UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

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

For the transition period from to

Commission File Number: 1-38874

(Exact name of registrant as specified in its charter)

Virginia	54-1232965
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

112 West King Street, Strasburg, Virginia	22657
(Address of principal executive offices)	(Zip Code)

(540) 465-9121

(Registrant’s telephone number, including area code)

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $1.25 per share	FXNC	The Nasdaq Stock Market LLC

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November ~~11, 2021, 6,226,418~~9, 2022, 6,262,381 shares of common stock, ~~par~~par value $1.25 per share, of the registrant were outstanding.

Table of Contents

	(unaudited)				(unaudited)
	September 30,		December 31,		September 30,			December 31,
	2021		2020*		2022			2021*
Assets
Cash and due from banks	$	19,182	$	13,115	$	22,809		$	18,725
Interest-bearing deposits in banks		95,459		114,182		52,976			157,281
Federal funds sold		80,589		0
Securities available for sale, at fair value		266,600		140,225		176,403			289,495
Securities held to maturity, at amortized cost (fair value, 2021, $10,262; 2020, $14,743)		10,046		14,234
Securities held to maturity, at amortized cost (fair value, 2022, $142,920; 2021, $33,617)						154,894			33,441
Restricted securities, at cost		1,813		1,875		1,908			1,813
Loans held for sale		0		245
Loans, net of allowance for loan losses, 2021, $5,434; 2020, $7,485		816,977		622,429
Other real estate owned		1,848		0
Loans, net of allowance for loan losses, 2022, $6,292; 2021, $5,710						900,222			819,408
Other real estate owned, net of valuation allowance						1,578			1,848
Premises and equipment, net		22,401		19,319		21,693			22,403
Accrued interest receivable		3,823		2,717		4,247			3,903
Bank owned life insurance		24,141		17,916		24,375			24,294
Goodwill						3,030			3,030
Core deposit intangibles, net		159		19		140			154
Goodwill		4,011		0
Other assets		8,740		4,656		19,320			13,642
Total assets	$	1,355,789	$	950,932	$	1,383,595		$	1,389,437

Liabilities and Shareholders’ Equity

Liabilities
Deposits:
Noninterest-bearing demand deposits	$	411,527	$	263,229	$	438,306		$	413,188
Savings and interest-bearing demand deposits		652,624		479,035		693,970			689,998
Time deposits		148,419		100,197		133,770			145,566
Total deposits	$	1,212,570	$	842,461	$	1,266,046		$	1,248,752
Subordinated debt		9,993		9,991
Subordinated debt, net of issuance cost						4,995			9,993
Junior subordinated debt		9,279		9,279		9,279			9,279
Accrued interest payable and other liabilities		7,041		4,285		4,198			4,374
Total liabilities	$	1,238,883	$	866,016	$	1,284,518		$	1,272,398

Commitments and contingencies

Shareholders’ Equity
Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding	$	0	$	0	$	—		$	—
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2021, 6,226,418 shares; 2020, 4,860,399 shares		7,783		6,075
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2022, 6,262,381 shares; 2021, 6,228,176 shares						7,828			7,785
Surplus		31,889		6,151		32,620			31,966
Retained earnings		75,554		69,292		86,382			76,990
Accumulated other comprehensive income, net		1,680		3,398
Accumulated other comprehensive (loss) income, net						(27,753	)		298
Total shareholders’ equity	$	116,906	$	84,916	$	99,077		$	117,039
Total liabilities and shareholders’ equity	$	1,355,789	$	950,932	$	1,383,595		$	1,389,437

	Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,			September 30,		September 30,		September 30,		September 30,		September 30,
	2021		2020		2021			2020		2022		2021		2022		2021
Interest and Dividend Income
Interest and fees on loans	$	9,215	$	7,568	$	23,432		$	22,187	$	10,759	$	9,215	$	30,218	$	23,432
Interest on deposits in banks		79		25		149			159		380		79		701		149
Interest on federal funds sold		8		0		8			0		—		8		—		8
Interest and dividends on securities:
Taxable interest		766		575		2,180			1,881		1,323		766		3,750		2,180
Tax-exempt interest		242		152		637			454		307		242		921		637
Dividends		21		23		65			75		23		21		65		65
Total interest and dividend income	$	10,331	$	8,343	$	26,471		$	24,756	$	12,792	$	10,331	$	35,655	$	26,471
Interest Expense
Interest on deposits	$	369	$	541	$	1,060		$	2,179	$	927	$	369	$	1,680	$	1,060
Interest on subordinated debt		156		160		464			341		70		156		208		464
Interest on junior subordinated debt		68		68		202			225		68		68		202		202
Total interest expense	$	593	$	769	$	1,726		$	2,745	$	1,065	$	593	$	2,090	$	1,726
Net interest income	$	9,738	$	7,574	$	24,745		$	22,011	$	11,727	$	9,738	$	33,565	$	24,745
(Recovery of) provision for loan losses		0		1,500		(1,000	)		3,200
Net interest income after (recovery of) provision for loan losses	$	9,738	$	6,074	$	25,745		$	18,811
Provision for (recovery of) loan losses											200		—		600		(1,000	)
Net interest income after provision for (recovery of) loan losses										$	11,527	$	9,738	$	32,965	$	25,745
Noninterest Income
Service charges on deposit accounts	$	547	$	446	$	1,436		$	1,475	$	708	$	547	$	2,015	$	1,436
ATM and check card fees		753		669		2,036			1,738		915		753		2,462		2,036
Wealth management fees		696		573		1,996			1,610		739		696		2,302		1,996
Fees for other customer services		434		323		1,027			767		180		279		601		611
Brokered mortgage fees											72		155		224		416
Income from bank owned life insurance		162		131		374			345		166		162		441		374
Net gains on securities available for sale		0		38		37			38		—		—		—		37
Net gains on sale of loans		0		3		25			60
Net gains on sale of mortgage loans held for sale											—		—		—		25
Other operating income		56		18		295			49		247		56		473		295
Total noninterest income	$	2,648	$	2,201	$	7,226		$	6,082	$	3,027	$	2,648	$	8,518	$	7,226
Noninterest Expense
Salaries and employee benefits	$	5,446	$	3,498	$	12,694		$	10,109	$	5,174	$	5,446	$	15,384	$	12,694
Occupancy		500		433		1,346			1,244		539		500		1,656		1,346
Equipment		519		439		1,383			1,267		546		519		1,725		1,383
Marketing		243		63		487			243		211		243		585		487
Supplies		176		112		341			304		117		176		384		341
Legal and professional fees		586		262		1,806			842		361		586		1,075		1,806
ATM and check card expense		329		259		828			727		332		329		982		828
FDIC assessment		87		52		234			142		109		87		393		234
Bank franchise tax		153		162		493			476		238		153		692		493
Data processing expense		465		191		885			563		243		465		700		885
Amortization expense		5		33		24			127		6		5		15		24
Other real estate owned expense, net											14		—		83		—
Other operating expense		917		631		2,185			1,857		1,193		917		2,971		2,185
Total noninterest expense	$	9,426	$	6,135	$	22,706		$	17,901	$	9,083	$	9,426	$	26,645	$	22,706

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2021

2020

2021

2020

Net income
$ 2,398 $ 1,754 $ 8,176 $ 5,702
Other comprehensive income (loss), net of tax,

Unrealized holding gains (losses) on available for sale securities, net of tax ($211) and $8 for the three months and ($565) and $700 for the nine months ended September 30, 2021 and 2020, respectively
(798 ) 26 (2,131 ) 2,632
Reclassification adjustment for gains included in net income, net of tax $0 and ($8) for the three months and ($8) and ($8) for the nine months ended September 30, 2021 and 2020, respectively
0 (30 ) (29 ) (30 )
Change in fair value of cash flow hedges, net of tax $21 and $34 for the three months and $117 and $28 for the nine months ended September 30, 2021 and 2020, respectively
80 131 442 106
Total other comprehensive (loss) income
(718 ) 127 (1,718 ) 2,708
Total comprehensive income
$ 1,680 $ 1,881 $ 6,458 $ 8,410

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2022			2021			2022			2021
Net income	$	4,454		$	2,398		$	12,018		$	8,176
Other comprehensive (loss), net of tax,
Unrealized holding gains (losses) on available for sale securities, net of tax $155 and ($211) for the three months and ($6,225) and ($565) for the nine months ended September 30, 2022 and 2021, respectively		581			(798	)		(23,424	)		(2,131	)
Unrealized holding losses on securities transferred from available for sale to held to maturity, net of tax $1,605 for the three and nine months ended September 30, 2022. There were no securities transferred for the three and nine months ended September 30, 2021		(6,036	)		—			(6,036	)		—
Reclassification adjustment for gains included in net income, net of tax $0 and ($8) for the nine months ended September 30, 2022 and 2021. There were no reclassification adjustments for the three month periods.		—			—			—			(29	)
Change in fair value of cash flow hedges, net of tax $106 and $21 for the three months and $373 and $117 for the nine months ended September 30, 2022 and 2021, respectively		404			80			1,409			442
Total other comprehensive (loss)		(5,051	)		(718	)		(28,051	)		(1,718	)
Total comprehensive (loss) income	$	(597	)	$	1,680		$	(16,033	)	$	6,458

	Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2022			2021
Cash Flows from Operating Activities
Net income	$	8,176		$	5,702		$	12,018		$	8,176
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,005			992			1,118			1,005
Amortization of core deposit intangibles		24			127			14			24
Amortization of debt issuance costs		2			14			2			2
Origination of loans held for sale		(1,586	)		(3,183	)
Proceeds from sale of loans held for sale		1,856			3,410
Net gains on sales of loans held for sale		(25	)		(60	)
(Recovery of) provision for loan losses		(1,000	)		3,200
Origination of mortgage loans held for sale								—			(1,586	)
Proceeds from sale of mortgage loans held for sale								—			1,856
Net gains on sales of mortgage loans held for sale								—			(25	)
Provision for (recovery of) loan losses								600			(1,000	)
Fair value adjustments on other real estate owned		139			0			—			139
Net gains on securities available for sale		(37	)		(38	)		—			(37	)
Net gains on sale of other real estate owned		(8	)		0
Net losses (gains) on sale of other real estate owned								33			(8	)
Increase in cash value of bank owned life insurance		(374	)		(345	)		(441	)		(374	)
Accretion of discounts and amortization of premiums on securities, net		725			497			891			725
Accretion of premium on time deposits		(101	)		(20	)		(159	)		(101	)
Accretion of certain acquisition-related loan discounts, net								(1,013	)		—
Stock-based compensation		300			254			728			300
Excess tax deficiency (benefit) on stock-based compensation		3			(2	)
Gains on disposal of premises and equipment		(26	)		(9	)
Deferred income tax (benefit)		(1,750	)		(1,030	)
Excess tax benefits on stock-based compensation								3			3
Losses (gains) on disposal of premises and equipment, net								4			(26	)
Deferred income tax expense (benefit)								46			(1,750	)
Changes in assets and liabilities:
Decrease (increase) in interest receivable		453			(1,091	)
(Increase) decrease in interest receivable								(344	)		453
Decrease in other assets		2,938			688			3,513			2,938
Increase (decrease) in accrued interest payable and other liabilities		1,625			(28	)
(Decrease) increase in accrued interest payable and other liabilities								(176	)		1,625
Net cash provided by operating activities	$	12,339		$	9,078		$	16,837		$	12,339
Cash Flows from Investing Activities
Proceeds from maturities, calls, principal payments, and sales of securities available for sale	$	43,247		$	24,787		$	21,556		$	43,247
Proceeds from maturities, calls, and principal payments of securities held to maturity		4,120			2,444			7,086			4,120
Purchase of securities available for sale		(160,864	)		(18,019	)
Purchases of securities available for sale								(21,147	)		(160,864	)
Net increase in federal funds sold		(80,589	)		0			—			(80,589	)
Net redemption (purchase) of restricted securities		245			(42	)
Purchases of securities held to maturity								(54,038	)		—
Net (purchase) redemption of restricted securities								(95	)		245
Purchase of premises and equipment		(622	)		(793	)		(596	)		(622	)
Cash value of bank owned life insurance released								360			—
Proceeds from sale of premises and equipment		32			9			—			32
Proceeds from sale of other real estate owned		288			0			421			288
Net cash paid in acquisition of Smartbank		(1,793	)		0			—			(1,793	)
Net cash acquired in acquisition of The Bank of Fincastle		39,363			0			—			39,363
Net (increase) in loans		(14	)		(74,379	)		(80,401	)		(14	)
Net cash used in investing activities	$	(156,587	)	$	(65,993	)	$	(126,854	)	$	(156,587	)

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Income

Total

Balance, June 30, 2020
$ 6,065 $ 5,967 $ 65,451 $ 3,305 $ 80,788
Net income
0 0 1,754 0 1,754
Other comprehensive income
0 0 0 127 127
Cash dividends on common stock ($0.11 per share)
0 0 (535 ) 0 (535 )
Stock-based compensation
0 86 0 0 86
Issuance of 2,530 shares common stock, dividend reinvestment plan
3 33 0 0 36
Issuance of 3,500 shares common stock, stock incentive plan
5 (5 ) 0 0 0
Balance, September 30, 2020
$ 6,073 $ 6,081 $ 66,670 $ 3,432 $ 82,256

	Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, June 30, 2021	$	6,088	$	6,295		$	73,901		$	2,398		$	88,682
Net income		—		—			2,398			—			2,398
Other comprehensive loss		—		—			—			(718	)		(718	)
Cash dividends on common stock ($0.12 per share)		—		—			(745	)		—			(745	)
Shares issued to shareholders of The Bank of Fincastle		1,685		25,384			—			—			27,069
Stock-based compensation		—		181			—			—			181
Issuance of 1,894 shares common stock, dividend reinvestment plan		2		37			—			—			39
Issuance of 6,000 shares common stock, stock incentive plan		8		(8	)		—			—			—
Balance, September 30, 2021	$	7,783	$	31,889		$	75,554		$	1,680		$	116,906

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Income

Total

Balance, June 30, 2021
$ 6,088 $ 6,295 $ 73,901 $ 2,398 $ 88,682
Net income
0 0 2,398 0 2,398
Other comprehensive loss
0 0 0 (718 ) (718 )
Cash dividends on common stock ($0.12 per share)
0 0 (745 ) 0 (745 )
Shares issued to shareholders of The Bank of Fincastle
1,685 25,384 0 0 27,069
Stock-based compensation
0 181 0 0 181
Issuance of 1,894 shares common stock, dividend reinvestment plan
2 37 0 0 39
Issuance of 6,000 shares common stock, stock incentive plan
8 (8 ) 0 0 0
Balance, September 30, 2021
$ 7,783 $ 31,889 $ 75,554 $ 1,680 $ 116,906

	Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance, June 30, 2022	$	7,815	$	32,398		$	82,804		$	(22,702	)	$	100,315
Net income		—		—			4,454			—			4,454
Other comprehensive loss		—		—			—			(5,051	)		(5,051	)
Cash dividends on common stock ($0.14 per share)		—		—			(876	)		—			(876	)
Stock-based compensation		—		187			—			—			187
Issuance of 2,733 shares common stock, dividend reinvestment plan		4		44			—			—			48
Issuance of 7,500 shares common stock, stock incentive plan		9		(9	)		—			—			—
Balance, September 30, 2022	$	7,828	$	32,620		$	86,382		$	(27,753	)	$	99,077

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Income

Total

Balance, December 31, 2019
$ 6,212 $ 7,700 $ 62,583 $ 724 $ 77,219
Net income
0 0 5,702 0 5,702
Other comprehensive income
0 0 0 2,708 2,708
Cash dividends on common stock ($0.33 per share)
0 0 (1,615 ) 0 (1,615 )
Stock-based compensation
0 254 0 0 254
Issuance of 7,267 shares of common stock, dividend reinvestment plan
9 97 0 0 106
Issuance of 12,492 shares of common stock, stock incentive plan
16 (16 ) 0 0 0
Repurchase of 2,223 shares of common stock, stock incentive plan
(3 ) (44 ) 0 0 (47 )
Repurchase of 129,035 shares of common stock, stock repurchase plan
(161 ) (1,910 ) 0 0 (2,071 )
Balance, September 30, 2020
$ 6,073 $ 6,081 $ 66,670 $ 3,432 $ 82,256

	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, December 31, 2020	$	6,075		$	6,151		$	69,292		$	3,398		$	84,916
Net income		—			—			8,176			—			8,176
Other comprehensive loss		—			—			—			(1,718	)		(1,718	)
Cash dividends on common stock ($0.36 per share)		—			—			(1,914	)		—			(1,914	)
Shares issued to shareholders of The Bank of Fincastle		1,685			25,384			—			—			27,069
Stock-based compensation		—			300			—			—			300
Issuance of 6,102 shares of common stock, dividend reinvestment plan		7			109			—			—			116
Issuance of 14,073 shares of common stock, stock incentive plan		18			(18	)		—			—			—
Repurchase of 2,221 shares of common stock, stock incentive plan		(2	)		(37	)		—			—			(39	)
Balance, September 30, 2021	$	7,783		$	31,889		$	75,554		$	1,680		$	116,906

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Income

Total

Balance, December 31, 2020
$ 6,075 $ 6,151 $ 69,292 $ 3,398 $ 84,916
Net income
0 0 8,176 0 8,176
Other comprehensive loss
0 0 0 (1,718 ) (1,718 )
Cash dividends on common stock ($0.36 per share)
0 0 (1,914 ) 0 (1,914 )
Shares issued to shareholders of The Bank of Fincastle
1,685 25,384 0 0 27,069
Stock-based compensation
0 300 0 0 300
Issuance of 6,102 shares of common stock, dividend reinvestment plan
7 109 0 0 116
Issuance of 14,073 shares of common stock, stock incentive plan
18 (18 ) 0 0 0
Repurchase of 2,221 shares of common stock, stock incentive plan
(2 ) (37 ) 0 0 (39 )
Balance, September 30, 2021
$ 7,783 $ 31,889 $ 75,554 $ 1,680 $ 116,906

	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2021	$	7,785		$	31,966		$	76,990		$	298		$	117,039
Net income		—			—			12,018			—			12,018
Other comprehensive loss		—			—			—			(28,051	)		(28,051	)
Cash dividends on common stock ($0.42 per share)		—			—			(2,626	)		—			(2,626	)
Stock-based compensation		—			728			—			—			728
Issuance of 7,853 shares common stock, dividend reinvestment plan		10			142			—			—			152
Issuance of 34,634 shares common stock, stock incentive plan		43			(43	)		—			—			—
Repurchase of 8,283 shares common stock, stock incentive plan		(10	)		(173	)		—			—			(183	)
Balance, September 30, 2022	$	7,828		$	32,620		$	86,382		$	(27,753	)	$	99,077

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial ~~information.~~information and in accordance with guidance provided by the SEC. Accordingly, they do not include all of the information and footnotes required by ~~GAAP.~~GAAP for annual year-end financial statements. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, the statements of income and comprehensive (loss) income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021, the cash flows for the ~~three~~ ~~and~~ nine months ended September 30, ~~2021~~2022 and ~~2020~~2021, and the changes in shareholders’ equity for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021. Operating results for the three and nine months ended September 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021~~2022.

~~The outbreak of COVID-~~19 ~~has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The spread of the outbreak has caused disruptions in the U.S. economy. While there has been~~ no ~~material impact to the Company’s employees to date, COVID-~~19 ~~could also potentially create widespread business continuity issues for the Company.~~

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law in ~~March 2020~~ ~~as a~~ $2 ~~trillion legislative package and the American Rescue Plan Act of~~ ~~2021~~ ~~was signed into law in~~ ~~March 2021~~ ~~and provides an additional~~ ~~$1.9~~ ~~trillion in spending to address the continued impact of COVID-~~~~19.~~ The goal of these legislative measures is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-~~19,~~ ~~certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts~~ ~~may~~ ~~have a material impact on the Company’s operations.~~

~~The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-~~19 ~~escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is~~ ~~not~~ ~~possible to know the full universe or extent that the impact of COVID-~~~~19,~~ ~~and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.~~

~~The Company’s net interest income could decrease due to COVID-~~~~19.~~ ~~In keeping with guidance from regulators, the Company worked with certain COVID-~~19 ~~affected borrowers to reduce their loan payments by modifying the loan agreements to allow for interest only payments. The loan modification periods ranged from~~ 6 ~~months to~~ 24 ~~months and were intended to provide payment relief to borrowers over the period of time that COVID-~~19 is expected to continue to negatively affect the profitability of the borrowers’ businesses. Although the modified loan payments have been made as agreed and interest income has been recognized by the Company, should the borrowers be negatively affected by COVID-19 ~~for a period of time that extends beyond the loan modification periods, it’s possible the borrowers~~ ~~may~~ ~~not~~ ~~be able to resume regular principal and interest payments in future periods and the Company~~ ~~may~~ no ~~longer be able to accrue interest income on the loans.~~

~~The Company’s net interest income could also decrease due to adverse economic conditions that~~ ~~may~~ ~~result from COVID-~~19 and a related decrease in loan demand, causing a shift in earning asset balances from loans into lower yielding interest-bearing deposits in banks and securities. The decrease in loan demand could also increase the competition for loans and result in a reduction of loan rates offered by other financial institutions.

