
Taxable		1,012		507		2,626		742			5,300			2,006
Tax exempt		304		176		313		280			925			729
Dividends		62		34		66		55			192			121
Total interest and dividend income		12,344		6,667		14,946		14,134			40,455			34,932

Interest expense:
Demand and savings deposits		676		377		471		673			1,645			1,598
Certificates and other time deposits		195		280		147		282			499			886
Borrowings		48		36		51		(325	)		148			(181	)
Total interest expense		919		693		669		630			2,292			2,303
Net interest income		11,425		5,974		14,277		13,504			38,163			32,629
Provision for loan losses		148		351
Net interest income after provision for loan losses		11,277		5,623
Provision for (recovery of) loan losses						39		267			(30	)		477
Net interest income after provision for (recovery of) loan losses						14,238		13,237			38,193			32,152

Noninterest income:
Wealth management fees		557		329		590		744			1,719			2,053
Advisory and brokerage income		216		191		213		358			639			908
Deposit account fees		465		160		443		396			1,366			982
Debit/credit card and ATM fees		707		154		660		808			2,146			1,561
Bank owned life insurance income		211		107		252		201			709			507
Resolution of commercial dispute		2,400		-		-		-			2,400			-
Gains on sale of assets						4		-			1,117			-
Other		231		98		138		971			637			1,426
Total noninterest income		4,787		1,039		2,300		3,478			10,733			7,437

Noninterest expense:
Salaries and employee benefits		4,731		2,402		4,252		4,562			13,069			11,705
Net occupancy		1,197		495		1,318		1,039			3,797			2,643
Equipment		283		116		249		205			786			661
Bank franchise tax		304		173		304		320			912			922
Computer software		263		167		287		361			907			744
Data processing		738		289		712		1,114			2,149			2,397
FDIC deposit insurance assessment		226		63		70		349			421			594
Marketing, advertising and promotion		267		137		347		337			873			706
Merger and merger-related expenses		-		278		-		1,935			-			8,087
Plastics expense		139		42
Debit/credit card and ATM expenses						91		212			322			589
Professional fees		337		177		310		186			1,051			873
Core deposit intangible amortization		439		-		415		417			1,281			845
Other		1,171		442		1,148		1,787			3,472			2,832
Total noninterest expense		10,095		4,781		9,503		12,824			29,040			33,598

Income before income taxes		5,969		1,881		7,035		3,891			19,886			5,991
Provision for income taxes		1,045		376		1,263		753			3,505			1,201
Net income	$	4,924	$	1,505	$	5,772	$	3,138		$	16,381		$	4,790
Net income per common share, basic	$	0.93	$	0.55	$	1.08	$	0.59		$	3.08		$	1.08
Net income per common share, diluted	$	0.92	$	0.55	$	1.08	$	0.59		$	3.06		$	1.07
Weighted average common shares outstanding, basic		5,311,983		2,719,840		5,326,543		5,306,370			5,321,652			4,453,303
Weighted average common shares outstanding, diluted		5,343,564		2,727,448		5,348,900		5,338,872			5,347,878			4,478,779

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

(Dollars in thousands)

(Unaudited)


	For the three months ended						For the three months ended						For the nine months ended
	March 31, 2022			March 31, 2021			September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net income	$	4,924		$	1,505		$	5,772		$	3,138		$	16,381		$	4,790
Other comprehensive income (loss):
Unrealized losses on securities, net of tax of ($5,228) for the three months ended March 31, 2022; and net of tax of ($900) for the three months ended March 31, 2021, respectively		(19,665	)		(3,387	)
Unrealized gains on interest rate swaps, net of tax of $62 for the three months ended March 31, 2022; and net of tax of $0 for the three months ended March 31, 2021, respectively		235			—
Unrealized losses on securities, net of tax of ($3,416) and ($12,952) for the three and nine months ended September 30, 2022; and net of tax of ($94) and ($488) for the three and nine months ended September 30, 2021, respectively								(12,845	)		(352	)		(48,724	)		(1,836	)
Unrealized gains (losses) on interest rate swaps, net of tax of $49 and $153 for the three and nine months ended September 30, 2022; and net of tax of $7 and ($22) for the three and nine months ended September 30, 2021, respectively								179			27			574			(84	)
Total other comprehensive loss		(19,430	)		(3,387	)		(12,666	)		(325	)		(48,150	)		(1,920	)
Total comprehensive loss	$	(14,506	)	$	(1,882	)
Total comprehensive income (loss)							$	(6,894	)	$	2,813		$	(31,769	)	$	2,870

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2022 AND 2021

(Dollars in thousands, except per share data)

(Unaudited)


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			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
Exercise of stock options																2		13			-			-			15
Stock option expense																-		31			-			-			31
Restricted stock grant expense																-		165			-			-			165
Vested stock grants																16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)																-		-			(1,596	)		-			(1,596	)
Net income																-		-			147			-			147
Other comprehensive income																-		-			-			1,792			1,792
Balance, June 30, 2021															$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602
Stock option expense																-		31			-			-			31
Restricted stock grant expense																-		57			-			-			57
Vested stock grants																2		(2	)		-			-			-
Cash dividends declared ($0.30 per share)																-		-			(1,593	)		-			(1,593	)
Net income																-		-			3,138			-			3,138
Other comprehensive loss																-		-			-			(325	)		(325	)
Balance, September 30, 2021															$	13,178	$	104,446		$	42,746		$	(460	)	$	159,910

Balance, December 31, 2021	$	13,178	$	104,584		$	46,436		$	(2,211	)	$	161,987		$	13,178	$	104,584		$	46,436		$	(2,211	)	$	161,987
Stock option expense		-		41			-			-			41			-		41			-			-			41
Restricted stock grant expense		-		93			-			-			93			-		93			-			-			93
Vested stock grants		12		(12	)		-			-			-			12		(12	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			4,924			-			4,924			-		-			4,924			-			4,924
Other comprehensive loss		-		-			-			(19,430	)		(19,430	)		-		-			-			(19,430	)		(19,430	)
Balance, March 31, 2022	$	13,190	$	104,706		$	49,764		$	(21,641	)	$	146,019		$	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
Exercise of stock options																3		21			-			-			24
Stock option expense																-		42			-			-			42
Restricted stock grant expense																-		184			-			-			184
Vested stock grants																10		(10	)		-			-			-
Cash dividends declared ($0.30 per share)																-		-			(1,598	)		-			(1,598	)
Net income																-		-			5,772			-			5,772
Other comprehensive loss																-		-			-			(12,666	)		(12,666	)
Balance, September 30, 2022															$	13,214	$	105,095		$	58,026		$	(50,361	)	$	125,974

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~dollars~~Dollars in thousands)

(Unaudited)


	For the three months ended						For the nine months ended
	March 31, 2022			March 31, 2021			September 30, 2022			September 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,924		$	1,505		$	16,381		$	4,790
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		148			351
Provision for (recovery of) loan losses								(30	)		477
Net accretion of certain acquisition-related adjustments		(540	)		—			(1,518	)		(2,474	)
Amortization of intangible assets		456			17			1,332			896
Net amortization and accretion of securities		388			241			317			1,100
Net gains on sale of other assets		(5	)		—			(1,117	)		(65	)
Earnings on bank owned life insurance		(211	)		(107	)		(709	)		(507	)
Depreciation and other amortization		967			476			2,875			2,173
Stock option expense		41			34			125			96
Stock grant expense, restricted		93			61
Stock grant expense								398			283
Net change in:
Accrued interest receivable and other assets		2,749			611			1,509			(1,552	)
Accrued interest payable and other liabilities		376			(3	)		(2,112	)		1,882
Net cash provided by operating activities		9,386			3,186			17,451			7,099

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares								—			153,278
Net (increase) decrease in restricted investments		(188	)		358			(188	)		2,019
Purchases of available for sale securities		(69,252	)		(7,974	)		(314,997	)		(36,127	)
Proceeds from maturities, calls and principal payments of available for sale securities		6,428			4,443			18,365			22,876
Net decrease (increase) in loans		54,484			(11,853	)
Net decrease in loans								119,905			95,117
Purchase of bank owned life insurance		(5,542	)		—			(6,354	)		—
Proceeds from sale of premises and equipment		5			—			6,211			34
Proceeds from sale of other real estate owned								610			—
Proceeds from sale of loans								—			6,126
Purchase of bank premises and equipment		(154	)		(142	)		(510	)		(1,055	)
Net cash used in investing activities		(14,219	)		(15,168	)
Net cash (used in) provided by investing activities								(176,958	)		242,268

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, interest checking accounts, and money market accounts		(15,179	)		71,654
Net (decrease) increase in certificates of deposit and other time deposits		(6,624	)		1,742
Net (decrease) increase in demand deposits, interest checking, money market and savings accounts								(171,728	)		192,565
Net decrease in certificates of deposit and other time deposits								(27,753	)		(3,728	)
Net decrease in other borrowings								-			(42,582	)
Proceeds from stock options exercised		-			15			24			30
Cash dividends paid		(1,596	)		(1,628	)		(4,791	)		(4,817	)
Net cash (used in) provided by financing activities		(23,399	)		71,783			(204,248	)		141,468
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$	(28,232	)	$	59,801		$	(363,755	)	$	390,835

CASH AND CASH EQUIVALENTS:
Beginning of period	$	508,840		$	34,695		$	508,840		$	34,695
End of period	$	480,608		$	94,496		$	145,085		$	425,530

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest	$	957		$	702
Cash payments for:
Interest							$	2,344		$	2,289
Taxes							$	2,750		$	1,042

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized losses on available for sale securities	$	(24,893	)	$	(4,287	)	$	(61,676	)	$	(2,324	)
Unrealized gains on interest rate swaps	$	297		$	—
Unrealized gains (losses) on interest rate swaps							$	727		$	(106	)
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	541		$	—		$	540		$	—
Assets acquired in business combination							$	—		$	909,736
Liabilities assumed in business combination							$	—		$	840,226
Change in goodwill							$	—		$	8,526

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~March 31,~~September 30, 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 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, 2021.

Business Combination: On April 1, 2021, Virginia National Bankshares Corporation 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 and Masonry Capital Management, LLC, 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 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 months ended ~~March 31,~~September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the FASB issued 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.

~~The new standard will be effective for~~Smaller reporting companies, like the Company, who file with the U.S. Securities and Exchange Commission (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 ~~on January 1, 2023. Early adoption of the new standard is permitted.~~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 established a cross-functional steering committee in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the 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 continuing to

develop and refine an approach to estimating the ~~ACL.~~Allowance for Credit Losses (ACL). The adoption of Topic 326 may result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the ACL that will 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 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 the ACL.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin 119. SAB 119 updated portions of SEC interpretative guidance to align with 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 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.

TDRs and Vintage Disclosures In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB 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 disclose current-period gross write-offs for financing receivables and 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 measurement of 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 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 amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

Note 2. Business Combinations

On April 1, 2021, the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company, with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and 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, Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving.

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

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


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

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

In connection with the Merger, the Company recorded approximately $7.8 million of goodwill and $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 will be amortized over a period of seven years using the sum of years digits method.

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 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. 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 acquired 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 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 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 $9.7 million or 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 thousand premium and is being amortized into income over a period of 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 thousand premium, which ~~will~~was anticipated to 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 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 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.

