
	September 30, 2022			December 31, 2021 *			June 30, 2023			December 31, 2022 *
ASSETS	Unaudited						Unaudited
Cash and due from banks	$	15,773		$	20,345		$	9,714		$	20,993
Interest-bearing deposits in other banks		76,194			336,032			20,225			19,098
Federal funds sold		53,118			152,463			-			45
Securities:
Available for sale, at fair value		538,459			303,817			473,868			538,186
Restricted securities, at cost		5,138			4,950			7,438			5,137
Total securities		543,597			308,767			481,306			543,323
Loans, net of deferred fees and costs		942,347			1,061,211			973,348			936,415
Allowance for loan losses		(5,485	)		(5,984	)
Allowance for credit losses								(7,863	)		(5,552	)
Loans, net		936,862			1,055,227			965,485			930,863
Premises and equipment, net		18,817			25,093			17,564			17,808
Assets held for sale								-			965
Bank owned life insurance		38,298			31,234			39,065			38,552
Goodwill		8,140			8,140			7,768			7,768
Core deposit intangible, net		6,990			8,271			5,815			6,586
Other intangible assets, net		223			274
Other real estate owned, net		-			611
Right of use asset, net		6,941			7,583			6,634			6,536
Deferred tax asset, net								16,961			17,315
Accrued interest receivable and other assets		28,803			18,144			13,551			13,507
Total assets	$	1,733,756		$	1,972,184		$	1,584,088		$	1,623,359
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	539,134		$	522,281		$	412,273		$	495,649
Interest-bearing		417,530			446,314			312,773			399,983
Money market and savings deposit accounts		505,733			665,530			398,074			467,600
Certificates of deposit and other time deposits		134,250			162,045			224,956			115,106
Total deposits		1,596,647			1,796,170			1,348,076			1,478,338
Federal funds purchased								20,503			-
Short-term borrowings								59,666			-
Junior subordinated debt, net		3,401			3,367			3,436			3,413
Lease liability		6,551			7,108			6,301			6,173
Accrued interest payable and other liabilities		1,183			3,552			3,667			2,019
Total liabilities		1,607,782			1,810,197			1,441,649			1,489,943
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value		-			-			-			-
Common stock, $2.50 par value		13,214			13,178			13,250			13,214
Capital surplus		105,095			104,584			105,667			105,344
Retained earnings		58,026			46,436			69,502			63,482
Accumulated other comprehensive loss		(50,361	)		(2,211	)		(45,980	)		(48,624	)
Total shareholders' equity		125,974			161,987			142,439			133,416
Total liabilities and shareholders' equity	$	1,733,756		$	1,972,184		$	1,584,088		$	1,623,359
Common shares outstanding		5,327,271			5,308,335			5,365,982			5,337,271
Common shares authorized		10,000,000			10,000,000			10,000,000			10,000,000
Preferred shares outstanding		-			-			-			-
Preferred shares authorized		2,000,000			2,000,000			2,000,000			2,000,000


	For the three months ended					For the nine months ended						For the three months ended					For the six months ended
	September 30, 2022		September 30, 2021			September 30, 2022			September 30, 2021			June 30, 2023		June 30, 2022			June 30, 2023			June 30, 2022
Interest and dividend income:
Loans, including fees	$	11,024	$	12,957		$	32,403		$	31,904		$	14,894	$	10,610		$	27,661		$	21,379
Federal funds sold		299		45			662			78			10		302			10			363
Other interest-bearing deposits		618		55			973			94			119		219			378			355
Investment securities:
Taxable		2,626		742			5,300			2,006			2,876		1,662			5,826			2,674
Tax exempt		313		280			925			729			329		308			656			612
Dividends		66		55			192			121			104		64			171			126
Total interest and dividend income		14,946		14,134			40,455			34,932			18,332		13,165			34,702			25,509

Interest expense:
Demand and savings deposits		471		673			1,645			1,598
Demand deposits													106		58			195			119
Money market and savings deposits													2,197		440			3,970			1,055
Certificates and other time deposits		147		282			499			886			1,776		157			2,424			352
Borrowings		51		(325	)		148			(181	)
Federal funds purchased													32		-			91			-
Short-term borrowings													439		-			766			-
Junior subordinated debt													79		49			140			97
Total interest expense		669		630			2,292			2,303			4,629		704			7,586			1,623
Net interest income		14,277		13,504			38,163			32,629			13,703		12,461			27,116			23,886
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
Provision for (recovery of) credit losses													261		(217	)		13			(69	)
Net interest income after provision for (recovery of) credit losses													13,442		12,678			27,103			23,955

Noninterest income:
Wealth management fees		590		744			1,719			2,053			397		572			801			1,129
Advisory and brokerage income		213		358			639			908			-		210			-			426
Deposit account fees		443		396			1,366			982			399		458			800			923
Debit/credit card and ATM fees		660		808			2,146			1,561			636		779			1,207			1,486
Bank owned life insurance income		252		201			709			507			261		246			513			457
Resolution of commercial dispute		-		-			2,400			-			-		-			-			2,400
Gains on sale of assets		4		-			1,117			-			-		1,113			-			1,113
Gain on termination of interest swap													-		-			460			-
Loss on sales of AFS, net													-		-			(206	)		-
Other		138		971			637			1,426			352		268			746			499
Total noninterest income		2,300		3,478			10,733			7,437			2,045		3,646			4,321			8,433

Noninterest expense:
Salaries and employee benefits		4,252		4,562			13,069			11,705			4,062		4,086			8,113			8,817
Net occupancy		1,318		1,039			3,797			2,643			929		1,282			2,108			2,479
Equipment		249		205			786			661			176		254			394			537
Bank franchise tax		304		320			912			922			313		304			637			608
Computer software		287		361			907			744			203		357			405			620
Data processing		712		1,114			2,149			2,397			806		699			1,548			1,437
FDIC deposit insurance assessment		70		349			421			594			220		125			320			351
Marketing, advertising and promotion		347		337			873			706			275		259			650			526
Merger and merger-related expenses		-		1,935			-			8,087
Debit/credit card and ATM expenses		91		212			322			589
Plastics expense													30		92			78			231
Professional fees		310		186			1,051			873			198		404			390			741
Core deposit intangible amortization		415		417			1,281			845			379		427			770			866
Other		1,148		1,787			3,472			2,832			973		1,153			2,012			2,324
Total noninterest expense		9,503		12,824			29,040			33,598			8,564		9,442			17,425			19,537

Income before income taxes		7,035		3,891			19,886			5,991			6,923		6,882			13,999			12,851
Provision for income taxes		1,263		753			3,505			1,201			1,272		1,197			2,557			2,242
Net income	$	5,772	$	3,138		$	16,381		$	4,790		$	5,651	$	5,685		$	11,442		$	10,609
Net income per common share, basic	$	1.08	$	0.59		$	3.08		$	1.08		$	1.05	$	1.07		$	2.14		$	1.99
Net income per common share, diluted	$	1.08	$	0.59		$	3.06		$	1.07		$	1.05	$	1.06		$	2.13		$	1.98
Weighted average common shares outstanding, basic		5,326,543		5,306,370			5,321,652			4,453,303			5,357,873		5,326,271			5,348,040			5,319,166
Weighted average common shares outstanding, diluted		5,348,900		5,338,872			5,347,878			4,478,779			5,375,073		5,347,008			5,375,545			5,345,242

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2022~~2023 AND ~~2021~~2022


	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
Exercise of stock options		1		14			-			-			15
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61
Vested stock grants		7		(7	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(814	)		-			(814	)
Net income		-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			(3,387	)		(3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	(1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165
Vested stock grants		16		(16	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,596	)		-			(1,596	)
Net income		-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	(135	)	$	158,602
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
															Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total
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			-		42			-			-			42
Restricted stock grant expense		-		121			-			-			121			-		121			-			-			121
Vested stock grants		11		(11	)		-			-			-			11		(11	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,597	)		-			(1,597	)		-		-			(1,597	)		-			(1,597	)
Net income		-		-			5,685			-			5,685			-		-			5,685			-			5,685
Other comprehensive loss		-		-			-			(16,054	)		(16,054	)		-		-			-			(16,054	)		(16,054	)
Balance, June 30, 2022	$	13,201	$	104,858		$	53,852		$	(37,695	)	$	134,216		$	13,201	$	104,858		$	53,852		$	(37,695	)	$	134,216

Balance, December 31, 2022															$	13,214	$	105,344		$	63,482		$	(48,624	)	$	133,416
Exercise of stock options		3		21			-			-			24			3		15			-			-			18
Stock option expense		-		42			-			-			42			-		42			-			-			42
Restricted stock grant expense		-		184			-			-			184			-		111			-			-			111
Vested stock grants		10		(10	)		-			-			-
Cash dividends declared ($0.30 per share)		-		-			(1,598	)		-			(1,598	)
Vested restricted stock grants																21		(21	)		-			-			-
Cash dividends declared ($0.33 per share)																-		-			(1,762	)		-			(1,762	)
Impact of adoption of CECL																-		-			(1,890	)		-			(1,890	)
Net income																-		-			5,791			-			5,791
Other comprehensive income																-		-			-			5,771			5,771
Balance, March 31, 2023															$	13,238	$	105,491		$	65,621		$	(42,853	)	$	141,497
Stock option expense																-		68			-			-			68
Restricted stock grant expense																-		120			-			-			120
Vested restricted stock grants																12		(12	)		-			-			-
Cash dividends declared ($0.33 per share)																-		-			(1,770	)		-			(1,770	)
Net income		-		-			5,772			-			5,772			-		-			5,651			-			5,651
Other comprehensive loss		-		-			-			(12,666	)		(12,666	)		-		-			-			(3,127	)		(3,127	)
Balance, September 30, 2022	$	13,214	$	105,095		$	58,026		$	(50,361	)	$	125,974
Balance, June 30, 2023															$	13,250	$	105,667		$	69,502		$	(45,980	)	$	142,439


	For the nine months ended						For the six months ended
	September 30, 2022			September 30, 2021			June 30, 2023			June 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,381		$	4,790		$	11,442		$	10,609
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		(30	)		477
Provision for (recovery of) credit losses								13			(69	)
Net accretion of certain acquisition-related adjustments		(1,518	)		(2,474	)		(4,671	)		(1,023	)
Amortization of intangible assets		1,332			896			770			900
Net amortization and accretion of securities		317			1,100
Net amortization and (accretion) of securities								(1,117	)		539
Net losses on sale of AFS								206			—
Net gains on sale of other assets		(1,117	)		(65	)		—			(1,113	)
Earnings on bank owned life insurance		(709	)		(507	)		(513	)		(457	)
Depreciation and other amortization		2,875			2,173			1,654			1,921
Stock option expense		125			96			110			83
Stock grant expense		398			283			231			214
Net change in:
Accrued interest receivable and other assets		1,509			(1,552	)		344			94
Accrued interest payable and other liabilities		(2,112	)		1,882			1,648			(2,032	)
Net cash provided by operating activities		17,451			7,099			10,117			9,666

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares		—			153,278
Net (increase) decrease in restricted investments		(188	)		2,019
Net increase in restricted investments								(2,301	)		(188	)
Purchases of available for sale securities		(314,997	)		(36,127	)		(10,000	)		(216,525	)
Proceeds from maturities, calls and principal payments of available for sale securities		18,365			22,876
Net decrease in loans		119,905			95,117
Proceeds from maturities, calls, sales and principal payments of available for sale securities								78,930			12,558
Net change in loans								(34,282	)		101,621
Purchase of bank owned life insurance		(6,354	)		—			—			(6,355	)
Proceeds from sale of premises and equipment		6,211			34			962			6,207
Proceeds from sale of other real estate owned		610			—			—			610
Proceeds from sale of loans		—			6,126
Purchase of bank premises and equipment		(510	)		(1,055	)		(501	)		(334	)
Net cash (used in) provided by investing activities		(176,958	)		242,268
Net cash provided by (used in) investing activities								32,808			(102,406	)

CASH FLOWS FROM FINANCING ACTIVITIES:
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	)
Net change in demand deposits, interest checking, money market and savings accounts								(240,112	)		(185,348	)
Net change in certificates of deposit and other time deposits								109,856			(11,892	)
Net change in federal funds purchased								20,503			—
Net change in other borrowings								59,666			—
Proceeds from termination of interest swap								479			—
Proceeds from stock options exercised		24			30			18			—
Cash dividends paid		(4,791	)		(4,817	)		(3,532	)		(3,193	)
Net cash (used in) provided by financing activities		(204,248	)		141,468
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$	(363,755	)	$	390,835
Net cash used in financing activities								(53,122	)		(200,433	)
NET DECREASE IN CASH AND CASH EQUIVALENTS							$	(10,197	)	$	(293,173	)

CASH AND CASH EQUIVALENTS:
Beginning of period	$	508,840		$	34,695		$	40,136		$	508,840
End of period	$	145,085		$	425,530		$	29,939		$	215,667

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,344		$	2,289		$	2,705		$	1,664
Taxes	$	2,750		$	1,042		$	2,134		$	1,500

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized losses on available for sale securities	$	(61,676	)	$	(2,324	)	$	3,852		$	(45,415	)
Unrealized gains (losses) on interest rate swaps	$	727		$	(106	)
Unrealized gains on interest rate swaps							$	—		$	499
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	540		$	—		$	—		$	540
Assets acquired in business combination	$	—		$	909,736
Liabilities assumed in business combination	$	—		$	840,226
Change in goodwill	$	—		$	8,526

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.~~2022.

