UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM 10-K | ||
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
or
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission file number 0-239761-38874
_______________________________________________________
_______________________________________________________
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) |
Registrant’s telephone number, including area code: (540) 465-9121
Securities registered pursuant to Section 12(b) of the Act: None
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 |
Securities registered pursuant to Section 12(g) of the Act:
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing salessales price on June 30, 20172021 was $59,937,677.
The number of outstanding shares of common stock as of March 23, 201821, 2022 was 4,952,575.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 20182022 Annual Meeting of Shareholders – Part III
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Cautionary Statement Regarding Forward-Looking Statements First National Corporation (the Company) makes forward-looking statements in this Form 10-K 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 • general business conditions, as well as conditions within the financial markets; • general economic conditions, including unemployment levels, inflation and slowdowns in economic growth; • • the impact of competition from banks and non-banks, including financial technology companies (Fintech); • the composition of the loan and deposit portfolio, including the types of accounts and customers, may change, which could impact the amount of net interest income and noninterest income in future periods, including revenue from service charges on deposits; • limited availability of financing or inability to raise capital; • reliance on third parties for key services; • the Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses; • the quality of the loan portfolio and the value of the collateral securing those loans; • demand for loan products; • deposit flows; • • the concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets; • the value of securities held in the Company's investment portfolio; • legislative or regulatory changes or actions, including the effects of changes in tax laws; • accounting principles, policies and guidelines and elections made by the Company thereunder; • cyber threats, attacks or events; • the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s reputation would become damaged; • monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of those policies on interest rates and business in the Company's markets; 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; • other factors identified in Item 1A, “Risk Factors”, below. Because of these and other uncertainties, actual future 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. Business General First National Corporation (the Company) is a bank holding company incorporated under Virginia law on September 7, 1983. The Company owns all of the stock of its primary operating subsidiary, First Bank (the Bank), which is a commercial bank chartered under Virginia law. The Company’s subsidiaries are: • First Bank (the Bank). The Bank owns: • First Bank Financial Services, Inc. • Shen-Valley Land Holdings, LLC • First National (VA) Statutory Trust II (Trust II) • First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts) First Bank Financial Services, Inc. invests in entities that provide title insurance and investment services. Shen-Valley Land Holdings, LLC The Bank first opened for business on July 1, 1907 under the name The Peoples National Bank of Strasburg. On January 10, 1928, the Bank changed its name to The First National Bank of Strasburg. On April 12, 1994, the Bank received approval from the Federal Reserve Bank of Richmond 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 25. Access to Filings The Company’s internet address is Products and Services 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 financial services industry remains highly competitive and is constantly evolving. The Company experiences strong competition in all aspects of its business. In its market areas, the Company competes with large national and regional financial institutions, credit unions, other community banks, as well as consumer finance companies, mortgage companies, marketplace lenders and other financial technology firms, mutual funds and life insurance companies. Competition for deposits and loans is affected by various factors including interest rates offered, the number and location of branches and types of products offered, and the reputation of the institution. Credit unions have been allowed to increasingly expand their membership definitions and, because they enjoy a favorable tax status, may be able to offer more attractive loan and deposit pricing. The Company believes its competitive advantages include long-term customer relationships, local management and directors, a commitment to excellent customer service, dedicated and loyal employees, and the support of and involvement in the communities that the Company serves. The Company focuses on providing products and services to individuals, small to medium-sized businesses, non-profit organizations, and local governmental entities within No material part of the business of the Company is dependent upon a single or a few customers, and the loss of any single customer would not have a materially adverse effect upon the business of the Company. Employees At December 31, SUPERVISION AND REGULATION Bank holding companies and banks are extensively and increasingly regulated under both federal and state laws. The following description briefly addresses certain historic and current provisions of federal and state laws and The Company General Permitted Banking Subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company’s acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 (the Exchange Act) or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company’s common stock is registered under Section 12 of the Exchange Act. Source Safety Under the Federal Deposit Insurance Act (the FDIA), the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. Capital Limits The Company’s subordinated debt is senior in The Company's ability to pay dividends on common stock is also limited by contractual restrictions under The Bank General Capital Effective January 1, 2015, the Bank became subject to capital rules adopted by federal bank The The following table shows the Bank’s regulatory capital ratios at December 31, First Bank Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity Tier 1 capital to risk-weighted assets Tier 1 capital to average assets Capital conservation buffer (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Bank’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital. The lowest of the three measures represents the Bank’s capital conservation buffer ratio. The In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel On September 17, 2019 the FDIC finalized a rule that introduced 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, Regulatory Relief and Consumer Protection Act (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%, have less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The Coronavirus Aid, Relief and Economic Security (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 Bank