~~The Company's noninterest income could decrease due to COVID-~~~~19.~~ ~~Service charges on deposits decreased after the pandemic was declared and~~ ~~may~~ ~~decrease again in future periods. Wealth management revenue~~ ~~may~~ ~~decrease in future periods if the market values of investments decline and mortgage fee income~~ ~~may~~ ~~decrease from less home buying and refinancing activity in the Company's market area. At this time, the Company is unable to project the materiality of such an impact but recognizes it~~ ~~may~~ ~~unfavorably affect its noninterest income in future periods.~~

~~The Company’s noninterest expense could increase due to COVID-~~~~19.~~ ~~If the Bank's asset quality worsens, it~~ ~~may~~ incur additional loan expenses in future periods from obtaining updated appraisals on loan collateral, additional legal and professional expenses related to the resolution of problem loans, an increase in other real estate owned expense, and potential losses on the sale of other real estate owned.

~~At this time, the Company is unable to project the full extent or materiality of the foregoing impacts but recognizes the breadth of the economic impacts of COVID-~~19~~may~~ ~~have an unfavorable impact on net interest income, noninterest income, noninterest expense, and loan customers' ability to repay loans, in future periods.~~

~~While the Company believes it has sufficient capital to withstand an extended economic recession brought about by COVID-~~~~19,~~ ~~its reported and regulatory capital ratios could be adversely impacted by provision for loan losses in future periods. Larger amounts of provision for loan losses~~ ~~may~~ result from factors including higher specific reserves on newly identified and existing impaired loans, higher levels of net charge-offs, and additional adjustments to qualitative factors in the general reserve component of the Bank’s allowance for loan losses. In ~~March 2020,~~ ~~the Company suspended future stock repurchases under its stock repurchase program due to the economic uncertainty caused by the pandemic, and the program remained suspended for the remainder of~~ ~~2020.~~ ~~The Company has~~ ~~not~~ ~~authorized another stock repurchase program due to the continued uncertainty and potential impact of the pandemic on the economy and the Bank’s customers. In~~ ~~June 2020,~~ the Company issued $5.0 million of subordinated debt to strengthen holding company liquidity and to remain a source of strength to the Bank in the event of a severe economic downturn resulting from the pandemic. The Company will continue to update its enterprise risk assessment and capital plans as the operating environment develops.

The Company maintains access to multiple sources of liquidity. While wholesale funding markets have remained open, interest rates for short term funding could become volatile. If funding costs would become elevated for an extended period of time, it ~~may~~ have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company could become more reliant on volatile or more expensive sources of funding.

~~The Company continues to operate under its Pandemic Continuity of Operations Plan that includes a remote working strategy. The Company has~~ ~~not~~ ~~incurred additional material costs related to employees working remotely.~~ No ~~material operational or internal control challenges or risks have been identified to date. The Company does~~ ~~not~~ ~~anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-~~~~19.~~ ~~The Company does~~ ~~not~~ ~~currently face any material resource constraint through the implementation of its business continuity plan.~~

~~In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company offered a payment deferral program, primarily during the~~ ~~second~~ ~~and~~ ~~third~~ ~~quarters of~~ ~~2020,~~ ~~for its individual and business customers adversely affected by the pandemic that deferred loan payments for up to~~ 90 ~~days. There were 0 loans remaining in the program at~~ ~~September~~ ~~30,~~~~2021.~~ ~~In accordance with the CARES Act and interagency guidance issued in~~ ~~August 2020,~~ ~~these short-term loan payment deferrals were~~ ~~not~~ ~~considered troubled debt restructurings.~~

~~During the~~ ~~fourth~~ ~~quarter of~~ ~~2020,~~ ~~and during the~~ ~~first~~ ~~half of~~ ~~2021,~~ the Bank modified terms of certain loans for customers that continued to be negatively impacted by the pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods rang~~ing between 6 and 24 months. All loans modified were in the Bank’s commercial real estate loan portfolio and totaled $13.3 million at~~ ~~September~~ ~~30,~~~~2021,~~ with $13.2 million in the Bank’s commercial real estate loan portfolio and $83 thousand in the commercial and industrial loans portfolio. The loans were comprised of $11.6 million in the lodging sector and $1.7 million in the leisure sector.

The Bank actively participated as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to support local small businesses and non-profit organizations by providing forgivable loans. Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $22.8 million at ~~September 30, 2021,~~ ~~with $1.3 million scheduled to mature in the~~ ~~second~~ ~~and~~ ~~third~~ ~~quarters of~~ ~~2022,~~ ~~and $21.5 million scheduled to mature in the~~ ~~first~~ ~~and~~ ~~second~~ ~~quarters of~~ ~~2026.~~ The Company believes the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings.

~~The Bank recognized $737 thousand and $247 thousand of accretion on deferred PPP income, net origination costs, through interest and fees on loans for~~ ~~three~~ ~~month periods ending~~ ~~September 30, 2021~~ ~~and~~ ~~2020,~~ ~~respectively, and recognized $1.8 million and $429 thousand for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and~~ ~~2020,~~ ~~respectively. The total amount of deferred PPP income, net of origination costs,~~ ~~not~~ ~~yet been recognized through interest and fees on loans totaled $652 thousand at~~ ~~September 30, 2021.~~

~~The economic impact of the pandemic had an unfavorable impact on the financial condition of certain Bank customers. The Bank entered into loan modification agreements in the~~ ~~fourth~~ ~~quarter of~~ ~~2020,~~ ~~and during the~~ ~~first~~ ~~half of~~ ~~2021,~~ to provide relief to certain customers that were continuing to experience temporary business interruptions from the pandemic. The modifications were designed to help borrowers continue their business operations while minimizing potential loan charge-offs. The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic.

On ~~July 1, 2021,~~ ~~the Company completed the acquisition of The Bank of Fincastle (Fincastle) for an aggregate purchase price of $33.8 million of cash and stock.~~ On ~~September 30, 2021,~~ the Bank acquired $82.0 million of loans and certain fixed assets from SmartBank related to their Richmond area branch. The Bank purchased the fixed assets for an amount equal to SmartBank’s book value. ~~Additional information about these acquisitions is presented in Note~~ ~~17.~~

In ~~December 2019,~~ ~~the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)~~ ~~No.~~~~2019~~-~~12,~~ ~~“Income Taxes (Topic~~ ~~740~~~~) – Simplifying the Accounting for Income Taxes” (ASU~~ ~~2019~~-12~~). The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic~~ ~~740~~ (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU ~~2019~~-12 ~~was effective for the Company on~~ ~~January 1, 2021.~~ ~~The adoption of this standard did~~ ~~not~~ ~~have a material effect on the Company's consolidated financial statements.~~

In ~~January 2020,~~ ~~the FASB issued ASU~~ ~~No.~~~~2020~~-~~01,~~ ~~“Investments – Equity Securities (Topic~~ ~~321~~~~), Investments – Equity Method and Joint Ventures (Topic~~ ~~323~~~~), and Derivatives and Hedging (Topic~~ ~~815~~~~) – Clarifying the Interactions between Topic~~ ~~321,~~ ~~Topic~~ ~~323,~~ ~~and Topic~~ ~~815”~~ ~~(ASU~~ ~~2020~~-01~~). The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU~~ ~~2016~~-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU ~~2020~~-01 ~~was effective for the Company on~~ ~~January 1, 2021.~~ ~~The adoption of this standard did~~ ~~not~~ ~~have a material effect on the Company's consolidated financial statements.~~

In ~~October 2020,~~ ~~the FASB issued ASU~~ ~~No.~~~~2020~~-~~08,~~ ~~“Codification Improvements to Subtopic~~ ~~310~~-~~20,~~ ~~Receivables – Nonrefundable fees and Other Costs” (ASU~~ ~~2020~~-08~~). This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph~~ ~~310~~-20-35-33 ~~for each reporting period. ASU~~ ~~2020~~-08 ~~was effective for the Company on~~ ~~January 1, 2021.~~ ~~The adoption of this standard did~~ ~~not~~ ~~have a material effect on the Company's consolidated financial statements.~~

In ~~December 2020,~~ ~~the Consolidated Appropriations Act of~~ ~~2021~~ ~~(CAA) was passed. Under Section~~ ~~541~~ ~~of the CAA, Congress extended or modified many of the relief programs~~ ~~first~~ ~~created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-~~19 ~~pandemic. For information about the impact of the COVID-~~19 ~~pandemic on the Company, see "Risks and Uncertainties" above.~~

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has formed a committee to address the compliance requirements of this ASU, which has analyzed gathered data, defined loan pools and segments, and selected methods for applying the concepts included in this ASU. The Company is in the process of testing selected models, building policy and ~~processing~~process documentation, modeling the impact of the ASU on the capital and strategic plans, performing model validation, and finalizing policies and procedures. This guidance may result in material changes in the Company's accounting for credit losses of financial instruments.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.

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

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” (ASU 2020-04). 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 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” (ASU 2021-01). This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company ~~is currently in the process of identifying~~has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company's transition away from LIBOR for its loan and other financial instruments.

In ~~August 2020,~~June 2022, the FASB issued ASU ~~No.~~~~2020~~2022-~~06,~~03, ~~"Debt – Debt with Conversion and Other Options (Subtopic~~“Fair Value Measurement (Topic ~~470~~-20~~) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic~~ ~~815~~-40820): ~~Accounting for Convertible Instruments~~Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, ~~Contracts~~therefore, is not considered in ~~an Entity’s Own Equity" (ASU~~ ~~2020~~-06).measuring fair value. The ASU ~~simplifies accounting~~is effective for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective forfiscal years, including interim periods within those fiscal years, beginning after December 15, ~~2021,~~2023. ~~and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after~~ ~~December 15, 2023,~~ ~~including interim periods within those fiscal years.~~ Early adoption is permitted. The Company does not expect the adoption of ASU ~~2020~~2022-0603 to have a material impact on its consolidated financial statements.

The Company invests in U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, and corporate debt securities. Amortized costs and fair values of securities at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows (in thousands):

At September 30, ~~2021~~2022 and December 31, ~~2020~~2021, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands):

The tables above provide information about securities that have been in an unrealized loss position for less than twelve consecutive months and securities that have been in an unrealized loss position for twelve consecutive months or more. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Impairment is considered to be other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis. Presently, the Company does not intend to sell any of these securities, does not expect to be required to sell these securities, and expects to recover the entire amortized cost of all the securities.

On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $157 thousand, or $124 thousand net of tax, for the third quarter of 2022. The securities selected for transfer had larger potential decreases in their fair market values in higher interest rate environments than most of the other securities in the available for sale portfolio and included U.S. Treasury, agency, municipal and commercial mortgage-backed securities. The securities were transferred to mitigate the potential unfavorable impact that higher market interest rates may have on the carrying value of the securities and on the related accumulated other comprehensive loss. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.

At September 30, ~~2021~~2022, there were ~~NaN~~12 out of ~~NaN~~12 U.S. Treasury securities, 122 out of 145 U.S. agency and mortgage-backed securities, 2111 out of ~~4 U.S. Treasury securities, and NaN out of~~ ~~one hundred~~ ~~and~~ ~~ten~~116 obligations of states and political subdivisions, and one out of one corporate debt securities in an unrealized loss position. OneOne hundred percent of the Company’s investment portfolio is considered investment grade. The ~~weighted-average~~weighted-average re-pricing term of the ~~portfoli~~oportfolio was ~~5.3~~6.1 years a att September 30, ~~2021~~2022. At December 31, ~~2020~~2021, there were ~~seven~~six out of ~~one hundred~~eight ~~and~~ ~~one~~U.S. Treasury securities, 58 out of 135 U.S. agency and mortgage-backed securities and ~~one~~and 37 out of ~~eighty-four~~ o~~bligations~~118 obligations of states and political subdivisions in an unrealized loss position. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, ~~2020~~2021. The weighted-average re-pricing term of the portfolio was ~~3.5~~5.2 years at December 31, ~~2020~~2021. The unrealized losses at September 30, ~~2021~~2022 in the U.S. Treasury securities portfolio, U.S. agency and mortgage-backed securities portfolio, ~~and the~~ obligations of states and political subdivisions portfolio, and the corporate debt securities portfolio were related to changes in market interest rates and not credit concerns of the issuers.

The amortized cost and fair value of securities at September 30, ~~2021~~2022 by contractual maturity are shown below (in thousands). Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock are generally viewed as long-term investments and as restricted securities, which are carried at cost, because there is a minimal market for the stock. Therefore, when evaluating restricted securities for impairment, their value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider these investments to be other-than-temporarily impaired at September 30, ~~2021~~2022, and 0no impairment has been recognized.

The composition of restricted securities at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 was as follows (in thousands):

The Company also holds limited partnership investments in Small Business Investment Companies (SBICs), which are included in other assets in the Consolidated Balance Sheets. The limited partnership investments are measured as equity investments without readily determinable fair values at their cost, less any impairment. The amounts included in other assets for the limited partnership ~~investment~~sinvestments were ~~$454~~$566 thousand and ~~$529~~$504 thousand at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, respectively.

Loans at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized as follows (in thousands):

Net deferred loan fees included in the above loan categories were ~~$1.1 million~~$856 thousand and ~~$1.6 million~~$871 thousand at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. Consumer and other loans included ~~$179~~$163 thousand and ~~$143~~$175 thousand of demand deposit overdrafts at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, respectively.

Risk characteristics of each loan portfolio class that are considered by the Company include:

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The outstanding principal balance and the carrying amount at September 30, ~~2021~~ 2022of loans acquired in business combinations were as follows:

The following tables provide a summary of loan classes and an aging of past due loans as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands):

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful, and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard, or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The following tables provide an analysis of the credit risk profile of each loan class as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands):

The following tables present, as of and during the periods ended September 30, ~~2021~~2022, December 31, ~~2020~~2021 and September 30, ~~2020~~2021, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands):

Impaired loans and the related allowance atas of and for the periods ended September 30, ~~2021~~2022, December 31, ~~2020~~2021 and September 30, ~~2020~~2021, were as follows (in thousands):

The “Recorded Investment” amounts in the table above represent the outstanding principal balance on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged off on each loan and/or payments that have been applied towards principal on non-accrual loans. Only loan classes with balances are included in the tables above.

As of September 30, ~~2021~~2022, loans classified as troubled debt restructurings (TDRs) and included in impaired loans in the disclosure above totaled ~~$1.7 million.~~$110 thousand. At September 30, ~~2021~~2022, none of the loans classified as TDRs were performing under the restructured terms and all were considered non-performing assets. There were ~~$6.0~~$1.6 million in TDRs at December 31, ~~2020~~2021, ~~none~~$7 thousand of which were performing under the restructured terms. Modified terms under TDRs may include rate reductions, extension of terms that are considered to be below market, conversion to interest only, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. There were 0no loans modified under TDRs during the three ~~months ended~~ ~~September 30, 2021~~and~~2020~~.

~~In response to the COVID-~~19 ~~pandemic, the Company created and implemented a loan payment deferral program for individual and business customers beginning in the~~ ~~first~~ ~~quarter of~~ ~~2020,~~ ~~which provided them the opportunity to defer monthly payments for~~ 90 ~~days. As of~~ ~~September 30, 2021~~~~, there were 0 loans remaining in the program. These loans were~~ ~~not~~ ~~considered TDRs because they were modified in accordance with relief provisions of the CARES Act and recent interagency regulatory guidance.~~

~~During the~~ ~~fourth~~ ~~quarter of~~ ~~2020,~~ ~~the Company modified~~ ~~terms of certain loans for customers that continued to be negatively impacted by the COVID-~~19 ~~pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6 and 24 months. As of~~ ~~September 30, 2021~~~~, loans that were modified totaled $13.3 million. These loans were~~ ~~not~~ ~~considered TDRs because they were modified in accordance with relief provisions of the CARES Act.~~

For the three and nine months ended September 30, 2022 and ~~2020~~2021, there were no TDRs that subsequently defaulted within twelve months of the loan modification. Management defines default as over ninety days past due or the foreclosure and repossession of the collateral or charge-off of the loan during the twelve month period subsequent to the modification.

~~Changes in the balance for OREO during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and the year ended~~ ~~December 31, 2020~~ ~~are as follows (in thousands):~~

~~There were 0 residential real estate properties included in the ending OREO balances at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~~~. The Bank did~~ ~~not~~ ~~have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of~~ ~~September 30, 2021~~.

~~The Company acquired $2.1 million of OREO in the acquisition of Fincastle including $1.8 million of real estate and buildings formerly used as bank premises by Fincastle. The Company will~~ ~~not~~ ~~place these properties into service as bank premises and has designated them as held for sale. Net expenses applicable to OREO, other than the provision for losses, were $21 thousand for the~~ ~~nine~~ ~~months ended~~ ~~September~~ ~~30,~~~~2021.~~ ~~The Bank did~~ ~~not~~ ~~have any expenses applicable to OREO~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September~~ ~~30,~~~~2020.~~~~The Bank did~~ ~~not~~ ~~have any expenses applicable to OREO~~ ~~for the year ended~~ ~~December 31, 2020.~~

~~The Company had an unsecured line of credit totaling $5.0 million with a non-affiliated bank at~~ ~~September 30, 2021~~~~. There were 0 borrowings outstanding on the line of credit at~~ ~~September 30, 2021~~~~. The interest rate on the line of credit floats at Wall Street Journal Prime Rate plus 0.25%, with a floor of 3.50%, and matures on~~ ~~March 28, 2026.~~

~~The Bank had unused lines of credit totaling $229.0 million and $237.7 million available with non-affiliated banks at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~, respectively. These amounts primarily consist of a blanket floating lien agreement with the Federal Home Loan Bank of Atlanta (FHLB) in which the Bank can borrow up to 19% of its total assets. The unused line of credit with FHLB totaled $159.4 million at ~~September 30, 2021~~~~. The Bank had collateral pledged on the borrowing line at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~ ~~including real estate loans totaling $216.3 million and $221.1 million, respectively, and Federal Home Loan Bank stock with a book value of $701 thousand and $818 thousand, respectively. The Bank did~~ ~~not~~ ~~have borrowings from the FHLB at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are ~~not~~ ~~applicable to bank holding companies.~~

~~The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective~~ ~~January~~ 1,~~2015,~~ ~~with full compliance of all the requirements phased in over a multi-year schedule, and became fully phased in~~ ~~January 1, 2019.~~ ~~As part of the new requirements, the common equity Tier~~ 1 capital ratio is calculated and utilized in the assessment of capital for all institutions. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer was phased-in over ~~four~~ ~~years, which began on~~ ~~January~~ 1,~~2016~~ ~~and was fully implemented on~~ ~~January 1, 2019.~~

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total (as defined in the regulations), Tier 1 ~~(as defined), and common equity Tier~~ 1 ~~capital (as defined) to risk-weighted assets (as defined), and of Tier~~ 1 ~~capital to average assets. Management believes, as of~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~~~, that the Bank met all capital adequacy requirements to which it is subject.~~

~~As of~~ ~~September 30, 2021~~, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum risk-based capital and leverage ratios as set forth in the following table. There are no ~~conditions or events since that notification that management believes have changed the Bank’s category.~~

~~A comparison of the capital of the Bank at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~ ~~with the minimum regulatory guidelines were as follows (dollars in thousands):~~

In addition to the regulatory minimum risk-based capital amounts presented above, the Bank must maintain a capital conservation buffer as required by the Basel III final rules. Accordingly, the Bank was required to maintain a capital conservation buffer of 2.50% at ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~. Under the final rules, an institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. As of ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~~~, the capital conservation buffer of the Bank was 6.42% and 7.82%, respectively.~~

On ~~October~~ ~~30,~~~~2015,~~ ~~the Company entered into a Subordinated Loan Agreement (the Agreement) pursuant to which the Company issued an interest only subordinated term note due~~ ~~2025~~ ~~in the aggregate principal amount of $5.0 million. The note bears interest at a fixed rate of 6.75% per annum. Debt issuance costs related to the note were fully amortized at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~~~. The note has a maturity date of~~ ~~October~~ 1,~~2025.~~ ~~Subject to regulatory approval, the Company~~ ~~may~~ ~~prepay the note, in part or in fu~~ll through maturity, at the Company's option, on any scheduled interest payment date. The Agreement contains customary events of default such as the bankruptcy of the Company and the non-payment of principal or interest when due. The holder of the note ~~may~~ ~~accelerate the repayment of the note only in the event of bankruptcy or similar proceedings and~~ ~~not~~ ~~for any other event of default.~~

On ~~June 29, 2020,~~ ~~the Company issued an interest only subordinated term note due~~ ~~2030~~ ~~in the aggregate principal amount of $5.0 million. The note initially bears interest at a fixed rate of 5.50% per annum. Beginning~~ ~~July 1, 2025,~~ ~~the interest rate shall reset quarterly to an interest rate per annum equal to the current~~ ~~three~~~~-month Secured Overnight Financing Rate (SOFR), plus 510 basis points. Unamortized debt issuance costs related to the note were $7 thousand and $9~~ ~~thousand at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~~~, respectively. The note has a maturity date of~~ ~~July 1, 2030.~~ ~~Subject to regulatory approval, the Company~~ ~~may~~ ~~prepay the note, in part or in full, beginning on~~ ~~July 1, 2025~~ through maturity, at the Company's option, on any scheduled interest payment date. The note contains customary events of default such as the bankruptcy of the Company and the non-payment of principal or interest when due. The holder of the note ~~may~~ ~~accelerate the repayment of the note only in the event of bankruptcy or similar proceedings and~~ ~~not~~ ~~for any other event of default.~~

Both of the notes are unsecured, subordinated obligations of the Company and they rank junior in right of payment to the Company’s existing and future senior indebtedness and to the Company’s obligations to its general creditors. The notes rank equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the notes. The notes rank senior to all current and future junior subordinated debt obligations, preferred stock, and common stock of the Company. The notes are ~~not~~ ~~convertible into common stock or preferred stock, and are~~ ~~not~~ ~~callable by the holders.~~

On ~~June~~ 8,~~2004,~~ First National (VA) Statutory Trust II (Trust II), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities. On ~~June~~ ~~17,~~~~2004,~~ ~~$5.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~ wa~~s 2.72% and~~ ~~2.83%, respectively. The securities have a mandatory redemption date of~~ ~~June~~ ~~17,~~~~2034,~~ ~~and were subject to varying call provisions that began~~ ~~September~~ ~~17,~~~~2009.~~ The principal asset of Trust II is $5.2 million of the Company’s junior subordinated debt with maturities and interest rates comparable to the trust preferred securities. The Trust’s obligations under the trust preferred securities are fully and unconditionally guaranteed by the Company. The Company is current on its interest payments on the junior subordinated debt.