There were 0no merger and ~~merger related~~merger-related expenses incurred during the three and nine months ended ~~March 31,~~September 30, 2022 and $~~278~~1.9 ~~thousand~~million and $8.1 million incurred during the three and nine months ended ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 and December 31, 2021 were as follows (dollars in thousands):


March 31, 2022			Gross		Gross
September 30, 2022												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government treasuries	$	39,393	$	-	$	(1	)	$	39,392	$	244,646	$	-	$	(3,271	)	$	241,375
U.S. Government agencies		35,404		-		(3,140	)		32,264		35,291		-		(6,386	)		28,905
Mortgage-backed securities/CMOs		189,456		2		(12,498	)		176,960		188,029		-		(27,568	)		160,461
Corporate bonds		3,734		-		(31	)		3,703		30,988		-		(1,693	)		29,295
Municipal bonds		100,985		37		(11,980	)		89,042		103,898		-		(25,475	)		78,423
Total Securities Available for Sale	$	368,972	$	39	$	(27,650	)	$	341,361	$	602,852	$	-	$	(64,393	)	$	538,459


December 31, 2021			Gross		Gross							Gross		Gross			��
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized				Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)				Value
U.S. Government agencies	$	32,424	$	24	$	(867	)	$	31,581	$	32,424	$	24	$	(867	)		$	31,581
Mortgage-backed securities/CMOs		172,975		248		(2,259	)		170,964		172,975		248		(2,259	)			170,964
Municipal bonds		101,136		1,162		(1,026	)		101,272		101,136		1,162		(1,026	)			101,272
Total Securities Available for Sale	$	306,535	$	1,434	$	(4,152	)	$	303,817	$	306,535	$	1,434	$	(4,152	)		$	303,817

As of ~~March 31,~~September 30, 2022, there were $~~330.6~~537.8 million or ~~245~~291 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $~~27.7~~64.4 million and ~~consisted~~consist of ~~110~~113 mortgage-backed/collateralized mortgage obligations, ~~113~~126 municipal bonds, 19 agency bonds, 214 ~~corporate~~treasury bonds and 119 ~~treasury bond.~~corporate bonds.

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


March 31, 2022
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
																Less than 12 Months					12 Months or More					Total
September 30, 2022																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Government treasuries	$	39,392	$	(1	)	$	—	$	—		$	39,392	$	(1	)	$	241,375	$	(3,271	)	$	—	$	—		$	241,375	$	(3,271	)
U.S. Government agencies		9,584		(666	)		19,672		(2,474	)		29,256		(3,140	)		6,017		(873	)		22,624		(5,513	)		28,641		(6,386	)
Mortgage-backed/CMOs		140,478		(9,288	)		33,478		(3,210	)		173,956		(12,498	)		104,457		(15,751	)		56,004		(11,817	)		160,461		(27,568	)
Corporate bonds		3,703		(31	)		—		—			3,703		(31	)		21,959		(1,311	)		7,336		(382	)		29,295		(1,693	)
Municipal bonds		68,007		(9,167	)		16,243		(2,813	)		84,250		(11,980	)		46,604		(11,239	)		31,382		(14,236	)		77,986		(25,475	)
	$	261,164	$	(19,153	)	$	69,393	$	(8,497	)	$	330,557	$	(27,650	)	$	420,412	$	(32,445	)	$	117,346	$	(31,948	)	$	537,758	$	(64,393	)



																Less than 12 Months					12 Months or More					Total
December 31, 2021																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)
Mortgage-backed/CMOs		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)
Municipal bonds		40,352		(722	)		10,409		(304	)		50,761		(1,026	)		40,352		(722	)		10,409		(304	)		50,761		(1,026	)
	$	186,671	$	(2,797	)	$	40,821	$	(1,355	)	$	227,492	$	(4,152	)	$	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 ~~March 31,~~September 30, 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” 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 ~~March 31,~~September 30, 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 $~~5.7~~5.1 million at ~~March 31,~~September 30, 2022 were pledged as collateral to secure deposits and facilitate borrowing from the Federal Reserve Bank of Richmond. At December 31, 2021, securities having carrying values of $12.7 million were similarly pledged.

For the three and nine months ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021, there were 0no sales of securities.

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

The amortized cost and fair value of AFS debt securities at September 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	$	191,949	$	190,074
After one year to five years		52,697		51,301
	$	244,646	$	241,375
U.S. Government agencies
After one year to five years	$	649	$	559
After five years to ten years		30,642		25,418
Ten years or more		4,000		2,928
	$	35,291	$	28,905
Mortgage-backed securities/CMOs
After one year to five years	$	1,915	$	1,752
After five years to ten years		930		852
Ten years or more		185,184		157,857
	$	188,029	$	160,461
Corporate bonds
One year or less	$	1,525	$	1,484
After one year to five years		25,347		24,070
After five years to ten years		4,116		3,741
	$	30,988	$	29,295
Municipal bonds
After one year to five years	$	610	$	585
After five years to ten years		18,085		16,251
Ten years or more		85,203		61,587
	$	103,898	$	78,423

Total Debt Securities Available for Sale	$	602,852	$	538,459

Note 4. Loans

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


	March 31,			December 31,			September 30,			December 31,
	2022			2021			2022			2021
Commercial	$	88,858		$	96,696		$	72,685		$	96,696
Real estate construction and land		64,937			79,331			49,668			79,331
1-4 family residential mortgages		343,382			358,148			324,891			358,148
Commercial mortgages		459,103			473,632			447,185			473,632
Consumer		50,682			53,404			47,918			53,404
Total loans		1,006,962			1,061,211			942,347			1,061,211
Less: Allowance for loan losses		(5,834	)		(5,984	)		(5,485	)		(5,984	)
Net loans	$	1,001,128		$	1,055,227		$	936,862		$	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 SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of ~~March 31,~~September 30, 2022, the Company had PPP loans of $~~10.0~~254 ~~million~~thousand 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 and fees. As of ~~March 31,~~September 30, 2022 and December 31, 2021, unamortized premiums on loans purchased prior to the Merger were $~~913~~1.1 ~~thousand~~million and $1.1 million, respectively. Net deferred loan fees totaled $~~632~~636 thousand and $865 thousand as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. ~~The deferred fees include $179~~ thousand in remaining fees collected from the SBA for the PPP loans that are being amortized over the contractual life of the underlying loans, most which are over a 24-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 fair value mark as of the Effective Date was $23.1 million. The table above includes a net fair value mark of $~~12.3~~12.1

million on the purchased impaired loans and $~~5.7~~5.0 million on the purchased performing loans as of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 on these Acquired Loans were as ~~follows:~~follows (dollars in thousands):


	March 31, 2022						December 31, 2021						September 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		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	70,058	$	339,765	$	409,823	$	76,608	$	372,172	$	448,780	$	49,265	$	302,578	$	351,843	$	76,608	$	372,172	$	448,780
Carrying amount:
Commercial	$	913	$	21,214	$	22,127	$	994	$	28,065	$	29,059	$	659	$	14,350	$	15,009	$	994	$	28,065	$	29,059
Real estate construction and land		16,412		11,596		28,008		18,576		14,297		32,873		4,310		8,862		13,172		18,576		14,297		32,873
1-4 family residential mortgages		13,828		184,065		197,893		16,020		194,708		210,728		10,445		168,603		179,048		16,020		194,708		210,728
Commercial mortgages		26,544		115,337		141,881		28,675		126,638		155,313		21,711		104,355		126,066		28,675		126,638		155,313
Consumer		105		1,889		1,994		118		2,224		2,342		81		1,421		1,502		118		2,224		2,342
Total acquired loans	$	57,802	$	334,101	$	391,903	$	64,383	$	365,932	$	430,315	$	37,206	$	297,591	$	334,797	$	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 March 31,					Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021		2022			2021			2022			2021
Accretable yield, beginning of period	$	13,742		$	—	$	11,667		$	14,641		$	13,742		$	—
Additions		—			—		—			—			—			15,499
Accretion		(738	)		—		(828	)		(773	)		(2,327	)		(1,631	)
Reclassification from (to) nonaccretable difference		2,193			—
Reclassification from nonaccretable difference							6,829			—			9,021			—
Other changes, net		(2,769	)		—		(734	)		—			(3,502	)		—
Accretable yield, end of period	$	12,428		$	—	$	16,934		$	13,868		$	16,934		$	13,868

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

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding ~~Acquired Loans,~~PCI loans, as of ~~March 31,~~September 30, 2022 and December 31, 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 ~~three~~nine months ended ~~March 31,~~September 30, 2022 or the twelve months ended December 31, 2021. Interest income recognized is for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 or the twelve months ended December 31, 2021 (dollars in thousands).


September 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	$	698	$	725	$	-	$	619	$	7
Total impaired loans without a valuation allowance		698		725		-		619		7

Impaired loans with a valuation allowance:
Consumer		756		756		16		812		38
Total impaired loans with a valuation allowance		756		756		16		812		38
Total impaired loans	$	1,454	$	1,481	$	16	$	1,431	$	45


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

March 31, 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

$
612

$
628

$
-

$
617

$
1

Total impaired loans without a valuation
allowance

612

628

-

617

1

Impaired loans with a valuation allowance

Consumer

846

846

27

846

12

Total impaired loans with a valuation
allowance

846

846

27

846

12

Total impaired loans

$
1,458

$
1,474

$
27

$
1,463

$
13

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

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):


	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
1-4 family residential mortgages	$	518	$	495	$	607	$	495
Total non-accrual loans	$	518	$	495	$	607	$	495

Additionally, 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 to $~~670~~zero ~~thousand~~ as of ~~March 31,~~September 30, 2022, from $~~1.5~~1.2 million as of ~~March~~December 31, 2021 and September 30, 2021. ~~The sole loan remaining in deferral status as of March 31, 2022 is government guaranteed.~~

Based on regulatory guidance on student lending, the Company has classified 5648 of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $~~846~~756 thousand as of ~~March 31,~~September 30, 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 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	March 31, 2022				December 31, 2021				September 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	$	94		1	$	99		1	$	91		1	$	99
Consumer		55		814		58		935		48		756		58		935
Total performing TDRs		56	$	908		59	$	1,034		49	$	847		59	$	1,034

Nonperforming TDRs
1-4 family residential mortgages		2		518		1		495		2	$	503		1	$	495
Consumer		1		32		0		—
Total nonperforming TDRs		3	$	550		1	$	495		2		503		1		495
Total TDRs		59	$	1,458		60	$	1,529		51	$	1,350		60	$	1,529

A summary of loans shown above that were modified under the terms of a TDR during the three and nine months ended ~~March 31,~~September 30, 2022 and 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 three months ended						For the three months ended
	September 30, 2022						September 30, 2021
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance

1-4 family residential mortgages		0	$	—	$	—		1	$	501	$	501
Total loans modified during the period		0	$	—	$	—		1	$	501	$	501

	For the nine months ended						For the nine months ended
	September 30, 2022						September 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		1		501		501
Total loans modified during the period		1	$	54	$	54		7	$	564	$	564

For the three months ended

For the three months ended

March 31, 2022

March 31, 2021

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Number
of Loans

Pre-
Modification
Recorded
Balance

Post-
Modification
Recorded
Balance

Consumer

0

$
—

$
—

6

$
63

$
63

1-4 family residential mortgages

1

54

54

0

—

—

Total loans modified
during the period

1

$
54

$
54

6

$
63

$
63

During the three and nine months ended ~~March 31,~~September 30, 2022, there were no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. There were 5five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $56 thousand prior to being charged off.

There were 0no loans secured by 1-4 family residential property that were in the process of foreclosure at ~~March 31,~~September 30, 2022 or December 31, 2021.

Note 5. Allowance for Loan Losses

The 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 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 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. Non-PCI acquired loan pools are also evaluated for additional required ALLL.

Note that under the acquisition method of accounting (ASC 805), the ALLL recorded in the books of Fauquier was not carried over into the books of the 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, 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 ~~March 31,~~September 30, 2022 and December 31, 2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.


March 31, 2022	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
September 30, 2022															Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	39,872	$	14,968	$	30,862	$	1,050	$	109	$	1,997	$	88,858	$	24,802	$	16,641	$	29,016	$	1,070	$	16	$	1,140	$	72,685
Real estate construction and land		-		-		45,556		347		4,180		14,854		64,937		-		-		43,774		342		817		4,735		49,668
1-4 family residential mortgages		-		-		324,564		7,019		1,135		10,664		343,382		-		-		308,834		7,620		5,605		2,832		324,891
Commercial mortgages		-		-		394,870		44,180		5,079		14,974		459,103		-		-		388,167		42,279		5,669		11,070		447,185
Consumer		535		17,965		30,904		1,084		84		110		50,682		464		18,785		27,449		1,105		63		52		47,918
Total Loans	$	40,407	$	32,933	$	826,756	$	53,680	$	10,587	$	42,599	$	1,006,962	$	25,266	$	35,426	$	797,240	$	52,416	$	12,170	$	19,829	$	942,347


December 31, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL		Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696
Real estate construction and land		-		-		51,098		7,360		2,849		18,024		79,331		-		-		51,098		7,360		2,849		18,024		79,331
1-4 family residential mortgages		-		2,030		334,300		5,013		1,520		15,285		358,148		-		2,030		334,300		5,013		1,520		15,285		358,148
Commercial mortgages		-		-		382,108		61,563		8,530		21,431		473,632		-		-		382,108		61,563		8,530		21,431		473,632
Consumer		524		18,535		32,821		1,225		179		120		53,404		524		18,535		32,821		1,225		179		120		53,404
Total Loans	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211

In addition, the adequacy of the Company’s 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.