~~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,~~Services. Until the sale of ~~TFB Trust and Investment Management. The~~the business line on December 19, 2022, the Bank also ~~offers,~~offered, through ~~its~~ networking agreements with third parties, investment advisory and other investment services under Sturman Wealth ~~Advisors and, in 2021, TFB Investment Services.~~Advisors. 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,~~ACL, accounting for business combinations, including loans acquired in the business combination, ~~impairment of~~ACL on individually evaluated loans, goodwill impairment, ~~other-than-temporary impairment~~credit losses of securities, other intangible assets, and fair value measurements. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

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~~Statement Presentation - In ~~June 2016,~~July 2023, the FASB issued ASU ~~2016-13, “Financial Instruments – Credit Losses~~2023-03, “Presentation of Financial Statements (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,205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), 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, theCompensation—Stock Compensation (Topic 718)”. This ASU amends the ~~accounting~~FASB Accounting Standards Codification for ~~credit losses on available-for-sale debt securities~~SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force Meeting, and ~~purchased financial assets with credit deterioration. The FASB has issued multiple updates~~Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. 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~~2023-03 is effective upon addition to the ~~codification as well as other transition matters.~~FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

~~Smaller~~

Investments in Tax Credit Structures -In March 2023, the FASB issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting ~~companies, like~~entities to elect to account for qualifying tax equity investments using the ~~Company, who file with~~proportional amortization method, regardless of the ~~U.S. Securities and Exchange Commission (SEC) and all other~~program giving rise to the related income tax credits. The ASU is effective for public business entities ~~who do not file with the SEC are required to apply the guidance~~ for fiscal ~~years, and interim periods within those~~ years beginning after December 15, ~~2022.~~2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The ~~amendments~~Company does not expect the adoption of ~~Topic 326, upon adoption, will be applied~~ASU 2023-02 to have a material impact 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.~~its consolidated financial statements.

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 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 December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the LIBOR would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The 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 No. 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 No. 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 No. 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~~

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

Note 2. Adoption of New Accounting Standards

Financial Instruments – Credit Losses - On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments," 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.~~Disclosures,” ~~ASU 2022-02 addresses areas identified by~~collectively referred to as ASC 326. This standard, in part, replaced the ~~FASB~~incurred loss methodology with an expected loss methodology that is referred to as ~~part~~the current expected credit loss ("CECL") methodology. ASC 326 requires an estimate of ~~its post-implementation review~~credit losses for the remaining estimated life 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~~financial assets using historical experience, current conditions, and ~~enhance the disclosure requirements for~~reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including 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 held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net ~~investment in leases~~amount expected to be collected by ~~year of origination in~~using an allowance for credit losses. Purchased credit deteriorated loans will receive an initial allowance at the ~~vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related~~acquisition date that represents an adjustment 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.

The following table ~~presents as~~illustrates the impact 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~~adopting ASC 326 (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


	December 31, 2022		January 1, 2023			January 1, 2023
	As Previously Reported (Incurred Loss)		Impact of ASC 326			As Reported Under ASC 326
Assets:
Loans, gross	$	936,415	$	355		$	936,770

Allowance for credit losses:
Commercial		194		(11	)		183
Real estate construction and land		221		440			661
1-4 family residential mortgages		1,618		14			1,632
Commercial mortgages		2,820		1,577			4,397
Consumer		699		471			1,171
Allowance for credit losses	$	5,552	$	2,491		$	8,044

Loans, net	$	930,863	$	(2,136	)	$	928,726

Net deferred tax asset	$	17,315	$	499		$	17,814

Liabilities:
Reserve for credit losses on unfunded commitments		60		253			313

Total equity	$	133,416	$	(1,890	)	$	131,526

11Available for Sale Securities

~~In connection with the Merger,~~- For AFS securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded ~~approximately $~~in earnings.~~7.8~~

~~million~~If either of ~~goodwill~~the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and $~~9.7~~ ~~million of other intangible assets~~adverse conditions specifically related to the ~~core deposits of Fauquier. The goodwill arising from~~security. If the ~~Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset will be amortized over~~assessment indicates that a ~~period of~~ ~~seven years~~ ~~using~~credit loss exists, the ~~sum of years digits method.~~

~~The Acquired Loans had aggregate outstanding principal of $622.9~~ ~~million and an estimated fair~~present 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.~~

~~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 are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no ACL related to the AFS securities portfolio.

Loans- Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.9 million at June 30, 2023 and was reported in Accrued interest receivable and other assets on the ~~Acquired Loans~~consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and ~~then discounting those cash flows~~recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a ~~discount rate that would be required by a market participant. In this regard,~~scheduled payment has not been received 30 days after 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).contractual due date.

~~Premises~~All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and ~~equipment:~~interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

Allowance for Credit Losses - Purchased Credit Deteriorated Loans ~~The land~~- Upon adoption of ASC 326, loans that were designated as PCI loans under the previous accounting guidance were classified as PCD loans without reassessment.

In future acquisitions, the Company may purchase loans, some of which may have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency status and ~~buildings acquired were~~other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at ~~fair value~~the amount paid. An initial ACL is determined using the same methodology as other loans held for investment, but with no impact to earnings. The initial ACL determined ~~by current appraisals by independent third parties~~on a collective basis is allocated to individual loans. The sum of the loan's purchase price 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~~ACL becomes its initial amortized cost basis. The difference between the ~~OREO was sold during~~initial amortized cost basis and 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~~par value of the ~~remaining lease payments, as if each acquired lease was~~loan is a ~~new lease~~noncredit discount or premium, which is amortized into interest income over the life of the ~~Company at the Effective Date. Right-of-use assets were measured at~~loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense.

Allowance for Credit Losses - Loans - The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount asexpected to be collected on the ~~lease liability~~loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The ACL represents management’s estimate of lifetime credit losses inherent in loans as ~~adjusted to reflect favorable or unfavorable terms~~ of the ~~lease~~balance sheet date. The ACL is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when ~~compared~~ similar risk characteristics exist. The Company has identified ten portfolio segments and calculates the ACL for each using the methodology specified below (with ~~market terms.~~the major classification noted in italics):

~~Core deposit intangible:~~Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase reserve levels and include: adjustments for changes in lending policies and procedures and underwriting practices; changes in national, regional and local economic conditions; changes in the nature and volume of the portfolio and terms of loans; changes in the experience, depth and ability of credit and loan operations staff; changes in the volume and severity of past due, special mention and substandard loans; changes in the quality of the loan review system; changes in the value of underlying collateral for loans that are not collateral dependent; the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors such as competition, legal and regulatory requirements, on the level of estimated credit losses.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the sale of collateral, the expected credit losses are based on the fair value of collateral at the ~~CDI was determined based on~~reporting dated adjusted for selling costs as appropriate.

Allowance for Credit Losses – Reserve for Unfunded Commitments - The Company records an ACL for off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a ~~discounted cash flow analysis~~charge to provision for credit losses in the Company’s consolidated statements of income. The ACL for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using ~~a discount rate based~~the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in Accrued interest and other liabilities 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.~~Company’s consolidated balance sheets.

~~Deposits:~~Accrued Interest Receivable - The ~~fair value adjustment~~Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection 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.~~is doubtful. 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 was anticipated to be amortized into interest expense over the remaining life of the debt on a straight-line basis. (Note~~Company has concluded that ~~such borrowings were repaid~~this policy results in the ~~third quarter~~timely reversal 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~~uncollectible interest. ~~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~~ no ~~merger and merger-related expenses incurred during the three and nine months ended September 30, 2022 and $1.9~~ ~~million and $8.1~~ ~~million incurred during the three and nine months ended 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were as follows (dollars in thousands):


September 30, 2022			Gross		Gross
June 30, 2023												Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government treasuries	$	244,646	$	-	$	(3,271	)	$	241,375	$	177,277	$	-	$	(1,726	)	$	175,551
U.S. Government agencies		35,291		-		(6,386	)		28,905		45,179		-		(6,340	)		38,839
Mortgage-backed securities/CMOs		188,029		-		(27,568	)		160,461		185,436		-		(27,648	)		157,788
Corporate bonds		30,988		-		(1,693	)		29,295		19,630		-		(928	)		18,702
Municipal bonds		103,898		-		(25,475	)		78,423		104,550		-		(21,562	)		82,988
Total Securities Available for Sale	$	602,852	$	-	$	(64,393	)	$	538,459	$	532,072	$	-	$	(58,204	)	$	473,868


December 31, 2021			Gross		Gross			��
December 31, 2022													Gross		Gross
	Amortized		Unrealized		Unrealized				Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)				Value		Cost		Gains		(Losses)			Value
U.S. Government treasuries											$	245,583	$	-	$	(3,113	)	$	242,470
U.S. Government agencies	$	32,424	$	24	$	(867	)		$	31,581		35,283		-		(6,528	)		28,755
Mortgage-backed securities/CMOs		172,975		248		(2,259	)			170,964		194,964		-		(27,888	)		167,076
Corporate bonds												19,581		-		(852	)		18,729
Municipal bonds		101,136		1,162		(1,026	)			101,272		104,831		-		(23,675	)		81,156
Total Securities Available for Sale	$	306,535	$	1,434	$	(4,152	)		$	303,817	$	600,242	$	-	$	(62,056	)	$	538,186

As of ~~September~~June 30, ~~2022,~~2023, there were $~~537.8~~471.8 million or ~~291~~288 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $~~64.4~~58.2 million and consist of ~~113~~120 mortgage-backed/collateralized mortgage obligations, ~~126~~125 municipal bonds, 1921 agency bonds, 1411 treasury bonds and 1911 corporate bonds.

Accrued interest receivable on AFS securities as of June 30, 2023 amounted to $2.1 million.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, for which no allowance for credit losses was recorded, at ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021~~2022 (dollars in thousands):



	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
September 30, 2022	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2023																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Government treasuries	$	241,375	$	(3,271	)	$	—	$	—		$	241,375	$	(3,271	)	$	84,250	$	(238	)	$	91,301	$	(1,488	)	$	175,551	$	(1,726	)
U.S. Government agencies		6,017		(873	)		22,624		(5,513	)		28,641		(6,386	)		10,107		(53	)		28,731		(6,287	)		38,838		(6,340	)
Mortgage-backed/CMOs		104,457		(15,751	)		56,004		(11,817	)		160,461		(27,568	)		13,028		(730	)		144,760		(26,918	)		157,788		(27,648	)
Corporate bonds		21,959		(1,311	)		7,336		(382	)		29,295		(1,693	)		9,628		(403	)		9,075		(525	)		18,703		(928	)
Municipal bonds		46,604		(11,239	)		31,382		(14,236	)		77,986		(25,475	)		3,123		(102	)		77,843		(21,460	)		80,966		(21,562	)
	$	420,412	$	(32,445	)	$	117,346	$	(31,948	)	$	537,758	$	(64,393	)	$	120,136	$	(1,526	)	$	351,710	$	(56,678	)	$	471,846	$	(58,204	)



	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
December 31, 2021	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2022																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Government treasuries																$	242,470	$	(3,113	)	$	-	$	-		$	242,470	$	(3,113	)
U.S. Government agencies	$	14,443	$	(340	)	$	15,220	$	(527	)	$	29,663	$	(867	)		4,285		(620	)		24,218		(5,908	)		28,503		(6,528	)
Mortgage-backed/CMOs		131,876		(1,735	)		15,192		(524	)		147,068		(2,259	)		55,396		(6,010	)		111,689		(21,878	)		167,085		(27,888	)
Corporate bonds																	18,729		(852	)		-		-			18,729		(852	)
Municipal bonds		40,352		(722	)		10,409		(304	)		50,761		(1,026	)		44,117		(8,001	)		35,964		(15,674	)		80,081		(23,675	)
	$	186,671	$	(2,797	)	$	40,821	$	(1,355	)	$	227,492	$	(4,152	)	$	364,997	$	(18,596	)	$	171,871	$	(43,460	)	$	536,868	$	(62,056	)

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.

Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Company has elected to exclude accrued interest receivable from the amortized cost basis. For debt securities AFS, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an ACL is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the ACL are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities AFS not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. In addition, issuers have continued to make timely payments of principal and interest. Accordingly, as of ~~September~~June 30, ~~2022,~~2023, management believes the impairments detailed in the table above are temporary, and no ~~impairment~~credit 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 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 $~~5.1~~3.1 million and $3.0 million at ~~September~~June 30, 2023 and December 31, 2022, respectively, were pledged as collateral to ~~secure deposits and~~ facilitate borrowing from the Federal Reserve Bank of Richmond. ~~At December 31, 2021, securities~~Securities having carrying values of $~~12.7~~18.2 million and $2.1 million at June 30, 2023 and December 31, 2022, respectively, were ~~similarly pledged.~~pledged to the Commonwealth of Virginia Department of the Treasury to secure public funds depository accounts.

~~For~~14

During the ~~three and nine~~six months ended ~~September~~June 30, ~~2022~~2023, the Company sold AFS securities with a total book value of $49.9 million, incurring a pre-tax loss of $206 thousand, and ~~September 30, 2021, there~~used the net proceeds to fund normal daily operating demands. There were no sales of ~~securities.~~securities during the three months ended June 30, 2023 or the three and six months ending June 30, 2022.

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 holding company for Community Bankers' Bank) and an investment in an SBA loan fund. These restricted securities, totaling $~~5.1~~7.4 million and $~~5.0~~5.1 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, are carried at cost.

The amortized cost and fair value of AFS debt securities at ~~September~~June 30, ~~2022~~2023 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		Amortized Cost		Fair Value
U.S. Government treasuries
One year or less	$	191,949	$	190,074	$	165,818	$	164,439
After one year to five years		52,697		51,301		11,459		11,112
	$	244,646	$	241,375	$	177,277	$	175,551
U.S. Government agencies
One year or less					$	10,000	$	9,948
After one year to five years	$	649	$	559		5,802		5,049
After five years to ten years		30,642		25,418		25,377		20,918
Ten years or more		4,000		2,928		4,000		2,924
	$	35,291	$	28,905	$	45,179	$	38,839
Mortgage-backed securities/CMOs
One year or less					$	2,954	$	2,890
After one year to five years	$	1,915	$	1,752		6,452		6,051
After five years to ten years		930		852		3,185		2,878
Ten years or more		185,184		157,857		172,845		145,969
	$	188,029	$	160,461	$	185,436	$	157,788
Corporate bonds
One year or less	$	1,525	$	1,484	$	1,002	$	977
After one year to five years		25,347		24,070		18,628		17,725
After five years to ten years		4,116		3,741
	$	30,988	$	29,295	$	19,630	$	18,702
Municipal bonds
After one year to five years	$	610	$	585	$	3,060	$	2,922
After five years to ten years		18,085		16,251		19,892		18,089
Ten years or more		85,203		61,587		81,598		61,977
	$	103,898	$	78,423	$	104,550	$	82,988

Total Debt Securities Available for Sale	$	602,852	$	538,459	$	532,072	$	473,868

Note 4. Loans

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All loan information presented as of June 30, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The composition of the loan portfolio by major loan classifications at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, stated at their face amount, net of deferred fees and costs and discounts, including fair value marks, appears below (dollars in thousands). The Company has elected to exclude accrued interest receivable, totaling $2.9 million as of June 30, 2023, from the amortized cost basis of loans.