On ~~July~~ ~~24,~~~~2006,~~ ~~First National (VA) Statutory Trust III (Trust III), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On~~ ~~July~~ ~~31,~~~~2006,~~ ~~$4.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~ ~~was~~ ~~1.73% and 1.83%, respectively. The securities have a mandatory redemption date of~~ ~~October~~ 1,~~2036,~~ ~~and were subject to varying call provisions that began~~ ~~October~~ 1,~~2011.~~ The principal asset of Trust III is $4.1 million of the Company’s junior subordinated debt with maturities and interest rates comparable to the trust preferred securities. The Trust’s obligations under the trust preferred securities are fully and unconditionally guaranteed by the Company. The Company is current on its interest payments on the junior subordinated debt.

~~The Company maintains a~~ ~~401~~~~(k) plan (the Plan) for all eligible employees. Participating employees~~ ~~may~~ ~~elect to contribute up to the maximum percentage allowed by the Internal Revenue Service, as defined in the Plan. The Company makes matching contributions, on a dollar-for dollar basis, for the~~ ~~first~~~~one~~ ~~percent of an employee’s compensation contributed to the Plan and~~ ~~fifty~~ ~~cents for each dollar of the employee’s contribution between~~ ~~two~~ ~~percent and~~ ~~six~~ ~~percent. The Company also makes an additional contribution based on years of service to participants who have completed at least~~ ~~one thousand~~ ~~hours of service during the year and who are employed on the last day of the Plan Year. All employees who are age~~ ~~nineteen~~ ~~or older are eligible. Employee contributions vest immediately. Employer matching contributions vest after~~ ~~two~~ Plan service years with the Company. The Company has the discretion to make a profit sharing contribution to the Plan each year based on overall performance, profitability, and other economic factors. For the ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and~~ ~~2020~~~~, expense attributable to the~~ ~~Plan amounted to $706 thousand and $449 thousand, respectively.~~

On ~~March 15, 2019,~~ ~~the Company entered into supplemental executive retirement plans and participation agreements with~~ ~~three~~ ~~of its employees. The retirement benefits are fixed and provide for retirement benefits payable in 180 monthly installments. The contribution expense totaled $197 thousand and $198 thousand for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and~~ ~~2020~~ ~~and was solely funded by the Company.~~

~~See Note~~ 13 ~~of the consolidated financial statements included in the Company’s Annual Report on Form~~ 10~~-K for the year ended~~ ~~December 31, 2020~~ ~~for additional information about the Company’s benefit plans.~~

Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The following table presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (dollars in thousands, except per share data):

~~There were 0 antidilutive shares of common stock for the~~ ~~three~~ ~~months and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021.~~ Restricted stock units for ~~9,632~~603 shares of common stock were not considered in computing diluted earnings per share for the three months and nine months ended September 30, ~~2020.~~2022 because they were antidilutive. There were no antidilutive shares of common stock for the three months and nine months ended September 30, 2022

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurement and Disclosures” topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a 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 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.

In accordance with this guidance, the Company groups its assets and 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.

An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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

Securities available for sale 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).

Cash flow hedges are recorded at fair value on a recurring basis. The fair value of the Company's cash flow hedges is determined by a third party vendor using the discounted cash flow method (Level 2).

The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands). ~~There were~~ no ~~liabilities measured at fair value at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020.~~

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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

~~Loans held for sale are carried at the lower of cost or market value. These loans currently consist of~~ ~~one~~~~-to-~~~~four~~ ~~family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is~~ ~~not~~ ~~materially different than cost due to the short duration between origination and sale (Level~~ 2~~). As such, the Company records any fair value adjustments on a nonrecurring basis. NaN nonrecurring fair value adjustments were recorded on loans held for sale during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and the year ended~~ ~~December 31, 2020~~.

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2) within the last twelve months. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses 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. At September 30, 2022, there was no allowance for loan losses relating to impaired loans.

Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis during the periods (dollars in thousands):

Accounting guidance requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying values and estimated fair values of the Company’s financial instruments at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows (in thousands):

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment 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.

On May 13, 2014, the Company’s shareholders approved the First National Corporation 2014 Stock Incentive Plan, which makes available up to 240,000 shares of common stock for the granting of stock options, restricted stock awards, stock appreciation rights, and other stock-based awards. Awards are made at the discretion of the Board of Directors and compensation cost equal to the fair value of the award is recognized over the vesting period.

Whenever the Company deems it appropriate to grant a stock award, the recipient receives a specified number of unrestricted shares of employer stock. Stock awards may be made by the Company at its discretion without cash consideration and may be granted as settlement of a performance-based compensation ~~awa~~award.~~rd.~~

Compensation expense related to stock awards totaled $131 and $481 thousand for the three months and nine months ended September 30, 2022, respectively. The Company did not have compensation expense related to stock awards for tthe three months and he nine months ended September 30, ~~2021~~2022 and ~~2020~~2021.

Restricted stock units are an award of units that correspond in number and value to a specified number of shares of employer stock which the recipient receives according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. Each restricted stock unit that vests entitles the recipient to receive one share of common stock on a specified issuance date.

During the first ~~nine~~ ~~months~~quarter of ~~2021~~2022, ~~16,094~~10,110 restricted stock units were granted to employees, with ~~2,026~~3,375 units vesting immediately, ~~7,040~~and 6,735 units subject to a two year vesting schedule with one half of the units vesting each ~~year, and 7,028 units subject to a~~ ~~five~~ ~~year vesting schedule with all of the units vesting in the~~ ~~fifth~~ year. The recipient does not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until vesting has occurred and the recipient becomes the record holder of those shares. The unvested restricted stock units will vest on the established schedule if the employees remain employed by the Company on future vesting dates.

A summary of the activity for the Company’s restricted stock units for the period indicated is presented in the following table:

At September 30, ~~2021~~2022, based on restricted stock unit awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested restricted stock unit awards was ~~$290~~$367 thousand. This expense is expected to be recognized through 2026. Compensation expense related to restricted stock unit awards recognized for the threenine months ended September 30, ~~2021~~2022 and ~~2020~~2021 totaled ~~$300~~$56 thousand and ~~$168~~$54 thousand, respectively. Compensation expense related to restricted stock unit awards recognized for the nine months ended September 30, 2022 and 2021 totaled $247 thousand and $172 thousand, respectively.

Changes in each component of accumulated other comprehensive income (loss) were as follows (in thousands):

The following table presents information related to reclassifications from accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):

On ~~January 1, 2018,~~ ~~the Company adopted ASU~~ ~~No.~~~~2014~~-~~09,~~ ~~"Revenue from Contracts with Customers: Topic~~ ~~606"~~ ~~and all subsequent ASUs that modified Topic~~ ~~606.~~Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of ~~the guidance.~~ASC topic 606. Gains and losses on investment securities, derivatives, financial guarantees, and sales of financial instruments are similarly excluded from the scope. The guidance is applicable to noninterest revenue streams such as service charges on deposit accounts, ATM and check card fees, wealth management fees, and fees for other customer services. Noninterest revenue streams within the scope of Topic 606 are discussed below.

Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts. Overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. ATM fees are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Check card fees are primarily comprised of interchange fee income. Interchange fees are earned whenever the Company's debit cards are processed through card payment networks, such as Visa. The Company's performance obligation for interchange fee income is largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, debit card fee income is presented net of associated expense.

Wealth management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company's performance obligation is generally satisfied over time and the resulting fees are primarily recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month-end through a direct charge to customers' accounts. Estate management fees are based upon the size of the estate. Revenue for estate management fees are recorded periodically, according to a fee schedule, and are based on the services that have been provided.

Brokered mortgage fees are comprised of loan fee income earned from generating loans in the secondary market. Brokered mortgage fee income is recognized at loan closing.

Fees for other customer services include fees for brokered loans, check ordering charges, merchant services income, safe deposit box rental fees, and other service charges. Check ordering charges are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Merchant services income mainly represent fees charged to merchants to process their debit and credit card transactions. The Company's performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):

On April 21, 2020, the Company entered into two interest rate swap agreements related to its outstanding junior subordinated debt. One swap agreement was related to the Company’s junior subordinated debt with a redemption date of June 17, 2034, which became effective on March 17, 2020. The notional amount of the interest rate swap was $5.0 million and terminates on June 17, 2034. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.79% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The other swap agreement was related to the Company’s junior subordinated debt with a redemption date of October 1, 2036, which became effective on April 1, 2020. The notional amount of the interest rate swap was $4.0 million and terminates on October 1, 2036. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.82% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The Company expects the junior subordinated debt instruments to transition from a LIBOR-indexed floating rate of interest to a SOFR-indexed floating rate by June 30, 2023.

The Company entered into interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converted variable rate debt into fixed rate debt. Alternatively, the Company may enter into interest rate swap agreements to convert fixed rate debt into variable rate debt. Interest differentials paid or received under interest rate swap agreements are reflected as adjustments to interest expense. The Company designated the interest rate swaps as hedging instruments in qualifying cash flow hedges. Changes in fair value of these designated hedging instruments is reported as a component of other comprehensive (loss) income. 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 as earnings. As of September 30, ~~2021~~2022, the Company has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2034 and October 2036. The notional amounts of the interest rate swaps were not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant.

Unrealized gains or losses recorded in other comprehensive (loss) income 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 (loss) 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.

The following table summarizes key elements of the Company's derivative instruments at September 30, ~~2021~~2022 ~~(in~~and December 31, 2021 (in thousands):

On ~~July 1, 2021,~~October 3, 2022, First Bank Financial Services, Inc., a wholly owned subsidiary of the ~~Company completed~~Bank, received proceeds totaling $3.1 million from the acquisition of The Bank of Fincastle (“Fincastle”) for an aggregate purchase price of $33.8 million of cash and stock. The Company paid cash consideration of $6.8 million and issued 1,348,065 sharessale of its ~~common stock~~interest in a broker-dealer of investments. First Bank Financial Services, Inc. expects to record a gain on the ~~shareholders of Fincastle. Upon completion~~sale of the ~~transaction, Fincastle was merged with and into First Bank. At the time of closing of the acquisition, The Bank of Fincastle had~~ ~~six~~ retail bank offices operating in the greater Roanoke region of Virginia. The former Fincastle branches continued to operate as The Bank of Fincastle, a division of First Bank, until the systems were converted on ~~October 16, 2021.~~ ~~As of~~ ~~June 30, 2021,~~ ~~Fincastle reported total assets of $267.9~~investment totaling $2.9 million ~~total loans of $194.5 million and total deposits of $236.3 million. For the~~ ~~three~~~~-month and~~ ~~nine~~~~-month periods ended~~ ~~September 30, 2021,~~ the Company recorded merger related expenses of $1.3 million and $2.0 million, respectively, in connection with the acquisition of Fincastle. The Company estimates that it will incur aggregate costs related to the merger of $3.4 million, with the remaining $1.4 million of merger related expenses expected to be recorded throughout the ~~fourth~~ ~~quarter of~~ ~~2021~~ ~~and~~ ~~first~~ ~~quarter of~~ ~~2022.~~

On ~~September 30, 2021,~~ the Bank acquired $82.0 million of loans and certain fixed assets from SmartBank related to their Richmond area branch, located in Glen Allen, Virginia. First Bank paid cash consideration of $83.7 million for the loans and fixed assets. Additionally, an experienced team of bankers based out of the SmartBank location have transitioned to become employees of First Bank. First Bank did ~~not~~ ~~assume any deposit liabilities from SmartBank in connection with the transaction, and SmartBank intends to close their branch operation on~~ ~~December 31, 2021.~~ First bank has agreed to assume the facility lease at the branch and will continue to operate a loan production office from the location after the SmartBank branch is closed. First Bank’s assumption of the lease and acquisition of the remaining branch assets is expected to be completed in the fourth quarter of ~~2021,~~2022. ~~subject to customary closing conditions.~~ The ~~Company did~~gain has not ~~incur significant expenses related to~~been reflected on the ~~acquisition of loans and fixed assets in the~~ ~~third~~ ~~quarter of~~ ~~2021.~~

~~The acquisitions were accounted for as business combinations under ASC~~ ~~805,~~~~Business Combinations~~. Under acquisition accounting, assets acquired, and liabilities assumed are recorded at their acquisition date fair values, and any excess of the purchase price over the aggregate fair value of the net assets acquired is recognized as goodwill. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. During the measurement period, the acquirer shall adjust the amounts recognized at the acquisition date and ~~may~~ recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period ~~may~~ ~~not~~ ~~exceed~~ ~~one~~ ~~year from the acquisition date.~~

The following table presents the total consideration paid by the Company in connection with the acquisition of Fincastle and the SmartBank loan portfolio, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill. AmountsCompany’s income statement for the ~~Bank of Fincastle acquisition are as of~~ ~~July 1, 2021.~~ ~~Amounts for SmartBank are as of~~ ~~September 30, 2021.~~

~~The following table presents certain unaudited pro forma information as if the acquisition had taken place on~~ ~~January 1, 2020.~~ These results combine the historical results of Fincastle and the Company for the period prior to the merger. While certain adjustments were made for estimated effects resulting from the application of the acquisition method, including certain fair value adjustments, this pro forma information is ~~not~~three ~~indicative of what would have occurred had the acquisition actually taken place on~~ ~~January 1, 2020.~~ ~~Pro forma adjustments for the~~or nine ~~month periods��~~months ended September 30, ~~2021~~ 2022.~~and~~

On ~~September 30, 2020~~October 12, 2022 ~~include~~ the ~~net impact~~Board of ~~accretion~~Directors of ~~loan discounts related to market interest rates, amortization of premiums on deposits, amortization of intangible assets and related income taxes. Additionally,~~ the Company ~~expects~~authorized a stock repurchase plan pursuant to ~~achieve further operational cost savings and other efficiencies as a result~~which the Company is authorized to repurchase up to $5.0 million of the ~~acquisition which are~~ ~~not~~ ~~reflected in the unaudited pro forma amounts below.~~

~~The revenue and earnings amounts specific to Fincastle since the acquisition 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 acquisition date. Merger related expenses associated with the acquisition of Fincastle were $2.0 millionCompany’s outstanding common stock through ~~September 30, 2021.~~December 31, 2023. ~~These costs included the integration of systems and operations and legal and consulting expenses, which~~Through November 10, 2022, there have been ~~expensed as incurred. Additional merger related expenses are expected to be incurred throughout~~no stock repurchases under the ~~fourth~~ ~~quarter of~~ ~~2021~~ ~~and~~ ~~first~~ ~~quarter of~~ ~~2022.~~plan.

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

First National Corporation (the Company) makes forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding profitability, liquidity, adequacy of capital, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and the impact of the Company’s acquisitions of The Bank of Fincastle (Fincastle) and the SmartBank loan portfolio, including the expected ~~levels of merger related expenses to be incurred by the Company, the expected~~ benefits of the acquisition of Fincastle (Merger), and the potential impact of the acquisitions on the Company’s and First Bank’s (the Bank) ~~liquidity and capital levels, as well as certain~~ financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

Because of these and other uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results. The following discussion and analysis of the financial condition at September 30, ~~2021~~2022 and statements of income of the Company for the three ~~and~~ ~~nine~~andnine months ended September 30, ~~2021~~2022 and ~~2020~~2021 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, ~~2020.~~2021. The statements of income for the three ~~and~~ ~~nine~~andnine months ended September 30, ~~2021~~2022 may not be indicative of the results to be achieved for the year.

First Bank Financial Services, Inc. ~~invests~~owns an interest in ~~entities~~an entity that ~~provide~~provides title insurance ~~and investment~~ services. Bank of Fincastle Services, Inc. ~~owns investments in~~is no longer an ~~entity that provides mortgage services.~~active operating entity. Shen-Valley Land Holdings, LLC ~~was~~and ESF, LLC were formed to hold other real estate owned and future office sites. The Trusts were formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities and are not included in the Company’s consolidated financial statements in accordance with authoritative accounting guidance because management has determined that the Trusts qualify as variable interest entities.

The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations. The Bank’s office locations are well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, central regions of Virginia, and the ~~Richmond and Roanoke market areas.~~city of Richmond. Within these markets, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education.

The ~~Bank offers loan and deposit~~Bank’s products and services are delivered through 20 bank branch offices, a loan production office and customer service centers in two retirement villages. For the location and general character of each of these offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2021. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, ~~its mobile banking platform,~~and a network of ATMs located throughout its market ~~area, one loan production office, a customer service center in a retirement community, and 20 bank branch office locations located throughout the Shenandoah Valley, the central regions of Virginia,~~ ~~and the Richmond and Roanoke market areas.~~ ~~In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management.~~ area.

The primary source of revenue is from net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense and typically represents between 70% and 80% of the Company’s total revenue. Interest income is determined by the amount of interest-earning assets outstanding during the period and the interest rates earned on those assets. The Bank’s interest expense is a function of the amount of interest-bearing liabilities outstanding during the period and the interest rates paid. In addition to net interest income, noninterest income is the other source of revenue for the Company. Noninterest income is derived primarily from service charges on deposits, fee income from wealth management services, and ATM and check card fees.

Primary expense categories are salaries and employee benefits, which comprised ~~56%~~58% of noninterest expenses for the nine months ended September 30, ~~2021,~~2022, followed by occupancy and equipment expense, which comprised ~~12%~~13% of noninterest expenses. The provision for loan losses is also typically a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for loan losses.

During the third quarter of 2021, the Bank continued to follow its Pandemic Plan that strives to protect the health of its employees and customers, while continuing to deliver banking services. In response to vaccinations that continued to be provided to thousands of people in our market areas, and the decrease in the number of COVID-19 cases in our communities, the Bank entered phase two of its plan in late March 2021 after operating in phase one since early December 2020. After operating for almost four months primarily through branch drive throughs, ATMs, and mobile and internet banking platforms, lobbies re-opened in March for walk-in customers to conduct their banking business.

The Bank actively participated as a lender in the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) to support local small businesses and non-profit organizations by providing forgivable loans. Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $22.8 million at September 30, 2021, with $1.3 million scheduled to mature in the second and third quarters of 2022, and $21.5 million scheduled to mature in the first and second quarters of 2026. The Company believes the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings.