Qualitative factors that were initially downgraded with the onset of the COVID-19 pandemic were subsequently upgraded with the quarter-ended June 30, 2021. During that quarter, the Company released 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, December 31, 2021 or March 31, 2022. 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 $1.5 million at ~~March 31,~~September 30, 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 $2716 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 ~~March 31, 2022 due to the loss of the insurance on this portfolio as discussed previously.~~September 30, 2022.

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


As of and for the period ended March 31, 2022
As of and for the period ended September 30, 2022																As of and for the period ended September 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	$	252		$	399		$	4,478		$	855		$	5,984			$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		(240	)		-			-			(233	)		(473	)			(243	)		-			-			(540	)		(783	)
Recoveries		114			4			2			55			175				151			9			8			146			314
Provision for (recovery of) loan losses		134			(50	)		(98	)		162			148				80			(81	)		(297	)		268			(30	)
Ending Balance	$	260		$	353		$	4,382		$	839		$	5,834			$	240		$	327		$	4,189		$	729		$	5,485

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	27		$	27			$	-		$	-		$	-		$	16		$	16
Collectively evaluated for impairment		260			353			4,382			812			5,807				240			327			4,189			713			5,469
Acquired loans - purchased credit impaired		-			-			-			-			-				-			-			-			-			-

Loans:
Individually evaluated for impairment	$	-		$	-		$	612		$	846		$	1,458			$	-		$	-		$	594		$	756		$	1,350
Collectively evaluated for impairment		87,945			48,525			761,501			49,731			947,702				72,026			45,358			739,326			47,081			903,791
Acquired loans - purchased credit impaired		913			16,412			40,372			105			57,802				659			4,310			32,156			81			37,206
Ending Balance	$	88,858		$	64,937		$	802,485		$	50,682		$	1,006,962			$	72,685		$	49,668		$	772,076		$	47,918		$	942,347


As of and for the period ended December 31, 2021	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		$	209		$	160	$	3,897	$	1,189		$	5,455			$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs			(147	)		-		-		(688	)		(835	)			(147	)		-		-		(688	)		(835	)
Recoveries			191			12		6		141			350				191			12		6		141			350
Provision for (recovery of) loan losses			(1	)		227		575		213			1,014				(1	)		227		575		213			1,014
Ending Balance		$	252		$	399	$	4,478	$	855		$	5,984			$	252		$	399	$	4,478	$	855		$	5,984

Ending Balance:
Individually evaluated for impairment		$	-		$	-	$	-	$	6		$	6			$	-		$	-	$	-	$	6		$	6
Collectively evaluated for impairment			252			399		4,478		849			5,978				252			399		4,478		849			5,978
Acquired loans - purchased credit impaired			-			-		-		-			-				-			-		-		-			-

Loans:
Individually evaluated for impairment		$	-		$	-	$	594	$	935		$	1,529			$	-		$	-	$	594	$	935		$	1,529
Collectively evaluated for impairment			95,702			60,755		786,491		52,351			995,299				95,702			60,755		786,491		52,351			995,299
Acquired loans - purchased credit impaired			994			18,576		44,695		118			64,383				994			18,576		44,695		118			64,383
Ending Balance		$	96,696		$	79,331	$	831,780	$	53,404		$	1,061,211			$	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 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 ~~March 31,~~September 30, 2022 and December 31, 2021 (dollars in thousands).


Past Due Aging as of March 31, 2022	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
Past Due Aging as of September 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	$	68	$	81	$	548	$	697	$	913	$	87,248	$	88,858	$	548	$	9	$	-	$	709	$	718	$	659	$	71,308	$	72,685	$	709
Real estate construction and land		215		-		-		215		16,412		48,310		64,937		-		5		-		-		5		4,310		45,353		49,668		-
1-4 family residential mortgages		926		-		210		1,136		13,828		328,418		343,382		210		831		324		129		1,284		10,445		313,162		324,891		129
Commercial mortgages		227		-		-		227		26,544		432,332		459,103		-		-		-		-		-		21,711		425,474		447,185		-
Consumer loans		300		84		79		463		105		50,114		50,682		79		361		78		21		460		81		47,377		47,918		21
Total Loans	$	1,736	$	165	$	837	$	2,738	$	57,802	$	946,422	$	1,006,962	$	837	$	1,206	$	402	$	859	$	2,467	$	37,206	$	902,674	$	942,347	$	859


Past Due Aging as of December 31, 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		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	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718
Real estate construction and land		873		1,283		-		2,156		18,576		58,599		79,331		-		873		1,283		-		2,156		18,576		58,599		79,331		-
1-4 family residential mortgages		1,508		100		495		2,103		16,020		340,025		358,148		-		1,508		100		495		2,103		16,020		340,025		358,148		-
Commercial mortgages		-		-		-		-		28,675		444,957		473,632		-		-		-		-		-		28,675		444,957		473,632		-
Consumer loans		345		196		83		624		118		52,662		53,404		83		345		196		83		624		118		52,662		53,404		83
Total Loans	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801

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

The carrying amount of goodwill was $8.1 million at ~~March 31,~~September 30, 2022 and December 31, ~~2021 and $372~~ ~~thousand at March 31,~~ 2021. ~~The acquisition of Fauquier as of April 1, 2021 accounted for the increase of $7.8~~ ~~million from March 31, 2021 to March 31, 2022.~~

The Company had $~~8.1~~7.2 million, $8.5 million and $~~324~~8.1 ~~thousand~~million of other intangible assets as of ~~March 31,~~September 30, 2022, December 31, 2021 and ~~March 31,~~September 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, 2022					December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	9,660	$	(2,670	)	$	9,660	$	(1,389	)
Customer relationships intangible		773		(550	)		773		(499	)
Total	$	10,433	$	(3,220	)	$	10,433	$	(1,888	)

March 31,
2022

December 31,
2021

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

Amortized intangible assets:

Core deposit intangible
$
9,660

$
(1,828
)

$
9,660

$
(1,389
)
Customer relationships intangible

773

(516
)

773

(499
)
Total
$
10,433

$
(2,344
)

$
10,433

$
(1,888
)

Amortization expense was $~~456~~432 thousand and $17434 thousand for the three months ended ~~March 31,~~September 30, 2022 and 2021, respectively and $1.3 million and $896 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Estimated future amortization expense as of ~~March 31,~~September 30, 2022 is as follows (dollars in thousands):


	Core		Customer		Core		Customer
	Deposit		Relationships		Deposit		Relationships
	Intangible		Intangible		Intangible		Intangible
For the nine months ending December 31, 2022	$	1,246	$	50
For the three months ending December 31, 2022					$	404	$	16
For the year ending December 31, 2023		1,493		67		1,493		67
For the year ending December 31, 2024		1,301		67		1,301		67
For the year ending December 31, 2025		1,110		67		1,110		67
For the year ending December 31, 2026		918		6		918		6
Thereafter		1,764		-		1,764		-
Total	$	7,832	$	257	$	6,990	$	223

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):


	March 31, 2022			March 31, 2021			September 30, 2022			September 30, 2021
Lease liability	$	7,295		$	3,392		$	6,551		$	7,463
Right-of-use asset	$	7,744		$	3,327		$	6,941		$	7,970
Weighted average remaining lease term	6.19 years			4.97 years			5.68 years			6.19 years
Weighted average discount rate		1.98	%		2.53	%		1.97	%		1.98	%


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
Lease Expense	2022		2021
Lease Expense:					2022		2021				2021
Operating lease expense	$	445	$	222	$	437	$	420	$	1,331	$	1,069
Short-term lease expense		52		29		196		127		387		188
Total lease expense	$	497	$	251	$	633	$	547	$	1,718	$	1,257
Cash paid for amounts included in lease liabilities	$	398	$	219	$	408	$	390	$	1,240	$	998

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	March 31, 2022			September 30, 2022
Nine months ending December 31, 2022	$	1,223
Three months ending December 31, 2022				$	409
Twelve months ending December 31, 2023		1,567			1,567
Twelve months ending December 31, 2024		1,296			1,296
Twelve months ending December 31, 2025		1,091			1,091
Twelve months ending December 31, 2026		748			748
Twelve months ending December 31, 2027		650
Thereafter		1,141			1,791
Total undiscounted cash flows	$	7,716		$	6,902
Less: Discount		(421	)		(351	)
Lease liability	$	7,295		$	6,551

Note 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 months ended ~~March 31,~~September 30, 2022 and 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~~The recipients of unvested restricted shares have full voting and dividend rights, and as such, unvested restricted stock as of ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021 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	March 31, 2022							March 31, 2021						September 30, 2022							September 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	$	4,924		5,311,983	$	0.93		$	1,505		2,719,840	$	0.55	$	5,772		5,326,543	$	1.08		$	3,138		5,306,370	$	0.59
Effect of dilutive stock options		-		31,581		(0.01	)		-		7,608		-		-		22,357		-			-		32,502		-
Diluted net income per share	$	4,924		5,343,564	$	0.92		$	1,505		2,727,448	$	0.55	$	5,772		5,348,900	$	1.08		$	3,138		5,338,872	$	0.59

Nine Months Ended														September 30, 2022							September 30, 2021
														Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share														$	16,381		5,321,652	$	3.08		$	4,790		4,453,303	$	1.08
Effect of dilutive stock options															-		26,226		(0.02	)		-		25,476		(0.01	)
Diluted net income per share														$	16,381	$	5,347,878	$	3.06		$	4,790		4,478,779	$	1.07

For the three and nine months ended ~~March 31,~~September 30, 2022, there were 101,901 option shares considered anti-dilutive and excluded from this calculation. For the three and nine months ended ~~March 31,~~September 30, 2021, there were ~~78,301~~91,501 option shares considered anti-dilutive and excluded from this calculation.

Note 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 made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan 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~~No new grants can be issued under the 2005 Stock Incentive 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 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 ~~March 31,~~September 30, 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 0no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.No grants have been issued under the 2022 Plan.


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

Stock grants issued and outstanding:
Total vested and unvested shares		77,488			—			—		77,488			—
Fully vested shares		27,509			—			—		35,724			—

Option grants issued and outstanding:
Total vested and unvested shares		167,901			1,379			—		166,901			1,379
Fully vested shares		62,894			1,379			—		87,548			1,379

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

Stock Options

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


	March 31, 2022						September 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, 2022		169,280	$	33.89	$	962		169,280		$	33.89		$	962
Issued		0		—				—			—
Exercised		—		—				(1,000	)		(23.75	)
Expired		—		—				—			—
Outstanding at March 31, 2022		169,280	$	33.89	$	680
Outstanding at September 30, 2022								168,280		$	33.95		$	532

Options exercisable at March 31, 2022		64,273	$	36.30	$	203
Options exercisable at September 30, 2022								88,927		$	36.18		$	223

For the three months ended ~~March 31,~~September 30, 2022 and 2021, the Company recognized $4142 thousand and $3431 thousand, respectively, in compensation expense for stock options. For the nine months ended September 30, 2022 and 2021, the Company recognized $125 thousand and $96 thousand, respectively, in compensation expense for stock options. As of ~~March 31,~~September 30, 2022, there was $~~356~~262 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2026. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were 0no stock option grants issued during the three and nine months ended ~~March 31,~~September 30, 2022 ~~or the three months ended March 31,~~and 2021.