has not opted into the CBLR framework, it may opt into the CBLR framework in a future quarterly period. For further discussion regarding the CARES Act, see "CARES Act" below. Deposit The FDIA, as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits of at least 1.35%. FDIC Transactions Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank (a “10% Shareholder”), are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers. Prompt Community Privacy Anti-Money Laundering Laws and Regulations. The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. If the Bank fails to meet the expectations set forth in this regulatory guidance, it could be subject to various regulatory actions and any remediation efforts may In November 2021, the federal banking agencies approved a final rule that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” that rises to the level of a “notification incident”, among other things, the rule also requires bank service providers to notify their banking organization customers as soon as possible after becoming aware of similar incidents. Consumer Incentive The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the financial institution is not taking prompt and effective measures to correct the deficiencies. At December 31, CARES Act. In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions: • Community Bank Leverage Ratio. The CARES Act directed federal bank regulators to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In October 2020, the federal bank regulators issued two interim final rules implementing this directive. The interim final rules provide that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. The leverage ratio requirement increases to 8.5% effective January 1, 2021 and 9% effective January 1, 2022. The final rules also established a two-quarter grace period for qualifying community banking organizations who fail to meet the qualifying criteria, including the leverage ratio, so long as the banking organization maintains a leverage ratio of 7% or greater effective the second quarter of 2020, 7.5% effective January 1, 2021, and 9 % effective January 1, 2022. • Temporary Troubled Debt Restructurings (TDR) Relief. The CARES Act allowed banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking regulators are required to defer to the determination of the banks making such suspension. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022. Effect of Governmental Monetary Policies The Company’s operations are affected not only by general economic conditions but also by the policies of various regulatory authorities. In particular, the Federal Reserve regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. Future Legislation and Regulation Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of any proposed legislation could impact the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank are difficult to predict, and could have a material, adverse effect on the business, financial condition and results of operations of the Company and the Bank. An investment in the Company’s securities involves risks. In addition to the other information set forth in this report, investors in the Company’s securities should carefully consider the factors discussed below. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations and capital position, and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report, in which case the trading price of the Company’s securities could decline. Risks Related Our business Deterioration in economic conditions could adversely affect our business. Our business is Adverse changes in We provide full-service banking and other financial services throughout the Company’s market The Company Like all financial institutions, the Company maintains an allowance for loan losses to provide for loans that its borrowers may not repay in their entirety. The Company believes that it maintains an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio as of the corresponding balance sheet date and in compliance with applicable accounting and regulatory guidance. However, the allowance for loan losses may not be sufficient to cover actual loan losses and future provisions for loan losses could materially and adversely affect the Company’s operating results. Accounting measurements related to impairment and the allowance for loan losses require significant estimates that are subject to uncertainty and changes relating to new information and changing circumstances. The significant uncertainties surrounding the ability of the Company’s borrowers to execute their business models successfully through changing economic environments, competitive challenges, and other factors complicate the Company’s estimates of the risk of loss and amount of loss on any loan. Because of the degree of uncertainty and susceptibility of these factors to change, the actual losses may vary from current estimates. The Company expects fluctuations in the loan loss provisions due to the uncertain economic conditions. The Company’s banking regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to increase its allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease the allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such required additional provisions for loan losses or charge-offs could have a material adverse effect on the Company’s financial condition and results of operations. The Company The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer, and other loans. Many of the Company’s loans are secured by real estate (both residential and commercial) in the Company’s market areas. A major change in the real estate markets, resulting in deterioration in the value of this collateral, or in the local or national economy, could adversely affect borrowers’ ability to pay these loans, which in turn could negatively affect the Company. Risks of loan defaults and foreclosures are unavoidable in the banking industry; the Company tries to limit its exposure to these risks by monitoring extensions of credit carefully. The Company cannot fully eliminate credit risk; thus, credit losses will occur in the future. Additionally, changes in the real estate market also affect the value of foreclosed assets, and therefore, additional losses may occur when management determines it is appropriate to sell the assets. The Company has a The Company’s commercial real estate portfolio consists primarily of owner-operated properties and other commercial properties. These types of loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because the Company’s loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in the percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition. The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations. The Although most of the Company’s construction and development loans are secured by real estate, the Company believes that, in the case of the majority of these loans, the real estate collateral by itself may not be a sufficient source for repayment of the loan if real estate values decline. If the Company is required to liquidate the collateral securing a construction and development loan to satisfy the debt, its earnings and capital may be adversely affected. A period of reduced real estate values may continue for some time, resulting in potential adverse effects on the Company’s earnings and capital. The The Company assumes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and