The Bank recognized $737 thousand and $247 thousand of accretion on deferred PPP income, net origination costs, through interest and fees on loans for three month periods ending September 30, 2021 and 2020, respectively, and recognized $1.8 million and $429 thousand for the nine months ended September 30, 2021 and 2020, respectively. The total amount of deferred PPP income, net of origination costs, not yet been recognized through interest and fees on loans totaled $652 thousand at September 30, 2021.

The economic impact of the pandemic had an unfavorable impact on the financial condition of certain Bank customers. The Bank entered into loan modification agreements in the fourth quarter of 2020, and during the first half of 2021, to provide relief to certain customers that were continuing to experience temporary business interruptions from the pandemic. The modifications were designed to help borrowers continue their business operations while minimizing potential loan charge-offs. The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic.

In response to the unknown impact of the pandemic on the economy and its customers, the Bank created and implemented a loan payment deferral program for individual and business customers beginning in the first quarter of 2020, which provided them the opportunity to defer monthly payments for 90 days. By June 30, 2020, loans participating in the program reached $182.6 million. The majority of these loans resumed regular payments during the second half of 2020 after their deferral periods ende~~d. There were no loans remaining in the program at September 30, 2021. These loans were not considered troubled debt restructurings (TDRs) because they were modified in accordance with relief provisions of the CARES Act and interagency regulatory guidance.~~

During the fourth quarter of 2020, and during the first half of 2021, the Bank modified terms of certain loans for customers that continued to be negatively impacted by the pandemic by lowering borrower’s loan payments with interest only payments for periods ranging between 6 and 24 months. Modified loans totaled $13.3 million at September 30, 2021, with $13.2 million in the Bank’s commercial real estate loan portfolio and $83 thousand in the commercial and industrial loans portfolio. The loans were comprised of $11.6 million in the lodging sector and $1.7 million in the leisure sector. All modified loans were either performing under their modified terms or resumed regular loan payments as of September 30, 2021.

The Company issued $5.0 million of subordinated debt in June 2020 as a result of its risk management program and capital planning. The purpose of the issuance was primarily to further strengthen holding company liquidity and to remain a source of strength for the Bank in the event of a severe economic downturn. The Company may also use the proceeds of the issuance for general corporate purposes, including the potential repayment of the Company’s subordinated debt that was issued in 2015 and became callable on a quarterly basis beginning January 1, 2021. The subordinated debt issued in 2020 consists of a 5.50% fixed-to-floating rate subordinated note due 2030 issued to an institutional investor and was structured to qualify as Tier 2 capital under bank regulatory guidelines.

After being suspended for most of 2020, the Company’s stock repurchase plan ended on December 31, 2020. The Company has not authorized another stock repurchase plan due to certain factors, which include the continued uncertainty and potential impact of the pandemic on the economy and the Bank’s customers. The Company continued to pay cash dividends on common stock of $0.11 per share throughout 2020, and in February 2021, it declared a quarterly cash dividend of $0.12 per share, which was a 9% increase. Company declared another quarterly cash dividend of $0.12 per share in both May 2021 and September 2021.

The following had a significant impact on financial performance in the third quarter of 2022 compared to the same period in 2021.

Net income increased ~~by $644 thousand to $2.4~~$2.1 million, or ~~$0.38~~86%, to $4.5 million, or $0.71 per diluted share, for the three months ended September 30, ~~2021,~~2022, compared to ~~$1.8~~$2.4 million, or ~~$0.36~~$0.39 per diluted share, for the same period in ~~2020.~~2021. Return on average assets was ~~0.71%~~1.27% and return on average equity was ~~8.64%~~17.27% for the third quarter of ~~2021,~~2022, compared to ~~0.74%~~0.71% and ~~8.52%~~8.64%, respectively, for the same period in ~~2020.~~2021.

The increase in net income resulted primarily from a ~~$2.2~~$2.0 million, or ~~29%~~20%, increase in net interest income, a ~~$1.5 million decrease in provision for loan losses, and a $447~~$379 thousand, or ~~20%~~14%, increase in total noninterest income, ~~compared to the same period of 2020.~~and a $343 thousand, or 4%, decrease in total noninterest expense. These favorable variances were partially offset by a ~~$3.3 million, or 54%,~~$200 thousand increase in ~~noninterest expenses.~~provision for loan losses.

Net interest income increased ~~$2.2~~by $2.0 million from a ~~$2.0~~$2.5 million increase in total interest income, ~~and~~which was partially offset by a ~~$176~~$472 thousand ~~decrease~~increase in total interest ~~expense,~~expense. Net interest income increased from a 52-basis point increase in the net interest margin and a 3% increase in average earning assets. The change in the composition of average earning assets had a significant impact on the increase in the net interest margin as average loans increased to 68% of average earning assets for the third quarter of 2022, compared to 60% of average earning assets for the same period of the prior year, while interest-bearing deposits in banks decreased to 6% of average earning assets from 16% for the same period of 2021. The Bank acquired an $82.6 million loan portfolio from SmartBank’s Richmond-area branch on September 30, 2021, which made a significant contribution to the increase in average loan balances when comparing the third quarter of 2022 to the same period of ~~2020. Although the net interest margin decreased by 35-basis points to 3.06%, net interest income increased~~2021 as the ~~impact~~acquisition occurred on the last day of the ~~lower net interest margin was offset by a $383.8 million, or 43%, increase in average earning assets, a $490 thousand increase in accretion~~quarter.

Accretion of ~~deferred~~ PPP ~~loan~~ income, net of ~~origination~~ costs, ~~and $238 thousand of accretion of loan discounts, net of premium amortization, on acquired loans. Total interest expense decreased by $176 thousand, or 23%, primarily from a decrease~~is recorded in interest ~~expense~~income and fees on ~~deposits as~~loans and positively impacts net interest income. Accretion totaled $0 for the ~~Bank lowered interest rates paid on deposit accounts. The Merger~~third quarter of ~~The Bank of Fincastle with and into First Bank on July 1, 2021 contributed~~2022 compared to $737 thousand for the ~~increase~~same period in ~~average earning assets.~~2021.

The provision for loan losses ~~decreased $1.5 million, which resulted from no provision~~totaled $200 thousand for ~~loan losses in the~~ third quarter of ~~2021 and~~2022 compared to no provision ~~for~~of loan losses ~~of $1.5 million~~ for ~~the~~ same period ~~of 2020.~~in the prior year. The allowance for loan losses totaled ~~$5.4~~$6.3 million, or 0.69% of total loans on September 30, 2022, 0.69% of total loans on December 31, 2021, and 0.66% of total loans at September 30, 2021. There were no significant changes in the general or specific reserve components of the allowance during the quarter. Net charge-offs totaled $31 thousand for the period. Loans acquired from Fincastle and SmartBank during the third quarter were recorded at fair market value, which resulted in valuation discounts on ~~the loan portfolios. Due to the valuation discounts, there was no allowance for loan losses required on the acquired loans at~~ September 30, 2021.

~~Noninterest~~Total noninterest income increased ~~$447~~$379 thousand, or 14%, primarily from increases in service charges on deposits, ATM and check card fees, wealth management fees, and other operating income. The increases were partially offset by decreases in fees for other customer ~~services. The merger with Fincastle contributed to increases in all noninterest income categories, except for wealth management~~services and brokered mortgage fees.

~~Noninterest~~Total noninterest expense ~~increased $3.3 million,~~decreased $343 thousand, or 4%, primarily from the addition of employees, customers and branch offices through the merger of The Bank of Fincastle with and into First Bank on July 1, 2021, and from merger related expenses that totaled $1.3 million during the quarter. Several noninterest expense categories increased as a result of the merger. The $1.3 million of merger related expenses contributed to the increasesdecreases in salaries and employee benefits, ~~marketing, supplies,~~ legal and ~~professional~~professional fees, and data processing ~~and~~expense, which were partially offset by an increase in other operating expense.

~~Based on management's analysis and the supporting allowance for loan loss calculation, a provision for loan losses was not required during the third quarter of 2021, compared~~ Merger related expenses decreased to a provision for loan losses of $1.5 million during the same period of 2020. The decrease in the provision for loan losses was attributable to a decrease in the general reserve component of the allowance for loan losses that was offset by net charge-offs on loans. The provision for loan losses recorded$0 in the third quarter of ~~2020 was primarily attributable~~2022 compared to ~~an increase~~$1.3 million in the ~~specific reserve component~~same period of the ~~allowance for loan losses.~~prior year. The decrease in merger related expenses had a significant impact on the decrease in total noninterest expense.

For a more detailed discussion of the Company's quarterly performance, see "Net Interest Income,” “Provision for Loan Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below.

On July 1, 2021, the Company completed the acquisition of The Bank of Fincastle for an aggregate purchase price of $33.8 million of cash and stock. The Company paid cash consideration of $6.8 million and issued 1,348,065 shares of its common stock to the shareholders of Fincastle. Upon completion of the transaction, Fincastle was merged with and into First Bank. At the time of closing of the acquisition, The Bank of Fincastle had six ~~retail~~ bank branch offices operating in the ~~greater~~ Roanoke Valley region of ~~Virginia. The~~Virginia and reported total assets of $267.9 million, total loans of $194.5 million and total deposits of $236.3 million. After the merger, the former Fincastle branches continued to operate as The Bank of Fincastle, a division of First Bank, until the systems were converted on October 16, 2021. ~~As of June 30, 2021, Fincastle reported total assets of $267.9 million, total loans of $194.5 million and total deposits of $236.3 million.~~All branch offices have been operating as First Bank since the system conversion. For the ~~three-month and nine-month periods~~nine months ended September 30, ~~2021,~~2022, the Company recorded merger related expenses of ~~$1.3 million and $2.0 million, respectively,~~$20 thousand in connection with the acquisition of Fincastle. ~~The Company estimates that it will incur aggregate costs related to the merger of $3.4 million, with the remaining $1.4 million of~~There were no merger related expenses ~~expected to be~~ recorded ~~throughout~~in the ~~fourth quarter of 2021 and first quarter of~~three months ended September 30, 2022.

Purchased performing loans were recorded at fair value, including a credit discount. The fair value discount will be accreted as an adjustment to yield over the estimated lives of the loans. A provision for loan losses on the purchased loans is expected in future periods as the accretion decreases the fair value discount amount. A provision may also be required for any deterioration in these loans in future periods.

The Company ~~expect~~expected to benefit from cost savings after the acquisition of Fincastle. As of September 30, 2022, the Company believes that it had substantially achieved all expected cost savings related to ~~be realized as Fincastle's operations are fully integrated in future periods.~~the merger of Fincastle with and into First Bank.

On September 30, 2021, the Bank acquired ~~$82.0~~$82.6 million of loans and certain fixed assets from SmartBank related to ~~their~~its Richmond area branch, located in Glen Allen, Virginia. First Bank paid cash consideration of $83.7 million for the loans and fixed assets. Additionally, an experienced team of bankers based out of the SmartBank location ~~have~~ transitioned to become employees of First Bank. First Bank did not assume any deposit liabilities from SmartBank in connection with the transaction, and SmartBank ~~intends to close~~closed their branch operation on December 31, 2021. First Bank ~~has agreed to assume~~assumed the facility lease and acquired the remaining assets at the branch on December 31, 2021 and ~~will continue to operate~~now operates a loan production office ~~from~~in the location ~~after the SmartBank branch is closed. First Bank’s assumption~~ of the ~~lease and acquisition of the remaining branch assets is expected to be completed in the fourth quarter of 2021, subject to customary closing conditions.~~former SmartBank branch. The Company ~~did not incur significant~~incurred expenses totaling $101 thousand related to the acquisition of loans and fixed assets of SmartBank in the ~~third~~fourth quarter of 2021. There were no additional expenses related to the acquisition for the three and nine months ended September 30, 2022.

This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains on disposal of premises and equipment, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities gains. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands).

This report also refers to net interest margin, which is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both ~~2021~~2022 and ~~2020~~2021 is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands).

The Company’s consolidated financial statements and related notes are prepared in accordance with GAAP. The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or relieving a liability. The Bank uses historical losses as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors used. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact transactions could change.

Presented below is a discussion of those accounting policies that management believes are the most important (Critical Accounting Policies) to the portrayal and understanding of the Company’s financial condition and results of operations. The Critical Accounting Policies require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. For further information about the Company’s loans and the allowance for loan losses, see Notes 3 and 4 to the Consolidated Financial Statements included in this Form 10-Q.

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

~~Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.~~

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

~~There were no acquired loans classified as PCI in the acquisition of Fincastle and the Smartbank loan portfolio acquisition during the third quarter of 2021.~~

The Company's goodwill was recognized in connection with business combinations that occurred in the third quarter of 2021. The Company will review the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing would be required and the goodwill of the reporting unit would not be impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit will be compared with its carrying value to determine whether an impairment exists.

The Company performs regular credit reviews of the loan portfolio to review credit quality and adherence to underwriting standards. The credit reviews consist of reviews by its internal credit administration department and reviews performed by an independent third party. Upon origination, each loan is assigned a risk rating ranging from one to nine, with loans closer to one having less risk. This risk rating scale is the Company's primary credit quality indicator. The Company has various committees that review and ensure that the allowance for loans losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.

The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of the collateral, overall portfolio quality, and review of specific potential losses. The evaluation also considers the following risk characteristics of each loan portfolio class:

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows, fair value of collateral less estimated costs to sell, or observable market price of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal is ordered if a current one is not on file. Appraisals are typically performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions among other considerations.

The general component covers loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is calculated by loan type and uses an average loss rate during the preceding twelve quarters. The qualitative factors are assigned by management based on delinquencies and asset quality, national and local economic trends, effects of the changes in the value of underlying collateral, trends in volume and nature of loans, effects of changes in the lending policy, the experience and depth of management, concentrations of credit, quality of the loan review system, and the effect of external factors such as competition and regulatory requirements. The factors assigned differ by loan type. The general allowance estimates losses whose impact on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor. For further information regarding the allowance for loan losses, see Note 4 to the Consolidated Financial Statements included in this Form 10-Q.

Loans acquired from Fincastle and SmartBank were recorded at fair value. ~~Accordingly, no~~There was $230 thousand of allowance for loan losses attributable to purchased loansat September 30, 2022.

Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required ~~for those~~principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of ~~September~~the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. There were no acquired loans classified as PCI in the acquisition of the Fincastle and the SmartBank loan portfolios.

Goodwill arises from business combinations and is determined as the excess fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected June 30 ~~2021. A provision for loan losses may be required for any deterioration in these loans in future periods.~~ as the date to perform the annual impairment test. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.

Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions and are amortized on an accelerated method over their estimated useful lives, which range from 6 to 10 years.

In an effort to manage risk, the Bank’s loan policy gives loan amount approval limits to individual loan officers based on their position within the Bank and level of experience. The Management Loan Committee can approve new loans up to the Bank's legal lending limit. The Board Loan Committee reviews all loans greater than $1.0 million. The Board Loan Committee currently consists of six directors, five of which are non-management directors. The Board Loan Committee approves the Bank’s Loan Policy and reviews risk management reports, including watch list reports and concentrations of credit. The Board Loan Committee meets at least two times per quarter and the Chairman of the Committee then reports to the Board of Directors.

Residential loan originations are primarily generated by mortgage loan officer solicitations and referrals by employees, real estate professionals, and customers. Commercial real estate loan originations and commercial and industrial loan originations are primarily obtained through direct solicitation and additional business from existing customers. All completed loan applications are reviewed by the Bank’s loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment, and credit history of the applicant. The Bank also participates in commercial real estate loans and commercial and industrial loans originated by other financial institutions that are typically outside its market area. In addition, the Bank has purchased consumer loans originated by other financial institutions that are typically outside its market area. Loan quality is analyzed based on the Bank’s experience and credit underwriting guidelines depending on the type of loan involved. Except for loan participations with other financial institutions, real estate collateral is valued by independent appraisers whoThere have been ~~pre-approved by the Board Loan Committee.~~

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, certain appraisals are analyzed by management or by an outsourced appraisal review specialist throughout the year in order to ensure standards of quality are met. The Company also obtains an independent review of loans within the portfolio on an annual basis to analyze loan risk ratings and validate specific reserves on impaired loans.

~~In the nor~~mal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are disclosed but not reflected in its financial statements, including commitments to extend credit. At ~~September 30, 2021, commitments to extend credit, stand-by letters of credit, and rate lock commitments totaled $171.1 million.~~

The Bank makes local construction loans, including residential and land acquisition and development loans. These loans are secured by the property under construction and the underlying land for which the loan was obtained. The majority of these loans mature in one year. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction and land development loans sometimes involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction and land development lending is the fact that loan funds are advanced upon the security of the land or property under construction, which value is estimated based on the completion of construction. Thus, there is risk associated with failure to complete construction and potential cost overruns. To mitigate the risks associated with this type of lending, the Bank generally limits loan amounts relative to the appraised value and/or cost of the collateral, analyzes the cost of the project and the creditworthiness of its borrowers, and monitors construction progress. The Bank typically obtains a first lien on the property as security for its construction loans, typically requires personal guarantees from the borrower’s principal owners, and typically monitors the progress of the construction project during the draw period.

1-4 family residential lending activity may be generated by Bank loan officer solicitations and referrals by real estate professionals and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment, and credit history of the applicant. Residential mortgage loans generally are made on the basis of the borrower’s ability to make payments from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In addition to the Bank’s underwriting standards, loan quality may be analyzed based on guidelines issued by a secondary market investor. The valuation of residential collateral is generally provided by independent fee appraisers who have been approved by the Board Loan Committee. In addition to originating mortgage loans with the intent to sell to correspondent lenders or broker to wholesale lenders, the Bank also originates and retains certain mortgage loans in its loan portfolio.

Commercial real estate loans are secured by various types of commercial real estate typically in the Bank’s market area, including multi-family residential buildings, office and retail buildings, hotels, industrial buildings, and religious facilities. Commercial real estate loan originations are primarily obtained through direct solicitation of customers and potential customers. The valuation of commercial real estate collateral is provided by independent appraisers who have been approved by the Board Loan Committee. Commercial real estate lending entails significant additional risk, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history, and reputation. The Bank typically requires personal guarantees of the borrowers’ principal owners and considers the valuation of the real estate collateral.

Commercial and industrial loans generally have a higher degree of risk than loans secured by real estate, but typically have higher yields. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business. The loans may be unsecured or secured by business assets, such as accounts receivable, equipment, and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, any collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much reliability as real estate.

Also included in this category are loans originated under the SBA's PPP. PPP loans are fully guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA.

Loans to individual borrowers may be secured or unsecured, and include unsecured consumer loans and lines of credit, automobile loans, deposit account loans, and installment and demand loans. These consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss, or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on a proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.

~~Also included in this category are loans purchased through a third-party lending program. These portfolios include consumer loans and carry risks associated with the borrower,~~no material changes in the ~~economic environment, and~~Company’s lending policies disclosed in the vendor itself. The Company manages these risks through policies that require minimum credit scores and other underwriting requirements, robust analysis of actual performance versus expected performance, as well as ensuring compliance withAnnual Report on Form 10-K for the ~~Company's vendor management program.~~year ended December 31, 2021.

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, subordinated debt, and junior subordinated debt. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets. The provision for loan losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consists of income from service charges on deposit accounts, revenue from wealth management services, ATM and check card income, revenue from other customer services, income from bank owned life insurance, general and administrative expenses, amortization expense, and other real estate owned expense.

Net income increased by $2.1 million, or 86%, to $4.5 million, or $0.71 per diluted share, for the ~~three-month period~~three months ended September 30, ~~2021~~

~~Net interest income increased $2.2~~2022, compared to $2.4 million, or ~~29%,~~$0.38 per diluted share, for ~~the three-month period ended September 30, 2021, compared to~~ the same period ~~of 2020. An increase~~ in 2021. Return on average ~~earning~~ assets ~~of $383.8 million, or 43%,~~ was ~~partially offset by a 35-basis point decrease in the net interest margin to 3.06%. The acquisition of The Bank of Fincastle~~1.27% and return on ~~July 1, 2021 and an increase in~~ average ~~deposit balances resulted in growth of average earning assets. The decrease in the net interest margin~~equity was ~~primarily attributable to the change in the composition of average earning assets. Average loans, which was the highest yielding category, decreased to 60% of average earning assets~~17.27% for the third quarter of ~~2021,~~2022, compared to ~~73%~~0.71% and 8.64%, respectively, for the third quarter of 2020. Although average loans increased $118.3 million, lower yielding categories experienced higher growth, as average securities increased $106.4 million and Federal funds sold and interest-bearing depositssame period in ~~other banks combined increased $159.2 million.~~ 2021.