Summary information pertaining to options outstanding at ~~March 31,~~September 30, 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	0.9 Years	$	13.69		1,379	$	13.69		1,379	0.4 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		66,000	8.3 Years		24.64		18,400		25.02		65,000	7.8 Years		24.65		25,400		24.67
$30.01 to $40.00		44,420	8.3 Years		36.97		10,008		38.38		44,420	7.8 Years		36.97		16,172		37.87
$40.01 to $42.62		57,481	6.1 Years		42.62		34,486		42.62		57,481	5.6 Years		42.62		45,976		42.62
Total		169,280	7.5 Years	$	33.89		64,273	$	36.30		168,280	7.0 Years	$	33.95		88,927	$	36.18

Stock Grants

Unrestricted stock grant - During the nine months ended September 30, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $4 thousand. No unrestricted stock grants were awarded during the three months ended September 30, 2022 or during the year ended December 31, 2021.

Restricted stock grants – During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, ~~5,680~~5,580 and 12,856 restricted shares, ~~respectively,~~ were granted to employees and non-employee directors, respectively, vesting over a 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 or third quarter of 2022.) During the three and nine months ended ~~March 31,~~September 30, 2021, ~~5,025~~5,730 and ~~8,478~~19,233 restricted shares, respectively, were granted. For the three and nine months ended ~~March 31,~~September 30, 2022, $93184 thousand and $61398 thousand, respectively, was expensed as a result of restricted stock grants.As of ~~March 31,~~September 30, 2022, there was $~~1.4~~1.1 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through ~~2026~~2027.

Changes in the restricted stock grants outstanding during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 are summarized below (dollars in thousands except per share data):


	March 31, 2022									September 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, 2022		37,011		$	28.98		$	1,277			37,011		$	28.98		$	1,165
Issued		18,536			35.62		639				18,536			35.62		601
Vested		(4,968	)		(27.91	)		(171	)		(13,183	)		(29.04	)		(392	)
Forfeited		(600	)		(33.74	)		(21	)		(600	)		(33.74	)		(19	)
Nonvested at March 31, 2022		49,979		$	31.49		$	1,724
Nonvested at September 30, 2022											41,764		$	31.82		$	1,355

Note 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 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 ~~March 31,~~September 30, 2022 and December 31, 2021 (dollars in thousands):


			Fair Value Measurements at March 31, 2022 Using:								Fair Value Measurements at September 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	$	39,392	$	-	$	39,392	$	-	$	241,375	$	-	$	241,375	$	-
U.S. Government agencies		32,264		-		32,264		-		28,905		-		28,905		-
Mortgage-backed securities/CMOs		176,960		-		176,960		-		160,461		-		160,461		-
Corporate bonds		3,703		-		3,703		-		29,295		-		29,295		-
Municipal bonds		89,042		-		89,042		-		78,423		-		78,423		-
Total securities available for sale	$	341,361	$	-	$	341,361	$	-	$	538,459	$	-	$	538,459	$	-

Interest rate swap asset		107		-		107		-		538		-		538		-
Total assets at fair value	$	341,468	$	-	$	341,468	$	-	$	538,997	$	-	$	538,997	$	-


			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:
U.S. Government agencies	$	31,581	$	-	$	31,581	$	-
Mortgage-backed securities/CMOs		170,964		-		170,964		-
Municipal bonds		101,272		-		101,272		-
Total securities available for sale	$	303,817	$	-	$	303,817	$	-

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

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:

U.S. Government agencies

$
31,581

$
-

$
31,581

$
-

Mortgage-backed securities/CMOs

170,964

-

170,964

-

Municipal bonds

101,272

-

101,272

-

Total securities available for sale

$
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 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 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 ~~March 31, 2022 and~~ December 31, 2021, the Company had 1one OREO property acquired through the Merger which iswas carried at a fair value of $611 thousand. The Company sold this OREO property during the second quarter of the current year and therefore had a zero balance in OREO as of September 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 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 $1.5 million as of ~~both March 31,~~September 30, 2022 and $1.5 million as of December 31, 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 ~~March~~December 31, ~~2022.~~2021. There were 0no such assets to report as of ~~December 31, 2021.~~September 30, 2022.


			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	$	-	$	-	$	611

Fair Value Measurements at March 31, 2022 Using:

Quoted Prices
in Active
Markets for
Identical Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Other Real Estate Owned

$
611

$
—

$
—

$
611

For the assets measured at fair value on a nonrecurring basis as of ~~March~~December 31, ~~2022,~~2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands):. There were no such assets to report as of September 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 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.

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


			Fair Value Measurements at September 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	145,085	$	145,085	$	-	$	-	$	145,085
Available for sale securities		538,459		-		538,459		-		538,459
Loans, net		936,862		-		-		901,051		901,051
Bank owned life insurance		38,298		-		38,298		-		38,298
Accrued interest receivable		4,351		-		2,114		2,237		4,351
Interest rate swap asset		538		-		538		-		538

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,462,397	$	-	$	1,462,397	$	-	$	1,462,397
Certificates of deposit		134,250		-		133,741		-		133,741
Junior subordinated debt, net		3,401		-		3,158		-		3,158
Accrued interest payable		123		-		123		-		123

Fair Value Measurements at March 31, 2022 Using:

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Carrying value

Level 1

Level 2

Level 3

Fair Value

Assets

Cash and cash equivalent

$
480,608

$
480,608

$
-

$
-

$
480,608

Available for sale securities

341,361

-

341,361

-

341,361

Loans, net

1,001,128

-

-

993,671

993,671

Bank owned life insurance

36,987

-

36,987

-

36,987

Other real estate owned, net

611

-

-

611

611

Accrued interest receivable

3,471

-

1,162

2,309

3,471

Interest rate swap asset

107

-

107

-

107

Liabilities

Demand deposits and interest-bearing
transaction and money market accounts

$
1,618,946

$
-

$
1,618,946

$
-

$
1,618,946

Certificates of deposit

155,402

-

155,093

-

155,093

Junior subordinated debt, net

3,379

-

3,804

-

3,804

Accrued interest payable

136

-

136

-

136

Fair Value Measurements at December 31, 2021 Using:

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Carrying value

Level 1

Level 2

Level 3

Fair Value

Assets

Cash and cash equivalent

$
508,840

$
508,840

$
-

$
-

$
508,840

Available for sale securities

303,817

-

303,817

-

303,817

Loans, net

1,055,227

-

-

1,059,650

1,059,650

Bank owned life insurance

31,234

-

31,234

-

31,234

Other real estate owned, net

611

-

-

611

611

Accrued interest receivable

3,778

-

1,252

2,526

3,778

Liabilities

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

174

-

174

-

174

Interest rate swap liabilities

197

-

197

-

197


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

Liabilities
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		174		-		174		-		174
Interest rate swap liabilities		205		-		205		-		205

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 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 AFS securities, net of income taxes. Reclassifications of realized gains and losses on 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 0no sales of securities in the ~~first~~ three and nine months ended ~~March 31,~~September 30, 2022 and 2021.

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of ($$~~4.5~~10.6) million and ($$464) thousand, as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively (dollars in thousands).


	March 31, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Accumulated other comprehensive loss on securities	$	(21,812	)	$	(2,164	)	$	(50,871	)	$	(2,164	)
Accumulated other comprehensive income (loss) on interest rate swap		171			(47	)		510			(47	)
Total accumulated other comprehensive loss	$	(21,641	)	$	(2,211	)	$	(50,361	)	$	(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 ~~March 31,~~September 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 $575 thousand as of September 30, 2022 and $570 thousand as of ~~March 31, 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 ~~March 31,~~September 30, 2022 and December 31, 2021 (dollars in thousands):


	March 31, 2022							September 30, 2022
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(621	)	Junior subordinated debt	6/15/2031	$	4,000	$	538		Other Liabilities	6/15/2031

	December 31, 2021							December 31, 2021
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	(633	)	Junior subordinated debt	6/15/2031	$	4,000	$	(197	)	Other Liabilities	6/15/2031
Interest rate swap - fair value	$	3,940	$	(8	)	Other Liabilities	2/12/2022	$	3,940	$	(8	)	Other Liabilities	2/12/2022

Note 13. Segment Reporting

The Company has 4four 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 4four 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.

•

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 ~~March 31,~~September 30, 2022 and 2021, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the nine months ended September 30, 2022 and 2021, management fees totaling $75 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three and nine months ended ~~March 31,~~September 30, 2022 and 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 March 31, 2022	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital		Consolidated
Three months ended September 30, 2022											Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income	$	11,425	$	-	$	-	$	-	$	11,425	$	14,277		$	-	$	-	$	-		$	14,277
Provision for loan losses		148		-		-		-		148		39			-		-		-			39
Noninterest income												1,486			212		435		167			2,300
Noninterest expense												8,833			154		324		192			9,503
Income (loss) before income taxes												6,891			58		111		(25	)		7,035
Provision for (benefit from) income taxes												1,233			12		23		(5	)		1,263
Net income (loss)											$	5,658		$	46	$	88	$	(20	)	$	5,772


Nine months ended September 30, 2022											Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Net interest income											$	38,163		$	-	$	-	$	-		$	38,163
Provision for (recovery of) loan losses												(30	)		-		-		-			(30	)
Noninterest income		1,534		216		2,831		206		4,787		5,871			639		3,631		592			10,733
Noninterest expense		8,821		166		922		186		10,095		26,370			482		1,621		567			29,040
Income before income taxes		3,990		50		1,909		20		5,969		17,694			157		2,010		25			19,886
Provision for income taxes		630		10		401		4		1,045		3,045			33		422		5			3,505
Net income	$	3,360	$	40	$	1,508	$	16	$	4,924	$	14,649		$	124	$	1,588	$	20		$	16,381


Three months ended March 31, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Three months ended September 30, 2021													Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	5,974	$	-	$	-		$	-		$	5,974	$	13,504	$	-	$	-		$	-		$	13,504
Provision for loan losses		351		-		-			-			351		267		-		-			-			267
Noninterest income		514		191		201			133			1,039		2,890		209		203			176			3,478
Noninterest expense		4,255		160		206			160			4,781		12,183		163		315			163			12,824
Income (loss) before income taxes		1,882		31		(5	)		(27	)		1,881		3,944		46		(112	)		13			3,891
Provision for (benefit from) income taxes		376		7		(1	)		(6	)		376		763		10		(23	)		3			753
Net income (loss)	$	1,506	$	24	$	(4	)	$	(21	)	$	1,505	$	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 (benefit from) income taxes														1,214		24		(27	)		(10	)		1,201
Net income (loss)													$	4,844	$	88	$	(102	)	$	(40	)	$	4,790

3435

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 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, 2021. Operating results for the three and nine months ended ~~March 31,~~September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 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 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 may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and other reports filed from time to time by the Company with the Securities and Exchange 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 with Fauquier. The Merger of Fauquier with and into the Company 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. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National 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, 2) return on average equity, and 3) net income per 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.")

•

ROAA for the three months ended ~~March 31,~~September 30, 2022 was ~~1.03%~~1.30% compared to ~~0.68%~~0.65% (0.96% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year, as the increase in net income ~~outweighed~~was significantly higher in the ~~increase~~current period and no merger or merger-related expenses were incurred in ~~assets as~~the current period. ROAA for the nine months ended September 30, 2022 was 1.20% compared to 0.41% (0.94% excluding merger and merger-related expenses, a ~~result of~~non-GAAP measure) realized in the ~~Merger.~~same period in the prior year.

•

ROAE for the three months ended ~~March 31,~~September 30, 2022 was ~~12.53%~~16.50% compared to ~~7.40%~~7.70% (11.29% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior ~~year, as~~year. ROAE for the ~~increase~~nine months ended September 30, 2022 was 14.98% compared to 4.80% (11.00% excluding merger and merger-related expenses, a non-GAAP measure) realized in ~~net income was greater than~~same period in the ~~increase in equity as a result of the Merger.~~prior year.

•

Net income per diluted share was ~~$0.92~~$1.08 for the three months ended ~~March 31,~~September 30, 2022, compared to ~~$0.55~~$0.59 ($0.86 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year. The increase in net income of $3.4 million, from $1.5 million for the three months ended March 31, 2021 to $4.9 million for the three months ended March 31, 2022, was proportionately larger than the increase in number of shares outstanding period over periodyear, due to the ~~Merger.~~increase of $2.6 million in net income. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $11.6 million in net 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. 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 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.