	September 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022
Commercial	$	72,685		$	96,696		$	98,312		$	71,139
Real estate construction and land		49,668			79,331			29,825			37,541
1-4 family residential mortgages		324,891			358,148			317,330			323,185
Commercial mortgages		447,185			473,632			486,643			459,125
Consumer		47,918			53,404			41,238			45,425
Total loans		942,347			1,061,211			973,348			936,415
Less: Allowance for loan losses		(5,485	)		(5,984	)
Less: Allowance for credit losses								(7,863	)		(5,552	)
Net loans	$	936,862		$	1,055,227		$	965,485		$	930,863

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 September 30, 2022, the Company had PPP loans of $254~~ ~~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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, unamortized premiums onfrom purchases of loans ~~purchased prior to~~(excluding loans acquired during the ~~Merger~~Merger) were $~~1.1~~1.8 million, ~~and $1.1~~ ~~million, respectively.~~remaining rather consistent due to purchases of loans with premiums, offset by amortization of existing premiums. Net deferred loan fees totaled $~~636~~1.7 million and $755 thousand as of June 30, 2023 and December 31, 2022, respectively.

Consumer loans include $58 thousand and $~~865~~180 thousand of demand deposit overdrafts as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Loans acquired in business combinations are recorded in the ~~Consolidated Balance Sheets~~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 remaining net fair value mark of $~~12.1~~11.0 million ~~on the purchased impaired loans and $5.0~~ ~~million on the purchased performing loans~~ as of ~~September~~June 30, ~~2022~~2023 on the Acquired Loans. ~~See Note 2 – Business Combinations~~

The following table shows the aging of the Company's loan portfolio, by class, at June 30, 2023 (dollars in thousands):


	30-59 Days		60-89 Days		90 Days or More Past Due and Still Accruing		Nonaccrual Loans		Current Loans		Total Loans

Commercial	$	793	$	-	$	-	$	-	$	97,519	$	98,312
Real estate construction and land		-		-		-		-		29,825		29,825
1-4 family residential mortgages		292		59		-		713		316,266		317,330
Commercial mortgages		439		-		-		472		485,732		486,643
Consumer loans		264		1		107		-		40,866		41,238
Total Loans	$	1,788	$	60	$	107	$	1,185	$	970,208	$	973,348

The following table shows the Company's amortized cost basis of loans on nonaccrual status as of June 30, 2023 and December 31, 2022 (dollars in thousands). All nonaccrual loans are evaluated for ~~more information~~an ACL on an individual basis. Only one nonaccrual loan required an ACL, in the amount of $19 thousand, due to collateral value shortfall. The adoption of CECL altered the manner in which purchased loans that were in non-accrual status are presented, and as a result, two such loans totaling $534 thousand are included in this figure in 2023 and not included in 2022.


	CECL						Incurred Loss
	June 30, 2023						December 31, 2022
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
Commercial	$	-	$	-	$	-	$	-
Real estate construction and land		-		-		-		-
1-4 family residential mortgages		233		480		713		673
Commercial mortgages		472				472		-
Consumer		-		-		-		-
Total Loans	$	705	$	480	$	1,185	$	673

From time to time, the Company modifies loans to borrowers who are experiencing financial difficulties by providing term extensions, interest rate reductions or other-than-insignificant payment delays. As the effect of most modifications is already included in the ACL due to the measurement methodologies used in its estimate, the ACL is typically not adjusted upon modification. During the three and six months ended June 30, 2023, no loans were modified for borrowers experiencing financial difficulties.

The Company closely monitors the performance of all modified loans to understand the effectiveness of its modification efforts. Upon determination, if applicable, that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. There were no payment defaults during the three months ended June 30, 2023 of modified loans that were modified during the previous twelve months and all are current as of June 30, 2023.

Prior to the adoption of ASC 326

Loans acquired in business combinations are recorded in the consolidated balance sheets at fair value at the acquisition date under the acquisition method of ~~loan balances acquired in the Merger.~~

accounting. The outstanding principal balance and the carrying amount at ~~September 30,~~December 31, 2022 ~~on these Acquired Loans~~of loans acquired in business combinations were as follows ~~(dollars~~(dollars in thousands):

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

Outstanding principal balance

$
49,265

$
302,578

$
351,843

$
76,608

$
372,172

$
448,780

Carrying amount:

Commercial

$
659

$
14,350

$
15,009

$
994

$
28,065

$
29,059

Real estate construction and land

4,310

8,862

13,172

18,576

14,297

32,873

1-4 family residential mortgages

10,445

168,603

179,048

16,020

194,708

210,728

Commercial mortgages

21,711

104,355

126,066

28,675

126,638

155,313

Consumer

81

1,421

1,502

118

2,224

2,342

Total acquired loans

$
37,206

$
297,591

$
334,797

$
64,383

$
365,932

$
430,315


	December 31, 2022
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	43,250	$	290,604	$	333,854
Carrying amount:
Commercial	$	630	$	12,606	$	13,236
Real estate construction and land		1,461		8,530		9,991
1-4 family residential mortgages		9,076		164,280		173,356
Commercial mortgages		20,828		99,206		120,034
Consumer		72		1,277		1,349
Total acquired loans	$	32,067	$	285,899	$	317,966

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,			Six Months Ended June 30,
	2022			2021			2022			2021			2022			2022
Accretable yield, beginning of period	$	11,667		$	14,641		$	13,742		$	—			12,428			13,742
Additions		—			—			—			15,499
Accretion		(828	)		(773	)		(2,327	)		(1,631	)		(761	)		(1,500	)
Reclassification from nonaccretable difference		6,829			—			9,021			—			-			2,193
Other changes, net		(734	)		—			(3,502	)		—			-			(2,768	)
Accretable yield, end of period	$	16,934		$	13,868		$	16,934		$	13,868			11,667			11,667

~~Accounting guidance requires certain disclosures about investments~~The past due status of loans as of December 31, 2022 was as follows (dollars 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.thousands):


	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	$	-	$	24	$	-	$	24	$	630	$	70,485	$	71,139	$	-
Real estate construction and land		287		-		75		362		1,461		35,718		37,541		-
1-4 family residential mortgages		1,176		191		598		1,965		9,076		312,144		323,185		-
Commercial mortgages		330		-		646		976		20,828		437,321		459,125		646
Consumer loans		315		41		59		415		72		44,938		45,425		59
Total Loans	$	2,108	$	256	$	1,378	$	3,742	$	32,067	$	900,606	$	936,415	$	705

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding PCI loans, as of 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 nine months ended September 30, 2022 or the twelve months ended December 31, 2021. Interest income recognized is for the nine months ended 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

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

September 30, 2022

December 31, 2021

1-4 family residential mortgages

$
607

$
495

Total non-accrual loans

$
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. COVID-19 related loan deferrals declined to ~~zero~~ ~~as of September 30, 2022, from $1.2~~ ~~million as of December 31, 2021 and September 30, 2021.~~

~~Based on regulatory guidance on student lending, the Company has classified~~ 48 ~~of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $756~~ thousand as of 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. Management evaluates these loans individually for impairment and includes any expected loss in the ALLL; interest continues to accrue on these TDRs during any deferment and forbearance periods.

~~The following~~table provides a summary, by class, of TDRs as of December 31, 2022 that ~~continue~~continued to accrue interest under the terms of the restructuring agreement, which ~~are~~were considered to be performing, and TDRs that ~~have been~~were placed in ~~non-accrual~~nonaccrual status which ~~are~~were considered to be nonperforming (dollars in thousands).:

Troubled debt restructurings

September 30, 2022

December 31, 2021

No. of

Recorded

No. of

Recorded

Loans

Investment

Loans

Investment

Performing TDRs

1-4 family residential mortgages

1

$
91

1

$
99

Consumer

48

756

58

935

Total performing TDRs

49

$
847

59

$
1,034

Nonperforming TDRs

1-4 family residential mortgages

2

$
503

1

$
495

Total nonperforming TDRs

2

503

1

495

Total TDRs

51

$
1,350

60

$
1,529


Troubled debt restructurings	December 31, 2022
	No. of		Recorded
	Loans		Investment
Performing TDRs
1-4 family residential mortgages		1	$	88
Consumer		46		700
Total performing TDRs		47	$	788

Nonperforming TDRs
1-4 family residential mortgages		2	$	495
Consumer		-		-
Total nonperforming TDRs		2		495
Total TDRs		49	$	1,283

A summary of loans shown above that were modified under the terms of a TDR during the three and nine months ended 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

During the three and nine months ended 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 ~~five~~ 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 no ~~loans secured by 1-4 family residential property that were~~defaults in the ~~process of foreclosure at September~~three months ended June 30, 2022 ~~or December 31, 2021.~~on loans modified in the previous twelve months.

Note 5. Allowance for ~~Loan~~Credit Losses

On January 1, 2023, the Company adopted ASC 326. The ~~ALLL is maintained at a level which, in management’s judgment, is adequate to absorb probable~~measurement of expected credit losses ~~inherent~~under the CECL methodology is applicable to financial assets measured at amortized cost. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All ACL information presented as of June 30, 2023 is in accordance with ASC 326. All ALLL information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The ACL on the loan portfolio is a material estimate for the Company. The Company estimates is ACL on its loan portfolio on a quarterly basis. The Company utilizes two methodologies in its development of the ACL, discounted cash flow and remaining life.

•

Discounted Cash Flow

DCF models, being periodic in nature, allow for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner.

The analysis aligns well with other calculations/actions outside the ACL estimation, which will mitigate model risk in other areas and allow for symmetrical application. For example, fair value (exit price notion), profitability analysis, IRR calculations, ALM, stress testing, and other forms of cash flow analysis.

Peer data is available for certain inputs (Probability of Default, Loss Given Default) if first-party data is not available or meaningful. This is made possible by the periodic nature of the model.

The DCF methodology is utilized on the following pools: 1) Commercial & Industrial; 2) Construction; 3) Consumer; 4) CRE NonOwner Occupied; 5) CRE Owner Occupied; 6) HELOC & Junior Lien; 7) Residential 1st Lien; and 8) Multifamily.

•

Remaining Life

This methodology leverages a quarterly loss rate as well as future expectations of portfolio balances to calculate a reserve.

There are two main strengths of this methodology. First, it is fairly easy to execute and does not rely on large quantities of historical loan-level data. Second, it can satisfy the need to incorporate a reasonable and supportable forecast in a straightforward manner by either applying a forecast policy of “applicable history” or leveraging an actual econometric model for the analysis.

The remaining life methodology is utilized on the following pools: 1) Minute Lender; and 2) Student Loans.

Maximum Loss Rate -Management utilizes the same model to calculate maximum loss rates and expected loss rates for each segment. No additional models or methodologies were used to quantify the maximum loss rate, rather, a worst-case economic environment is utilized in the models. This process ensures symmetry between the maximum loss rate and the quantified loss rate. This process also leverages the well-documented regression models used in model development.

The process for deriving the maximum loss rate is outlined below:

•

The economic forecast reflects the worst economic environment observed for each economic factor. This is done by quantifying a rolling 1-year average for each economic factor. Then, the most pessimistic 1-year average observations are captured and utilized as economic forecast inputs within the application.

•

The economic forecast assumed is a ‘worst-case’ economic environment with inputs reflective of the great recession.

•

The economic forecast is used to quantify credit risk in the form of Loss Rate. The resulting periodic default and loss rates are applied to the prepayment adjusted amortization schedules for each segment.

•

The resulting ACL, which represents a lifetime reserve (symmetrical to the base model), is input into the qualitative framework’s maximum loss rate field. The difference between the expected model and the maximum model results are then allocated based on weight and risk assignment.

Qualitative Factors -ASC 326 requires an entity to adjust historical loss information to reflect the extent to which management expects reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments for reasonable and supportable forecasts may be qualitative in nature and should reflect changes related to relevant data.

The Company utilizes a scorecard approach to assign qualitative factors. The scorecard approach is in alignment with the AICPA audit considerations for CECL which states:

These adjustments should be grounded in a methodology that is subject to appropriate governance, challenge, and periodic controlled reevaluation. Such methodology will generally require significant management judgment. The information used to support management’s adjustments may be publicly available information, information specifically developed for the entity via management’s specialist (internal or external), or other relevant and reliable information.

The purpose of the qualitative scorecard is to provide a qualitative estimate of the expected credit losses of the current loan portfolio in response to potential limitations of the quantitative model. It is used to aid in the assessment of the unquantifiable factors affecting expected credit losses in the loan portfolio. ~~The amount~~Benefits 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,~~scorecard include directional consistency, objectivity, controls 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.quantification framework (auditable).

For ~~purposes of determining~~each segment, the ~~ALLL on~~scorecard calculates the ~~outstanding loans~~difference between the quantitative expected credit loss and the maximum loss rate. This difference represents all available qualitative adjustment 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, based on the associated risks within these classes. Non-PCI acquired loan pools are also evaluated for additional required ALLL.

~~Note~~can be applied to 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.segment.

~~Management utilizes~~Individual Evaluation -In accordance with ASC 326, the Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a ~~loss migration model for determining the quantitative risk assigned to unimpaired loans~~collective (pooled) basis. Loans will not be included in ~~order to capture historical loss information at the loan level, track loss migration through risk grade deterioration,~~both collective and ~~increase efficiencies related to performing the calculations. The quantitative risk factor~~individual analysis. Individual analysis will establish a specific reserve for each loan, ~~class primarily utilizes~~using one of four methods: 1) Fair Value of Collateral Method (Collateral Relationship); 2) Cash Flow Method; 3) Advanced Cash Flow Method; or 4) Loan Pricing Method.