The increase in net income resulted primarily from a $2.0 million, or 20%, increase in net interest income, ~~was primarily attributable to~~ a ~~$2.0 million,~~$379 thousand, or ~~24%~~14%, increase in total ~~interest and dividend~~noninterest income, ~~from increases in both interest and fees on loans and interest and dividends on securities. Interest and fees on loans increased $1.6 million, or 22%, from an 18% increase in average loan balances~~ and a ~~13-basis point increase~~$343 thousand, or 4%, decrease in ~~the yield on loans. Accretion on deferred PPP fee income, net of origination costs, included in interest and fees on loans~~total noninterest expense. The provision for loan losses totaled $737 thousand for the period compared to $247 thousand for the same period of 2020. Accretion of loan discounts, net of premium amortization, on acquired loans included in interest and fees on loans totaled $238$200 thousand for the third quarter of ~~2021.~~2022. There was no ~~accretion or amortization of discounts or premiums during~~provision for loan losses for the same period of ~~2020. Interest~~2021.

Net income increased by $3.9 million, or 47%, to $12.0 million, or $1.92 per diluted share, for the nine months ended September 30, 2022, compared to $8.2 million, or $1.53 per diluted share, for the same period in 2021. Return on average assets was 1.14% and ~~dividends~~return on ~~securities increased $279 thousand, or 37%~~average equity was 15.12% for the nine months ended September 30, 2022, compared to 0.97% and 11.40%, respectively, for the same period in 2021.

The increase in net income resulted primarily from a ~~78%~~$8.8 million, or 36%, increase in ~~average securities balances,~~net interest income and a $1.2 million, or 18%, increase in total noninterest income, which ~~was~~were partially offset by a ~~53-basis point decrease~~$3.9 million, or 17%, increase in total noninterest expense and an increase in the ~~yield on total securities to 1.79%.~~

~~Total interest expense decreased by $176~~provision for loan losses. The provision for loan losses totaled $600 thousand ~~or 23%, which also contributed to~~for the increase in net interest income. Interest expense on deposits decreased $172 thousand, or 32%, from a 19-basis point decrease in the cost of interest-bearing deposits and was partially offset by a 35% increase in average interest-bearing deposit balances. The decrease in the cost of interest-bearing deposits was attributable to a reduction in interest rates paid on checking, money market and time deposits.

~~Net interest income increased $2.7~~2022, compared to a recovery of loan losses of $1.0 million ~~or 12%,~~ for ~~the nine-month period ended September 30, 2021, compared to~~ the same period of ~~2020. An increase~~2021.

For the third quarter of 2022, net interest income increased to $11.7 million from $9.7 million for the same period in ~~average earning assets of $236.4~~the prior year, which was a $2.0 million, or ~~29%~~20%, increase and was ~~partially offset~~favorably impacted by a 45-basis point decrease in the net interest margin to 3.13%. The acquisition of The Bank of Fincastle on July 1, 2021 and an increase in average deposit balances resulted in growth of average earning assets. The decrease in the net interest margin was attributable to decreases in earning asset yields and a change in the composition of average earning assets. Average ~~loans,~~loan balances increased by $124.7 million, or 16%, while average interest-bearing deposits in banks decreased by $122.0 million, or 61%, comparing the periods.

Total interest income increased by $2.5 million, which was partially offset by a $472 thousand increase in total interest expense. Net interest income increased primarily from a 52-basis point increase in the ~~highest yielding category,~~net interest margin to 3.58%. The increase in net interest margin resulted from a 65-basis point increase in the yield on average earning assets, which was partially offset by a 14-basis point increase in the cost of funds. The change in the composition of average earning assets had a significant impact on the increase in the yield on average earning assets as average loans increased to 68% from 60% of average earning assets, while average interest-bearing deposits in banks decreased to ~~64%~~6% from 16%, comparing the third quarter 2022 to the same period of 2021. The Bank’s acquisition of an $82.6 million loan portfolio from SmartBank on September 30, 2021 made a significant contribution to the increase in average loan balances when comparing the third quarter of 2022 to the same period of 2021. The loan portfolio acquisition occurred on the last day of the third quarter of 2021, and as a result, average loans and net interest income were not favorably impacted during the prior year period.

Net accretion of discounts on purchased loans was included in interest and fees on loans and totaled $295 thousand in the third quarter of 2022 compared to $238 thousand in the third quarter of 2021. Accretion of Paycheck Protection Program (“PPP”) loan income, net of costs was also included in interest and fees on loans. Net accretion of PPP income totaled $0 in the third quarter of 2022 compared to $737 thousand in the same period of 2021.

For the nine months ended September 30, 2022, net interest income increased to $33.6 million, which was an $8.8 million, or 36%, increase from $24.7 million for the same period in the prior year. The higher net interest income resulted from a 19% increase in average earning assets and a 44-basis point increase in the net interest margin.

The acquisition of The Bank of Fincastle (“Fincastle”) occurred on July 1, 2021 and made a greater impact on average earning assets for the ~~nine-month~~nine month period ending September 30, ~~2021, compared to 75%~~2022 than it did for the same period in 2021. The acquisition of ~~2020. Although~~Fincastle occurred on the first day of the third quarter of 2021, and as a result, average loans increased $58.6 million, increases in lower yielding categories experienced higher growth, as average securities increased $57.6 million and Federal funds sold and interest-bearing deposits in other banks combined increased $120.2 million. earning assets for the third quarter of 2021 was favorably impacted, while the first two quarters of 2021 were not impacted.

The increase in net interest ~~income was attributable to~~margin resulted from higher yields in all earning asset categories and no change in interest expense as a ~~$1.7 million, or 7%, increase~~percentage of average earning assets. The net interest margin also benefited from a favorable change in ~~total interest and dividend income, from increases in both interest and fees on loans and interest and dividends on securities. Interest and fees on~~the composition of average earning assets. As a percentage of average earning assets, average loans increased ~~$1.2~~to 68% from 64%, and total securities increased to 22% from 19%, while average interest-bearing deposits in banks decreased to 10% from 16%, comparing the periods. The Bank’s acquisition of an $82.6 million ~~or 6%,~~loan portfolio from ~~an 9%~~SmartBank on September 30, 2021 contributed to the increase in average loan balances ~~which was partially offset by a 17-basis point decrease in the yield on total loans to 4.63%. Accretion on deferred PPP fee income, net of costs, included in net interest income for~~when comparing the nine months ~~ended~~ending September 30, ~~2021 totaled $1.8 million compared~~2022 to ~~$429 thousand for~~ the same period of ~~2020. Accretion~~2021. The loan portfolio acquisition occurred on the last day of ~~loan~~the third quarter of 2021, and as a result, average loans and net interest income were not impacted during the nine-month period of the prior year.

Net accretion of discounts ~~net of premium amortization,~~ on ~~acquired~~purchased loans was included in interest and fees on loans and totaled $1.0 million for the nine-month period of 2022 compared to $238 thousand for the ~~nine months ended September 30,~~same period of 2021. ~~There~~Accretion of Paycheck Protection Program (“PPP”) loan income, net of costs was noalso included in interest and fees on loans. Net accretion ~~or amortization~~ of ~~discounts or premiums during~~PPP income totaled $358 thousand for nine-month period of 2022 compared to $1.8 million for the same period of 2020. Interest and dividends on securities increased $472 thousand, or 20%, from a 41% increase in average securities balances, which was partially offset by a 34-basis point decrease in the yield on total securities to 2.06%.2021.

Total interest expense decreased by $1.0 million, or 37%, which also contributed to the increase in net interest income. Interest expense on deposits decreased $1.1 million, or 51%, from a 31-basis point decrease in the cost of interest-bearing deposits and was partially offset by a 21% increase in average interest-bearing deposit balances. The decrease in the cost of interest-bearing deposits was attributable to a reduction in interest rates paid on checking, money market and time deposits.

Net interest income was negatively impacted by higher levels of nonaccrual loans during the beginning of the pandemic. Subsequently, nonaccrual loans decreased to $2.2 million at September 30, 2021, from $7.0 million at September 30, 2020. Loans to customers who are not able to make their loan payments to the Bank are placed on nonaccrual status, which causes a reversal of accrued interest receivable and interest income on loans. Recognition of interest on the loans will not resume until the borrowers can once again demonstrate their ability to repay. Net interest income may also be negatively impacted in future periods if total average earning assets decrease or unfavorable changes in the earning asset composition occur. An unfavorable change in the Company’s earning asset composition could occur if a decrease in loan demand causes a reduction in loan balances, the Bank’s highest yielding asset category. Decreases in market rates on earning asset yields could also have an unfavorable impact on net interest income in future periods.

The ability of loan customers to make loan payments and the potential of decreasing loan demand may depend on the length of time and extent the Bank’s loan customers experience business interruptions from the pandemic. During the fourth quarter of 2020 and the first half of 2021, the Bank modified certain loan agreements to provide payment relief to its customers by providing interest only payments for periods ranging between 6 and 24 months. The extent of asset quality deterioration that could result from the modified loans may be impacted by the continuation of customers' business interruptions beyond the modification periods.

The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):

Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)

	Three Months Ended																Three Months Ended
	September 30, 2021								September 30, 2020								September 30, 2022								September 30, 2021
	Average Balance			Interest Income/Expense		Yield/Rate			Average Balance			Interest Income/Expense		Yield/Rate			Average Balance			Interest Income/Expense		Yield/Rate			Average Balance			Interest Income/Expense		Yield/Rate
Assets
Securities:
Taxable	$	190,182		$	767		1.60	%	$	106,852		$	575		2.14	%	$	285,482		$	1,323		1.84	%	$	190,182		$	767		1.60	%
Tax-exempt ⁽¹⁾		49,492			306		2.46	%		26,994			193		2.83	%		54,319			389		2.84	%		49,492			306		2.46	%
Restricted		2,408			21		3.48	%		1,848			23		5.07	%		1,908			23		4.75	%		2,408			21		3.48	%
Total securities	$	242,082		$	1,094		1.79	%	$	135,694		$	791		2.32	%	$	341,709		$	1,735		2.01	%	$	242,082		$	1,094		1.79	%
Loans: ⁽²⁾
Taxable	$	762,623		$	9,185		4.78	%	$	644,259		$	7,537		4.65	%	$	890,696		$	10,759		4.79	%	$	762,623		$	9,185		4.78	%
Tax-exempt ⁽¹⁾		3,378			38		4.49	%		3,476			39		4.51	%		—			—		—			3,378			38		4.49	%
Total loans	$	766,001		$	9,223		4.78	%	$	647,735		$	7,576		4.65	%	$	890,696		$	10,759		4.79	%	$	766,001		$	9,223		4.78	%
Federal funds sold		65,514			8		0.05	%		—			—		0.00	%		1			—		—			65,514			8		0
Interest-bearing deposits with other institutions		199,372			78		0.15	%		105,698			25		0.09	%		77,388			380		1.95	%		199,372			78		0.15	%
Total earning assets	$	1,272,969		$	10,403		3.25	%	$	889,127		$	8,392		3.75	%	$	1,309,794		$	12,874		3.90	%	$	1,272,969		$	10,403		3.25	%
Less: allowance for loan losses		(5,450	)							(6,323	)							(6,152	)							(5,450	)
Total non-earning assets		69,728								61,586								89,667								69,728
Total assets	$	1,337,247							$	944,390							$	1,393,309							$	1,337,247
Liabilities and Shareholders’ Equity
Interest bearing deposits:
Checking	$	266,623		$	105		0.16	%	$	203,790		$	139		0.27	%	$	293,169		$	416		0.56	%	$	266,623		$	105		0.16	%
Regular savings		196,025			41		0.08	%		114,202			16		0.06	%		205,608			56		0.11	%		196,025			41		0.08	%
Money market accounts		182,350			47		0.10	%		157,769			110		0.27	%		215,199			284		0.52	%		182,350			47		0.10	%
Time deposits:
$100,000 and over		60,977			110		0.72	%		50,864			166		1.30	%		59,892			95		0.63	%		60,977			110		0.72	%
Under $100,000		86,565			66		0.30	%		58,861			110		0.74	%		72,847			76		0.42	%		86,565			66		0.30	%
Brokered		767			1		0.28	%		592			—		0.27	%		554			—		0.12	%		767			1		0.28	%
Total interest-bearing deposits	$	793,307		$	370		0.18	%	$	586,078		$	541		0.37	%	$	847,269		$	927		0.43	%	$	793,307		$	370		0.18	%
Federal funds purchased		—			—		0.00	%		—			—		0.00	%		—			—		—	%		—			—		0.00	%
Subordinated debt		9,993			155		6.17	%		9,984			160		6.37	%		4,995			70		5.50	%		9,993			155		6.17	%
Junior subordinated debt		9,279			68		2.91	%		9,279			68		2.92	%		9,279			68		2.91	%		9,279			68		2.91	%
Total interest-bearing liabilities	$	812,579		$	593		0.29	%	$	605,341		$	769		0.51	%	$	861,542		$	1,065		0.49	%	$	812,579		$	593		0.29	%
Non-interest bearing liabilities
Demand deposits		410,439								253,597								425,630								410,439
Other liabilities		4,076								3,558								3,795								4,076
Total liabilities	$	1,227,094							$	862,496							$	1,290,967							$	1,227,094
Shareholders’ equity		110,153								81,894								102,341								110,153
Total liabilities and Shareholders’ equity	$	1,337,247							$	944,390							$	1,393,308							$	1,337,247
Net interest income				$	9,810							$	7,623							$	11,809							$	9,810
Interest rate spread							2.95	%							3.24	%							3.41	%							2.95	%
Cost of funds							0.19	%							0.36	%							0.33	%							0.19	%
Interest expense as a percent of average earning assets							0.18	%							0.34	%							0.32	%							0.18	%
Net interest margin							3.06	%							3.41	%							3.58	%							3.06	%

	Nine Months Ended																Nine Months Ended
	September 30, 2021								September 30, 2020								September 30, 2022								September 30, 2021
	Average Balance			Interest Income/Expense		Yield/Rate			Average Balance		��	Interest Income/Expense		Yield/Rate			Average Balance			Interest Income/Expense		Yield/Rate			Average Balance			Interest Income/Expense		Yield/Rate
Assets
Securities:
Taxable	$	153,793		$	2,180		1.90	%	$	112,166		$	1,881		2.24	%	$	221,708		$	3,750		2.26	%	$	153,793		$	2,180		1.90	%
Tax-exempt (1)		42,446			806		2.54	%		26,651			575		2.88	%		57,359			1,166		2.72	%		42,446			806		2.54	%
Restricted		1,964			65		4.45	%		1,835			75		5.48	%		1,881			65		4.65	%		1,964			65		4.45	%
Total securities	$	198,203		$	3,051		2.06	%	$	140,652		$	2,531		2.40	%	$	280,948		$	4,981		2.37	%	$	198,203		$	3,051		2.06	%
Loans: (2)
Taxable	$	673,375		$	23,342		4.63	%	$	614,439		$	22,088		4.80	%	$	858,150		$	30,202		4.70	%	$	673,375		$	23,342		4.63	%
Tax-exempt (1)		3,400			114		4.49	%		3,737			125		4.49	%		733			24		4.49	%		3,400			114		4.49	%
Total loans	$	676,775		$	23,456		4.63	%	$	618,176		$	22,213		4.80	%	$	858,883		$	30,226		4.70	%	$	676,775		$	23,456		4.63	%
Federal funds sold		22,122			8		0.05	%		6			—		0.10	%		—			—		—			22,122			8		0.05	%
Interest-bearing deposits with other institutions		166,497			148		0.12	%		68,406			159		0.31	%		125,677			701		0.75	%		166,497			148		0.12	%
Total earning assets	$	1,063,597		$	26,663		3.35	%	$	827,240		$	24,903		4.02	%	$	1,265,508		$	35,908		3.79	%	$	1,063,597		$	26,663		3.35	%
Less: allowance for loan losses		(6,468	)							(5,591	)							(5,923	)							(6,468	)
Total non-earning assets		64,096								62,092								155,583								64,096
Total assets	$	1,121,225							$	883,741							$	1,415,168							$	1,121,225
Liabilities and Shareholders’ Equity
Interest bearing deposits:
Checking	$	242,821		$	321		0.18	%	$	187,755		$	569		0.40	%	$	294,386		$	671		0.31	%	$	242,821		$	321		0.18	%
Regular savings		152,424			80		0.07	%		109,600			49		0.06	%		207,302			108		0.07	%		152,424			80		0.07	%
Money market accounts		166,141			135		0.11	%		145,530			649		0.60	%		227,330			410		0.24	%		166,141			135		0.11	%
Time deposits:
$100,000 and over		47,991			292		0.81	%		52,533			555		1.41	%		62,230			258		0.55	%		47,991			292		0.81	%
Under $100,000		66,078			231		0.47	%		60,675			356		0.78	%		75,332			230		0.41	%		66,078			231		0.47	%
Brokered		647			2		0.37	%		575			1		0.26	%		556			3		0.73	%		647			2		0.37	%
Total interest-bearing deposits	$	676,102		$	1,061		0.21	%	$	556,668		$	2,179		0.52	%	$	867,136		$	1,680		0.26	%	$	676,102		$	1,061		0.21	%
Federal funds purchased		1			—		0.46	%		1			—		1.61	%		1			—		—			1			—		0.46	%
Subordinated debt		9,992			464		6.20	%		6,701			341		6.79	%		5,494			208		5.05	%		9,992			464		6.20	%
Junior subordinated debt		9,279			202		2.91	%		9,279			225		3.25	%		9,279			202		2.91	%		9,279			202		2.91	%
Other borrowings		—			—		—	%		—			—		0.00	%		—			—		—	%		—			—		0.00	%
Total interest-bearing liabilities	$	695,374		$	1,727		0.33	%	$	572,649		$	2,745		0.64	%	$	881,910		$	2,090		0.32	%	$	695,374		$	1,727		0.33	%
Non-interest bearing liabilities
Demand deposits		327,263								228,042								423,069								327,263
Other liabilities		2,728								2,822								4,035								2,728
Total liabilities	$	1,025,365							$	803,513							$	1,309,014							$	1,025,365
Shareholders’ equity		95,860								80,228								103,285								95,860
Total liabilities and Shareholders’ equity	$	1,121,225							$	883,741							$	1,412,299							$	1,121,225
Net interest income				$	24,936							$	22,158							$	33,818							$	24,936
Interest rate spread							3.02	%							3.38	%							3.48	%							3.02	%
Cost of funds							0.23	%							0.46	%							0.21	%							0.23	%
Interest expense as a percent of average earning assets							0.22	%							0.44	%							0.22	%							0.22	%
Net interest margin							3.13	%							3.58	%							3.57	%							3.13	%

The ~~Bank did not record a~~provision for loan losses totaled $200 thousand for the third quarter of 2022. There was no provision for loan losses for the ~~third quarter~~same period of ~~2021, which resulted in a total allowance for loan losses of $5.4 million, or 0.66% of total loans, at September 30,~~ 2021. Excluding loans acquired from Fincastle and SmartBank, which did not require an allowance for loan losses under acquisition accounting, the allowance for loan losses totaled 0.94% of total loans at September 30, 2021. ~~This compared to a~~The provision for loan losses ~~of $1.5 million for the third quarter of 2020~~resulted from net charge-offs and an ~~allowance for loan losses of $7.8 million, or 1.20% of total loans, at September 30, 2020. The allowance for loan losses totaled $7.5 million, or 1.19% of total loans, at December 31, 2020.~~

~~A provision for loan losses was not recorded for the third quarter of 2021 as a decrease~~increase in the general reserve component of the allowance for loan ~~losses was offset by net charge-offs on loans.~~losses. The increase in the general reserve component resulted from loan growth during the quarter and was partially offset by an improvement to a qualitative factor. The qualitative factor related to asset quality was improved for the other real estate loan category as all loans that had modified loan payments in prior years under the CARES Act resumed original contractual loan payments. There were no specific reserves on impaired loans on September 30, 2022, compared $55 thousand of specific reserves on December 31, 2021, and $84 thousand on September 30, 2021. Net charge-offs totaled $111 thousand during the third quarter of 2022, compared to $31 thousand of net charge-offs for the same period of 2021.

The allowance for loan losses ~~decreased primarily from adjustments to qualitative factors, which resulted from the Bank's observation~~totaled $6.3 million, or 0.69% of ~~improved economic conditions. Net charge-offs totaled $31 thousand for the third quarter of 2021,~~total loans on September 30, 2022, compared to ~~$19 thousand for the same period in 2020. There were no significant changes to the specific reserve component~~$5.7 million, or 0.69% of ~~the allowance for loan losses during the quarter.~~total loans on December 31, 2021, and $5.4 million, or 0.66% of total loans on September 30, 2021. The net discount on purchased loans totaled $2.7 million on September 30, 2022, $3.7 million on December 31, 2021, and $3.8 million on September 30, 2021.