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. ~~Loan~~There were no COVID-19 related loan deferrals as of ~~March 31, 2022 were negligible.~~September 30, 2022.

As of ~~March 31,~~September 30, 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.

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 worked remotely, 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 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. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to 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 2021 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2021.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of ~~March 31,~~September 30, 2022 were ~~$1.9~~$1.7 billion. This is a ~~$37 thousand,~~$238 million, or ~~1.9%~~12.1%, decrease from total assets reported at December 31, 2021 and a ~~$1.0 billion,~~$178.1 million, or ~~110.7%~~9.3%, ~~increase~~decrease from ~~the $918.4 million~~total assets reported at ~~March 31,~~September 30, 2021. The ~~year-over-year increase was~~decreases were substantially within gross loans, as legacy organic loan balances declined due to business sales, property sales, loan refinances and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, SBA PPP loans were forgiven, 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 ~~$311.5~~$76.2 million of interest-bearing deposits in other banks as of ~~March 31,~~September 30, 2022, compared to $336.0 million as of December 31, 2021 and ~~zero~~$254.2 million as of ~~March 31, 2021, as~~September 30, 2021. Significant excess liquidity has been deployed into short-term investment securities in the ~~current and year-end balance included accounts held by Fauquier, primarily at the Federal Reserve Bank of Richmond.~~nine months ended September 30, 2022 to earn a higher yield.

Federal funds sold

The Company had overnight federal funds sold of $53.1 million as of September 30, 2022, $152.5 million as of ~~March 31, 2022 and~~ December 31, 2021 and ~~$77.1~~$152.4 million as of ~~March 31,~~September 30, 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 of the Federal Reserve Bank of 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 ~~March 31,~~September 30, 2022 totaled ~~$346.5~~$543.6 million, an increase of ~~$37.7~~$234.8 million compared with the $308.8 million reported at December 31, 2021 and an increase of ~~$170.8~~$263.9 million from the ~~$175.7~~$279.7 million reported at ~~March 31,~~September 30, 2021. The increase from year-end and the same period in the prior year is the result of deploying excess funds into higher yielding ~~assets and the increase from the same period in the prior year is due to the inclusion of the investment securities portfolio of Fauquier upon effective date of the Merger as of April 1, 2021.~~assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~March 31,~~September 30, 2022 and December 31, 2021, the investment securities holdings represented ~~17.9%~~31.4% and 15.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $5.1 million as of ~~March 31,~~September 30, 2022, compared to $5.0 million as of December 31, 2021 and ~~$2.7~~$2.6 million as of ~~March 31,~~September 30, 2021. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation ~~the~~(the holding company for Community ~~Bankers Bank,~~Bankers' 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 Federal Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At ~~March 31,~~September 30, 2022, the unrestricted securities portfolio totaled ~~$341.4~~$538.5 million. The following table summarizes the Company's AFS securities by type as of ~~March 31,~~September 30, 2022, December 31, 2021, and ~~March 31,~~September 30, 2021 (dollars in thousands):


	March 31, 2022					December 31, 2021					March 31, 2021					September 30, 2022					December 31, 2021					September 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	$	39,392		11.5	%	$	—		—		$	—		—		$	241,375		44.8	%	$	—		—		$	—		—
U.S. Government agencies		32,264		9.5	%		31,581		10.4	%		32,561		18.8	%		28,905		5.4	%		31,581		10.4	%		32,538		11.7	%
Mortgage-backed securities/CMOs		176,960		51.8	%		170,964		56.3	%		72,328		41.8	%		160,461		29.8	%		170,964		56.3	%		145,998		52.7	%
Corporate bonds		3,703		1.1	%		—		—			—		—			29,295		5.4	%		—		—			—		—
Municipal bonds		89,042		26.1	%		101,272		33.3	%		68,199		39.4	%		78,423		14.6	%		101,272		33.3	%		98,510		35.6	%
Total available for sale securities	$	341,361		100.0	%	$	303,817		100.0	%	$	173,088		100.0	%	$	538,459		100.0	%	$	303,817		100.0	%	$	277,046		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, Manassas and Richmond (and the greater Richmond area), the counties of Albemarle, Fauquier, Prince William and Frederick, and areas in the Commonwealth of Virginia~~Columbia that are within a 100-mile radius of any office of the Company.

As of ~~March 31,~~September 30, 2022, total loans were ~~$1.0 billion,~~$942.3 million, compared to $1.1 billion as of December 31, 2021 and ~~$621.1 million~~$1.1 billion at ~~March 31,~~September 30, 2021. Loans as a percentage of total assets at ~~March 31,~~September 30, 2022 were ~~52.0%~~54.4%, compared to ~~67.6%~~58.2% as of ~~March 31,~~September 30, 2021. Loans as a percentage of deposits at ~~March 31,~~September 30, 2022 were ~~56.8%~~59.0%, compared to ~~77.2%~~64.0% as of ~~March 31,~~September 30, 2021.

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


	March 31, 2022					December 31, 2021					March 31, 2021					September 30, 2022					December 31, 2021					September 30, 2021
	Balance		Percent of Total			Balance		Percent of Total			Balance		Percent of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
Commercial loans	$	88,858		8.8	%	$	96,696		9.1	%	$	130,388		21.0	%	$	72,685		7.7	%	$	96,696		9.1	%	$	119,959		10.8	%
Real estate mortgage:
Construction and land		64,937		6.5	%		79,331		7.5	%		26,254		4.2	%		49,668		5.3	%		79,331		7.5	%		92,082		8.3	%
1-4 family residential mortgages		343,382		34.1	%		358,148		33.8	%		134,826		21.7	%		324,891		34.5	%		358,148		33.8	%		372,474		33.5	%
Commercial		459,103		45.6	%		473,632		44.6	%		274,610		44.2	%		447,185		47.5	%		473,632		44.6	%		464,866		41.8	%
Total real estate mortgage		867,422		86.2	%		911,111		85.9	%		435,690		70.1	%		821,744		87.3	%		911,111		85.9	%		929,422		83.6	%
Consumer		50,682		5.0	%		53,404		5.0	%		54,990		8.9	%		47,918		5.0	%		53,404		5.0	%		63,069		5.6	%
Total loans	$	1,006,962		100.0	%	$	1,061,211		100.0	%	$	621,068		100.0	%	$	942,347		100.0	%	$	1,061,211		100.0	%	$	1,112,450		100.0	%

The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a ~~decease~~decrease in loan balances ~~of $54.2 million, or 5.1%,~~from September 30, 2021 and December 31, 2021 to September 30, 2022. The decrease from December 31, 2021 is due predominantly to: 1) paydowns of legacy organic loans due mainly to ~~March 31, 2022. Loan balances increased $385.9~~business sales, property sales, refinances and participation fluctuations of $59.3 million, ~~or 62.1%, from March 31, 2021. The increase year-over-year is primarily due to~~2) workouts and paydowns of Acquired Loans of $51.9 million, and 3) the ~~inclusion~~forgiveness of ~~Fauquier’s~~SBA PPP loans in the amount 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 March 31, 2022 amounts to $391.9~~$24.2 million. As of ~~March 31,~~September 30, 2022, ~~less than $10.0 million~~only $254 thousand of PPP loans remain outstanding on the Bank's balance sheet.

Loan quality

Non-accrual loans, comprised of only ~~two~~three loans to ~~one borrower,~~two borrowers, totaled ~~$518~~$607 thousand at ~~March 31,~~September 30, 2022, compared to balances of $495 thousand and $5$777 thousand reported at December 31, 2021 and ~~March 31,~~September 30, 2021, respectively. ~~Acquired Loans~~PCI loans which otherwise would be in non-accrual status are not included in the ~~March 31, 2022 and December 31, 2021~~ balances, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling ~~$837~~$859 thousand, $801 thousand and ~~$399~~$678 thousand, as of ~~March 31,~~September 30, 2022, December 31, 2021 and ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 includes a government-guaranteed loan in the amount of ~~$548~~$709 thousand. The portfolio ~~only~~ includes ~~four~~three non-insured student loans that are 90 days or more past due and still accruing interest, amounting to ~~$79~~$21 thousand.

~~At March 31, 2022 and December 31, 2021, the~~40

The Company had loans classified as impaired loans in the amount of $1.5 million ~~compared to $1.2~~as of September 30, 2022, $1.5 million as of December 31, 2021, and $1.6 million at ~~March 31,~~September 30, 2021. Based on regulatory guidance on student lending, the Company has classified 5648 of its Purchased Student Loans as TDRs for a total of ~~$846~~$756 thousand as of ~~March 31,~~September 30, 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. 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):


	March 31, 2022			December 31, 2021			March 31, 2021			September 30, 2022			December 31, 2021			September 30, 2021
Total loans	$	1,006,962		$	1,061,211		$	621,068		$	942,347		$	1,061,211		$	1,112,450
Nonaccrual loans	$	518		$	495		$	5		$	607		$	495		$	777
Allowance for loan losses	$	5,834		$	5,984		$	5,615		$	5,485		$	5,984		$	5,623
Nonaccrual loans to total loans		0.05	%		0.05	%		0.00	%		0.06	%		0.05	%		0.07	%
ALLL to total loans		0.58	%		0.56	%		0.90	%		0.58	%		0.56	%		0.51	%
ALLL to nonaccrual loans		1126.25	%		1208.89	%		112300.00	%		903.62	%		1208.89	%		723.68	%

The ALLL as a percentage of loans was 0.58% as of ~~March 31,~~September 30, 2022, 0.56% as of December 31, 2021, and ~~0.90%~~0.51% as of ~~March 31,~~September 30, 2021. ~~The percentage decrease as compared to the same period in the prior year relates to the elimination of Fauquier’s ALLL as the Acquired Loans were recorded at fair value.~~ The ALLL as a percentage of gross loans, excluding the impact of the Acquired ~~Loans~~loans and ~~the~~ fair value mark (a non-GAAP financial measure), would have been ~~0.95%~~0.90% as of ~~March 31,~~September 30, 2022, unchanged from 0.90% as of September 30, 2021. The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38% as of September 30, 2022, compared to 2.24% as of September 30, 2021. The fair value mark that was allocated to the acquired loans was $21.3 million as of the Effective Date, with a remaining balance of

$17.0 million as of September 30, 2022. Refer to the ~~Reconciliation~~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 ~~$148~~$30 thousand and ~~$351~~a provision for loan losses totaling $477 thousand were recorded in the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively. The following is a summary of the changes in the ALLL for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 (dollars in thousands):


	2022			2021			2022			2021
Allowance for loan losses, January 1	$	5,984		$	5,455		$	5,984		$	5,455
Charge-offs		(473	)		(241	)		(783	)		(605	)
Recoveries		175			50			314			296
Provision for loan losses		148			351
Allowance for loan losses, March 31	$	5,834		$	5,615
Provision for (recovery of) loan losses								(30	)		477
Allowance for loan losses, September 30							$	5,485		$	5,623

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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 totaled ~~$24.7~~$18.8 million compared to $25.1 million as of December 31, 2021 and ~~$5.1~~$25.2 million as of ~~March 31,~~September 30, 2021, ~~with the increase from the same period in the prior year~~decreasing due to the ~~inclusion~~sale of ~~Fauquier’s land and~~two buildings ~~at fair value effective April 1, 2021.~~during the current year. 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 ~~March 31,~~September 30, 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 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 103 Third Street, SE, Charlottesville, 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 ~~March 31,~~September 30, 2022, the Company has recorded ~~$7.7~~$6.9 million of right-of-use assets and ~~$7.3~~$6.6 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2021, $7.6 million of right-of-use assets and $7.1 million of lease liabilities were included on the balance sheet. ~~The increase is due to the addition of a new lease for wealth management space and an extension of an existing lease for an additional five-year term.~~ 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 ~~March 31,~~September 30, 2022 were ~~$1.8~~$1.6 billion, a decrease of ~~$22~~$199.5 million compared to December 31, 2021, and ~~an increase~~a decrease of ~~$970.2~~$140.5 million compared to ~~March 31, 2021. The primary reason for the increase~~September 30, 2021 (dollars in ~~the year-over-year~~thousands).