Management has elected to perform an individual evaluation on all loans in non-accrual status. As of June 30, 2023, after reviewing each loan in non-accrual status, a ~~migration analysis loss method based on loss history for the prior twelve quarters.~~specific reserve of $19 thousand was established.

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~~primary driver in the ~~Risk Ratings and Historical Loss Factor Assigned section as follows.~~

•

~~Student loans purchased - The loss rate methodology for student loans is based on~~increase in reserves from adoption date of January 1, 2023 to June 30, 2023 was the ~~average historical loss rate for each tranche of loans, using a twelve-quarter lookback period. Due to the declining balances~~increase in ~~these pools, a balance weighted loss rate weight is used. In addition, qualitative factors 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 relatedoutstanding loan balances.

1920

~~Risk Ratings~~The following table shows the ACL activity by loan portfolio for the three and ~~Historical Loss Factor Assigned~~six months ended June 30, 2023 (dollars in thousands):


	Commercial Loans			Real Estate Construction and Land			1-4 family residential mortgages			Commercial mortgages			Consumer Loans			Total
Allowance for Credit Losses:
Balance as of December 31, 2022	$	194		$	221		$	1,618		$	2,820		$	699		$	5,552
Impact of ASC 326 adoption		(11	)		440			14			1,577			471			2,491
Charge-offs		-			-			-			-			(142	)		(142	)
Recoveries		-			-			3			41			62			106
Provision for (recovery of) credit losses		(7	)		(90	)		(75	)		33			(96	)		(235	)
Balance as of March 31, 2023	$	176		$	571		$	1,560		$	4,471		$	994		$	7,772
Charge-offs		-			-			-			-			(180	)		(180	)
Recoveries		20			-			2			-			33			55
Provision for (recovery of) credit losses		19			(107	)		715			(516	)		105			216
Balance as of June 30, 2023	$	215		$	464		$	2,277		$	3,955		$	952		$	7,863

The following table presents a breakdown of the provision for credit losses for the periods indicated (dollars in thousands):

~~Excellent~~


	Three Months Ended					Six Months Ended
	June 30, 2023		June 30, 2022			June 30, 2023			June 30, 2022
Provision for credit losses:
Provision (recovery) for loans	$	216	$	(217	)	$	(19	)	$	(69	)
Provision for unfunded commitments		45		-			32			-
Total	$	261	$	(217	)	$	13		$	(69	)

The following table presents the Company's amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as of June 30, 2023 (dollars in thousands):


	June 30, 2023
	Real Estate Secured Loans		Allowance for Credit Losses -Loans
Commercial real estate - non owner occupied	$	698	$	-
Residential 1-4 family real estate		741		19
Total	$	1,439	$	19

~~A 0% historical loss factor is applied,~~21

The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as ~~these loans are secured by cash or fully guaranteed by a U.S. government agency and~~of June 30, 2023 (dollars in thousands). Current period gross write-off amounts represent ~~a minimal risk.~~ write-offs for the six months ended June 30, 2023 (dollars in thousands):


	June 30, 2023
	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Loans Converted to Term		Total
Commercial
Pass	$	28,457	$	12,818	$	3,101	$	5,959	$	8,560	$	15,005	$	22,694	$	14	$	96,608
Watch		-		44		-		-		122		7		7		-		180
Special Mention		-		-		1		-		-		93		215		-		309
Substandard		-		73		10		40		344		261		-		487		1,215
Total commercial	$	28,457	$	12,935	$	3,112	$	5,999	$	9,026	$	15,366	$	22,916	$	501	$	98,312
Current period gross write-off	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
.
Real estate construction and land
Pass	$	3,665	$	13,539	$	4,512	$	1,754	$	940	$	2,932	$	-	$	-	$	27,342
Watch		-		-		-		-		-		329		-		-		329
Special Mention		-		-		-		-		-		750		-		-		750
Substandard		-		-		-		-		364		1,040		-		-		1,404
Total real estate construction and land	$	3,665	$	13,539	$	4,512	$	1,754	$	1,304	$	5,051	$	-	$	-	$	29,825
Current period gross write-off	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
.
1-4 family residential mortgages
Pass	$	9,025	$	14,994	$	57,925	$	77,837	$	25,810	$	93,193	$	23,425	$	387	$	302,596
Watch		-		1,396		125		1,449		-		6,025		470		-		9,465
Special Mention		-		853		127		-		-		1,389		78		-		2,447
Substandard		-		-		55		507		99		2,161		-		-		2,822
Total 1-4 family residential mortgage	$	9,025	$	17,243	$	58,232	$	79,793	$	25,909	$	102,768	$	23,973	$	387	$	317,330
Current period gross write-off	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
.
Commercial mortgages
Pass	$	48,144	$	40,929	$	48,145	$	105,357	$	36,869	$	168,088	$	2,518	$	-	$	450,050
Watch		-		-		265		178		7,311		13,216		-		-		20,970
Special Mention		-		-		394		291		-		4,257		-		-		4,942
Substandard		156		-		1,860		2,838		-		5,827		-		-		10,681
Total commercial mortgages	$	48,300	$	40,929	$	50,664	$	108,664	$	44,180	$	191,388	$	2,518	$	-	$	486,643
Current period gross write-off	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer
Pass	$	76	$	237	$	587	$	412	$	179	$	24,303	$	14,389			$	40,183
Watch		-		-		-		15		12		825		-				852
Special Mention		-		-		-		-		-		75		1		9		85
Substandard		-		-		3		-		8		107		-				118
Total consumer	$	76	$	237	$	590	$	427	$	199	$	25,310	$	14,390	$	9	$	41,238
Current period gross write-off	$	-	$	-	$	17	$	1	$	27	$	273	$	4	$	-	$	322

Credit Quality Indicators

The Company ~~has never experienced a loss within this category.~~

~~Good~~

~~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.~~utilizes the following credit quality indicators:

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”:

Excellent – minimal risk loans secured by cash or fully guaranteed by a U.S. government agency

Good – low risk loans secured by marketable collateral within margin

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.

2023

Prior to the adoption of ASC 326

The following table presents the changes in the ACL by major classification during the year ended December 31, 2022 (dollars in thousands):


	Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages			Consumer Loans			Total
Allowance for Credit Losses:
Balance as of beginning of year	$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		(600	)		-			-			(655	)		(1,255	)
Recoveries		519			9			11			178			717
Provision for (recovery of) loan losses		23			(187	)		(51	)		321			106
Ending Balance	$	194		$	221		$	4,438		$	699		$	5,552

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	23		$	23
Collectively evaluated for impairment		194			221			4,438			676			5,529
Acquired loans - purchased credit impaired		-			-			-			-			-

Loans:
Individually evaluated for impairment	$	-		$	-		$	583		$	700		$	1,283
Collectively evaluated for impairment		70,509			36,080			751,823			44,653			903,065
Acquired loans - purchased credit impaired		630			1,461			29,904			72			32,067
Ending Balance	$	71,139		$	37,541		$	782,310		$	45,425		$	936,415

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


December 31, 2022	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	30,121	$	16,058	$	22,853	$	992	$	122	$	993	$	71,139
Real estate construction and land		-		-		35,258		342		532		1,409	$	37,541
1-4 family residential mortgages		-		-		308,041		7,935		5,431		1,778	$	323,185
Commercial mortgages		-		-		408,513		34,828		3,872		11,912	$	459,125
Consumer		461		17,544		26,326		977		22		95	$	45,425
Total Loans	$	30,582	$	33,602	$	800,991	$	45,074	$	9,979	$	16,187	$	936,415

~~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:~~

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.

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 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 $16 ~~thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of September 30, 2022.~~

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

As of and for the period ended September 30, 2022

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

Charge-offs

(243
)

-

-

(540
)

(783
)
Recoveries

151

9

8

146

314

Provision for (recovery of) loan losses

80

(81
)

(297
)

268

(30
)
Ending Balance

$
240

$
327

$
4,189

$
729

$
5,485

Ending Balance:

Individually evaluated for impairment

$
-

$
-

$
-

$
16

$
16

Collectively evaluated for impairment

240

327

4,189

713

5,469

Acquired loans - purchased credit
impaired

-

-

-

-

-

Loans:

Individually evaluated for impairment

$
-

$
-

$
594

$
756

$
1,350

Collectively evaluated for impairment

72,026

45,358

739,326

47,081

903,791

Acquired loans - purchased credit impaired

659

4,310

32,156

81

37,206

Ending Balance

$
72,685

$
49,668

$
772,076

$
47,918

$
942,347

As of and for the period ended December 31, 2021

Commercial
Loans

Real Estate
Construction
and Land

Real Estate
Mortgages

Consumer
Loans

Total

Allowance for Loan Losses:

Balance as of beginning of year

$
209

$
160

$
3,897

$
1,189

$
5,455

Charge-offs

(147
)

-

-

(688
)

(835
)
Recoveries

191

12

6

141

350

Provision for (recovery of) loan losses

(1
)

227

575

213

1,014

Ending Balance

$
252

$
399

$
4,478

$
855

$
5,984

Ending Balance:

Individually evaluated for impairment

$
-

$
-

$
-

$
6

$
6

Collectively evaluated for impairment

252

399

4,478

849

5,978

Acquired loans - purchased credit
impaired

-

-

-

-

-

Loans:

Individually evaluated for impairment

$
-

$
-

$
594

$
935

$
1,529

Collectively evaluated for impairment

95,702

60,755

786,491

52,351

995,299

Acquired loans - purchased credit impaired

994

18,576

44,695

118

64,383

Ending Balance

$
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.

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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. 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. The recipients of unvested restricted shares have full voting and dividend rights, and as such, unvested restricted stock as of ~~September~~June 30, ~~2022~~2023 and ~~September~~June 30, ~~2021~~2022 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).


Three Months Ended	September 30, 2022							September 30, 2021							June 30, 2023							June 30, 2022
	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	$	5,772		5,326,543	$	1.08		$	3,138		5,306,370	$	0.59		$	5,651		5,357,873	$	1.05		$	5,685		5,326,271	$	1.07
Effect of dilutive stock options		-		22,357		-			-		32,502		-			-		17,200		-			-		20,737		(0.01	)
Diluted net income per share	$	5,772		5,348,900	$	1.08		$	3,138		5,338,872	$	0.59		$	5,651		5,375,073	$	1.05		$	5,685		5,347,008	$	1.06

Nine Months Ended	September 30, 2022							September 30, 2021
Six Months Ended															June 30, 2023							June 30, 2022
	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	$	16,381		5,321,652	$	3.08		$	4,790		4,453,303	$	1.08		$	11,442		5,348,040	$	2.14		$	10,609		5,319,166	$	1.99
Effect of dilutive stock options		-		26,226		(0.02	)		-		25,476		(0.01	)		-		27,505		(0.01	)		-		26,076		(0.01	)
Diluted net income per share	$	16,381	$	5,347,878	$	3.06		$	4,790		4,478,779	$	1.07		$	11,442	$	5,375,545	$	2.13		$	10,609		5,345,242	$	1.98

For the three and ~~nine~~six months ended ~~September~~June 30, 2023, there were 105,501 option shares considered anti-dilutive and excluded from this calculation. For the three and six months ended June 30, 2022, there were 101,901 option shares considered anti-dilutive and excluded from this calculation. ~~For the three and nine months ended September 30, 2021, there were~~ ~~91,501~~ ~~option shares considered anti-dilutive and excluded from this calculation.~~

Note 9. Stock Incentive Plans

At the Annual Shareholders Meeting on June 23, 2022, shareholders approved the Virginia National Bankshares Corporation 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 provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. 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 and nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of ~~September~~June 30, ~~2022.~~2023. Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends. Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.No ~~grants have been issued under the 2022 Plan.~~


	2022 Plan		2014 Plan			2005 Plan			2022 Plan			2014 Plan			2005 Plan
Aggregate shares issuable		150,000		275,625			253,575			150,000			275,625			253,575
Options issued, net of forfeited and expired options		—		(170,106	)		(59,870	)		-			(173,706	)		(59,870	)
Unrestricted stock issued		—		(11,635	)		—			-			(11,635	)		-
Restricted stock grants issued, net of forfeited		—		(65,853	)		—			(18,932	)		(84,253	)		-
Cancelled due to Plan expiration		—		—			(193,705	)		-			-			(193,705	)
Remaining available for grant		150,000		28,031			-			131,068			6,031			-

Stock grants issued and outstanding:
Total vested and unvested shares		—		77,488			—			18,932			95,888			-
Fully vested shares		—		35,724			—			-			48,675			-

Option grants issued and outstanding:
Total vested and unvested shares		—		166,901			1,379			-			170,501			-
Fully vested shares		—		87,548			1,379			-			109,616			-

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

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

Stock Options

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


	September 30, 2022								June 30, 2023
	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
Outstanding at January 1, 2023										168,280		$	33.95		$	830
Issued		—			—					3,600		$	35.13
Exercised		(1,000	)		(23.75	)				(1,379	)	$	(13.69	)
Expired		—			—					-		$	-
Outstanding at September 30, 2022		168,280		$	33.95		$	532
Outstanding at June 30, 2023										170,501		$	34.14		$	488

Options exercisable at September 30, 2022		88,927		$	36.18		$	223
Options exercisable at June 30, 2023										109,616		$	36.72		$	222

For the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized $4268 thousand and $3141 thousand, respectively, in compensation expense for stock options. For the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized $~~125~~110 thousand and $9683 thousand, respectively, in compensation expense for stock options. As of ~~September~~June 30, ~~2022,~~2023, there was $~~262~~153 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 stock options grants of 3,600 issued during the three months ended June 30, 2023 and none granted during the first quarter of 2023. There were no stock option grants issued during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022 and 2021.~~2022.