The provision for loan losses totaled $600 thousand for the ~~third quarter~~nine months ended September 30, 2022, compared to a $1.0 million recovery of ~~2020 was~~loan losses for the same period of 2021. The provision for loan losses resulted primarily ~~attributable to an~~from a $637 thousand increase in the ~~specific~~general reserve component of the allowance for loan losses, which was partially offset by a decrease in the general reserve component. The increase in the specific reserve component of the allowance for loan losses included reserves placed on newly identified impaired loans and an increase in a reserve on a loan evaluated in a prior period. The general reserve component of the allowance for loan losses decreased primarily from adjustments to qualitative factors, which resulted from the Bank's observation of improved economic conditions and a reduction in the number and amount of loans participating in the Bank's loan payment deferral program.

For the nine months ended September 30, 2021, the Bank recorded a recovery of loan losses of $1.0 million as an increase in the general reserve component of the allowance for loan losses was offset by a$55 thousand decrease in the specific reserve component. The general reserve component of the allowance for loan losses increased primarily from a higher historical loss reserve. These increases were partially offset by decreases in the general reserve that resulted from upgrades to qualitative factors related to asset quality and economic conditions. The decrease in the specific reserve component of the allowance for loan losses resulted primarily from the resolution of a previously impaired loan.

The Bank recorded a provision for loan losses of $3.2 million for the nine months ended September 30, 2020, which was attributable to increases in both the general and specific reserve components of the allowance for loan losses. The general reserve component of the allowance for loan losses increased primarily from adjustments to qualitative factors, which resulted from the Bank’s observation of unfavorable changes in economic indicators impacted by the pandemic, consideration of risks associated with loans participating in the Bank's loan payment deferral program, and an increase in substandard loan amounts. The increase in the specific reserve component of the allowance for loan losses included reserves placed on newly identified impaired loans and an increase in a reserve on a loan evaluated in a prior period. Net charge offs on loans also contributed to the provision for loan losses, which totaled $357 thousand for the first nine months of 2020.

The Bank may experience a higher provision for loan losses in future periods from factors including higher specific reserves on newly identified impaired loans, higher levels of net charge-offs, and additional adjustments to qualitative factors in the general reserve component ofresulted from loan growth during the ~~allowance~~period and was partially offset by improvements to qualitative factors. During the nine-month period ended September 30, 2022, the qualitative factor related to asset quality was improved for the commercial and industrial and the other real estate loan ~~losses. The Bank believes~~categories, and the ~~length of time and extent that the Bank’s customers experience business interruptions from the pandemic will impact the amount of provision~~factor related to economic conditions was improved for all loan ~~losses in future periods.~~categories.

~~For the three-month period ended~~Three Month Period Ended September 30, ~~2021~~2022

Noninterest income increased ~~$447~~$379 thousand, or ~~20%~~14%, to ~~$2.6~~$3.0 million for the third quarter of 2022, compared to the same period of ~~2020. The increase was primarily attributable to a $101 thousand, or 23%, increase in service~~2021. Service charges on deposits ~~a $84~~increased $161 thousand, or ~~23%~~29%, ~~increase in~~ ATM and check card fees ~~a $123~~increased $162 thousand, or ~~21%~~22%, ~~increase in~~ wealth management fees ~~and a $111~~increased $43 thousand, or ~~34%~~6%, ~~increase in fees for~~and other ~~customer services.~~

~~Service charges on deposits benefited from an increase in overdraft fee~~operating income the increase in ATM and check card fees was attributable to the addition of new customer deposit accounts through the Merger with Fincastle, wealth management revenue increased from a higher amount of assets under management, and the increase in fees for other customer services was impactedincreased $191 thousand. These increases were partially offset by an ~~increase in mortgage fee income.~~

~~Noninterest income increased $1.2 million, or 19%, to $7.2 million compared to the same period of 2020. The increase was primarily attributable to a $298~~$83 thousand, or ~~17%~~54%, ~~increase~~decrease in ~~ATM and check card fees, a $386 thousand, or 24%, increase in wealth management~~brokered mortgage fees, and a ~~$260~~$99 thousand, or ~~34%~~35%, ~~increase~~decrease in fees for other customer services.

The increases in service charges on deposits and ATM and check card fees were impacted by an increase in customer transactions. The increase in ATM and check card fees was also attributable to the ~~addition~~timing of ~~new customer deposit accounts through~~annual check card revenue that was received in third quarter of 2022, compared to the ~~Merger with Fincastle and~~prior year when it was received during the fourth quarter. The increase in wealth management income was attributable to an increase in ~~customer check card transactions. Wealth management revenue increased~~the number of client accounts. The increase in other operating income was primarily a result of a $170 thousand death benefit payment received from a ~~higher amount~~bank-owned life insurance policy. Brokered mortgage fees decreased from a reduction in the number of ~~assets under management.~~mortgage loans originated. The ~~increase~~decrease in fees for other customer services ~~was~~resulted from higher amounts of fees earned on loans in the third quarter of the prior year.

Noninterest income increased $1.3 million, or 18%, to $8.5 million for the nine months ended September 30, 2022, compared to the same period of 2021. Service charges on deposits increased $579 thousand, or 40%, ATM and check card fees increased $426 thousand, or 21%, wealth management fees increased $306 thousand, or 15%, and other operating income increased $178 thousand, or 60%. The increases were partially offset by a $192 thousand, or 46%, decrease in brokered mortgage fees.

The increases in service charges on deposits and ATM and check card fees were favorably impacted by an increase in customer transactions and addition of customers from the acquisition of The Bank of Fincastle on July 1, 2021. The increase in wealth management income was attributable to an increase in the number of client accounts. The increase in other operating income was due primarily to a $170 thousand death benefit payment received from a bank-owned life insurance policy. Brokered mortgage ~~fee income~~fees decreased from a reduction in the number of mortgage loans originated.

The number of customer overdrafts and resulting income from service charges on deposits decreased significantly in the second quarter of 2020. The Bank believes this may have resulted from a reduction in consumer spending due to government stay at home orders, social distancing, and an increase in unemployment. The lower amount of overdrafts may have also been impacted by receipt of government stimulus checks and an increase in the average balances of customer deposit accounts. The Bank also suspended certain overdraft fees at the beginning of the second quarter of 2020 in an effort to provide relief to its customers who may have experienced financial difficulties related to the pandemic. The suspension of the overdraft fees ended on September 30, 2020. Service charges on deposits may continue to remain at recent levels, or decrease, depending on factors that include customer spending behaviors and the balances of customer deposit accounts.

ATM and check card fee revenue could also decrease in future periods as customers may spend and visit ATM machines less during periods of uncertainty. Wealth management revenue may decrease in future periods if the market values of investments decline and mortgage fee income may decrease if the number of home purchases and refinancing activity slows in the Bank's market area.

Noninterest expense decreased $343 thousand, or 4%, to $9.1 million for the three-month period ended September 30, ~~2021~~2022, compared $9.4 million for the same period one year ago. The decrease was primarily attributable to a $272 thousand, or 5% decrease in salaries and employee benefits, a $225 thousand, or 38%, decrease in legal and professional expense, and a $222 thousand, or 48%, decrease in data processing expense, which were partially offset by a $276 thousand, or 30% increase in other operating expense and an $85 thousand, or 56%, increase in bank franchise tax expense.

Costs related to the acquisition of Fincastle and the acquisition of the loan portfolio and branch assets from SmartBank totaled $1.3 million in the third quarter of 2021 and had a significant impact on the decrease in noninterest expense when comparing the third quarter of 2022 to the same period of 2021, as merger related costs decreased to $0 for the three months ended September 30, 2022. The decreases in merger related costs impacted legal and professional expense and data processing expense comparing the periods. The decrease in salaries and employee benefits reflected the reduction of operating costs and efficiencies created from the merger of Fincastle into First Bank.

The increase in other operating expense resulted primarily from an increase in education and training, courier and armored services, and an increase in losses related to customer account fraud. Bank franchise tax increased primarily from the growth of the balance sheet that resulted from the Fincastle acquisition.

Noninterest expense increased ~~$3.3~~$3.9 million, or ~~54%~~17%, to ~~$9.4~~$26.6 million for the nine-month period ended September 30, 2022, compared to $22.7 million for the same period one year ago. The increase was primarily attributable to a $2.7 million, or 21% increase in salaries and employee benefits, a $342 thousand, or 25%, increase in equipment expense, a $310 thousand, or 23%, increase in occupancy expense, a $154 thousand, or 19%, increase in ATM and check card expense, a $159 thousand, or 68%, increase in FDIC assessment, a $98 thousand, or 20%, increase in marketing, a $199 thousand, or 40%, increase in bank franchise tax, and a $786 thousand, or 36%, increase in other operating expense. These increases were partially offset by a $731 thousand, or 40%, decrease in legal and professional fees and a $185 thousand, or 21% decrease in data processing expense.

The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle on July 1, 2021 and the acquisition of the loan portfolio, branch assets and the addition of employees from SmartBank on September 30, 2021. The decreases in legal and professional fees and data processing were primarily attributable to merger related costs during the first nine months of 2021. Merger related expenses totaled $20 thousand for the first nine months of 2022 compared to $2.0 million for the same period of 2021.

Income tax expense increased $455 thousand for the third quarter of 2022, compared to the same period one year ago. Merger related expenses totaled $1.3 million during the quarter and were comprised of $911 thousand of salaries and employee benefits, $37 thousand of marketing expense, $25 thousand of supplies, $196 thousand of legal and professional fees, $106 thousand data processing fees, and $24 thousand of other operating expense. In addition, several noninterest expense categories also increased during the third quarter as a result of adding employees, customers and branch offices from the merger of The Bank of Fincastle with and into First Bank on July 1, 2021. Expenses that increased during the quarter as a result of the merger were salaries and employee benefits, occupancy, equipment, marketing, supplies, ATM and check card expense, FDIC assessment, data processing, and other operating expense. The Company estimates it will incur an additional $1.4 million of merger related expense throughout the fourth quarter of 2021 and first quarter of 2022.

Noninterest expense increased $4.8 million, or 27%, to $22.7 million, compared to the same period one year ago. Merger related expenses totaled $2.0 million and were comprised of $911 thousand of salaries and employee benefits, $53 thousand of marketing expense, $79 thousand of supplies, $782 thousand of legal and professional fees, $106 thousand data processing fees, and $51 thousand of other operating expense. In addition, several noninterest expense categories also increased during the nine-month period as a result of adding employees, customers and branch offices from the merger with Fincastle. Expenses that increased during the period as a result of the merger were salaries and employee benefits, occupancy, equipment, marketing, supplies, ATM and check card expense, FDIC assessment, data processing, and other operating expense.

If asset quality deteriorates as a result of the pandemic, the Bank may incur an increase in expenses related to the resolution of problem loans including appraisal costs, legal and professional fees, OREO expenses and losses on the sale of OREO. The Bank believes the length of time and extent that the Bank’s customers experience business interruptions from the pandemic may impact the amount of noninterest expense in future periods.

~~Income~~effective tax ~~expense increased $176 thousand f~~orrate for the third quarter of ~~2021, and increased by $799~~2022 was 18.6% compared to 19.0% for the ~~nine months ended September 30, 2021,~~same period in 2021. The reduced effective tax rate for 2022 was the result of lower non-deductible expenses and higher non-taxable income in 2022 compared to ~~the same periods one year ago.~~2021. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three ~~and nine~~ months ended September 30, ~~2021~~2022, and ~~2020.~~2021. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Income tax expense increased $731 thousand, or 35%, for the first nine months of 2022 compared with the same period in 2021. The effective tax rate for the first nine months of 2022 was 19.0% compared with 20.4% for the same period in 2021. Like the three month period ended September 30, 2022, the reduced effective tax rate for 2022 was also the result of lower non-deductible expenses and higher non-taxable income in 2022 compared to 2021.

Assets totaled $1.4 billio~~Total~~n on September 30, 2022, which was a slight decrease of $5.8 million from December 31, 2021. Although there was not a significant change in total assets, the asset composition changed notably as total loans increased ~~$404.9~~by $81.4 million, or 10%, to $906.5 million and resulted in a loan-to-asset ratio of 66% compared to 59% at year-end. While loans increased, interest-bearing deposits in banks decreased by $104.3 million to ~~$1.4~~$53.0 million, or 4% of total assets compared to 11% of total assets at year-end.

Total liabilities increased by $12.1 million to $1.3 billion at on September 30, ~~2021~~,2022, compared to ~~$950.9 million at~~ December 31, ~~2020~~.2021, as total deposits increased by $17.3 million and was partially offset primarily by a $5.0 million decrease in subordinated debt. Deposits totaled $1.3 billion and was an increase of $17.3 million, or 1%, from December 31, 2021. The ~~increase~~deposit composition changed slightly as noninterest-bearing demand deposits increased by $25.1, or 6%, to $438.3 million and represented 35% of total deposits, up from 33% of total deposits at year-end. While noninterest-bearing deposits increased, savings and interest-bearing deposits and time deposits decreased slightly as a percentage of total deposits. On January 1, 2022, the Company repaid $5.0 million of subordinated debt with a fixed interest rate of 6.75%.

Total shareholders’ equity decreased $18.0 million to $99.1 million on September 30, 2022, compared to $117.0 million on December 31, 2021. This was primarily attributable to the acquisition of the Bank of Fincastle which added $267.2 million in assets on July 1, 2021. Loans, net of the allowance for loan losses increased $194.5 million or 31%. Securities increased $126.3 million or 90%. Federal funds purchased increased by $80.6 million. The increase in the loan portfolio was impacted by $194.5 million of loans purchased on July 1, 2021 ~~through the acquisition of Fincastle, an $82.0 million loan portfolio acquisition from SmartBank on September 30, 2021, and~~ a ~~$41.9 million decrease in PPP loan balances, comparing the same periods.~~

At ~~September 30, 2021, total liabilities increased $372.9 million to $1.2 billion compared to $866.0 million at~~ ~~December 31, 2020~~. The increase was primarily attributable to the acquisition of Fincastle which added total liabilities of $238.0 million in July 1, 2021. Total deposits increased by $370.1 million, which included $236.3 million in total deposits acquired from Fincastle on July 1, 2021. Proceeds from PPP loan originations and the receipt of government stimulus checks by customers during 2021 also contributed to the increase in deposits. Noninterest-bearing demand deposits and savings and interest-bearing demand deposits increased $148.3 million and $173.6 million, respectively, while time deposits increased $48.2 million.

~~Total shareholders’ equity increased $32.0 million to $116.9 million at~~ ~~September 30, 2021, compared to $84.9 million at~~ ~~December 31, 2020~~. The increase was primarily attributable to the issuance of common stock in the amount of $1.7 million and acquired surplus of $25.4 million in the acquisition of Fincastle. Other notable increases include a $6.2 million increase in retained earnings. This increase was partially offset by a $1.7$28.1 million decrease in accumulated other comprehensive ~~income. Tangible common equity totaled $112.7~~(loss) income (AOCI). The decrease in AOCI was related to unrealized losses in the available-for-sale securities portfolio stemming from market rate increases during the first nine months of 2022. This decrease was partially offset by a $9.4 million ~~at the end of the~~ ~~third~~ ~~quarter, an~~ increase ~~of 33% compared to $84.9 million at~~ ~~December 31, 2020~~.in retained earnings. The Company's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Loans, net of the allowance for loan losses, increased ~~$194.5~~$80.8 million to ~~$817.0~~$900.2 million aton September 30, ~~2021,~~2022, compared to ~~$622.4~~$819.4 million aton December 31, ~~2020. Construction loans increased by $17.8 million. Commercial real estate loans and~~2021. This change was primarily due to increases in residential real estate, commercial real estate, and commercial and industrial loans ~~also increased by $115.8~~of $25.4 million, $52.9 million, and ~~$58 thousand,~~$12.6 million, respectively, during the first nine months of ~~2021. Commercial~~2022. Construction and industrial loans decreased by $4.2 million during the first nine months of 2021. The decrease in commercial and industrial loans was a result of $41.2 million decrease in PPP loans during the first nine months of 2021.

~~The Company, through its banking subsidiary, grants mortgage, commercial, and consumer loans to customers. The Bank segments its loan portfolio into real estate loans, commercial and industrial~~land development loans and consumer and other loans decreased by $4.4 million and $3.8 million, respectively, during the same period.

The Bank actively participated as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to support local small businesses and non-profit organizations by providing forgivable loans. ~~Real estate~~Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $471 thousand on September 30, 2022, and the loans are ~~further divided into~~scheduled to mature in the ~~following classes: Construction~~first and ~~Land Development; 1-4 Family Residential;~~second quarters of 2026. The total amount of deferred PPP income, net of origination costs, that has not yet been recognized through interest and ~~Other Real Estate Loans. Descriptions~~fees on loans totaled $8 thousand on September 30, 2022. The Company believes the loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan ~~classes are as follows:~~losses through additional provision for loan losses charged to earnings.

~~Real Estate Loans – Construction and Land Development~~~~: The Company originates construction~~During the fourth quarter of 2020, the Bank modified terms of certain loans for ~~the acquisition and development of land and construction of commercial buildings, condominiums, townhomes, and one-to-four family residences.~~

~~Real Estate Loans – 1-4 Family~~~~: This class of loans includes loans secured by one-to-four family homes. In addition~~customers that continued to ~~traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.~~

~~Real Estate Loans – Other~~: This loan class consists primarily of loans secured by various types of commercial real estate typically in the Bank’s market area, including multi-family residential buildings, office and retail buildings, industrial and warehouse buildings, hotels, and religious facilities.

~~Commercial and Industrial Loans:~~ ~~Commercial loans may~~ be unsecured or secured with non-real estate commercial property. The Company's banking subsidiary makes commercial loans to businesses located within its market area and also to businesses outside of its market area through loan participations with other financial institutions. Loans originated under the SBA's PPP are also included in this loan class.

~~Consumer and Other Loans~~: Consumer loans include all loans made to individuals for consumer or personal purposes. They include new and used automobile loans, unsecured loans, and lines of credit. The Company's banking subsidiary makes consumer loans to individuals located within its market area. The Bank has also made loans to individuals outside of its market area through the purchase of loans from another financial institution. Other loans in this category include loans to state and political subdivisions.

A substantial portion of the loan portfolio is represented by residential and commercial loans secured by real estate throughout the Bank's market area. The ability of the Bank’s debtors to honor their contracts may benegatively impacted by the ~~real estate~~pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6 and ~~general economic conditions in this area.~~24 months. All loans that were modified have resumed original contractual loan payments as of September 30, 2022.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of purchase premiums and discounts, recognized evenly over the life of the loans.

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. Loans greater than 90 days past due and still accruing totaled $7$306 thousand aat t September 30, ~~2021, compared to $302 thousand~~2022. There were no loans greater than 90 days past due and still accruing at December 31, ~~2020.~~2021. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When a loan is returned to accrual status, interest income is recognized based on the new effective yield to maturity of the loan.

Any unsecured loan that is deemed uncollectible is charged-off in full. Any secured loan that is considered by management to be uncollectible is partially charged-off and carried at the fair value of the collateral less estimated selling costs. This charge-off policy applies to all loan segments.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (net of selling costs), and the probability of collecting scheduled principal and interest payments when due. Additionally, management generally evaluates substandard and doubtful loans greater than $250 thousand for impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value of the collateral, net of selling costs, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company typically does not separately identify individual consumer, residential, and certain small commercial loans that are less than $250 thousand for impairment disclosures, except for troubled debt restructurings (TDRs) as noted below. The recorded investment in impaired loans totaled ~~$2.2 million~~$566 thousand and ~~$6.7~~$2.3 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

In situations where, for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status, and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. There we~~re $1.7 million~~ were $110 thousand in loans classified as TDRs asas of September 30, ~~2021~~2022 and ~~$6.0~~$1.6 million as of December 31, ~~2020.~~2021.

Management classifies ~~non-performing~~non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $2.1 million and $4.2 million at September 30, 2022 and December 31, 2021, representing approximately 0.15% and 0.30% of total assets, respectively. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in branch operations, ~~or expansion~~ but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank had $1.6 million and $1.8 million in assets classified as OREO at September 30, ~~2021~~2022~~. The Bank did not have any assets classified as OREO at~~ and December 31, ~~2020~~.