a continuous quality assessment process of credit already extended. The Company’s exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company’s credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk. Although the Company emphasizes local lending practices, the Company purchases certain loans through a third-party lending program. These portfolios include The Most of the Company’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company’s results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle. Any deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company’s financial condition and results of operations. The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans. A significant portion of the Company’s loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment that adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company’s loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan. The In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer’s audited financial statements conform to U.S. generally accepted accounting principles (GAAP) and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the customer. The Company’s financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading. Nonperforming assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition. Nonperforming assets adversely affect the Company in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases loan administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases the Company’s risk profile, which may reduce the amount of liquidity available to the Company and require a higher level of capital in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect the Company’s business, results of operations, and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including origination of new loans. There can be no assurance that the Company will avoid increases in nonperforming assets in the future. We are subject to environmental liability risk associated with our lending activities. A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. Remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. Weakness in the secondary residential mortgage loan markets or demand for mortgage loans may adversely affect income. Our mortgage department contributes to our noninterest income. We generate income from brokered mortgage loans and gains on sales of mortgage loans primarily from loans that we source and/or originate. Interest rates, housing inventory, housing demand, cash buyers, new mortgage lending regulations and other market conditions have a direct effect on loan originations across the industry. In particular, in a rising or higher interest rate environment, sourcing and originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold or brokered to investors. This would result in a decrease in noninterest income. In addition, our results of operations are affected by the amount of noninterest expenses (including for personnel and systems infrastructure) associated with mortgage banking activities. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity. The Company’s wealth management revenue is directly impacted by the market value of assets under management, which could adversely impact Company profitability. A significant portion of revenue from wealth management services is based on the market value of assets under management, which may decrease due to a variety of factors including an economic slowdown. Any sustained period of lower market values of assets under management would adversely affect the Company’s wealth management revenue and, as a result, would also adversely affect the Company’s results of operations. Risks Related to our Industry We are subject to interest rate risk and fluctuations in interest rates may negatively affect our financial performance. Our profitability depends in substantial part on our net interest margin, which is the difference between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits and borrowings divided by total interest-earning assets. Changes in interest rates will affect our net interest margin in diverse ways, including the pricing of loans and deposits, the levels of prepayments and asset quality. We are unable to predict actual fluctuations of market interest rates because many factors influencing interest rates, including changes in economic conditions, are beyond our control. We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes. Although the Company does not believe it has significant exposure to changes in interest rates, it could experience pressure on the net interest margin due to intense competition for loans and deposits from both local and national financial institutions, as well as the effect of a continued period of low interest rates on interest income. In addition, the Company could experience net interest margin compression if it is unable to maintain its current level of loans outstanding by continuing to originate new loans or if it experiences a decrease in deposit balances, which would require the Company to seek funding from other sources at higher rates of interest. We rely substantially on deposits obtained from customers in our target markets to provide liquidity and support growth. Our business strategies are based on access to funding from local customer deposits. Deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions that affect savings levels and the amount of liquidity in the economy, including government stimulus efforts in response to economic crises. If our deposit levels fall, we could lose a relatively low-cost source of funding and our interest expense would likely increase as we obtain alternative funding to replace lost deposits. If local customer deposits are not sufficient to fund our normal operations and growth, we will look to outside sources, such as borrowings from the FHLB, which is a secured funding source. Our ability to access borrowings from the FHLB will be dependent upon whether and the extent to which we can provide collateral to secure FHLB borrowings. We may also look to federal funds purchased and brokered deposits, although the use of brokered deposits may be limited or discouraged by our banking regulators. We may also seek to raise funds through the issuance of shares of our common stock, or other equity or equity-related securities, or debt securities including subordinated notes as additional sources of liquidity. If we are unable to access funding sufficient to support our business operations and growth strategies or are unable to access such funding on attractive terms, we may not be able to implement our business strategies which may negatively affect our financial performance. Consumers may increasingly decide not to use banks to complete their financial transactions, which could have a material adverse impact on our financial condition and operations. Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, general-purpose reloadable prepaid cards, or in other types of assets, including crypto currencies or other digital assets. Consumers can also complete transactions such as paying bills or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the loss of deposits as a lower cost source of funds could have a material adverse effect on our financial condition and results of operations. Strong competition in our primary market area may limit asset growth and profitability. We encounter strong competition from other financial institutions in our primary market area. In addition, established financial institutions not already operating in our primary market area may open branches at future dates. In the conduct of certain aspects of our business, we also compete with credit unions, mortgage banking companies, consumer finance companies, insurance companies, real estate companies, Fintech, and other institutions, some of which are not subject to the same degree of regulation or restrictions as are imposed upon us. Many of these competitors have substantially greater resources and lending limits than we have and offer services that we do not provide. In addition, many of these competitors have numerous branch offices located throughout their extended market areas that may provide them with a competitive advantage. Finally, these institutions may have differing pricing and underwriting standards, which may adversely affect our company through the loss of business or causing a misalignment in our risk-return relationship. No assurance can be given that such competition will not have an adverse impact on the financial condition and results of operations. The carrying value of intangible assets, such as goodwill and core deposit intangibles, may be adversely affected. When a Company completes an acquisition, intangibles, such as goodwill and core deposit intangibles, are recorded on the date of acquisition as an asset. Current accounting guidance requires an evaluation for impairment, and the Company would perform such impairment analysis at least annually. A significant adverse change in expected future cash flows, sustained adverse change in the Company’s common stock, or a decline in core deposit balances could require the asset to become impaired. If impaired, the Company would incur a charge to earnings that could have a significant impact on the results of operations. There are risks resulting from the use of models in our business. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting or estimating losses, assessing capital adequacy and calculating economic and regulatory capital levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating model output would be adversely affected due to the inadequacy of that information. Also, information we provide to the public or to our regulators based on poorly designed or implemented models could be inaccurate or misleading. Risks Related to Operations and Technology The Company’s risk-management framework may not be effective in mitigating risk and loss. The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include interest rate, credit, liquidity, operations, reputation, compliance, and litigation. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company’s risk-management program, or if its controls break down, the Company’s results of operations and financial condition may be adversely affected. Security breaches and other disruptions could compromise our information and expose us to liability or result in the loss of money, which could damage our reputation and our business. We rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. While we have policies and procedures designed to prevent or limit the effect of a possible security breach, our computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses, or other malicious code, and other events that could have a security impact. To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers. If one or more such events occur, this potentially could jeopardize our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our or our customers’ operations or result in the loss of money. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Security breaches in our internet banking activities could further expose us to possible liability, financial loss, and damage to our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We have implemented security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in damage to our reputation and our business. The Company relies on other companies to provide key components of its business infrastructure. Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections, and network access. While the Company has selected these third-party vendors carefully, it does not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in communication services provided by a vendor and failure to handle current or higher volumes, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business, and may harm its reputation. Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those difficulties affect the vendor’s ability to serve the Company. Replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company’s business operations. Our business is technology dependent, and an inability to successfully implement technological improvements may adversely affect our ability to be competitive and our results of operations and financial condition. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products, systems and Loss of any of our key personnel could disrupt our operations and result in reduced revenues or increased expenses. We are a relationship-driven organization. A key aspect of our business strategy is for our senior officers to have primary contact with our customers. Our growth and development to date have been, in large part, a result of these personalized relationships with our customer base. Our senior officers have considerable experience in the banking industry and related financial services and are extremely valuable and would be difficult to replace. The loss of the services of these officers could have a material adverse effect upon future prospects. Although we believe the The success of our business strategies depends on our ability to identify and recruit individuals with experience and relationships in our primary markets. The successful implementation of our business strategy will require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. The market for qualified management personnel is competitive, which has contributed to salary and employee benefit costs that have risen and are expected to continue to rise, which may have an adverse effect on the Difficulties in combining the The Company may not be able to achieve fully the strategic objectives and operating efficiencies expected in opening a new branch or loan production office (LPO) or through an acquisition. Inherent uncertainties exist in integrating the operations of a new or acquired entity or acquired branches or LPO's. In addition, the markets and industries in which the Company and its potential new office locations or acquisition targets operate may be highly competitive. The Company may lose customers or the customers of acquired entities as a result of an acquisition; the Company may lose key personnel, either from the acquired entity or from itself; and the Company may not be able to control the incremental increase in noninterest expense arising from a new office location or acquisition in a manner that improves its overall operating efficiencies. These factors could contribute to the Company’s not achieving the expected benefits from its new branch or LPO locations or acquisitions within desired time frames, or at all. Future business acquisitions could be material to the Company, and it may issue additional shares of common stock to support those acquisitions, which would dilute current shareholders’ ownership