	September 30, 2022					December 31, 2021					September 30, 2021
			% of					% of					% of
	Balance		Total			Balance		Total			Balance		Total
No cost and low cost deposits:
Noninterest demand deposits	$	539,134		33.8	%	$	522,281		29.1	%	$	504,696		29.1	%
Interest checking accounts		417,530		26.2	%		446,314		24.8	%		424,642		24.4	%
Money market and savings deposit accounts		505,733		31.7	%		665,530		37.1	%		642,788		37.0	%

Total noninterest and low cost deposit accounts		1,462,397		91.7	%		1,634,125		91.0	%		1,572,126		90.5	%

Time deposit accounts:
Certificates of deposit		129,038		8.0	%		155,901		8.7	%		158,113		9.1	%
CDARS deposits		5,212		0.3	%		6,144		0.3	%		6,944		0.4	%
Total certificates of deposit and other time deposits		134,250		8.3	%		162,045		9.0	%		165,057		9.5	%

Total deposit account balances	$	1,596,647		100.0	%	$	1,796,170		100.0	%	$	1,737,183		100.0	%

~~comparison is the inclusion of Fauquier’s deposits of $817.7 million, at fair value, effective upon the Merger date of April 1, 2021.~~

Deposit accounts

(dollars in thousands)

March 31, 2022

December 31, 2021

March 31, 2021

Balance

% of Total
Deposits

Balance

% of Total
Deposits

Balance

% of Total
Deposits

No cost and low cost
   deposits:

Noninterest demand deposits

$
523,189

29.5
%

$
522,281

29.1
%

$
248,212

30.9
%
Interest checking accounts

451,339

25.5
%

446,314

24.8
%

162,218

20.2
%
Money market and savings
   deposit accounts

644,418

36.3
%

665,530

37.1
%

292,886

36.4
%

Total noninterest and low
   cost deposit accounts

1,618,946

91.3
%

1,634,125

91.0
%

703,316

87.5
%

Time deposit accounts:

Certificates of deposit

149,759

8.4
%

155,901

8.7
%

92,352

11.4
%
CDARS deposits

5,643

0.3
%

6,144

0.3
%

8,492

1.1
%
Total certificates of
   deposit and other time
   deposits

155,402

8.7
%

162,045

9.0
%

100,844

12.5
%

Total deposit account
   balances

$
1,774,348

100.0
%

$
1,796,170

100.0
%

$
804,160

100.0
%

Noninterest-bearing demand deposits on ~~March 31,~~September 30, 2022 were ~~$523.2~~$539.1 million, representing ~~29.5%~~33.8% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$1.1 billion,~~$923.3 million, and represented ~~61.8%~~57.9% of total deposits at ~~March 31,~~September 30, 2022. Collectively, noninterest-bearing and interest-bearing transaction, ~~and~~ money market and savings accounts represented ~~91.3%~~91.7% of total deposit accounts at ~~March 31,~~September 30, 2022. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep deposit products. ICS® deposit balances of ~~$31.0~~$28.4 million and ~~$229.1~~$110.1 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of ~~March 31,~~September 30, 2022. As of December 31, 2021, ICS® deposit balances of $39.2 million and $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 ~~8.7% and 9.0%~~8.3% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$155.4 million and $162.0~~$134.3 million at ~~March 31, 2022 and December 31, 2021, respectively.~~September 30, 2022. Included in these deposit totals are CDARSTM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled ~~$5.6~~$5.2 million as of ~~March 31,~~September 30, 2022 and $6.1 million as of December 31, 2021, all of which were reciprocal balances for the Company’s customers.

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, ~~yet had~~with no outstanding borrowings ~~from FHLB advances~~ as of ~~March 31,~~September 30, 2022 or December 31, 2021. The Company ~~had~~has an off-balance sheet letter of credit in the amount of $30 million as of September 30, 2022 and $60 million as of December 31, 2021, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository ~~accounts and pledged commercial mortgages, in the amount of $60 million as of March 31, 2022 and December 31, 2021, as collateral for that~~accounts. This letter of ~~credit.~~

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 ~~March 31,~~September 30, 2022, December 31, 2021 or ~~March 31,~~September 30, 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 ~~March 31,~~September 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, 2021 to ~~March 31,~~September 30, 2022 (dollars in thousands):


Equity, December 31, 2021	$	161,987		$	161,987
Net income		4,924			16,381
Other comprehensive loss		(19,430	)		(48,150	)
Cash dividends declared		(1,596	)		(4,791	)
Exercise of stock options					24
Equity increase due to expensing of stock options		41			125
Equity increase due to expensing of restricted stock		93			398
Equity, March 31, 2022	$	146,019
Equity, September 30, 2022				$	125,974

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 ~~15.09%~~16.41%, ~~15.09%~~16.41%, ~~15.66%~~16.97% and ~~8.03%~~9.17%, respectively, as of ~~March 31,~~September 30, 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 ~~14.88%~~16.18%, ~~14.88%~~16.18%, ~~15.45%~~16.73% and ~~7.92%~~9.04%, respectively, as of ~~March 31,~~September 30, 2022, also exceeding the minimum requirements.

As of ~~March 31,~~September 30, 2022, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the 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 the banking industry. However, certain non-GAAP measures are used by management to 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 on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

Management believes that the 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 ALLL to total loans, such as the impact of fair value 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 banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented ~~below:~~below (dollars in thousands):

Reconcilement of Non-GAAP Measures:

As of or for the Three Months Ended

March 31,
2022

March 31,
2021

Fully tax-equivalent measures

Net interest income

$
11,425

$
5,974

Fully tax-equivalent adjustment

65

47

Net interest income (FTE)

$
11,490

$
6,021

Efficiency ratio

62.3
%

68.2
%

Fully tax-equivalent adjustment

-0.3
%

-0.5
%

Efficiency ratio (FTE)

62.0
%

67.7
%

Net interest margin

2.57
%

2.81
%

Fully tax-equivalent adjustment

0.02
%

0.02
%

Net interest margin (FTE)

2.59
%

2.83
%

Other financial measures

ALLL to total loans

0.58
%

0.90
%

Impact of acquired loans and fair value mark

0.37
%

0.00
%

ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)

0.95
%

0.90
%

Book value per share

$
27.42

$
29.33

Impact of intangible assets

(3.05
)

(0.26
)

Tangible book value per share (non-GAAP)

$
24.37

$
29.07

Total equity

$
146,019

$
80,012

Impact of intangible assets

(16,231
)

(696
)

Tangible equity

$
129,788

$
79,316


	For the three months ended						For the nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Performance measures
Return on average assets ("ROAA")		1.30	%		0.65	%		1.20	%		0.41	%
Impact of merger and merger related expenses, net of tax		0.00	%		0.31	%		0.00	%		0.53	%
ROAA, excluding merger and merger related expenses (non-GAAP)		1.30	%		0.96	%		1.20	%		0.94	%

Return on average equity ("ROAE")		16.50	%		7.70	%		14.98	%		4.80	%
Impact of merger and merger related expenses, net of tax		0.00	%		3.59	%		0.00	%		6.20	%
ROAE, excluding merger and merger related expenses (non-GAAP)		16.50	%		11.29	%		14.98	%		11.00	%

Net income	$	5,772		$	3,138		$	16,381		$	4,790
Impact of merger and merger related expenses, net of tax		-			1,465			-			6,188
Net income, excluding merger and merger related expenses (non-GAAP)	$	5,772		$	4,603		$	16,381		$	10,978

Net income per share, diluted	$	1.08		$	0.59		$	3.06		$	1.07
Impact of merger and merger related expenses, net of tax		-			0.27			-			1.38
Net income per share, excluding merger and merger related expenses (non-GAAP), diluted	$	1.08		$	0.86		$	3.06		$	2.45

Fully tax-equivalent measures
Net interest income	$	14,277		$	13,504		$	38,163		$	32,629
Fully tax-equivalent adjustment		84			77			245			194
Net interest income (FTE)	$	14,361		$	13,581		$	38,408		$	32,823

Efficiency ratio		57.3	%		75.5	%		59.4	%		83.9	%
Fully tax-equivalent adjustment		-0.3	%		-0.3	%		-0.3	%		-0.4	%
Efficiency ratio (FTE)		57.0	%		75.2	%		59.1	%		83.5	%

Net interest margin		3.45	%		3.06	%		2.98	%		3.01	%
Fully tax-equivalent adjustment		0.02	%		0.02	%		0.02	%		0.02	%
Net interest margin (FTE)		3.47	%		3.08	%		3.00	%		3.03	%

	As of
	September 30, 2022			December 31, 2021			September 30, 2021
Other financial measures:
ALLL to total loans		0.58	%		0.56	%		0.51	%
Impact of acquired loans and fair value mark		0.32	%		0.39	%		0.39	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.90	%		0.95	%		0.90	%

ALLL to total loans		0.58	%		0.56	%		0.51	%
Fair value mark to total loans		1.80	%		1.74	%		1.73	%
ALLL + fair value mark to total loans (non-GAAP)		2.38	%		2.30	%		2.24	%

Book value per share	$	23.65		$	30.50		$	30.13
Impact of intangible assets		(2.88	)		(3.14	)		(3.21	)
Tangible book value per share (non-GAAP)	$	20.77		$	27.36		$	26.92

Total equity	$	125,974		$	161,987		$	159,910
Impact of intangible assets		(15,353	)		(16,685	)		(17,043	)
Tangible equity	$	110,621		$	145,302		$	142,867

Net income

Net income for the three months ended ~~March 31,~~September 30, 2022 was ~~$4.9~~$5.8 million, a ~~$3.4~~$2.6 million ~~or 227%~~ increase compared to net income reported for the three months ended ~~March 31,~~September 30, 2021. Net income per diluted share was ~~$0.92~~$1.08 for the quarter ended ~~March 31,~~September 30, 2022 compared to ~~$0.55~~$0.59 ($0.86 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same quarter in the prior ~~year, increasing as the expansion of~~year.

Net income for the nine months ended September 30, 2022 was $16.4 million, compared to $4.8 million for the nine months ended September 30, 2021. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding the impact of merger and merger related expenses, net ~~income was proportionately larger than~~of tax, a non-GAAP financial measure) per diluted share for the ~~increase~~same period in ~~weighted average diluted shares outstanding as a result of~~ the ~~Merger.~~prior year.

Net interest income

Net interest income (FTE) for the three months ended ~~March 31,~~September 30, 2022 was ~~$11.5~~$14.4 million, a ~~$5.5 million~~$780 thousand increase compared to net interest income (FTE) of ~~$6.0~~$13.6 million for the three months ended ~~March 31,~~September 30, 2021. Net interest income (FTE) increased primarily due to the ~~inclusion~~increased volume of ~~Fauquier’s~~securities, increasing from an average of $274.1 million in the three months ended September 30, 2021 to $511.7 million in the three months ended September 30, 2022, positively impacting interest income by $1.2 million. The increase in yield earned on such securities over the same period positively impacted interest income by $698 thousand, increasing from 1.68% for the three months ended September 30, 2021 to 2.41% for the three months ended September 30, 2022. FFS and interest bearing deposits in other banks contributed an additional $254 thousand and $563 thousand, respectively, to net interest income (FTE) for the ~~current quarter, as the Merger was effective April 1, 2021. The increased volume of loans, a result of the Merger, increasing from an average of $618.9 million in~~three months ended September 30, 2022 compared to the three months ended ~~March 31, 2021 to $1.0~~September 30, 2021. The decline in average loan balances, from $1.1 billion infor the three months ended ~~March 31,~~September 30, 2021 to $959.1 million for the three months ended September 30, 2022, ~~positively~~negatively impacted interest income by ~~$4.2~~$2.1 million. ~~The higher average yield earned on loans, increasing to 4.23% from 3.89% for the periods noted, positively impacted interest income by $641 thousand.~~ The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the three months ended ~~March 31,~~September 30, 2022. Net interest income (FTE) was mildly impacted by the $39 thousand increase in interest expense, as described below.