Summary information pertaining to options outstanding at ~~September~~June 30, ~~2022~~2023 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	0.4 Years	$	13.69		1,379	$	13.69
$20.01 to $30.00		65,000	7.8 Years		24.65		25,400		24.67
$23.75 to $30.00											65,000	7.0 Years	$	24.65		30,600	$	24.90
$30.01 to $40.00		44,420	7.8 Years		36.97		16,172		37.87		48,020	7.3 Years	$	36.83		21,536	$	37.79
$40.01 to $42.62		57,481	5.6 Years		42.62		45,976		42.62		57,481	4.9 Years	$	42.62		57,480	$	42.62
Total		168,280	7.0 Years	$	33.95		88,927	$	36.18		170,501	6.4 Years	$	34.14		109,616	$	36.72

Stock Grants

Unrestricted stock grant -– No unrestricted stock grants were awarded during the six months ended June 30, 2023. During the ~~nine~~six months ended ~~September~~June 30, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $43 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 – 8,400 and 18,932 restricted shares were granted to employees and non-employee directors, respectively, vesting over a four-year period, during the six months ended June 30, 2023. (Note that all such shares were granted during the second quarter of 2023 with no shares granted during the first quarter of 2023.) During the ~~nine~~six months ended ~~September~~June 30, 2022, 5,580 and 12,856 restricted shares, 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 September 30, 2021,~~ ~~5,730~~ ~~and~~ ~~19,233~~ ~~restricted shares, respectively, were granted.~~ For the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, $~~184~~120 ~~thousand~~ and $~~398~~231 thousand, respectively, was expensed as a result of restricted stock grants. As of ~~September~~June 30, ~~2022,~~2023, there was $~~1.1~~1.9 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2027.

Changes in the restricted stock grants outstanding during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are summarized below (dollars in thousands except per share data):


	September 30, 2022									June 30, 2023
	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		$	1,165
Nonvested as of January 1, 2023											51,664		$	32.05	$	1,661
Issued		18,536			35.62		601				27,332		$	32.73	$	879
Vested		(13,183	)		(29.04	)		(392	)		(12,851	)	$	30.40	$	(413	)
Forfeited		(600	)		(33.74	)		(19	)		-		$	-	$	-
Nonvested at September 30, 2022		41,764		$	31.82		$	1,355
Nonvested at June 30, 2023											66,145		$	32.65	$	2,127

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:


	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). Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities.

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. Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities.

The following tables present the balances measured at fair value on a recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (dollars in thousands):


			Fair Value Measurements at September 30, 2022 Using:								Fair Value Measurements at June 30, 2023 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	$	241,375	$	-	$	241,375	$	-	$	175,551	$	-	$	175,551	$	-
U.S. Government agencies		28,905		-		28,905		-		38,839		-		38,839		-
Mortgage-backed securities/CMOs		160,461		-		160,461		-		157,788		-		157,788		-
Corporate bonds		29,295		-		29,295		-		18,702		-		18,702		-
Municipal bonds		78,423		-		78,423		-		82,988		-		82,988		-
Total securities available for sale	$	538,459	$	-	$	538,459	$	-	$	473,868	$	-	$	473,868	$	-

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


			Fair Value Measurements at December 31, 2021 Using:								Fair Value Measurements at December 31, 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									$	242,470	$	-	$	242,470	$	-
U.S. Government agencies	$	31,581	$	-	$	31,581	$	-		28,755		-		28,755		-
Mortgage-backed securities/CMOs		170,964		-		170,964		-		167,076		-		167,076		-
Corporate bonds										18,729		-		18,729
Municipal bonds		101,272		-		101,272		-		81,156		-		81,156		-
Total securities available for sale	$	303,817	$	-	$	303,817	$	-	$	538,186	$	-	$	538,186	$	-

Liabilities:
Interest rate swap liabilities	$	197	$	-	$	197	$	-	$	506	$	-	$	506	$	-
Total liabilities at fair value	$	197	$	-	$	197	$	-	$	538,692	$	-	$	538,692	$	-

Certain financial 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~~Collateral Dependent Loans with an ACL

~~Other real estate owned is measured at fair value less cost to sell, based~~In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an ~~appraisal conducted by an independent, licensed appraiser outside~~individual basis and excluded from the collective evaluation. Specific allocations of the ~~Company. If~~ACL are determined by analyzing the borrower's ability to repay amounts owed, collateral ~~value is significantly adjusted due to differences in~~deficiencies, 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 December 31, 2021, the Company had ~~one~~ ~~OREO property acquired through the Merger which was 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~~relative risk grade of the loan ~~agreement will not~~and economic conditions affecting the borrower's industry, among other things. A loan is considered to be ~~collected~~collateral dependent when, ~~due. The measurement of loss associated with impaired loans can~~based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be ~~based on either (a)~~provided substantially through the ~~observable market price~~operation or sale of the ~~loan or~~collateral. In such cases, expected credit losses are based on the fair value of the collateral ~~or (b) using~~at the ~~present~~measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of ~~expected future cash flows discounted at the loan’s effective interest rate, which is not~~collateral supporting collateral dependent loans on a ~~fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.~~quarterly basis. The ~~vast majority of the collateral is real estate. The~~fair value of real estate collateral supporting collateral dependent loans is ~~determined utilizing an income or market valuation approach based on an~~evaluated by appraisal ~~conducted by an independent, licensed appraiser outside~~services using a methodology that is consistent with the Uniform Standards 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.Professional Appraisal Practice.

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).31

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 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.~~

The following table presents the ~~Company’s~~Company's assets that were measured at fair value on a nonrecurring basis as of ~~December 31, 2021. There were~~ no ~~such assets to report as of September~~June 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

~~For the assets measured at fair value on a nonrecurring basis as of December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements~~2023 (dollars in thousands). There were no such assets to report as of ~~September 30,~~December 31, 2022.

Description

Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

Assets:

Other Real Estate Owned

$
611

Market comparables

Discount applied to bonafide offer *

6.0
%
* A discount percentage is applied based on estimated cost to sell.

Quoted Prices
in Active
Markets for
Identical Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Individually evaluated loans

461

Description

Fair Value

Valuation Technique

Unobservable Inputs

Discount Rate

Assets:

Individually evaluated loans

461

Market comparables

Discount applied to recent appraisal

20.0

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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows (dollars in thousands):


			Fair Value Measurements at September 30, 2022 Using:										Fair Value Measurements at June 30, 2023 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	145,085	$	145,085	$	-	$	-	$	145,085	$	29,939	$	29,939	$	-	$	-	$	29,939
Available for sale securities		538,459		-		538,459		-		538,459		473,868		-		473,868		-		473,868
Restricted securities												7,438		-		7,438		-		7,438
Loans, net		936,862		-		-		901,051		901,051		965,485		-		-		902,429		902,429
Bank owned life insurance		38,298		-		38,298		-		38,298		39,065		-		39,065		-		39,065
Accrued interest receivable		4,351		-		2,114		2,237		4,351		5,092		-		2,137		2,955		5,092
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	$	1,123,120	$	-	$	1,123,120	$	-	$	1,123,120
Certificates of deposit		134,250		-		133,741		-		133,741		224,956		-		224,677		-		224,677
Federal funds purchased												20,503	$	-		20,503	$	-		20,503
FHLB Borrowings												59,666		-		59,717		-		59,717
Junior subordinated debt, net		3,401		-		3,158		-		3,158		3,436		-		3,436		-		3,436
Accrued interest payable		123		-		123		-		123		1,059		-		1,059		-		1,059


			Fair Value Measurements at December 31, 2021 Using:										Fair Value Measurements at December 31, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs						Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	508,840	$	508,840	$	-	$	-	$	508,840	$	40,136	$	40,136	$	-	$	-	$	40,136
Available for sale securities		303,817		-		303,817		-		303,817		538,186		-		538,186		-		538,186
Restricted securities												5,137		-		5,137		-		5,137
Loans, net		1,055,227		-		-		1,059,650		1,059,650		930,863		-		-		890,929		890,929
Assets held for sale												965		-		965		-		965
Bank owned life insurance		31,234		-		31,234		-		31,234		38,552		-		38,552		-		38,552
Other real estate owned, net		611		-		-		611		611
Accrued interest receivable		3,778		-		1,252		2,526		3,778		4,879		-		2,265		2,614		4,879
Interest rate swap asset												506		-		506		-		506

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125	$	1,363,232	$	-	$	1,363,232	$	-	$	1,363,232
Certificates of deposit		162,045		-		161,850		-		161,850		115,106		-		109,260		-		109,260
Junior subordinated debt		3,367		-		3,367		-		3,367
Junior subordinated debt, net												3,413		-		3,413		-		3,413
Accrued interest payable		174		-		174		-		174		157		-		157		-		157
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 no ~~sales of securities in the three and nine months ended September 30, 2022 and 2021.~~

The following table presents the ~~cumulative balances of the components~~changes in each component of accumulated other comprehensive income (loss)~~, net of deferred taxes of $10.6~~ ~~million and $464~~ ~~thousand,~~ as of ~~September~~June 30, ~~2022~~2023 and ~~December 31, 2021, respectively~~June 30, 2022 (dollars in thousands).

September 30, 2022

December 31, 2021

Accumulated other comprehensive loss on securities

$
(50,871
)

$
(2,164
)
Accumulated other comprehensive income (loss) on interest rate swap

510

(47
)
Total accumulated other comprehensive loss

$
(50,361
)

$
(2,211
)


	AFS Securities			Interest Rate Swap			Total
Accumulated other comprehensive income (loss) at December 31, 2022	$	(49,024	)	$	400		$	(48,624	)

Other comprehensive income (loss) arising during the period		3,647			(46	)		3,601
Related income tax effects		(766	)		9			(757	)
		2,881			(37	)		2,844

Reclassification into net income		206			(460	)		(254	)
Related income tax effects		(43	)		97			54
		163			(363	)		(200	)

Accumulated other comprehensive loss at June 30, 2023	$	(45,980	)	$	—		$	(45,980	)

	AFS Securities			Interest Rate Swap			Total
Accumulated other comprehensive loss at December 31, 2021	$	(2,164	)	$	(47	)	$	(2,211	)

Other comprehensive income (loss) arising during the period		(45,415	)		499			(44,916	)
Related income tax effects		9,536			(104	)		9,432
		(35,879	)		395			(35,484	)

Accumulated other comprehensive income (loss) at June 30, 2022	$	(38,043	)	$	348		$	(37,695	)

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 September 30, 2022 and~~At December 31, ~~2021,~~2022, the Company had a designated cash flow ~~hedges~~hedge to manage its exposure to variability in cash flows on ~~certain~~one variable rate ~~borrowings~~borrowing through 2036. In anticipation of terminating the borrowing position, such hedge position was liquidated in the first quarter of 2023 for a gain of $479 thousand. There are no other hedges in place as of June 30, 2023.

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~~580 thousand as of December 31, ~~2021.~~2022. Related to the liquidation of the hedge as noted above, the cash collateral was returned to the Company. Collateral iswas dependent on the market valuation of the underlying hedges.

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

September 30, 2022

December 31, 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

538

Other Liabilities

6/15/2031

4,000

506

Junior subordinated debt

6/15/2031

December 31, 2021

Derivatives designated as hedging instruments

Notional/ Contract Amount

Fair Value

Fair Value Balance Sheet Location

Expiration Date

Interest rate forward swap - cash flow

4,000

(197

)

Other Liabilities

6/15/2031

Interest rate swap - fair value

3,940

)

Other Liabilities

2/12/2022

Note 13. Segment Reporting

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

The four reportable segments are:

•

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

•

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, ~~offers~~offered wealth management and investment advisory services. Revenue for this segment iswas generated primarily from investment advisory and financial planning fees, with a small ~~and decreasing~~ portion attributable to brokerage commissions. The Bank sold this business line effective December 19, 2022.

•

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. 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 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.~~

3435

Segment information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 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;~~level and the assets of Sturman Wealth Advisors were reported at the Bank level prior to the sale of the business line on December 19, 2022; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.


Three months ended September 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Three months ended June 30, 2023														Bank		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	14,277		$	-	$	-	$	-		$	14,277		$	13,703	$	-		$	-		$	13,703
Provision for loan losses		39			-		-		-			39
Provision for credit losses															261		-			-			261
Noninterest income		1,486			212		435		167			2,300			1,637		250			158			2,045
Noninterest expense		8,833			154		324		192			9,503			7,987		361			216			8,564
Income (loss) before income taxes		6,891			58		111		(25	)		7,035			7,092		(111	)		(58	)		6,923
Provision for (benefit from) income taxes		1,233			12		23		(5	)		1,263			1,308		(24	)		(12	)		1,272
Net income (loss)	$	5,658		$	46	$	88	$	(20	)	$	5,772		$	5,784	$	(87	)	$	(46	)	$	5,651


Nine months ended September 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services		Masonry Capital			Consolidated
Six months ended June 30, 2023														Bank		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	38,163		$	-	$	-	$	-		$	38,163		$	27,116	$	-		$	-		$	27,116
Provision for (recovery of) loan losses		(30	)		-		-		-			(30	)
Provision for credit losses															13		-			-			13
Noninterest income		5,871			639		3,631		592			10,733			3,492		510			319			4,321
Noninterest expense		26,370			482		1,621		567			29,040			16,355		672			398			17,425
Income before income taxes		17,694			157		2,010		25			19,886
Provision for income taxes		3,045			33		422		5			3,505
Net income	$	14,649		$	124	$	1,588	$	20		$	16,381
Income (loss) before income taxes															14,240		(162	)		(79	)		13,999
Provision for (benefit from) income taxes															2,607		(34	)		(16	)		2,557
Net income (loss)														$	11,633	$	(128	)	$	(63	)	$	11,442


Three months ended September 30, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Three months ended June 30, 2022													Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	13,504	$	-	$	-		$	-		$	13,504	$	12,461		$	-	$	-		$	-	$	12,461
Provision for loan losses		267		-		-			-			267
Provision for (recovery of) credit losses														(217	)		-		-			-		(217	)
Noninterest income		2,890		209		203			176			3,478		2,851			210		365			220		3,646
Noninterest expense		12,183		163		315			163			12,824		8,717			161		376			188		9,442
Income (loss) before income taxes		3,944		46		(112	)		13			3,891		6,812			49		(11	)		32		6,882
Provision for (benefit from) income taxes		763		10		(23	)		3			753		1,181			11		(2	)		7		1,197
Net income (loss)	$	3,181	$	36	$	(89	)	$	10		$	3,138	$	5,631		$	38	$	(9	)	$	25	$	5,685

Nine months ended September 30, 2021	Bank		Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Six months ended June 30, 2022													Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	32,629	$	-	$	-		$	-		$	32,629	$	23,886		$	-	$	-		$	-	$	23,886
Provision for loan losses		477		-		-			-			477
Provision for (recovery of) credit losses														(69	)		-		-			-		(69	)
Noninterest income		5,760		602		607			468			7,437		4,385			426		3,196			426		8,433
Noninterest expense		31,854		490		736			518			33,598		17,538			327		1,298			374		19,537
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
Income before income taxes														10,802			99		1,898			52		12,851
Provision for income taxes														1,811			21		399			11		2,242
Net income													$	8,991		$	78	$	1,499		$	41	$	10,609

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.~~2022. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results for the year ending December 31, ~~2022~~2023 or any future period.