~~Non-performing assets totaled $4.0 million and $6.7 million at~~ ~~September 30,~~ 2021 ~~and~~ ~~December 31, 2020~~, ~~representing approximately 0.30% and 0.71% of total assets,~~ respectively. ~~Non-performing assets consisted of~~ OREO ~~and non-accrual loans at~~ ~~September 30, 2021. Non-performing assets consisted only of non-accrual loans at~~ ~~December 31, 2020~~. The decrease in non-accrual loans was primarily attributable to the resolution of a $4.3 million loan that was partially charged-off. This decrease was partially offset by $2.0 million of nonperforming assets acquired from the Bank of Fincastle, including $1.8included $1.6 million in properties formerly classified as bank premises by ~~the~~The Bank of Fincastle which are now classified as held for sale.

At September 30, ~~2021~~2022, 4%21% of non-performing assets were ~~commercial real estate loans, 3% were construction loans, 38% were commercial and industrial loans, and 12% were~~comprised of residential real estate loans. Additionally, ~~43%~~79% was ~~related to properties acquired from the Bank~~comprised of ~~Fincastle which will not be used in the Company's operations and are classified as held for sale.~~OREO. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled ~~$319~~$304 thousand and ~~$1.4~~$1.1 million at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.

Loans greater than 90 days past due and still accruing totaled $7$306 thousand at September 30, ~~2021~~2022. ~~Loans that~~There were no loans greater than 90 days past due and still accruing ~~totaled $302 thousand~~ at December 31, ~~2020~~2021.

The allowance for loan losses represents management’s analysis of the existing loan portfolio and related credit risks. The provision for loan losses is based upon management’s current estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses totaled ~~$5.4~~$6.3 million at September 30, ~~2021~~2022 and ~~$7.5~~$5.7 million December 31, ~~2020~~2021, representing ~~0.66%~~0.69% and ~~1.19%~~0.69% of total loans, respectively. For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above.

~~Recoveries of~~Provision for loan losses ~~of $25~~totaling $99 thousand, ~~$97~~$331 thousand, ~~$813~~$69 thousand, and ~~$81~~$123 thousand were recorded in the construction and land development, ~~1-4 family residential,~~ other real estate, ~~and~~ commercial and industrial, and consumer and other loan classes, respectively, during the nine months ended September 30, ~~2021~~2022. The provisions were offset by a recovery of loan losses of $22 thousand in the construction and land development and 1-4 family residential loan classes resulted primarily from decreases in the general reserves. The decrease in the general reserve for the construction and land development loan class resulted primarily from adjustments to qualitative factors for improvements in asset quality and economic conditions. The decrease in the general reserve for the 1-4 family residential loan class resulted primarily from improvements in the historical loss rate and an adjustment to qualitative factors for improvements in economic conditions. The recovery of loan losses in the other real estate loan category resulted primarily from a decrease in the specific reserve, which was partially offset by charge-offs on loans. The decrease in the specific reserve resulted from the resolution of a previously impaired loan for which a specific reserve was calculated. The recovery of loan losses in the commercial and industrial loan category resulted primarily from a decrease in the specific reserve. The decrease in the specific reserve resulted from a decrease in a reserve on a loan evaluated in a prior period. These recoveries were partially offset by provision for loan losses of $16 thousand in the consumer and other loanloans class. For more detailed information regarding the provision for (recovery of) ~~provision for~~ loan losses, see Note 4 to the Consolidated Financial Statements.

Impaired loans totaled ~~$2.2 million~~$566 thousand and ~~$6.7~~$2.3 million at September 30, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. There was no related allowance for loan losses recorded for these loans at September 30, 2022. The related allowance for loan losses provided for these loans totaled ~~$84~~$55 thousand ~~and $2.2 million~~ at~~September 30, 2021~~ ~~and~~ December 31, ~~2020~~2021. The average recorded investment in impaired loans during the nine months ended September 30, ~~2021~~2022 and the year ended December 31, ~~2020~~2021 was ~~$5.4~~$1.4 million and ~~$3.9~~$4.5 million, respectively. Included in the impaired loans total are loans classified as TDRs totaling ~~$1.7 million~~$110 thousand and ~~$6.0~~$1.6 million at September 30, ~~2021~~2022 and December 31, ~~2020~~2021., respectively. Loans classified as TDRs represent situations in which a modification to the contractual interest rate or repayment structure has been granted to address a financial hardship. As of September 30, ~~2021~~2022, none of these TDRs were performing under the restructured terms and all were considered non-performing assets.

Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio. For each period presented, the provision for loan losses charged to expense was based on management’s judgment after taking into consideration all factors connected with the collectability of the existing portfolio. Management considers economic conditions, historical loss factors, past due percentages, internally generated loan quality reports, and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that an additional provision for loan losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for loan losses, see “Critical Accounting Policies” above.

The Bank anticipated the pandemic to have an unfavorable impact on the financial condition of many of its customers, and as a result, identified the related credit risk within its loan portfolio throughout 2020 and the first half of 2021, with the goal of mitigating the risk and minimizing potential loan charge-offs. In keeping with guidance from regulators, the Company worked with certain COVID-19 affected borrowers to reduce their loan payments by modifying the loan agreements to allow for interest only payments. These loans were not considered TDRs because they were modified in accordance with relief provisions of the CARES Act. The loan modification periods ranged from 6 months to 24 months and were intended to provide payment relief to borrowers over the period of time that COVID-19 is expected to continue to negatively affect the profitability of the borrowers’ businesses. Although the modified loan payments have been made as agreed and interest income has been recognized by the Company, should the borrowers be negatively affected by COVID-19 for a period of time that extends beyond the loan modification periods, it’s possible the borrowers may not be able to resume regular principal and interest payments in future periods and the Company may no longer be able to accrue interest income on the loans. The extent of asset quality deterioration that could result from these modified loans may be impacted by the continuation of customers' business interruptions beyond the modification periods.

The securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value. Restricted securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.

~~Securities at~~ On September 30, ~~2021~~2022 securities totaled ~~$278.5~~$333.2 million, an increase of ~~$122.2~~$8.5 million, or ~~78.0%~~2.6%, from ~~$156.3~~$324.7 million at December 31, ~~2020.~~2021. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of September 30, ~~2021,~~2022, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio t~~otaled $2.8~~totaled $133 thousand and $2.0 million ~~and $4.0 million~~at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Gross unrealized losses in the available for sale portfolio totaled ~~$1.7~~$30.3 million and ~~$82 thousand~~$2.6 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Gross unrealized gains in the held to maturity portfolio totaled ~~$218~~ $0 and $242 thousand ~~and $509 thousand~~ at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Gross unrealized losses in the held to maturity portfolio totaled $2$12.0 million and $66 thousand at September 30, ~~2021 There were no gross unrealized losses in the held to maturity portfolio at~~ 2022 and December 31, ~~2020.~~2021. Investments in an unrealized loss position were considered temporarily impaired at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The change in the unrealized gains and losses of investment securities from December 31, ~~2020~~2021 to September 30, ~~2021~~2022 was related to changes in market interest rates and was not related to credit concerns of the issuers.

~~Deposits~~On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $157 thousand, or $124 thousand net of tax, for the third quarter of 2022. The securities selected for transfer had larger potential decreases in their fair market values in higher interest rate environments than most of the other securities in the available-for-sale portfolio and included U.S. Treasury, agency, municipal and commercial mortgage-backed securities. The securities were transferred to mitigate the potential unfavorable impact that higher market interest rates may have on the carrying value of the securities and on the related accumulated other comprehensive loss. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.

At September 30, 2022, the securities portfolio was comprised of $176.4 million of securities available for sale and $154.9 million of securities held to maturity compared to $289.5 million and $33.4 million at December 31, 2021, respectively. Securities held to maturity increased by $43.8 million during the first nine months of 2022 as a result of the transfer disclosed above and new purchases as a part of the Company's strategy to mitigate the risk of potential fluctuations in value and the related impact on total shareholders' equity.

At September 30, 2022, deposits totaled ~~$1.2~~$1.3 billion, an ~~increa~~seincrease of ~~$370.1 million,~~$17 thousand, from ~~$842.5 million~~$1.2 billion at December 31, ~~2020~~2021. There was a slight change in the deposit mix when comparing the periods. At September 30, ~~2021~~2022, noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits composed 34%, ~~54%~~55%, and ~~12%~~11% of total deposits, respectively, compared to ~~31%~~33%, 57%, and ~~12%~~10% at December 31, ~~2020~~2021.

Liquidity represents the ability to meet present and future financial obligations through either the sale or maturity of existing assets or with borrowings from correspondent banks or other deposit markets. The Company classifies cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, investment securities, and loans maturing within one year as liquid assets. As part of the Bank’s liquidity risk management, stress tests and cash flow modeling are performed quarterly.

As a result of the Bank’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Bank maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ borrowing needs.

At September 30, ~~2021~~2022, cash, interest-bearing and noninterest-bearing deposits with banks, securities, and loans maturing within one year totaled ~~$274.5~~$163.4 million. At September 30, ~~2021~~2022, ~~9.0%~~9.6% or ~~$74.0~~$86.7 million of the loan portfolio matured within one year. Non-deposit sources of available funds totaled ~~$239.0~~$300.7 million at September 30, ~~2021~~2022, which included ~~$159.4~~$204.6 million of secured funds available from Federal Home Loan Bank of Atlanta (FHLB), ~~$24.6~~$45.2 million of secured funds available through the Federal Reserve Discount Window, and $51.0 million of unsecured federal funds lines of credit with other correspondent banks.

Although the Bank’s liquidity has not been negatively impacted by the pandemic during the second quarter of 2021, it could be reduced in future periods. Factors that could reduce the Bank’s liquidity include a reduction in cash inflows from loan customers if they would experience financial difficulties and are not able to make contractual payments. Other factors that could reduce liquidity include decreasing customer deposit balances, increasing customer draws on their lines of credit with the Bank, and a reduction in the available lines of credit from correspondent banks. The Bank actively manages and monitors liquidity risk in order to maintain sufficient liquidity to meet the demand from its customers.

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the Company’s asset and liability levels and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015 and is ~~no longer~~not obligated to report consolidated regulatory capital.

Effective January 1, 2015, the Bank became subject to capital rules adopted by federal bank regulators implementing the Basel III regulatory capital reforms adopted by the Basel Committee on Banking Supervision (the Basel Committee), and certain changes required by the Dodd-Frank Act.

The minimum capital level requirements applicable to the Bank under the final rules are as follows: a new common equity Tier 1 capital ratio of 4.5%; a Tier 1 capital ratio of 6%; a total capital ratio of 8%; and a Tier 1 leverage ratio of 4% for all institutions. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer was phased-in over four years and, as fully implemented effective January 1, 2019, requires a buffer of 2.5% of risk-weighted ~~assets.~~assets. This results in the following minimum capital ratios beginning in 2019: a common equity Tier 1 capital ratio of 7.0%, a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary ~~bonuse~~sbonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. Management believes, as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.

The following table shows the Bank’s regulatory capital ratios at September 30, ~~2021:~~2022:

The prompt corrective action framework is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized:” a common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8%; a total capital ratio of 10%; and a Tier 1 leverage ratio of 5%. The B~~ank~~Bank met the requirements to qualify as "well capitalized" as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act temporarily lowered the tier 1 leverage ratio requirement to 8% until December 31, 2020. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the "well-capitalized" ratio requirements under the prompt corrective action regulations and will not be required to report or calculate risk-based capital. Although, the Company did not opt into the CBLR framework at September 30, ~~2021,~~2022, it may opt into the CBLR framework in a future quarterly period.

~~During the fourth quarter of 2019,~~On October 12, 2022 the Board of ~~Directors~~Directors of the Company authorized a stock repurchase plan pursuant to which the Company ~~may~~is authorized to repurchase up to $5.0 million of the Company’s outstanding common stock through December 31, ~~2020. During 2020,~~2023. As of November 10, 2022, there have been no stock repurchases under the Company repurchased and retired 129,035 shares at an average price paid per share of $16.05, for a total of $2.1 million. The Company has not authorized another stock repurchase plan as of September 30, 2021.plan.

The Company’s capital resources may be affected by the Company’s acquisition of Fincastle, which was completed on July 1, 2021. Fincastle shareholders received aggregate merger consideration of $6.8 million in cash and 1,348,065 shares of the Company’s common stock.

The acquisition of Fincastle resulted in goodwill and other intangible assets that were excluded from the regulatory capital of First Bank. The addition of goodwill and other intangible assets did not result in a decrease in First Bank’s regulatory capital ratios. For the three-month and nine-month periods ended September 30, 2021, the Company recorded merger related expenses of $1.3 million and $2.0 million, respectively, in connection with the acquisition of Fincastle. The Company estimates that it will incur aggregate merger related costs of $3.4 million, with the remaining $1.4 million expected to be recorded throughout the fourth quarter of 2021 and the first quarter of 2022. First Bank remained well-capitalized at September 30, 2021.

The Company will continue to update its enterprise risk assessment and capital plan as the operating environment develops. As a result of its risk assessments and capital planning, the Company issued $5.0 million of subordinated debt in June 2020, primarily to further strengthen holding company liquidity and remain a source of strength for the Bank in the event of a severe economic downturn. The Company may also use the proceeds of the issuance for general corporate purposes, including the potential repayment of the Company’s existing subordinated debt, which became callable on a quarterly basis beginning in January 2021. The Company’s stock repurchase plan remained suspended during the second, third and fourth quarters of 2020 and ended on December 31, 2020. The Company has not authorized another stock repurchase plan due to the potential impact of the pandemic on the economy and the Bank’s customers. The capital planning process also included consideration of whether to continue the Company’s cash dividend payments to common shareholders. The Company declared and paid a $0.12 per share dividend during the first quarter of 2021, which was a 9% increase over the prior quarter. The Company declared and paid another $0.12 per share dividend during the second and third quarters of 2021.

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

Commitments to extend credit, which ~~amou~~amounte~~nted~~d to ~~$114.0~~$163.1 million aat t September 30, ~~2021, an~~2022~~d $149.8~~, and $161.4 million at December 31, ~~2020,~~2021, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized as deemed necessary and may or may not be drawn upon to the total extent to which the Bank is committed.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had ~~$14.5~~$21.4 million and ~~$10.7~~$18.9 million in outstanding standby letters of credit, respectively.

~~At September 30, 2021, the~~ ~~Bank had $6.8 million in locked-rate commitments to originate mortgage loans. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Bank does not expect any counterparty to fail to meet its obligations.~~

On April 21, 2020, the Company entered into interest rate swap agreements related to its outstanding junior subordinated debt. The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.

The interest rate swaps qualified and are designated as cash flow hedges. The Company’s cash flow hedges effectively modify the Company’s exposure to interest rate risk by converting variable rates of interest on $9.0 million of the Company’s junior subordinated debt to fixed rates of interest. The cash flow hedges end and the junior subordinated debt matures between June 2034 and October 2036. The cash flow hedges’ total notional amount is $9.0 million. At September 30, ~~2021,~~2022, the cash flow hedges hadhad a fair value of ~~$990 thousand,~~$2.7 million, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive (loss) income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 16 to the Consolidated Financial Statements.

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, ~~2021~~2022 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.

The Company completed the acquisition of Fincastle on July 1, 2021. The conversion of Fincastle’s loan and deposit systems was completed in October 2021. The integration of Fincastle's legacy systems and processes does not have a material effect on our internal control over financial reporting.

The Company completed the acquisition of the SmartBank loan portfolio and certain fixed assets on September 30, 2021. There were no system conversions required as part of this acquisition. The integration of the SmartBank loan portfolio and certain fixed assets does not have a material effect on our internal control over financial reporting.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or to which the property of the Company is subject.

On May 7, 2021, Susan Taylor, a purported shareholder of Fincastle, filed a lawsuit in the United States District Court for the Southern District of New York against Fincastle and members of the Fincastle board of directors: Taylor v. The Bank of Fincastle et al. The lawsuit contained allegations contending, among other things that the registration statement on Form S-4 misstated or failed to disclose certain allegedly material information in violation of federal securities laws. The lawsuit was voluntarily dismissed by the plaintiff on August 20, 2021.

There were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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.

		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021	3

	Consolidated Statements of Income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)	4

	Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)	7

	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)	9

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3530

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5346

Item 4.	Controls and Procedures	5346

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	5447

Item 1A.	Risk Factors	5447

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5447

Item 3.	Defaults Upon Senior Securities	5447

Item 4.	Mine Safety Disclosures	5447

Item 5.	Other Information	5447

Item 6.	Exhibits	5548

	Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2022			2021
Cash Flows from Financing Activities
Net increase in demand deposits and savings accounts	$	137,352		$	147,872		$	29,090		$	137,352
Net decrease in time deposits		(3,923	)		(15,899	)		(11,637	)		(3,923	)
Proceeds from subordinated debt, net of issuance costs		0			4,990
Repayment of subordinated debt								(5,000	)		—
Cash dividends paid on common stock, net of reinvestment		(1,798	)		(1,509	)		(2,474	)		(1,798	)
Repurchase of common stock, stock incentive plan		(39	)		(47	)		(183	)		(39	)
Repurchase of common stock, stock repurchase plan		0			(2,071	)
Net cash provided by financing activities	$	131,592		$	133,336		$	9,796		$	131,592
(Decrease) increase in cash and cash equivalents	$	(12,656	)	$	76,421
(Decrease) in cash and cash equivalents							$	(100,221	)	$	(12,656	)
Cash and Cash Equivalents
Beginning	$	127,297		$	45,785		$	176,006		$	127,297
Ending	$	114,641		$	122,206		$	75,785		$	114,641
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,728		$	2,739		$	2,285		$	1,728
Income taxes	$	1,674		$	2,451		$	2,265		$	1,674
Supplemental Disclosures of Noncash Investing and Financing Activities
Unrealized (losses) gains on securities available for sale	$	(2,733	)	$	3,294
Unrealized (losses) on securities available for sale							$	(29,649	)	$	(2,733	)
Unrealized losses on securities transferred from available for sale to held to maturity							$	(7,641	)	$	—
Fair value of securities transferred from available for sale to held to maturity							$	74,416		$	—
Change in fair value of cash flow hedges	$	559		$	134		$	1,782		$	559
Transfer from premises and equipment to other real estate owned, net							$	(184	)	$	—
Transfer from loans to other real estate owned	$	130		$	0		$	—		$	130
Issuance of common stock, dividend reinvestment plan	$	115		$	106		$	152		$	115

	September 30, 2021									September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. Treasury securities	$	19,951	$	63	$	(38	)	$	19,976	$	19,953	$	—	$	(2,422	)	$	17,531
U.S. agency and mortgage-backed securities		172,782		1,713		(1,234	)		173,261		122,190		113		(16,000	)		106,303
Obligations of states and political subdivisions		70,703		1,002		(378	)		71,327		64,472		20		(11,923	)		52,569
Corporate debt securities		2,027		9		0			2,036
Total securities available for sale	$	265,463	$	2,787	$	(1,650	)	$	266,600	$	206,615	$	133	$	(30,345	)	$	176,403
Securities held to maturity:
U.S. Treasury securities										$	37,994	$	—	$	(638	)	$	37,356
U.S. agency and mortgage-backed securities	$	7,301	$	117	$	(2	)	$	7,416		101,321		—		(9,351	)		91,970
Obligations of states and political subdivisions		2,745		101		0			2,846		12,579		—		(1,701	)		10,878
Corporate debt securities											3,000		—		(284	)		2,716
Total securities held to maturity	$	10,046	$	218	$	(2	)	$	10,262	$	154,894	$	—	$	(11,974	)	$	142,920
Total securities	$	275,509	$	3,005	$	(1,652	)	$	276,862	$	361,509	$	133	$	(42,319	)	$	319,323

	December 31, 2020									December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. Treasury securities										$	39,871	$	37	$	(250	)	$	39,658
U.S. agency and mortgage-backed securities	$	98,848	$	2,830	$	(80	)	$	101,598		177,131		1,085		(1,837	)		176,379
Obligations of states and political subdivisions		37,507		1,122		(2	)		38,627		71,037		910		(509	)		71,438
Corporate debt securities											2,019		1		—			2,020
Total securities available for sale	$	136,355	$	3,952	$	(82	)	$	140,225	$	290,058	$	2,033	$	(2,596	)	$	289,495
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	9,588	$	264	$	0		$	9,852	$	26,392	$	124	$	(53	)	$	26,463
Obligations of states and political subdivisions		3,146		140		0			3,286		7,049		118		(13	)		7,154
Corporate debt securities		1,500		105		0			1,605
Total securities held to maturity	$	14,234	$	509	$	0		$	14,743	$	33,441	$	242	$	(66	)	$	33,617
Total securities	$	150,589	$	4,461	$	(82	)	$	154,968	$	323,499	$	2,275	$	(2,662	)	$	323,112