interests. Acquisitions could also require the Company to use substantial cash or other liquid assets or to incur debt; the Company could therefore become more susceptible to economic downturns and competitive pressures. The inability of the Company to successfully manage its growth or implement its growth strategy may adversely affect the Company’s results of operations and financial conditions. The Company may not be able to successfully implement its growth strategy if it is unable to expand market share in existing locations, identify attractive markets, locations, or opportunities to expand in the future. In addition, the ability to manage growth successfully depends on whether the Company can maintain adequate capital levels, maintain cost controls, effectively manage asset quality, and successfully integrate any expanded business divisions or acquired businesses into the organization. As the Company continues to implement its growth strategy by opening new branches or acquiring branches or banks, it expects to incur increased personnel, occupancy, and other operating expenses. In the case of new branches, the Company must absorb those higher expenses while it begins to generate new deposits. In the case of acquired branches, the Company must absorb higher expenses while it begins deploying the newly assumed deposit liabilities. With either new branches opened, or branches acquired, there would be a time lag involved in deploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, the Company’s plans to expand could depress earnings in the short run, even if it efficiently executes a branching strategy leading to long-term financial benefits. Combining Fincastle into the Company may be more difficult, costly or time-consuming than we expect. The success of the Merger will depend, in part, on the Company’s ability to realize the anticipated benefits and cost savings from combining the business of Fincastle into the business of the Company without materially disrupting the existing customer relationships of Fincastle or the Company. If the Company is not able to achieve these objectives, the anticipated benefits and cost savings of the Merger may not be realized fully, or at all, or may take longer to realize than expected. The success of the Merger will depend, in part, on the Company’s ability to successfully combine the businesses of the Company and Fincastle. To realize these anticipated benefits, the Company will integrate Fincastle’s business into its own. The integration process in the Merger could result in the disruption of ongoing business, inconsistencies in standards, controls, procedures, and policies that affect adversely the Company’s ability to maintain relationships with customers and The Company may not be able to effectively integrate the operations of Fincastle into the Bank. The future operating performance of the Company and the Bank will depend, in part, on the success of the merger of Fincastle with and into the Bank. The success of the subsidiary bank merger will, in turn, depend on a number of factors, including the Company’s ability to (i) integrate the operations and branches of Fincastle and the Bank, (ii) retain the deposits and customers of Fincastle and the Bank, (iii) control the incremental increase in noninterest expense arising from the Merger in a manner that enables the combined bank to improve its overall operating efficiencies, and (iv) retain and integrate the appropriate personnel of Fincastle into the operations of the Bank, and reduce overlapping bank personnel. The integration of Fincastle and the Bank will require the dedication of the time and resources of the Bank’s management and may temporarily distract management’s attention from the day-to-day business Failure to maintain effective systems of internal and disclosure controls could have a material adverse effect on the Company’s results of operation and financial condition. Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud, and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal controls, it may discover material weaknesses or significant deficiencies in its internal controls that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company continually works on improving its internal controls. However, the Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement of the Company’s internal and disclosure controls could, among other things, The Company or any of its subsidiaries is a defendant from time to time in a variety of litigation and other actions. The Company or any of its subsidiaries may be involved from time to time in a variety of litigation arising out of its business, and the Company operates in a legal and regulatory environment that exposes it to potential significant litigation risk. The Company’s insurance may not cover all claims that may be asserted against it in legal or administrative actions or costs that it may incur defending such actions, and any claims asserted against it, regardless of merit or eventual outcome, may harm the Company’s reputation. Should the ultimate judgments or settlements and/or costs incurred in any litigation exceed any applicable insurance coverage, they could have a material adverse effect on the Company’s financial condition and results of operation for any period. The Company is subject to claims and litigation pertaining to fiduciary responsibility. From time to time, customers make claims and take legal action pertaining to the performance of the Company’s fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company’s fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. The soundness of other financial institutions could adversely affect the Company. The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations. The operational functions of business counterparties over which the Company may have limited, or no control may experience disruptions that could adversely impact the Company. Every year, retailers and service providers are the target of data systems incursions which result in the thefts of credit and debit card information, online account information, and other financial data of their customers and users. These incursions affect cards issued and deposit accounts maintained by many banks, including the Company. Although our systems are not breached in such incursions, these events can cause the Company to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Company and its customers. In some cases, the Company may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (“cloud”) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers. Severe weather, pandemics, natural disasters, acts of war or terrorism, and other external events could significantly impact our business. Severe weather, pandemics, natural disasters, and other environmental risks, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, cause economic or market uncertainty, negatively impact consumer confidence, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause us to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Risks Related to the COVID-19 Pandemic The Company’s results of operations and financial condition may be adversely affected by the COVID-19 pandemic. The outbreak of the COVID-19 pandemic, the widespread government response and the impact on consumers and businesses have caused significant disruption in the United States and international economies and