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~~judgment 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: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict between Russia and Ukraine) or other major events, the governmental and societal responses thereto, or the prospect of these events; changes, particularly declines, in general economic and market conditions in the local economies in which the Company operates, including the effects of declines in real estate ~~values,~~values; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the impact of changes in laws, regulations and guidance related to financial services including, but not limited to, taxes, banking, securities and insurance; changes in accounting principles, policies and guidelines; the financial condition of the Company’s borrowers; the Company's ability to attract, hire, train and retain qualified employees; an increase in unemployment ~~levels~~levels; competitive pressures on loan and ~~general economic contraction as a result of COVID-19 or other pandemics; fluctuations~~deposit pricing and demand; fluctuation in ~~interest rates, deposits, loan demand, and~~ asset quality; assumptions that underlie the Company’s ~~ALLL;~~ACL; the ~~potential adverse effects~~value 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;securities held in 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;~~Company's investment portfolio; performance of assets under management; ~~expected revenue synergies~~cybersecurity threats or attacks and ~~cost savings~~the development and maintenance of reliable electronic systems; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the risks and uncertainties described from time to time in the ~~recently completed merger~~Company’s press releases and filings with ~~Fauquier may not be fully realized or realized within~~ the ~~expected timeframe;~~SEC; and the ~~businesses~~Company’s performance in managing the risks involved in any 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.foregoing. 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~~2022 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.

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.

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.")~~

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. During the second quarter of 2023, the Board of Directors approved a share repurchase plan of up to 5% of outstanding common stock, subject to consultation with the Federal Reserve.

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.

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. There were no COVID-19 related loan deferrals as of September 30, 2022.

As of 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 also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate that the Company can react effectively to an economic downturn.

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.

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~~2022 Form 10-K. ~~There have been no~~The significant ~~changes~~change in the Company’s application of critical accounting policies since December 31, ~~2021.~~2022 relates to the estimate of the allowance for credit losses, described as follows:

Allowance for credit losses - The Company establishes the ACL through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL. The ACL represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the ACL is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the ACL on all loans is based in part on forecasts of the national unemployment rate, which we believe to be indicative of risk factors related to the collectability of the loans. In addition, management’s estimate of expected credit losses is based on the remaining life of certain consumer loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the ACL. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the ACL, we consider a range of possible assumptions and outcomes related to the various factors identified above. The level of the allowance is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.

The total assets of the Company as of ~~September~~June 30, ~~2022~~2023 were ~~$1.7~~$1.6 billion. This is a ~~$238~~$39.3 million, or ~~12.1%~~2.4%, decrease from total assets reported at December 31, ~~2021~~2022 and a ~~$178.1~~$160.8 million, or ~~9.3%~~9.2%, decrease from total assets reported at ~~September~~June 30, ~~2021. The~~2022. During 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines in deposit balances through the second quarter of 2023, which resulted in decreases ~~were substantially~~ within ~~gross loans, as legacy organic loan balances declined due to business sales, property sales, loan refinances~~overnight investments 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 ~~Loan~~securities portfolio ~~section following).~~in order to provide necessary funding.

The Company had ~~$76.2~~$20.2 million of interest-bearing deposits in other banks as of ~~September~~June 30, ~~2022,~~2023, compared to ~~$336.0~~$19.1 million as of December 31, ~~2021~~2022 and ~~$254.2~~$145.2 million as of ~~September~~June 30, ~~2021. Significant~~2022. During 2022, significant excess liquidity ~~has been~~was deployed into short-term investment ~~securities~~securities. During the first six months of 2023, customer deposit balances declined $130.3 million, which was largely funded by interest-bearing deposits in ~~the nine months ended September 30, 2022 to earn a higher yield.~~other banks.

The Company had no overnight federal funds sold ~~of $53.1 million~~ as of ~~September~~June 30, ~~2022, $152.5 million~~2023, $45 thousand as of December 31, ~~2021~~2022 and ~~$152.4~~$52.8 million as of ~~September~~June 30, ~~2021.~~2022. Any excess funds are sold on a daily basis in the federal funds market. The Company ~~intends~~monitors liquidity on a daily basis to ~~maintain~~ensure that it maintains sufficient liquidity ~~at all times~~ to meet its funding ~~commitments.~~commitments at all times.

The Company ~~continues to participate~~participates 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.

The Company’s investment securities portfolio as of ~~September~~June 30, ~~2022~~2023 totaled ~~$543.6~~$481.3 million, ~~an increase~~a decrease of ~~$234.8~~$62.0 million compared with the ~~$308.8~~$543.3 million reported at December 31, ~~2021~~2022 and an increase of ~~$263.9~~$14.3 million from the ~~$279.7~~$467.0 million reported at ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease from year-end ~~and~~is due to sales from lower yielding AFS securities to meet funding demands discussed earlier, while the increase during the same period in the prior year is the result of deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the investment securities holdings represented ~~31.4%~~30.4% and ~~15.7%~~33.5% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling ~~$5.1~~$7.4 million as of ~~September~~June 30, ~~2022,~~2023, compared to ~~$5.0~~$5.1 million as of December 31, ~~2021~~2022 and ~~$2.6~~$5.1 million as of ~~September~~June 30, ~~2021.~~2022. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation (the holding company for Community 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 ~~September~~June 30, ~~2022,~~2023, the unrestricted securities portfolio totaled ~~$538.5~~$473.9 million. The following table summarizes the Company's AFS securities by type as of ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021,~~2022, and ~~September~~June 30, ~~2021~~2022 (dollars in thousands):

The unrestricted 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. Refer to Note 2. Adoption of New Accounting Standards for discussion on the impact of CECL to the evaluation of securities for ACL.

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 Company's geographical trade area includes localities in Virginia, Maryland and the District of Columbia that are within a 100-mile radius of any office of the ~~Company.~~Company as well as the counties of Jefferson and Berkeley in West Virginia.

As of ~~September~~June 30, ~~2022,~~2023, total loans were ~~$942.3~~$973.3 million, compared to ~~$1.1 billion~~$936.4 million as of December 31, ~~2021~~2022 and ~~$1.1 billion~~$960.2 million at ~~September~~June 30, ~~2021.~~2022. Loans as a percentage of total assets at ~~September~~June 30, ~~2022~~2023 were ~~54.4%~~61.4%, compared to ~~58.2%~~55.0% as of ~~September~~June 30, ~~2021.~~2022. Loans as a percentage of deposits at ~~September~~June 30, ~~2022~~2023 were ~~59.0%~~72.2%, compared to ~~64.0%~~60.1% as of ~~September~~June 30, ~~2021.~~2022.

The following table summarizes the Company's loan portfolio by type of loan as of ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021,~~2022, and ~~September~~June 30, ~~2021~~2022 (dollars in thousands):

~~The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loan~~Loan balances ~~from September 30, 2021 and December 31, 2021 to September 30, 2022. The decrease~~increased by $36.9 million or 3.9% from December 31, ~~2021 is due predominantly to: 1) paydowns~~2022 to June 30, 2023. During the first half of ~~legacy~~2023, the Company funded $62.3 million in organic ~~loans due mainly to business sales, property sales, refinances~~loan production and ~~participation fluctuations~~purchased $27.7 million in government guaranteed loans. Paydowns and normal amortization of ~~$59.3~~$53.1 million ~~2) workouts and paydowns~~significantly impacted gross loan balances during the first half of ~~Acquired Loans of $51.9 million, and 3) the forgiveness of SBA PPP loans in the amount of $24.2 million.~~2023. As of ~~September~~June 30, ~~2022,~~2023, only ~~$254~~$196 thousand of PPP loans remain outstanding on the Bank's balance sheet.

The following table details the Company's levels of non-owner occupied commercial real estate as of June 30, 2023, along with the average loan size and % of risk ratings for each category (dollars in thousands):

~~Non-accrual~~The Company continues to experience extremely low levels of NPAs, as a result of strict underwriting standards and practices. However, the economic environment in the Company's lending footprint could be impacted as persistent inflation, higher interest rates, and other signs of recession materialize, which could increase NPAs in future periods.

Nonaccruals - Nonaccrual loans, comprised of ~~only three~~six loans to ~~two~~five borrowers, totaled ~~$607 thousand~~$1.2 million at ~~September~~June 30, ~~2022,~~2023, compared to balances of ~~$495~~$673 thousand and ~~$777~~$511 thousand reported at December 31, ~~2021~~2022 and ~~September~~June 30, ~~2021,~~2022, respectively. ~~PCI~~The adoption of CECL altered the manner in which purchased loans ~~which otherwise would be~~that were in ~~non-accrual~~nonaccrual status are ~~not~~presented, and as a result, two such loans totaling $534 thousand are now included in ~~the balances, as they earn interest through the yield accretion.~~this figure.

Past Due Loans - The Company had loans in its portfolio totaling ~~$859~~$107 thousand, ~~$801~~$705 thousand and ~~$678~~$626 thousand, as of ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021~~2022 and ~~September~~June 30, ~~2021,~~2022, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible.

Troubled Loan Modifications - The Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023 on a prospective basis. Refer to Note 1. Summary of Significant Accounting Policies in Part I, Item 1, Notes to Consolidated Financial Statements for information on the Company's accounting policy for loan modifications to borrowers experiencing financial difficulty and how the Company defines TLMs. As of June 30, 2023, the Company had TLMs totaling $1.1 million.

Troubled Debt Restructurings - After the adoption of ASU 2022-02, the Company no longer has TDRs. The below information is presented for December 31, 2022, prior to the adoption of ASU 2022-02.

As of December 31, 2022, the Company had a total of $1.3 million of loans classified as TDRs. Of this balance ~~as of September 30, 2022 includes a government-guaranteed~~only one loan in the amount of ~~$709 thousand.~~$495 thousand was a nonperforming TDR. The ~~portfolio includes three non-insured~~remaining $788 thousand, of which $700 thousand were student loans, ~~that are 90 days or more past due and still accruing interest, amounting to $21 thousand.~~

~~The Company had loans~~were classified as ~~impaired loans in the amount of $1.5 million as of September 30, 2022, $1.5 million as of December 31, 2021, and $1.6 million at September 30, 2021.~~performing. Based on regulatory guidance on student lending, the Company ~~has~~ classified 4846 of its Purchased Student Loans as TDRs for a total of ~~$756~~$700 thousand as of ~~September 30,~~December 31, 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~~continued 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.

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:

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~~ACL to total loans and nonaccrual loans appears below (dollars in thousands):

The ~~ALLL~~ACL on loans as a percentage of loans was ~~0.58%~~0.81% as of ~~September~~June 30, ~~2022, 0.56%~~2023, 0.59% as of December 31, ~~2021,~~2022, and ~~0.51%~~0.57% as of ~~September~~June 30, 2021. The ALLL as a percentage of gross loans, excluding the impact of the Acquired loans and fair value mark (a non-GAAP financial measure), would have been 0.90% as of September 30, 2022, unchanged from 0.90% as of September 30, 2021.2022. The total of the ~~ALLL~~ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to ~~2.38%~~1.94% as of ~~September~~June 30, ~~2022,~~2023, compared to ~~2.24%~~2.29% as of ~~September 30, 2021.~~December 31, 2022. 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 $11.0 million as

~~$17.0 million as~~ of ~~September~~June 30, ~~2022.~~2023. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ~~ALLL~~ACL as a percentage of loans.

A recovery of provision for ~~loan~~credit losses totaling ~~$30~~$19 thousand and a provision for loan losses totaling ~~$477~~$148 thousand were recorded in the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The following is a summary of the changes in the ~~ALLL~~ACL for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (dollars in thousands):

For additional insight into management’s approach and methodology in estimating the ~~ALLL,~~ACL, please refer to the earlier discussion of “Allowance for ~~Loan~~Credit 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~~ACL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ~~ALLL~~ACL was adequately provided for as of ~~September~~June 30, ~~2022~~2023 and acknowledges that the ~~ALLL~~ACL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

The Company’s premises and equipment, net of depreciation, as of ~~September~~June 30, ~~2022~~2023 totaled ~~$18.8~~$17.6 million compared to ~~$25.1~~$17.8 million as of December 31, ~~2021~~2022 and ~~$25.2~~$19.2 million as of ~~September~~June 30, ~~2021,~~2022, decreasing from prior year second quarter due to the sale of ~~two buildings during~~a branch building in the ~~current year.~~first quarter of 2023. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of ~~September~~June 30, ~~2022,~~2023, the Company occupied ~~sixteen~~fourteen 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.

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~~the office of ~~both~~ Masonry ~~Capital and~~Capital. Sturman Wealth ~~Advisors.~~currently leases space in the 404 People Place office building. 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.

Assets held for sale of $965 thousand as of December 31, 2022 were sold during the three months ended March 31, 2023.

As of ~~September~~June 30, ~~2022,~~2023, the Company has recorded ~~$6.9~~$6.6 million of right-of-use assets and ~~$6.6~~$6.3 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, ~~2021, $7.6~~2022, $6.5 million of right-of-use assets and ~~$7.1~~$6.2 million of lease liabilities were included on the balance sheet. 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.

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 Commonwealth of Virginia.