Net interest income (FTE) for the nine months ended September 30, 2022 was $38.4 million, a $5.6 million increase compared to net interest income (FTE) of $32.8 million for the nine months ended September 30, 2021. The increase in volume of securities held, ~~primarily as the result of the Merger,~~ from an average balance of ~~$176.1~~$239.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 to ~~$313.4~~$406.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022, positively impacted net interest income by ~~$638 thousand,~~$2.4 million, and the ~~increase in~~ yield ~~earned~~ on such securities increased from ~~1.74%~~1.70% to ~~1.86%~~2.19% for the periods noted, positively ~~impacted~~impacting net interest income by ~~$57 thousand. Interest~~$1.2 million. FFS and interest bearing deposits in other banks contributed ~~$120~~an additional $584 thousand and $879 thousand, respectively, to net interest income (FTE) for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~as such assets were acquired during the Merger and not held prior~~compared to the ~~Effective Date.~~nine months ended September 30, 2021. Net interest income (FTE) was ~~negatively~~also positively impacted by the ~~$227~~improved loan yields which increased from 4.28% for the nine months ended September 30, 2021 to 4.37% for the nine months ended September 30, 2022, positively impacting net interest income by $846 thousand. The decrease in volume of loans negatively impacted interest income by $347 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the nine months ended September 30, 2022. Net interest income (FTE) was slightly impacted by the $11 thousand ~~increase~~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 ~~2.59%~~3.47% for the three months ended ~~March 31,~~September 30, 2022 was 2439 bps ~~lower~~higher than the ~~2.83%~~3.08% for the three months ended ~~March 31,~~September 30, 2021. The net interest margin (FTE) of 3.00% for the nine months ended September 30, 2022 was 3 bps lower than the 3.03% for the nine months ended September 30, 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 increased ~~$227~~$39 thousand for the three months ended ~~March~~September 30, 2022 compared to the same period in the prior year. Overall, the cost of interest-bearing deposits declined period over period, from a cost of 31 bps to 22 bps, due to decreased volume of interest-bearing deposits, declining $111.0 million for the period noted, positively impacting interest expense by $109 thousand, coupled with lower rates paid on deposits, positively impacting interest expense by $228 thousand. The slight increase in total interest expense is due to the impact of the Company prepaying 100% of its outstanding FHLB advances during the quarter ending September 30, 2021, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such TFB debt. During the three months ended September 30, 2021, the Bank's average outstanding borrowing with the FHLB prior to repayment was $22.3 million, incurring interest expense of $41 thousand. No such borrowings were outstanding during the three months ended September 30, 2022.

Interest expense decreased $11 thousand for the nine months ended September 30, 2022 compared to the same period in the prior year, primarily due to ~~increased volume of deposits from~~ the ~~Merger, as average interest-bearing deposits increased $705.3 million for the period noted, negatively impacting interest expense by $525 thousand, offset by lower~~decline in rates paid on deposits, ~~positively impacting~~from 34 bps to 25 bps, lowering interest expense by ~~$311~~$659 thousand. The ~~rate paid on~~increase in the volume of interest-bearing deposits ~~averaged 29 bps in~~from period to period negatively impacted interest expense by $319 thousand. The prepayment of 100% of outstanding FHLB advances, as noted above, positively impacted interest expense by $416 thousand as a result of accelerating the ~~three~~fair value accretion on such TFB debt, offsetting the interest expense incurred during the nine months ended ~~March 31, 2022, compared~~September 30, 2021 of $136 thousand, netting to ~~50 bps for~~a positive impact on interest expense during the ~~three months ended March 31, 2021.~~prior period presented of $280 thousand.

4548

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 months ended ~~March 31,~~September 30, 2022 and 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
	September 30, 2022			September 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	$445,854	$2,692	2.42%	$214,194	$797	1.49%	$1,203	$692	$1,895
Tax Exempt Securities 1	65,836	397	2.41%	59,869	355	2.37%	36	6	42
Total Securities 1	511,690	3,089	2.41%	274,063	1,152	1.68%	1,239	698	1,937
Loans:
Real Estate	834,323	9,485	4.51%	929,017	10,005	4.27%	(1,056)	538	(518)
Commercial	74,970	846	4.48%	141,388	1,810	5.08%	(770)	(194)	(964)
Consumer	49,793	693	5.52%	69,876	1,144	6.50%	(296)	(155)	(451)
Total Loans	959,086	11,024	4.56%	1,140,281	12,959	4.51%	(2,122)	189	(1,933)
Fed Funds Sold	52,908	299	2.24%	137,472	45	0.13%	(44)	298	254
Other interest-bearing deposits	120,440	618	2.04%	198,983	55	0.11%	(30)	593	563
Total Earning Assets	1,644,124	15,030	3.63%	1,750,799	14,211	3.22%	(957)	1,778	821
Less: Allowance for Loan Losses	(5,530)			(5,607)
Total Non-Earning Assets	124,247			159,106
Total Assets	$1,762,841			$1,904,298

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$401,886	$56	0.06%	$410,504	$72	0.07%	$(1)	$(15)	$(16)
Money Market and Savings Deposits	547,878	415	0.30%	621,211	601	0.38%	(66)	(120)	(186)
Time Deposits	142,195	147	0.41%	171,256	282	0.65%	(42)	(93)	(135)
Total Interest-Bearing Deposits	1,091,959	618	0.22%	1,202,971	955	0.31%	(109)	(228)	(337)
Borrowings	—	—	—	22,260	(375)	-6.68%	375	—	375
Junior subordinated debt	3,394	51	5.96%	3,349	50	—	1	—	1
Total Interest-Bearing Liabilities	1,095,353	669	0.24%	1,228,580	630	0.20%	267	(228)	39
Non-Interest-Bearing Liabilities:
Demand deposits	519,759			499,068
Other liabilities	8,932			15,003
Total Liabilities	1,624,044			1,742,651
Shareholders' Equity	138,797			161,647
Total Liabilities & Shareholders' Equity	$1,762,841			$1,904,298
Net Interest Income (FTE)		$14,361			$13,581		$(1,224)	$2,006	$782
Interest Rate Spread 2			3.38%			3.02%
Cost of Funds			0.16%			0.14%
Interest Expense as a Percentage of Average Earning Assets			0.16%			0.14%
Net Interest Margin (FTE) 3			3.47%			3.08%

For the three months ended

March 31, 2022

March 31, 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/

(dollars in thousands)

Expense

Expense

(Decrease)

ASSETS

Interest Earning Assets:

Securities:

Taxable Securities

$
248,219

$
1,074

1.73
%

$
142,837

$
541

1.52
%

$
447

$
86

$
533

Tax Exempt Securities 1

65,145

385

2.36
%

33,234

223

2.68
%

191

(29
)

162

Total Securities 1

313,364

1,459

1.86
%

176,071

764

1.74
%

638

57

695

Loans:

Real Estate

887,117

9,095

4.16
%

433,789

4,107

3.84
%

4,622

366

4,988

Commercial

92,742

1,089

4.76
%

128,994

1,189

3.74
%

(381
)

281

(100
)
Consumer

51,734

586

4.59
%

56,119

642

4.64
%

(50
)

(6
)

(56
)
Total Loans

1,031,593

10,770

4.23
%

618,902

5,938

3.89
%

4,191

641

4,832

Fed Funds Sold

152,477

61

0.16
%

67,400

12

0.07
%

25

24

49

Other interest-bearing deposits

305,027

120

0.16
%

—

—

—

120

—

120

Total Earning Assets

1,802,461

12,410

2.79
%

862,373

6,714

3.16
%

4,974

722

5,696

Less: Allowance for Loan Losses

(6,027
)

(5,476
)

Total Non-Earning Assets

140,916

45,619

Total Assets

$
1,937,350

$
902,516

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest Bearing Liabilities:

Interest Bearing Deposits:

Interest Checking

$
421,468

$
61

0.06
%

$
146,781

$
26

0.07
%

$
41

$
(6
)

$
35

Money Market and Savings Deposits

656,219

615

0.38
%

284,333

351

0.50
%

366

(102
)

264

Time Deposits

158,423

195

0.50
%

99,692

280

1.14
%

118

(203
)

(85
)
Total Interest-Bearing Deposits

1,236,110

871

0.29
%

530,806

657

0.50
%

525

(311
)

214

Borrowings

—

—

—

30,000

36

0.49
%

(18
)

(18
)

(36
)
Junior subordinated debt

3,371

49

5.90
%

—

—

—

49

—

49

Total Interest-Bearing Liabilities

1,239,481

920

0.30
%

560,806

693

0.50
%

556

(329
)

227

Non-Interest-Bearing Liabilities:

Demand deposits

527,091

255,227

Other liabilities

11,347

3,948

Total Liabilities

1,777,919

819,981

Shareholders' Equity

159,431

82,535

Total Liabilities & Shareholders' Equity

$
1,937,350

$
902,516

Net Interest Income (FTE)

$
11,490

$
6,021

$
4,418

$
1,051

$
5,469

Interest Rate Spread 2

2.49
%

2.66
%

Cost of Funds

0.21
%

0.34
%

Interest Expense as a Percentage of Average
Earning Assets

0.21
%

0.33
%

Net Interest Margin (FTE) 3

2.59
%

2.83
%

(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.

4649

Consolidated Average Balance Sheet and Analysis of Net Interest Income


	For the Nine Months Ended
	September 30, 2022			September 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	$340,692	$5,492	2.15%	$189,250	$2,127	1.50%	$2,181	$1,184	$3,365
Tax Exempt Securities 1	65,447	1,170	2.38%	50,559	923	2.43%	267	(19)	248
Total Securities 1	406,139	6,662	2.19%	239,809	3,050	1.70%	2,448	1,165	3,613
Loans:
Real Estate	855,632	27,567	4.31%	771,407	24,284	4.21%	2,703	580	3,283
Commercial	85,148	2,930	4.60%	158,691	4,967	4.18%	(2,490)	453	(2,037)
Consumer	50,808	1,906	5.02%	65,426	2,653	5.42%	(560)	(187)	(747)
Total Loans	991,588	32,403	4.37%	995,524	31,904	4.28%	(347)	846	499
Fed Funds Sold	118,228	662	0.75%	94,502	78	0.11%	24	560	584
Other interest-bearing deposits	196,801	973	0.66%	118,331	94	0.11%	99	780	879
Total Earning Assets	1,712,756	40,700	3.18%	1,448,166	35,126	3.24%	2,224	3,351	5,575
Less: Allowance for Loan Losses	(5,806)			(5,618)
Total Non-Earning Assets	124,518			104,539
Total Assets	$1,831,468			$1,547,087

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$411,504	$175	0.06%	$333,193	$191	0.08%	$39	$(55)	$(16)
Money Market and Savings Deposits	584,597	1,470	0.34%	484,742	1,407	0.39%	266	(203)	63
Time Deposits	151,045	499	0.44%	148,715	886	0.80%	14	(401)	(387)
Total Interest-Bearing Deposits	1,147,146	2,144	0.25%	966,650	2,484	0.34%	319	(659)	(340)
Borrowings	—	—	—	31,967	(280)	-1.17%	280	—	280
Junior subordinated debt	3,383	148	5.85%	2,324	99	—	46	3	49
Total Interest-Bearing Liabilities	1,150,529	2,292	0.27%	1,000,941	2,303	0.31%	645	(656)	(11)
Non-Interest-Bearing Liabilities:
Demand deposits	524,592			402,163
Other liabilities	10,107			10,617
Total Liabilities	1,685,228			1,413,721
Shareholders' Equity	146,240			133,366
Total Liabilities & Shareholders' Equity	$1,831,468			$1,547,087
Net Interest Income (FTE)		$38,408			$32,823		$1,579	$4,007	$5,586
Interest Rate Spread 2			2.91%			2.94%
Cost of Funds			0.18%			0.22%
Interest Expense as a Percentage of Average Earning Assets			0.18%			0.21%
Net Interest Margin (FTE) 3			3.00%			3.03%

(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)