	September 30, 2021														September 30, 2022
	Less than 12 months					12 months or more				Total					Less than 12 months					12 months or more					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)		Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
Securities available for sale:
U.S. Treasury securities	$	9,934	$	(38	)	$	0	$	0	$	9,934	$	(38	)	$	17,531	$	(2,422	)	$	—	$	—		$	17,531	$	(2,422	)
U.S. agency and mortgage-backed securities		110,631		(1,234	)		0		0		110,631		(1,234	)		33,107		(2,596	)		64,184		(13,404	)		97,291		(16,000	)
Obligations of states and political subdivisions		25,202		(378	)		0		0		25,202		(378	)		33,128		(6,055	)		17,036		(5,868	)		50,164		(11,923	)
Total securities available for sale	$	145,767	$	(1,650	)	$	0	$	0	$	145,767	$	(1,650	)	$	83,766	$	(11,073	)	$	81,220	$	(19,272	)	$	164,986	$	(30,345	)
Securities held to maturity:
U.S. Treasury securities															$	28,517	$	(395	)	$	8,839	$	(243	)	$	37,356	$	(638	)
U.S. agency and mortgage-backed securities	$	0	$	0		$	0	$	0	$	0	$	0			68,723		(6,595	)		18,242		(2,756	)		86,965		(9,351	)
Obligations of states and political subdivisions		0		0			0		0		0		0			9,104		(1,576	)		1,774		(125	)		10,878		(1,701	)
Corporate debt securities																2,716		(284	)		—		—			2,716		(284	)
Total securities held to maturity	$	0	$	0		$	0	$	0	$	0	$	0		$	109,060	$	(8,850	)	$	28,855	$	(3,124	)	$	137,915	$	(11,974	)
Total securities	$	145,767	$	(1,650	)	$	0	$	0	$	145,767	$	(1,650	)	$	192,826	$	(19,923	)	$	110,075	$	(22,396	)	$	302,901	$	(42,319	)

	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	2,765	$	2,781	$	2,410	$	2,418	$	-	$	-	$	907	$	902
Due after one year through five years		15,905		16,002		2,335		2,432		17,612		16,341		44,214		43,113
Due after five years through ten years		62,654		63,525		1,552		1,599		53,590		48,051		27,267		24,698
Due after ten years		184,139		184,292		3,749		3,813		135,413		112,011		82,506		74,207
	$	265,463	$	266,600	$	10,046	$	10,262	$	206,615	$	176,403	$	154,894	$	142,920

	Acquired Loans-		Acquired Loans-
	Purchased		Purchased
(Dollars in thousands)	Performing		Performing
Outstanding principal balance	$	244,054	$	166,832

Carrying amount
Real estate loans:
Construction and land development	$	20,264	$	5,943
Secured by 1-4 family residential		58,570		44,046
Other real estate loans		115,514		86,226
Commercial and industrial loans		39,597		23,848
Consumer and other loans		6,652		4,115
Total acquired loans	$	240,597	$	164,178

	September 30, 2021																September 30, 2022
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing		30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing
Real estate loans:
Construction and land development	$	0	$	178	$	0	$	178	$	44,942	$	45,120	$	0	$	0	$	432	$	175	$	211	$	818	$	50,534	$	51,352	$	—	$	211
Secured by 1-4 family residential		1,898		289		137		2,324		291,892		294,216		470		0		153		—		286		439		316,975		317,414		549		95
Other real estate loans		0		0		122		122		362,521		362,643		153		0		—		—		—		—		417,504		417,504		17		—
Commercial and industrial		92		196		0		288		105,376		105,664		1,535		0		114		1,204		—		1,318		110,827		112,145		—		—
Consumer and other loans		47		7		3		57		14,711		14,768		0		7		39		—		—		39		8,060		8,099		—		—
Total	$	2,037	$	670	$	262	$	2,969	$	819,442	$	822,411	$	2,158	$	7	$	738	$	1,379	$	497	$	2,614	$	903,900	$	906,514	$	566	$	306

	September 30, 2021										September 30, 2022
	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	45,120	$	0	$	0	$	0	$	45,120	$	51,352	$	—	$	—	$	—	$	51,352
Secured by 1-4 family residential		293,427		0		789		0		294,216		316,561		—		853		—		317,414
Other real estate loans		362,490		0		153		0		362,643		415,966		1,521		17		—		417,504
Commercial and industrial		104,129		0		1,535		0		105,664		110,484		1,661		—		—		112,145
Consumer and other loans		14,768		0		0		0		14,768		8,099		—		—		—		8,099
Total	$	819,934	$	0	$	2,477	$	0	$	822,411	$	902,462	$	3,182	$	870	$	—	$	906,514

	September 30, 2021																		September 30, 2022
	Construction and Land Development			Secured by 1-4 Family Residential			Other Real Estate			Commercial and Industrial			Consumer and Other Loans			Total			Construction and Land Development		Secured by 1-4 Family Residential			Other Real Estate		Commercial and Industrial		Consumer and Other Loans			Total
Allowance for loan losses:
Beginning Balance, December 31, 2020	$	306		$	1,022		$	4,956		$	784		$	417		$	7,485
Beginning Balance, December 31, 2021																			$	345	$	1,077		$	3,230	$	718	$	340		$	5,710
Charge-offs		0			(15	)		(992	)		0			(255	)		(1,262	)		—		(6	)		—		—		(387	)		(393	)
Recoveries		0			46			2			6			157			211			10		15			12		144		194			375
(Recovery of) provision for loan losses		(25	)		(97	)		(813	)		(81	)		16			(1,000	)
Ending Balance, September 30, 2021	$	281		$	956		$	3,153		$	709		$	335		$	5,434
Provision for (recovery of) loan losses																				99		(22	)		331		69		123			600
Ending Balance, September 30, 2022																			$	454	$	1,064		$	3,573	$	931	$	270		$	6,292
Ending Balance:
Individually evaluated for impairment		0			0			0			84			0			84			—		—			—		—		—			—
Collectively evaluated for impairment		281			956			3,153			625			335			5,350			454		1,064			3,573		931		270			6,292
Loans:
Ending Balance	$	45,120		$	294,216		$	362,643		$	105,664		$	14,768		$	822,411		$	51,352	$	317,414		$	417,504	$	112,145	$	8,099		$	906,514
Individually evaluated for impairment		0			470			153			1,535			0			2,158			—		549			17		—		—			566
Collectively evaluated for impairment		45,120			293,746			362,490			104,129			14,768			820,253			51,352		316,865			417,487		112,145		8,099			905,948

	September 30, 2020																September 30, 2021
	Construction and Land Development			Secured by 1-4 Family Residential		Other Real Estate		Commercial and Industrial			Consumer and Other Loans			Total			Construction and Land Development			Secured by 1-4 Family Residential			Other Real Estate			Commercial and Industrial			Consumer and Other Loans			Total
Allowance for loan losses:
Beginning Balance, December 31, 2019	$	464		$	776	$	2,296	$	562		$	836		$	4,934
Beginning Balance, December 31, 2020																	$	306		$	1,022		$	4,956		$	784		$	417		$	7,485
Charge-offs		0			0		0		(69	)		(550	)		(619	)		—			(15	)		(992	)		—			(255	)		(1,262	)
Recoveries		2			6		2		17			235			262			—			46			2			6			157			211
Provision for (recovery of) loan losses		(164	)		305		2,691		398			(30	)		3,200
Ending Balance, September 30, 2020	$	302		$	1,087	$	4,989	$	908		$	491		$	7,777
(Recovery of) provision for loan losses																		(25	)		(97	)		(813	)		(81	)		16			(1,000	)
Ending Balance, September 30, 2021																	$	281		$	956		$	3,153		$	709		$	335		$	5,434
Ending Balance:
Individually evaluated for impairment		0			0		2,108		181			0			2,289			—			—			—			84			—			84
Collectively evaluated for impairment		302			1,087		2,881		727			491			5,488			281			956			3,153			625			335			5,350
Loans:
Ending Balance	$	27,472		$	234,198	$	250,319	$	125,277		$	11,102		$	648,368		$	45,120		$	294,216		$	362,643		$	105,664		$	14,768		$	822,411
Individually evaluated for impairment		283			469		4,674		1,548			0			6,974			—			470			153			1,535			—			2,158
Collectively evaluated for impairment		27,189			233,729		245,645		123,729			11,102			641,394			45,120			293,746			362,490			104,129			14,768			820,253

	September 30, 2021														September 30, 2022
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Real estate loans:
Construction and land development	$	0	$	0	$	0	$	0	$	0	$	273	$	0
Secured by 1-4 family		611		470		0		470		0		420		3
Secured by 1-4 family residential															$	560	$	549	$	—	$	549	$	—	$	593	$	11
Other real estate loans		167		153		0		153		0		3,159		1		29		17		—		17		—		24		—
Commercial and industrial		1,655		0		1,535		1,535		84		1,548		0		—		—		—		—		—		823		—
Total	$	2,433	$	623	$	1,535	$	2,158	$	84	$	5,400	$	4	$	589	$	566	$	—	$	566	$	—	$	1,440	$	11

	Nine Months Ended			Year Ended
	September 30, 2021			December 31, 2020
Balance at the beginning of year, gross	$	0		$	0
Transfers in		130			0
Acquired in merger		2,137			0
Sales proceeds		(288	)		0
Gain on disposition		8			0
Balance at the end of period, gross	$	1,987		$	0
Less: valuation allowance		(139	)		0
Balance at the end of period, net	$	1,848		$	0

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021
Total Capital (to Risk-Weighted Assets)	$	128,197		14.42	%	$	71,108		8.00	%	$	88,885		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	122,763		13.81	%	$	53,331		6.00	%	$	71,108		8.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	122,763		13.81	%	$	39,998		4.50	%	$	57,775		6.50	%
Tier 1 Capital (to Average Assets)	$	122,763		9.22	%	$	53,274		4.00	%	$	66,593		5.00	%
December 31, 2020
Total Capital (to Risk-Weighted Assets)	$	91,243		15.82	%	$	46,129		8.00	%	$	57,661		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	84,032		14.57	%	$	34,597		6.00	%	$	46,129		8.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	84,032		14.57	%	$	25,948		4.50	%	$	37,480		6.50	%
Tier 1 Capital (to Average Assets)	$	84,032		8.80	%	$	38,187		4.00	%	$	47,733		5.00	%

			Fair Value Measurements at September 30, 2021								Fair Value Measurements at September 30, 2022
Description	Balance as of September 30, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale
U.S. Treasury securities	$	19,976	$	0	$	19,976	$	0	$	17,531	$	—	$	17,531	$	—
U.S. agency and mortgage-backed securities		173,261		0		173,261		0		106,303		—		106,303		—
Obligations of states and political subdivisions		71,327		0		71,327		0		52,569		—		52,569		—
Corporate debt securities		2,036		0		2,036		0
Total securities available for sale	$	266,600	$	0	$	266,600	$	0	$	176,403	$	—	$	176,403	$	—
Derivatives - cash flow hedges		990		0		990		0		2,723		—		2,723		—
Total assets	$	267,590	$	0	$	267,590	$	0	$	179,126	$	—	$	179,126	$	—

			Fair Value Measurements at December 31, 2020								Fair Value Measurements at December 31, 2021
Description	Balance as of December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale
U.S. Treasury securities									$	39,658	$	—	$	39,658	$	—
U.S. agency and mortgage-backed securities	$	101,598	$	0	$	101,598	$	0		176,379		—		176,379		—
Obligations of states and political subdivisions		38,627		0		38,627		0		71,438		—		71,438		—
Corporate debt securities										2,020		—		2,020		—
Total securities available for sale	$	140,225	$	0	$	140,225	$	0	$	289,495	$	—	$	289,495	$	—
Derivatives - cash flow hedges		431		0		431		0		941		—		941		—
Total assets	$	140,656	$	0	$	140,656	$	0	$	290,436	$	—	$	290,436	$	—

			Fair Value Measurements at September 30, 2021 Using										Fair Value Measurements at September 30, 2022 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Fair Value		Carrying Amount		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Fair Value
Financial Assets
Cash and short-term investments	$	195,230	$	195,230	$	0	$	0	$	195,230
Cash and interest-bearing deposits in banks											$	75,785	$	75,785	$	—	$	—	$	75,785
Securities available for sale		266,600		0		266,600		0		266,600		176,403		—		176,403		—		176,403
Securities held to maturity		10,046		0		10,262		0		10,262		154,894		—		142,920		—		142,920
Restricted securities		1,813		0		1,813		0		1,813		1,908		—		1,908		—		1,908
Loans, net		816,977		0		0		823,227		823,227		900,222		—		—		TBD		—
Bank owned life insurance		24,141		0		24,141		0		24,141		24,375		—		24,375		—		24,375
Accrued interest receivable		3,823		0		3,823		0		3,823		4,247		—		4,247		—		4,247
Derivatives - cash flow hedges		990		0		990		0		990		2,723		—		2,723		—		2,723
Financial Liabilities
Deposits	$	1,212,570	$	0	$	1,064,150	$	148,681	$	1,212,831	$	1,266,046	$	—		TBD		TBD	$	—
Subordinated debt		9,993		0		0	$	10,935		10,935		4,995		—		—		TBD		—
Junior subordinated debt		9,279		0		0	$	10,824		10,824		9,279		—		—		TBD		—
Accrued interest payable		232		0		232		0		232		184		—		184		—		184

	Net Unrealized Gains (Losses) on Securities			Change in Fair Value of Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2020	$	3,330		$	(25	)	$	3,305
Unrealized holding gains (net of tax, $8)		26			0			26
Reclassification adjustment (net of tax, ($8))		(30	)		0			(30	)
Change in fair value (net of tax, $34)		0			131			131
Change during period		(4	)		131			127
Balance at September 30, 2020	$	3,326		$	106		$	3,432
Balance at June 30, 2021	$	1,696		$	702		$	2,398
Unrealized holding gains (net of tax, $211)		(798	)		0			(798	)
Change in fair value (net of tax, $21)		0			80			80
Change during period		(798	)		80			(718	)
Balance at September 30, 2021	$	898		$	782		$	1,680

Details About Accumulated Other Comprehensive Income (Loss)	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)					Affected Line Item in the Consolidated Statements of Income
	Three Months Ended
	September 30, 2021		September 30, 2020
Securities available for sale:
Net securities gains reclassified into earnings	$	0	$	(38	)	Net gains on securities available for sale
Related income tax expense		0		8		Income tax expense
Total reclassifications	$	0	$	(30	)	Net of tax

	September 30, 2021								September 30, 2022
	Notional Amount		Assets		Liabilities		Collateral Pledged(1)		Notional Amount		Assets		Liabilities		Collateral Pledged(1)
Cash Flow Hedges
Interest rate swap contracts	$	9,000	$	990	$	0	$	0	$	9,000	$	2,723	$	—	$	—

	December 31, 2021
	Notional Amount		Assets		Liabilities		Collateral Pledged(1)
Cash Flow Hedges
Interest rate swap contracts	$	9,000	$	941	$	—	$	—

(Dollars in thousands)	Bank of Fincastle		SmartBank		Total
Purchase price:
Cash paid	$	6,752	$	83,745	$	90,497
Common stock issued		27,069		0		27,069
Total purchase price	$	33,821	$	83,745	$	117,566

Identifiable assets acquired:
Cash and due from banks	$	46,158	$	0	$	46,158
Federal funds sold		120		0		120
Securities, AFS, at fair value		12,112		0		12,112
Restricted securities		183		0		183
Loans, net of ALLL		193,664		81,636		275,300
Bank premises and equipment		3,471		172		3,643
Accrued interest receivable		1,561		143		1,704
OREO		2,137		0		2,137
BOLI		5,852		0		5,852
Other assets		4,259		0		4,259
Total identifiable assets acquired	$	269,517	$	81,951	$	351,468

Identifiable liabilities assumed:
Demand deposits & savings accounts	$	184,535	$	0	$	184,535
Time deposits		52,246		0		52,246
Accrued expenses and other liabilities		1,132		0		1,132
Total identifiable liabilities assumed	$	237,913	$	0	$	237,913

Net identifiable assets acquired at fair value	$	31,604	$	81,951	$	113,555

Goodwill resulting from acquisitions	$	2,217	$	1,794	$	4,011

	Unaudited Pro Forma		Unaudited Pro Forma
	Nine Months Ended		Nine Months Ended
(Dollars in thousands, except per share amounts)	September 30, 2021		September 30, 2020
Total revenues (net interest income plus noninterest income)	$	37,670	$	36,077
Net income	$	7,849	$	7,145
Net income per share, basic	$	1.26	$	1.15
Net income per share, diluted	$	1.26	$	1.15

	•	the quality of the loan portfolio and the value of the collateral securing those loans;
	•	demand for loan products;
	•	deposit flows;

	•	changes in interest rates could have a negative impact on the Company’s net interest income and an unfavorable impact on the Company’s customers’ ability to repay loans;
	•	geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad; and

	•	Bank of Fincastle Services, Inc.
	•	ESF, LLC
	•	Shen-Valley Land Holdings, LLC

	Efficiency Ratio												Efficiency Ratio
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Noninterest expense	$	9,426		$	6,135		$	22,706		$	17,892		$	9,083		$	9,426		$	26,645		$	22,706
Add/(Subtract): other real estate owned (expense), net														(14	)		—			(83	)		—
Subtract: amortization of intangibles		(5	)		(33	)		(24	)		(127	)		(6	)		(5	)		(15	)		(24	)
Add: gains on disposal of premises and equipment, net		—			—			26			9			—			—			—			26
Subtract: merger related expenses		(1,341	)		—			(2,023	)		—			—			(1,341	)		(20	)		(2,023	)
	$	8,080		$	6,102		$	20,685		$	17,774		$	9,063		$	8,080		$	26,527		$	20,685
Tax-equivalent net interest income	$	9,810		$	7,623		$	24,938		$	22,158		$	11,809		$	9,810		$	33,818		$	24,938
Noninterest income		2,648			2,201			7,226			6,073			3,027			2,648			8,518			7,226
Subtract: securities gains, net		—			(38	)		(37	)		(38	)		—			—			—			(37	)
	$	12,458		$	9,786		$	32,127		$	28,193		$	14,836		$	12,458		$	42,336		$	32,127
Efficiency ratio		64.86	%		62.35	%		64.39	%		63.04	%		61.09	%		64.86	%		62.66	%		64.39	%

	Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income												Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
GAAP measures:
Interest income – loans	$	9,215		$	7,568		$	23,432		$	22,187		$	10,759		$	9,215		$	30,218		$	23,432
Interest income – investments and other		1,116			775			3,039			2,569			2,033			1,116			5,437			3,039
Interest expense – deposits		(369	)		(541	)		(1,060	)		(2,179	)		(927	)		(369	)		(1,680	)		(1,060	)
Interest expense – subordinated debt		(156	)		(160	)		(464	)		(341	)		(70	)		(156	)		(208	)		(464	)
Interest expense – junior subordinated debt		(68	)		(68	)		(202	)		(225	)		(68	)		(68	)		(202	)		(202	)
Total net interest income	$	9,738		$	7,574		$	24,745		$	22,011		$	11,727		$	9,738		$	33,565		$	24,745
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans	$	8		$	8		$	24		$	26		$	—		$	8		$	8		$	24
Tax benefit realized on non-taxable interest income – municipal securities		64			41			169			121			82			64			245			169
Total tax benefit realized on non-taxable interest income	$	72		$	49		$	193		$	147		$	82		$	72		$	253		$	193
Total tax-equivalent net interest income	$	9,810		$	7,623		$	24,938		$	22,158		$	11,809		$	9,810		$	33,818		$	24,938

	First Bank
Total capital to risk-weighted assets		~~14.42~~14.18	%
Tier 1 capital to risk-weighted assets		~~13.81~~13.52	%
Common equity Tier 1 capital to risk-weighted assets		~~13.81~~13.52	%
Tier 1 capital to average assets		~~9.22~~9.27	%
Capital conservation buffer ratio⁽¹⁾		~~6.42~~6.18	%

3.1	Bylaws of First National Corporation (attached as Exhibit 3.1 to the Company's current report on Form 8-K filed October 26, 2022 and incorporated herein by reference).

31.1	Certification of Chief Executive Officer, Section 302 Certification.

31.2	Certification of Chief Financial Officer, Section 302 Certification.

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

101	The following materials from First National Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021~~2022 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive (Loss) Income (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.

104	The cover page from First National Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021,~~2022, formatted in Inline XBRL (included with Exhibit 101).


FIRST NATIONAL CORPORATION
(Registrant)

/s/ Scott C. Harvard				November ~~15, 2021~~10, 2022
Scott C. Harvard				Date
President and Chief Executive Officer

/s/ M. Shane Bell				November ~~15, 2021~~10, 2022
M. Shane Bell				Date
Executive Vice President and Chief Financial Officer