Total deposits as of ~~September~~June 30, ~~2022~~2023 were ~~$1.6~~$1.3 billion, a decrease of ~~$199.5~~$130.3 million compared to December 31, ~~2021,~~2022, and a decrease of ~~$140.5~~$250.8 million compared to ~~September~~June 30, ~~2021~~2022 (dollars in thousands). As stated above, during 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines during 2022 and the first half of 2023 in deposit balances.


		September 30, 2022					December 31, 2021					September 30, 2021						June 30, 2023					December 31, 2022					June 30, 2022
				% of					% of					% of						% of					% of					% of
		Balance		Total			Balance		Total			Balance		Total				Balance		Total			Balance		Total			Balance		Total
No cost and low cost deposits:	No cost and low cost deposits:																No cost and low cost deposits:
Noninterest demand deposits		$	539,134		33.8	%	$	522,281		29.1	%	$	504,696		29.1	%		$	412,273		30.6	%	$	495,649		33.5	%	$	512,889		32.1	%
Interest checking accounts			417,530		26.2	%		446,314		24.8	%		424,642		24.4	%			312,773		23.2	%		399,983		27.1	%		399,930		25.0	%
Money market and savings deposit accounts			505,733		31.7	%		665,530		37.1	%		642,788		37.0	%			398,074		29.5	%		467,600		31.6	%		535,958		33.5	%

Total noninterest and low cost deposit accounts			1,462,397		91.7	%		1,634,125		91.0	%		1,572,126		90.5	%			1,123,120		83.3	%		1,363,232		92.2	%		1,448,777		90.6	%
											��
Time deposit accounts:
Certificates of deposit			129,038		8.0	%		155,901		8.7	%		158,113		9.1	%			218,630		16.2	%		111,134		7.5	%		144,913		9.1	%
CDARS deposits			5,212		0.3	%		6,144		0.3	%		6,944		0.4	%			6,326		0.5	%		3,972		0.3	%		5,208		0.3	%
Total certificates of deposit and other time deposits			134,250		8.3	%		162,045		9.0	%		165,057		9.5	%			224,956		16.7	%		115,106		7.8	%		150,121		9.4	%

Total deposit account balances		$	1,596,647		100.0	%	$	1,796,170		100.0	%	$	1,737,183		100.0	%		$	1,348,076		100.0	%	$	1,478,338		100.0	%	$	1,598,898		100.0	%

Noninterest-bearing demand deposits on ~~September~~June 30, ~~2022~~2023 were ~~$539.1~~$412.3 million, representing ~~33.8%~~30.6% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$923.3~~$710.8 million, and represented ~~57.9%~~52.7% of total deposits at ~~September~~June 30, ~~2022.~~2023. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented ~~91.7%~~83.3% of total deposit accounts at ~~September~~June 30, ~~2022.~~2023. 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 $28.4 million and ~~$110.1~~$104.4 million are included in the interest checking accounts and in the money market and savings deposit accounts balances, respectively, in the table above, as of ~~September~~June 30, ~~2022.~~2023. As of December 31, ~~2021,~~2022, ICS® deposit balances of ~~$39.2~~$28.8 million and ~~$225.9~~$128.6 million are included in the interest checking accounts and in the money market and savings deposit account balances, respectively. All ICS® accounts consist of reciprocal balances for the Company’s customers. The Company currently holds no brokered or specialty CDs.

The remaining ~~8.3%~~16.7% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$134.3~~$225.0 million at ~~September~~June 30, ~~2022.~~2023, increasing over the balances as of December 31, 2022 as a result of several interest rate promotions put into place in the second quarter of 2023. 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 ~~$5.2~~$6.3 million as of ~~September~~June 30, ~~2022~~2023 and ~~$6.1~~$4.0 million as of December 31, ~~2021,~~2022, all of which were reciprocal balances for the Company’s customers.

As of June 30, 2023 and December 31, 2022, the estimated amounts of uninsured deposits were $311.6 million, or 23.1% and $459.4 million, or 31.1% of total deposits, respectively.

The Company purchased $20.5 million in federal funds as of June 30, 2023, (comprised of $10.5 million in overnight federal funds purchased and $10 million in an unsecured federal funds line of credit), compared to no such purchases as of December 31, 2022 or June 30, 2022. As noted in the Federal funds sold section previously, any excess funds are sold on a daily basis in the federal funds market and Federal funds are purchased as needed to meet liquidity needs.

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.

As of June 30, 2023, based on the FHLB’s evaluation, the Company has an available credit position of $393 million, for which access can be negotiated based on multiple factors. The Company currently has a collateral dependent line of credit with the FHLB for $67.7 million, secured by commercial mortgages, with borrowings of $59.7 million as of June 30, 2023. As of December 31, 2022, there were no outstanding borrowings ~~as of September 30, 2022 or December 31, 2021. The~~with the FHLB and the Company ~~has~~had an off-balance sheet letter of credit in the amount of ~~$30~~$30.0 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. ~~This~~The letter of credit iswas secured ~~by commercial mortgages.~~under the collateral dependent line of credit described above and was retired in the second quarter of 2023.

Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with ~~five~~six major regional correspondent banks for a total of $114.0 million and a secured line with the Federal Reserve discount ~~window.~~window in the amount of $4.0 million, based on the market value of the collateral. The Company had no$10.0 million in outstanding balances on these lines or facilities, as noted in the federal funds purchased section above, as of ~~September~~June 30, ~~2022,~~2023, but no outstanding balance as of December 31, ~~2021~~2022 or ~~September~~June 30, ~~2021.~~2022.

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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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.

The following table displays the changes in shareholders' equity for the Company from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022~~2023 (dollars in thousands):

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 ~~16.41%~~17.97%, ~~16.41%~~17.97%, ~~16.97%~~18.80% and ~~9.17%~~11.20%, respectively, as of ~~September~~June 30, ~~2022,~~2023, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were ~~16.18%~~17.73%, ~~16.18%~~17.73%, ~~16.73%~~18.56% and ~~9.04%~~11.05%, respectively, as of ~~September~~June 30, ~~2022,~~2023, also exceeding the minimum requirements.

As of ~~September~~June 30, ~~2022,~~2023, 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%.

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~~ACL to total loans, tangible book value per share, tangible equity 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~~ACL 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 (dollars in ~~thousands)~~thousands, except for the per share data):

Net income for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$5.8~~$5.7 million, a ~~$2.6 million increase~~$34 thousand decrease compared to ~~net income~~$5.7 million reported for the three months ended ~~September~~June 30, ~~2021.~~2022. Net income per diluted share was ~~$1.08~~$1.05 for the ~~quarter~~three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$0.59 ($0.86 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure)~~$1.06 per diluted share for the same ~~quarter~~period in the prior year.

Net income for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$16.4~~$11.4 million, compared to ~~$4.8~~$10.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Net income per diluted share was ~~$3.06~~$2.13 for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~ 2023,compared to ~~$1.07 ($2.45 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure)~~$1.98 per diluted share for the same period in the prior year.

Net interest income (FTE) for the three months ended September 30, 2022 was $14.4 million, a $780 thousand increase compared to net interest income (FTE) of $13.6 million for the three months ended September 30, 2021. Net interest income (FTE) increased primarily due to the increased volume of 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 three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decline in average loan balances, from $1.1 billion for the three months ended September 30, 2021 to $959.1 million for the three months ended September 30, 2022, negatively impacted interest income by $2.1 million. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the three months ended 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, from an average balance of $239.8 million for the nine months ended September 30, 2021 to $406.1 million for the nine months ended September 30, 2022, positively impacted net interest income by $2.4 million, and the yield on such securities increased from 1.70% to 2.19% for the periods noted, positively impacting net interest income by $1.2 million. FFS and interest bearing deposits in other banks contributed an additional $584 thousand and $879 thousand, respectively, to net interest income (FTE) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Net interest income (FTE) was also positively impacted by the 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 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).

Quarterly overview - Net interest income (FTE) for the three months ended June 30, 2023 was $13.8 million, a $1.2 million increase compared to net interest income (FTE) of $12.5 million for the three months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.32% to 6.35%, positively impacting interest income by $4.8 million. This metric was also positively impacted by the volume of securities, increasing from an average of $391.2 million in the three months ended June 30, 2022 to $488.1 million in the three months ended June 30, 2023, positively impacting interest income by $594 thousand. The increase in yield earned on such securities over the same period positively impacted interest income by $685 thousand, increasing from 2.16% for the three months ended June 30, 2022 to 2.78% for the three months ended June 30, 2023. The decline in average loan balances, from $984.9 million for the three months ended June 30, 2022 to $940.3 million for the three months ended June 30, 2023, negatively impacted interest income by $527 thousand. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 88 bps during the three months ended June 30, 2023. Interest expense increased $3.9 million for the three months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The

net interest margin (FTE) of 3.83% for the three months ended June 30, 2023 was 81 bps higher than the 3.02% for the three months ended June 30, 2022. Overall, the cost of interest-bearing deposits increased period over period, from a cost of 24 bps to 174 bps, increasing interest expense by $3.5 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) by $439 thousand as compared to the prior year.

Year-to-date overview - Net interest income (FTE) for the six months ended June 30, 2023 was $27.3 million, a $3.2 million increase compared to net interest income (FTE) of $24.1 million for the six months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.28% to 5.96%, positively impacting interest income by $7.9 million. The decrease in volume of loans, from an average balance of $1.0 billion for the six months ended June 30, 2022 to $936.6 million for the six months ended June 30, 2023, negatively impacted interest income (FTE) by $1.7 million. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 32 bps during the six months ended June 30, 2023. The increase in volume of securities held, from an average balance of $352.5 million for the six months ended June 30, 2022 to $501.2 million for the six months ended June 30, 2023, positively impacted net interest income (FTE) by $1.8 million, and the increase in yield earned on such securities increased from 2.03% to 2.72% for the periods noted, positively impacting net interest income (FTE) by $1.5 million. Interest expense increased $6.0 million for the six months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of ~~3.47%~~3.77% for the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023 was 3999 bps higher than the ~~3.08%~~2.78% for the ~~three~~six months ended ~~September~~June 30, ~~2021.~~2022.Overall, the cost of interest-bearing deposits increased period over period, from a cost of 26 bps to 141 bps, increasing interest expense by $5.1 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) ~~of 3.00% for~~by $766 thousand as compared to the ~~nine months ended September 30, 2022 was 3 bps lower than the 3.03% for the nine months ended September 30, 2021.~~ prior year.

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 $39 thousand for the three months ended 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 the decline in rates paid on deposits, from 34 bps to 25 bps, lowering interest expense by $659 thousand. The increase in the volume of interest-bearing deposits 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 fair value accretion on such TFB debt, offsetting the interest expense incurred during the nine months ended September 30, 2021 of $136 thousand, netting to a positive impact on interest expense during the prior period presented of $280 thousand.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. These tables also include rate/volume analyses for these same periods (dollars in thousands).


	For the Three Months Ended										For the Three Months Ended
	September 30, 2022			September 30, 2021			Change in Interest Income/ Expense				June 30, 2023			June 30, 2022			Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total		Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/		Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/
		Expense			Expense				(Decrease)			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		$421,156	$2,980	2.83%	$325,833	$1,726	2.12%	$584	$670	$1,254
Tax Exempt Securities 1	65,836	397	2.41%	59,869	355	2.37%	36	6	42		66,956	415	2.48%	65,352	390	2.39%	10	15	25
Total Securities 1	511,690	3,089	2.41%	274,063	1,152	1.68%	1,239	698	1,937		488,112	3,395	2.78%	391,185	2,116	2.16%	594	685	1,279
Loans:
Real Estate	834,323	9,485	4.51%	929,017	10,005	4.27%	(1,056)	538	(518)		823,289	13,167	6.41%	847,661	8,988	4.25%	(265)	4,444	4,179
Commercial	74,970	846	4.48%	141,388	1,810	5.08%	(770)	(194)	(964)		74,665	969	5.21%	86,394	995	4.62%	(144)	118	(26)
Consumer	49,793	693	5.52%	69,876	1,144	6.50%	(296)	(155)	(451)		42,310	758	7.19%	50,828	627	4.95%	(118)	249	131
Total Loans	959,086	11,024	4.56%	1,140,281	12,959	4.51%	(2,122)	189	(1,933)		940,264	14,894	6.35%	984,883	10,610	4.32%	(527)	4,811	4,284
Fed Funds Sold	52,908	299	2.24%	137,472	45	0.13%	(44)	298	254		895	10	4.48%	150,393	302	0.81%	(545)	253	(292)
Other interest-bearing deposits	120,440	618	2.04%	198,983	55	0.11%	(30)	593	563		13,777	119	3.46%	142,010	219	0.62%	(347)	247	(100)
Total Earning Assets	1,644,124	15,030	3.63%	1,750,799	14,211	3.22%	(957)	1,778	821		1,443,048	18,418	5.12%	1,668,471	13,247	3.18%	(825)	5,996	5,171
Less: Allowance for Loan Losses	(5,530)			(5,607)
Less: Allowance for Credit Losses											(7,805)			(5,866)
Total Non-Earning Assets	124,247			159,106							113,883			133,526
Total Assets	$1,762,841			$1,904,298							$1,549,126			$1,796,131