Provision for loan losses

A provision for loan losses of ~~$148~~$39 thousand was recognized during the three months ended ~~March 31,~~September 30, 2022 compared to ~~$351~~$267 thousand recognized during the three months ended ~~March 31,~~September 30, 2021. A recovery of provision for loan losses of $30 thousand was recognized during the nine months ended September 30, 2022 compared to a provision for loan losses recognized of $477 thousand during the nine months ended September 30, 2021. The period-end ALLL as a percentage of ~~assets~~total loans was 0.58% as of ~~March 31,~~September 30, 2022, 0.56% as of December 31, 2021 and ~~0.90%~~0.51% as of ~~March 31,~~September 30, 2021. The percentage decrease as compared to 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 March 31, 2022, excluding the impacttotal of the ~~Acquired Loans~~ALLL and the fair value mark ~~would have been 0.95%. Refer~~as a percentage of gross loans (a non-GAAP financial measure) amounted to ~~the Reconcilement~~2.38% as of ~~Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement~~September 30, 2022, compared to 2.30% as of ~~GAAP to Non-GAAP ALLL.~~December 31, 2021 and 2.24% as of September 30, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 and 2021 are shown below (dollars in thousands):


	For the three months ended				Variance					For the Three Months Ended				Variance
	March 31, 2022		March 31, 2021		$		%			September 30, 2022		September 30, 2021		$			%
Noninterest income:
Wealth management fees	$	557	$	329	$	228		69.3	%	$	590	$	744	$	(154	)		-20.7	%
Advisory and brokerage income		216		191		25		13.1	%		213		358		(145	)		-40.5	%
Deposit account fees		465		160		305		190.6	%		443		396		47			11.9	%
Debit/credit card and ATM fees		707		154		553		359.1	%		660		808		(148	)		-18.3	%
Bank owned life insurance income		211		107		104		97.2	%		252		201		51			25.4	%
Resolution of commercial dispute		2,400	--		--		--
Gains on sale of assets											4		-		4			100.0	%
Other		231		98		133		135.7	%		138		971		(833	)		-85.8	%
Total noninterest income	$	4,787	$	1,039	$	3,748		360.7	%	$	2,300	$	3,478	$	(1,178	)		-33.9	%

Noninterest income for the three months ended ~~March 31,~~September 30, 2022 of ~~$4.8~~$2.3 million was ~~$3.7~~$1.2 million or ~~360.7% higher~~33.9% lower than the amount recorded for the three months ended ~~March 31,~~September 30, 2021. Noninterest income decreased predominantly due to the prior period Other Income, as reported on the consolidated statements of income, including a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio and a recovery of $312 thousand from a TFB loan that was charged off prior to April 1, 2021. In addition, wealth management fees, advisory and brokerage fees and debit/credit card/ATM fees have each decreased approximately $150 thousand over the prior period due to an anticipated reduction in the number of accounts in each area.

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


	For the Nine Months Ended				Variance
	September 30, 2022		September 30, 2021		$			%
Noninterest income:
Wealth management fees	$	1,719	$	2,053	$	(334	)		-16.3	%
Advisory and brokerage income		639		908		(269	)		-29.6	%
Deposit account fees		1,366		982		384			39.1	%
Debit/credit card and ATM fees		2,146		1,561		585			37.5	%
Bank owned life insurance income		709		507		202			39.8	%
Resolution of commercial dispute		2,400		-		2,400		N/A
Gain on sale of assets		1,117		-		1,117		N/A
Other		637		1,426		(789	)		-55.3	%
Total noninterest income	$	10,733	$	7,437	$	3,296			44.3	%

Noninterest income for the nine months ended September 30, 2022 of $10.7 million was $3.3 million or 44.3% higher than the amount recorded for the nine months ended September 30, 2021. Noninterest income increased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial ~~dispute. Also,~~dispute, the ~~inclusion~~$1.1 million gain on the sale of ~~Fauquier’s~~two buildings and an increase of $585 thousand of debit/credit card and ATM fees due to increased number of retail accounts ~~contributed to~~as a result of the ~~increase in debit card income of $553 thousand, deposit fees of $305 thousand, wealth management fees of $228 thousand, and income from bank-owned life insurance policies of $104 thousand.~~Merger.

Noninterest expense

The components of noninterest expense for the three months ended ~~March 31,~~September 30, 2022 and 2021 are shown below (dollars in thousands):


	For the Three Months Ended				Variance
	September 30, 2022		September 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	4,252	$	4,562	$	(310	)		-6.8	%
Net occupancy		1,318		1,039		279			26.9	%
Equipment		249		205		44			21.5	%
Bank franchise tax		304		320		(16	)		-5.0	%
Computer software		287		361		(74	)		-20.5	%
Data processing		712		1,114		(402	)		-36.1	%
FDIC deposit insurance assessment		70		349		(279	)		-79.9	%
Marketing, advertising and promotion		347		337		10			3.0	%
Merger and merger-related expenses		-		1,935		(1,935	)		-100.0	%
Debit/credit card and ATM expenses		91		212		(121	)		-57.1	%
Professional fees		310		186		124			66.7	%
Core deposit intangible amortization		415		417		(2	)		-0.5	%
Other		1,148		1,787		(639	)		-35.8	%
Total noninterest expense	$	9,503	$	12,824	$	(3,321	)		-25.9	%

For the three months ended

Variance

March 31,
2022

March 31,
2021

$

%

Noninterest expense:

Salaries and employee benefits

$
4,731

$
2,402

$
2,329

97.0
%
Net occupancy

1,197

495

702

141.8
%
Equipment

283

116

167

144.0
%
Bank franchise tax

304

173

131

75.7
%
Computer software

263

167

96

57.5
%
Data processing

738

289

449

155.4
%
FDIC deposit insurance assessment

226

63

163

258.7
%
Marketing, advertising and promotion

267

137

130

94.9
%
Merger and merger related expenses

-

278

(278
)

-100.0
%
Plastics expense

139

42

97

231.0
%
Professional fees

337

177

160

90.4
%
Core deposit intangible amortization

439

-

439

N/A

Other

1,171

442

729

164.9
%
Total noninterest expense

$
10,095

$
4,781

$
5,314

111.1
%

Noninterest expense for the quarter ended ~~March 31,~~September 30, 2022 of ~~$10.1~~$9.5 million was ~~$5.3~~$3.3 million or ~~111.1% higher~~25.9% lower than the quarter ended ~~March 31,~~September 30, 2021. This decrease is due to merger and merger-related expenses incurred during the nine months ended September 30, 2021 of $1.9 million, a reduction in salaries and employee benefits of $310 thousand as a result of reduced headcount and a $402 thousand reduction in data processing costs as a result of efficiencies gained in connection with the Merger.

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


	For the Nine Months Ended				Variance
	September 30, 2022		September 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	13,069	$	11,705	$	1,364			11.7	%
Net occupancy		3,797		2,643		1,154			43.7	%
Equipment		786		661		125			18.9	%
Bank franchise tax		912		922		(10	)		-1.1	%
Computer software		907		744		163			21.9	%
Data processing		2,149		2,397		(248	)		-10.3	%
FDIC deposit insurance assessment		421		594		(173	)		-29.1	%
Marketing, advertising and promotion		873		706		167			23.7	%
Merger and merger-related expenses		-		8,087		(8,087	)		-100.0	%
Debit/credit card and ATM expenses		322		589		(267	)		-45.3	%
Professional fees		1,051		873		178			20.4	%
Core deposit intangible amortization		1,281		845		436			51.6	%
Other		3,472		2,832		640			22.6	%
Total noninterest expense	$	29,040	$	33,598	$	(4,558	)		-13.6	%

Noninterest expense for the nine months ended September 30, 2022 of $29.0 million was ~~that~~$4.6 million or 13.6% lower than the ~~current year figures include~~nine months ended September 30, 2021. This decrease is due to merger and merger-related expenses incurred during the ~~expenses~~nine months ended September 30, 2021 of $8.1 million, offset by increases in the ~~merged company. The~~following areas due to the Merger being effective April 1, 2021: 1) salaries and employee benefits increased $1.4 million, 2) net occupancy increased $1.2 million, and 3) core deposit intangible amortization increased $436 thousand. In addition, the Company incurred $685 thousand ~~for~~in expenses in the first quarter ~~ended March 31,~~of 2022, included in ~~expenses~~other noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier. ~~Core deposit intangible amortization expense, which was not incurred prior to the Merger, was $439 thousand during the three months ended March 31, 2022.~~

The efficiency ratio (FTE) of ~~62.0%~~57.0% for the three months ended ~~March 31,~~September 30, 2022 compared favorably to the ~~67.7%~~75.2% for the same quarter of 2021, due ~~primarily~~ to the increase in net interest income (FTE) and the decrease in noninterest ~~income,~~expense, as described above. The efficiency ratio (FTE) of 59.1% for the nine months ended September 30, 2022 also compared favorably to the 83.5% for the nine months ended September 30, 2021 for the same 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 ~~March 31,~~September 30, 2022 and 2021, the Company provided ~~$1.0~~$1.3 million and ~~$376~~$753 thousand for Federal income taxes, respectively, resulting in an effective income tax ~~rate~~rates of ~~17.5%~~18.0% and 19.4%, respectively. For the nine months ended September 30, 2022 and 2021, the Company provided $3.5 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 17.6% and 20.0%, respectively. The effective income tax rate for the ~~three months ended March 31, 2022~~current quarter and current year-to-date was lower than the prior year, due to the ~~recognition~~non-deductibility of ~~low-income housing tax credits~~certain merger and merger-related expenses in the ~~current period.~~prior year. For ~~both~~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.~~bonds and the recognition of low-income housing tax credits.

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 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 ~~March 31,~~September 30, 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 September 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, 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 not 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 ~~March 31,~~September 30, 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 ~~Loss~~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 ~~March 31,~~September 30, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

5054

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:		~~May 13,~~November 2, 2022

~~By:~~		/s/ Tara Y. Harrison
		Tara Y. Harrison
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Date:		~~May 13,~~November 2, 2022

5155


Deposit accounts
(dollars in thousands)	March 31, 2022					December 31, 2021					March 31, 2021
	Balance		% of Total Deposits			Balance		% of Total Deposits			Balance		% of Total Deposits
No cost and low cost deposits:
Noninterest demand deposits	$	523,189		29.5	%	$	522,281		29.1	%	$	248,212		30.9	%
Interest checking accounts		451,339		25.5	%		446,314		24.8	%		162,218		20.2	%
Money market and savings deposit accounts		644,418		36.3	%		665,530		37.1	%		292,886		36.4	%

Total noninterest and low cost deposit accounts		1,618,946		91.3	%		1,634,125		91.0	%		703,316		87.5	%

Time deposit accounts:
Certificates of deposit		149,759		8.4	%		155,901		8.7	%		92,352		11.4	%
CDARS deposits		5,643		0.3	%		6,144		0.3	%		8,492		1.1	%
Total certificates of deposit and other time deposits		155,402		8.7	%		162,045		9.0	%		100,844		12.5	%

Total deposit account balances	$	1,774,348		100.0	%	$	1,796,170		100.0	%	$	804,160		100.0	%


Reconcilement of Non-GAAP Measures:	As of or for the Three Months Ended
	March 31, 2022			March 31, 2021
Fully tax-equivalent measures
Net interest income	$	11,425		$	5,974
Fully tax-equivalent adjustment		65			47
Net interest income (FTE)	$	11,490		$	6,021

Efficiency ratio		62.3	%		68.2	%
Fully tax-equivalent adjustment		-0.3	%		-0.5	%
Efficiency ratio (FTE)		62.0	%		67.7	%

Net interest margin		2.57	%		2.81	%
Fully tax-equivalent adjustment		0.02	%		0.02	%
Net interest margin (FTE)		2.59	%		2.83	%

Other financial measures
ALLL to total loans		0.58	%		0.90	%
Impact of acquired loans and fair value mark		0.37	%		0.00	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.95	%		0.90	%

Book value per share	$	27.42		$	29.33
Impact of intangible assets		(3.05	)		(0.26	)
Tangible book value per share (non-GAAP)	$	24.37		$	29.07

Total equity	$	146,019		$	80,012
Impact of intangible assets		(16,231	)		(696	)
Tangible equity	$	129,788		$	79,316

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company