LIABILITIES AND SHAREHOLDERS' EQUITY										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)		$331,523	$106	0.13%	$411,374	$58	0.06%	$(13)	$61	$48
Money Market and Savings Deposits	547,878	415	0.30%	621,211	601	0.38%	(66)	(120)	(186)		415,015	2,197	2.12%	550,883	440	0.32%	(134)	1,891	1,757
Time Deposits	142,195	147	0.41%	171,256	282	0.65%	(42)	(93)	(135)		194,736	1,776	3.66%	152,695	157	0.41%	55	1,564	1,619
Total Interest-Bearing Deposits	1,091,959	618	0.22%	1,202,971	955	0.31%	(109)	(228)	(337)		941,274	4,079	1.74%	1,114,952	655	0.24%	(92)	3,516	3,424
Borrowings	—	—	—	22,260	(375)	-6.68%	375	—	375
Federal funds purchased											2,392	32	5.37%	—	—	—	32	—	32
Short-term borrowings											34,265	439	5.14%	—	—	—	439	—	439
Junior subordinated debt	3,394	51	5.96%	3,349	50	—	1	—	1		3,430	79	9.24%	3,383	49	5.81%	1	29	30
Total Interest-Bearing Liabilities	1,095,353	669	0.24%	1,228,580	630	0.20%	267	(228)	39		981,361	4,629	1.89%	1,118,335	704	0.25%	380	3,545	3,925
Non-Interest-Bearing Liabilities:
Demand deposits	519,759			499,068							416,039			527,008
Other liabilities	8,932			15,003							9,853			10,067
Total Liabilities	1,624,044			1,742,651							1,407,253			1,655,410
Shareholders' Equity	138,797			161,647							141,873			140,721
Total Liabilities & Shareholders' Equity	$1,762,841			$1,904,298							$1,549,126			$1,796,131
Net Interest Income (FTE)		$14,361			$13,581		$(1,224)	$2,006	$782			$13,789			$12,543		$(1,205)	$2,451	$1,246
Interest Rate Spread 2			3.38%			3.02%							3.23%			2.93%
Cost of Funds			0.16%			0.14%							1.33%			0.17%
Interest Expense as a Percentage of Average Earning Assets			0.16%			0.14%							1.29%			0.17%
Net Interest Margin (FTE) 3			3.47%			3.08%							3.83%			3.02%


	For the Nine Months Ended										For the Six Months Ended
	September 30, 2022			September 30, 2021			Change in Interest Income/ Expense				June 30, 2023								June 30, 2022								Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total		Average			Interest		Average			Average			Interest		Average			Change Due to : 4					Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/		Balance			Income/		Yield/Cost			Balance			Income/		Yield/Cost			Volume			Rate		Increase/
		Expense			Expense				(Decrease)					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		$	434,219		$	5,997		2.76	%	$	287,241		$	2,800		1.95	%	$	1,762		$	1,435	$	3,197
Tax Exempt Securities 1	65,447	1,170	2.38%	50,559	923	2.43%	267	(19)	248			67,019			831		2.48	%		65,249			775		2.38	%		21			35		56
Total Securities 1	406,139	6,662	2.19%	239,809	3,050	1.70%	2,448	1,165	3,613			501,238			6,828		2.72	%		352,490			3,575		2.03	%		1,783			1,470		3,253
Loans:
Real Estate	855,632	27,567	4.31%	771,407	24,284	4.21%	2,703	580	3,283			820,033			24,032		5.91	%		866,863			18,082		4.21	%		(1,023	)		6,973		5,950
Commercial	85,148	2,930	4.60%	158,691	4,967	4.18%	(2,490)	453	(2,037)			73,357			2,098		5.77	%		89,944			2,084		4.67	%		(424	)		438		14
Consumer	50,808	1,906	5.02%	65,426	2,653	5.42%	(560)	(187)	(747)			43,179			1,531		7.15	%		51,302			1,213		4.77	%		(215	)		533		318
Total Loans	991,588	32,403	4.37%	995,524	31,904	4.28%	(347)	846	499			936,569			27,661		5.96	%		1,008,109			21,379		4.28	%		(1,662	)		7,944		6,282
Fed Funds Sold	118,228	662	0.75%	94,502	78	0.11%	24	560	584			455			10		4.43	%		151,429			363		0.48	%		(683	)		330		(353	)
Other interest-bearing deposits	196,801	973	0.66%	118,331	94	0.11%	99	780	879			20,789			378		3.67	%		235,418			356		0.30	%		(598	)		620		22
Total Earning Assets	1,712,756	40,700	3.18%	1,448,166	35,126	3.24%	2,224	3,351	5,575			1,459,051			34,877		4.82	%		1,747,446			25,673		2.96	%		(1,160	)		10,364		9,204
Less: Allowance for Loan Losses	(5,806)			(5,618)
Less: Allowance for Credit Losses												(7,947	)							(5,946	)
Total Non-Earning Assets	124,518			104,539								114,372								124,851
Total Assets	$1,831,468			$1,547,087							$	1,565,476							$	1,866,351

LIABILITIES AND SHAREHOLDERS' EQUITY										LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:										Interest Bearing Liabilities:
Interest Bearing Deposits:										Interest Bearing Deposits:
Interest Checking	$411,504	$175	0.06%	$333,193	$191	0.08%	$39	$(55)	$(16)		$	346,625		$	195		0.11	%	$	416,393		$	119		0.06	%	$	(23	)	$	99	$	76
Money Market and Savings Deposits	584,597	1,470	0.34%	484,742	1,407	0.39%	266	(203)	63			431,849			3,970		1.85	%		603,259			1,055		0.35	%		(380	)		3,295		2,915
Time Deposits	151,045	499	0.44%	148,715	886	0.80%	14	(401)	(387)			161,247			2,424		3.03	%		155,544			352		0.46	%		13			2,059		2,072
Total Interest-Bearing Deposits	1,147,146	2,144	0.25%	966,650	2,484	0.34%	319	(659)	(340)			939,721			6,589		1.41	%		1,175,196			1,526		0.26	%		(390	)		5,453		5,063
Borrowings	—	—	—	31,967	(280)	-1.17%	280	—	280
Federal funds purchased												3,754			91		4.89	%		—			—		—			91			—		91
Short-term borrowings												31,074			766		4.97	%		—			—		—			766			—		766
Junior subordinated debt	3,383	148	5.85%	2,324	99	—	46	3	49			3,423			140		8.25	%		3,377			97		0.00	%		1			42		43
Total Interest-Bearing Liabilities	1,150,529	2,292	0.27%	1,000,941	2,303	0.31%	645	(656)	(11)			977,972			7,586		1.56	%		1,178,573			1,623		0.28	%		468			5,495		5,963
Non-Interest-Bearing Liabilities:
Demand deposits	524,592			402,163								440,285								527,049
Other liabilities	10,107			10,617								9,423								10,704
Total Liabilities	1,685,228			1,413,721								1,427,680								1,716,326
Shareholders' Equity	146,240			133,366								137,796								150,025
Total Liabilities & Shareholders' Equity	$1,831,468			$1,547,087							$	1,565,476							$	1,866,351
Net Interest Income (FTE)		$38,408			$32,823		$1,579	$4,007	$5,586					$	27,291							$	24,050				$	(1,628	)	$	4,869	$	3,241
Interest Rate Spread 2			2.91%			2.94%											3.26	%							2.68	%
Cost of Funds			0.18%			0.22%											1.08	%							0.19	%
Interest Expense as a Percentage of Average Earning Assets			0.18%			0.21%											1.05	%							0.19	%
Net Interest Margin (FTE) 3			3.00%			3.03%				Net Interest Margin (FTE) 3							3.77	%							2.78	%

The Company believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases/reinvestment of AFS securities. The Company also expects the cost of deposits to continue to rise as competition for deposits increases and as time deposits reprice at maturity. A portion of the Company’s funding may continue to be drawn from borrowings in the near term, also resulting in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin (FTE) will depend on a number of factors, including the Company’s ability to continue to increase the loan portfolio, compete for deposits and manage its borrowings. The Company can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Company's net interest margin (FTE). Alternatively, if market interest rates begin to decline, the Company’s net interest margin (FTE) may be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.

A provision for ~~loan~~credit losses of ~~$39~~$261 thousand was recognized during the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$267~~a recovery of provision for loan losses of $217 thousand recognized during the three months ended ~~September~~June 30, ~~2021.~~2022. A provision for credit losses of $13 thousand was recognized during the six months ended June 30, 2023 compared to a recovery of provision for loan losses recognized of ~~$30~~$69 thousand ~~was recognized~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2022 compared to a~~2022. The second quarter 2023 provision for credit losses was comprised of $216 thousand of provision for loan losses ~~recognized~~and $45 thousand of ~~$477 thousand during the nine months ended September 30, 2021.~~provision for losses on unfunded commitments. The period-end ~~ALLL~~ACL as a percentage of total loans was ~~0.58%~~0.81% as of ~~September~~June 30, ~~2022, 0.56%~~2023, 0.59% as of December 31, ~~2021~~2022 and ~~0.51%~~0.57% as of ~~September~~June 30, ~~2021.~~2022. The total of the ~~ALLL~~ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to ~~2.38%~~1.94% as of ~~September~~June 30, ~~2022,~~2023, compared to ~~2.30%~~2.29% as of December 31, ~~2021~~2022 and ~~2.24%~~2.39% as of ~~September~~June 30, ~~2021.~~2022.

Loan growth in the second quarter of 2023 was the primary driver of the provision for credit losses taken during the period; however, the majority of the increase in loan balances was attributable to the purchase of government-guaranteed loans which do not require an ACL. No changes have been made to the qualitative factor methodology since January 1, 2023.

Further discussion of management’s assessment of the ~~ALLL~~ACL is provided earlier in the report and in Note 5 – Allowance for ~~Loan~~Credit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the ~~allowance~~ACL was adequately provided for at ~~September~~June 30, ~~2022.~~2023. The ~~ALLL~~ACL calculation, provision for ~~loan~~credit 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~~Should economic conditions worsen, we could experience further increases in our required ~~ALLL~~ACL and record additional provision for ~~loan~~credit loss exposure.

The components of noninterest income for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 are shown below (dollars in thousands):

Noninterest income for the three months ended ~~September~~June 30, ~~2022~~2023 of ~~$2.3~~$2.0 million was ~~$1.2~~$1.6 million or ~~33.9%~~43.9% lower than the amount recorded for the three months ended ~~September~~June 30, ~~2021. Noninterest income decreased predominantly~~2022, primarily due to gains on the sale of two properties of $1.1 million in the second quarter of the prior ~~period Other Income, as reported on the consolidated statements~~year. In addition, $210 thousand of income ~~including a~~was recognized in the second ~~partial~~quarter of the prior year related to advisory and brokerage income; this business line was sold in the fourth quarter of 2022, eliminating future income or expense related thereto. In the second quarter of 2023, the Company received an additional $267 thousand recovery of ~~$401 thousand of~~ unearned ~~insurance~~ premiums related to the loss of insurance on the student loan portfolio, ~~and a recovery~~bringing the total recovered from liquidation of ~~$312 thousand from a TFB loan that was charged off prior~~the insurance company 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.~~$1.3 million.

The components of noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 are shown below (dollars in thousands):

Noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 of ~~$10.7~~$4.3 million was ~~$3.3~~$4.1 million or ~~44.3% higher~~48.8% lower than the amount recorded for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Noninterest income ~~increased~~decreased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial dispute, the $1.1 million gain on the sale of two ~~buildings~~properties and ~~an increase of $585~~$426 thousand of ~~debit/credit card~~advisory and ~~ATM fees due to increased number~~brokerage income recognized in the first half of ~~retail accounts as a result of the Merger.~~2022.

The components of noninterest expense for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 are shown below (dollars in thousands):

Noninterest expense for the quarter ended ~~September~~June 30, ~~2022~~2023 of ~~$9.5~~$8.6 million was ~~$3.3 million~~$878 thousand or ~~25.9%~~9.3% lower than the quarter ended ~~September~~June 30, ~~2021.~~2022. This decrease is primarily due to ~~merger~~lower occupancy expenses of $353 thousand from the elimination of four branch facilities, as well as reduced professional and ~~merger-related~~consulting fees of $206 thousand and reduced computer software expenses ~~incurred during the nine months ended September 30, 2021~~ of ~~$1.9 million, a reduction in salaries and employee benefits of $310~~$154 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~~from the Merger.

The components of noninterest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 are shown below (dollars in thousands):

Noninterest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 of ~~$29.0~~$17.4 million was ~~$4.6~~$2.1 million or ~~13.6%~~10.8% lower than the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. This decrease is ~~due to merger and merger-related expenses incurred during~~ the ~~nine months ended September 30, 2021~~result of ~~$8.1 million, offset by increases in the following areas due to~~efficiencies gained from the Merger, ~~being effective April 1, 2021:~~namely : 1) salaries and employee benefits ~~increased $1.4 million,~~decreased $704 thousand, 2) net occupancy ~~increased $1.2 million,~~decreased $371 thousand, 3) professional fees decreased $351 thousand, and ~~3) core deposit intangible amortization increased $436~~4) computer software expense decreased $215 thousand. In addition, the Company incurred $685 thousand in expenses in the first quarter of 2022, included in other noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier.

The efficiency ratio (FTE) of ~~57.0%~~54.1% for the three months ended ~~September~~June 30, ~~2022~~2023 compared favorably to ~~the 75.2%~~58.3% for the same quarter of ~~2021,~~2022, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of ~~59.1%~~55.1% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 also compared favorably to ~~the 83.5%~~60.1% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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.

For the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company provided $1.3 million and $753 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 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%~~18.4% and ~~20.0%~~17.4%, respectively. ~~The~~For the six months ended June 30, 2023 and 2022, the Company provided $2.6 million and $2.2 million for Federal income taxes, respectively, resulting in effective income tax ~~rate for the current quarter~~rates of 18.3% and ~~current year-to-date was lower than the prior year, due to the non-deductibility of certain merger and merger-related expenses in the prior year.~~17.4%, respectively. For ~~all periods,~~each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the recognition of low-income housing tax credits and the effect of tax-exempt income from ~~life insurance policies and~~ municipal bonds and ~~the recognition of low-income housing tax credits.~~bank owned life insurance policies.

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~~were no ~~change~~changes in the Company’s internal control over financial reporting that occurred during the ~~quarter~~three months ended ~~September~~June 30, ~~2022~~2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the quarter ended ~~September~~June 30, ~~2022,~~2023, 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.~~2022. 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 be material also may materially adversely affect our business, financial condition and/or operating results.

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	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)


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 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 3637
Application of Critical Accounting Policies and Estimates		Page 38
Financial Condition		Page 3839
Results of Operations		Page 45

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 53

Item 4 Controls and Procedures		Page 53

Part II. Other Information
Item 1 Legal Proceedings		Page 5453
Item 1A Risk Factors		Page 5453
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 5453
Item 3 Defaults Upon Senior Securities		Page 5453
Item 4 Mine Safety Disclosures		Page 5453
Item 5 Other Information		Page 54
Item 6 Exhibits		Page 54

Signatures		Page 55


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


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

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Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company