financial markets and may have had or may have a significant impact on consumers and businesses in our market area and the operations and financial performance of the Company. Governments, businesses and the public initially responded to the pandemic in ways that resulted in a significant disruption of economic activity, and the businesses of many of our customers have been adversely impacted, which could result in adverse impacts on our results of operations. Although the scope, duration and full effects of the pandemic are evolving and cannot be fully known at this time, consequences of the pandemic have included and may include further market volatility, lower interest rates, disrupted trade and supply chains, increased unemployment, rising prices, inflation and reduced economic activity. The period of recovery from the negative economic effects of the pandemic cannot be predicted and may be protracted. The effects of the pandemic on our borrowers has been mitigated by loan payment deferral programs and government stimulus or relief efforts, such as the PPP. However, as these programs have largely ended, signs of credit deterioration that were masked or obscured may emerge, and the Company can give no assurance that loan performance or net charge-offs will continue at the levels experienced in 2021 and 2020. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration and severity of the COVID-19 pandemic, the acceptance and continued effectiveness of vaccines and treatments for COVID-19, the effects of the pandemic on our customers and vendors, the short- and long-term health impacts of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. If the severity of the COVID-19 pandemic worsens, additional actions may be taken by federal, state, and local governments, or public behavior may change in response to evolving circumstances, to mitigate its effects. There can be no assurance that any efforts by the Company to address the adverse impacts of the COVID-19 pandemic will be effective. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of changes in the behavior of customers, businesses and their employees. Furthermore, the financial condition of our customers and vendors may be adversely impacted, which may result in an elevated level of loan losses, a decrease in demand for our products and services, or reduced availability of services provided by third parties on which we rely. Any of these events may, in turn, have a material adverse impact our business, results of operations and financial condition. Risks Related to the Regulation of the Company Compliance with laws, regulations and supervisory guidance, both new and existing, may adversely affect our business, financial condition and results of operations. We are subject to numerous laws, regulations and supervision from both federal and state agencies. Failure to comply with these laws and regulations could result in financial, structural and operational penalties, including receivership. In addition, establishing systems and processes to achieve compliance with these laws and regulations may increase our costs and/or limit our ability to pursue certain business opportunities. Laws and regulations, and any interpretations and applications with respect thereto, generally are intended to benefit consumers, borrowers and depositors, but not stockholders. The legislative and regulatory environment is beyond our control, may change rapidly and unpredictably and may negatively influence our revenues, costs, earnings, and capital levels. Our success depends on our ability to maintain compliance with both existing and new laws and regulations. We expect that financial institutions will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices. Future legislation, regulation and government policy could affect the banking industry as a whole, including the Company’s business and results of operations, in ways that are difficult to predict. In addition, the Company’s results of operations could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies. The CFPB may increase our regulatory compliance burden and could affect the consumer financial products and services that we offer. Among significant regulatory changes, the Dodd-Frank Act created a new financial consumer protection agency, the CFPB. The CFPB is reshaping the consumer financial laws through rulemaking and enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive consumer finance products or practices, which are directly affecting the business operations of financial institutions offering consumer financial products or services. This agency’s broad rulemaking authority includes identifying practices or acts that are unfair, deceptive or abusive in connection with any consumer financial transaction, financial product or service. Although the CFPB has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the CFPB may also apply to the Company or its subsidiaries by virtue of the adoption of such policies and best practices by the Federal Reserve and the FDIC. Further, the CFPB may include its own examiners in regulatory examinations by the Company’s primary regulators. The total costs and limitations related to this additional regulatory agency and the limitations and restrictions that will be placed upon the Company with respect to its consumer product and service offerings have yet to be determined in their entirety. However, these costs, limitations and restrictions may produce significant, material effects on our business, financial condition and results of operations. Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The policies of the Federal Reserve affect us significantly. The Federal Reserve regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower's products and services. This could adversely affect the borrower’s earnings and ability to repay a loan, which could have a material adverse effect on our financial condition and results of operations. The Company is subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act, the short-term and long-term impact of which is uncertain. The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for Legislative or regulatory changes or actions, or significant litigation, could adversely affect the Company or the businesses in which the Company is engaged. The Company is subject to extensive state and federal regulation, supervision, and legislation that govern almost all aspects of its operations. Laws and regulations change from time to time and are primarily intended for the protection of consumers, depositors, and the FDIC’s DIF. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively affect the Company or its ability to increase the value of its business. Such changes could include higher capital requirements, and See the section of this report entitled “Supervision and Regulation” for additional information on the statutory and regulatory issues that affect the Company’s business. Changes in accounting standards could impact reported earnings and capital. The authorities that promulgate accounting standards, including the Financial Accounting Standards Board (the FASB), the Changes in tax rates applicable to the Company may cause impairment of deferred tax assets. The Company determines deferred income taxes using the balance sheet method. Under this method, each asset and liability The marginal tax rate applicable to the Company, as with all entities subject to federal income tax, is based on the Company’s taxable income. If the Company’s taxable income declines such that the Company’s marginal tax rate declines, the change in deferred income tax assets and liabilities would result in an expense during the period that a lower marginal tax rate occurs. If changes in tax rates and laws are enacted, the The In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one-week and Regulators, industry groups, and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., SOFR, as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in Increasing scrutiny and evolving expectations from customers, regulators, investors, and other Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to the Company’s overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company’s reputation, ability to do business with certain partners, and the Company’s stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks’ risk management practices. In December 2021, the Office of the The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank’s loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company’s financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company’s financial condition and results of operations. The Company relies on dividends from its subsidiaries for substantially all of its revenue. The Company is a bank holding company that conducts substantially all of its operations through the Bank. As a result, the Company relies on dividends from the Bank for substantially all of its revenues. There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations, or pay a cash dividend to the holders of its common stock and the Company’s business, financial condition, and results of operations may be materially adversely affected. Further, although the Company has historically paid a cash dividend to the holders of its common stock, holders of the common stock are not entitled to receive dividends, and regulatory or economic factors may cause the Company’s Board of Directors to consider, among other things, the reduction of dividends paid on the Company’s common stock even if the Bank continues to pay dividends to the Company. There is a limited trading market for the The trading volume in the Company’s common stock has been relatively limited. Even if a more active market develops, there can be no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of its common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock. Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock. The lack of liquidity of the investment in the common shares should be carefully considered when making an investment decision. Future issuances of the The Company is not restricted from issuing additional authorized shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, including in connection with acquisitions by the Company, could materially adversely affect the market price of the shares of common stock and could be dilutive to shareholders. Because the Company’s decision to issue common stock in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing, or nature of possible future issuances of its common stock. Accordingly, the Company’s shareholders bear the risk that future issuances will reduce the market price of the common stock and dilute their stock holdings in the Company. Current economic conditions or other factors may cause volatility in the The value of publicly traded stocks in the financial services sector can be volatile. The value of the Company’s common stock can also be affected by a variety of factors such as expected results of operations, actual results of operations, actions taken by shareholders, news or expectations based on the performance of others in the financial services industry and expected impacts of a changing regulatory environment. These factors not only impact the value of the Company’s common stock but could also affect the liquidity of the stock given the Company’s size, geographical footprint, and industry. Future sales of our common stock by shareholders or the perception that those sales could occur may cause our common stock price to decline. Although our common stock is listed for trading on NASDAQ Capital Market stock exchange, the trading volume in our common stock may be lower than that of other larger financial institutions. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the potential for lower relative trading volume in our common stock, significant sales of the common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of these sales or perceptions. The The Company's ability to pay dividends on common stock is also limited by contractual restrictions under its subordinated debt and junior subordinated debt. Interest must be paid on the subordinated debt and junior subordinated debt before dividends may be paid to common shareholders. The Company is current in its interest payments on subordinated debt and junior subordinated debt; however, it has the right to defer distributions on its junior subordinated debt, during which time no dividends may be paid on its common stock. If the Company does not have sufficient earnings in the future and begins to defer distributions on the junior subordinated debt, it will be unable to pay dividends on its common stock until it becomes current on those distributions. The The Company’s Articles of Incorporation and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control of the Company. These provisions and the ability to set the voting rights, preferences, and other terms of any series of outstanding preferred stock and preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company’s common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders and could potentially adversely affect the market price of the Company’s common stock. Unresolved Staff Comments Not applicable. Properties The Company, through its primary operating subsidiary, First Bank, owns or leases buildings that are used in the normal course of business. The Company’s headquarters is located at 112 West King Street, Strasburg, Virginia. The Bank owns or leases various other offices in the counties and cities in which it operates. At December 31, Legal Proceedings There are no material pending legal proceedings to which the Company is a party or to which the property of the Company is subject. Mine Safety Disclosures None. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Shares of the common stock of the Company are traded on the Dividend Policy A discussion of certain limitations on the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends on its common stock, is set forth in Part I., Item 1—Business, of this Form 10-K under the headings “Supervision and Regulation - Limits on Dividends and Other Payments” and Item 1A—Risk Factors, “The Company’s subordinated debt and junior subordinated debt are superior to The Company’s future dividend policy is subject to the discretion of its Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity and capital requirements of both the Company and the Bank, applicable governmental regulations and policies and other factors deemed relevant by the Board of Directors. Issuer Purchases of Equity Securities During the fourth quarter of 2019, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company may have repurchased up to $5.0 million of its outstanding common stock. Repurchases [Reserved] Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the financial condition and results of operations of the Company for the years ended December 31, Executive Overview The Company First National Corporation (the Company) is the bank holding company of: • First Bank (the Bank). The Bank owns: • First Bank Financial Services, Inc. • Shen-Valley Land Holdings, LLC • First National (VA) Statutory Trust II (Trust II) • First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts) First Bank Financial Services, Inc. invests in entities that provide title insurance and investment services. Shen-Valley Land Holdings, LLC Products, Services, Customers and Locations 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, Revenue Sources and Expense Factors 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, Primary expense categories are salaries and employee benefits, which Net income increased by The Net interest income increased The provision for loan Noninterest income increased $1.9 million, primarily from increases in ATM and check card fees, wealth management fees, fees for other customer services and other operating income. The merger with Fincastle contributed to increases in all noninterest income categories, except for wealth management fees. Noninterest expense increased $8.9 million, 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 $3.5 million during the The following is selected financial data for the Company for the years ended December 31, As of and for the years ended December 31, 2021 2020 Results of Operations Interest and dividend income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax expense Net income Key Performance Ratios Return on average assets Return on average equity Net interest margin (1) Efficiency ratio (1) Dividend payout Equity to assets Per Common Share Data Net income, basic Net income, diluted Cash dividends Book value at period end Financial Condition Assets Loans, net Securities Deposits Shareholders’ equity Average shares outstanding, diluted Capital Ratios (2) Leverage Risk-based capital ratios: Common equity Tier 1 capital Tier 1 capital Total capital (1) This performance ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational performance. Such information is not prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be construed as such. Management believes 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. See “Non-GAAP Financial Measures” included in Item 7 of this Form 10-K. (2) All capital ratios reported are for the Bank. For a more detailed discussion of the Company's annual performance, see "Net Interest Income,” “Provision for Loan Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below. Acquisition of The Bank of Fincastle 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 bank branch offices operating in the Roanoke Valley region of Virginia and reported total assets of $267.9 million, total loans of $194.5 million and total deposits of $236.3 million. For the year ended December 31, 2021, the Company recorded merger related expenses of $3.4 million in connection with the acquisition of Fincastle. The Company estimates that it will incur an additional $20 thousand of merger related expenses in the first and second quarters of 2022. 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. All branch offices were operating as First Bank as of December 31, 2021. 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 Acquisition of SmartBank Loan On September 30, 2021, the Bank acquired $82.0 million of loans and certain fixed assets from SmartBank related to 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 closed their branch operation on December 31, 2021. First Bank assumed the facility lease at the branch on December 31, 2021 and now operates a loan production office in the location of the former SmartBank branch. First Bank’s assumption of the lease and acquisition of the remaining branch assets was completed in the 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 Non-GAAP Financial Measures This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding OREO Efficiency Ratio 2021 2020 Noninterest expense Subtract: other real estate owned expense, net Subtract: amortization of intangibles Subtract: merger related expenses Tax-equivalent net interest income Noninterest income Subtract: securities gains, net Efficiency ratio 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 2020 GAAP measures: Interest income - loans Interest income - investments and other Interest expense - deposits Interest expense – subordinated debt Interest expense – junior subordinated debt Total net interest income Non-GAAP measures: Tax benefit realized on non-taxable interest income - loans Tax benefit realized on non-taxable interest income - municipal securities Total tax benefit realized on non-taxable interest income Total tax-equivalent net interest income Critical Accounting Policies General 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 Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance 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 1, 3, and 4 to the Consolidated Financial Statements included in this Form 10-K. 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. 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 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: • 1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral. • Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project. • Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project. • Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability. • Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. Consumer loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. These loans are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Other loans included in this category include loans to states and political subdivisions. 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 Notes 1 and 4 to the Consolidated Financial Loans Acquired in a Business Combination Purchased performing loans are those for Goodwill Lending Policies General 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 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 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 normal 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 December 31, Construction and Land Development Lending 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 1-4 Family Residential Real Estate Lending 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 Commercial Real Estate Lending 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 Lending Commercial and industrial loans generally have a higher degree of risk than loans secured by real estate, but typically have higher yields. Commercial 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. Consumer Lending 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 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, changes in the economic environment, and 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 with the Company's vendor management program. General 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, noninterest expense and Net Interest Income For the year ended December 31, Interest income increased $4.3 million during 2021. The higher amount of total interest and dividend income resulted from increases in both interest and fees on loans and interest on securities. Interest and fees on loans increased $3.3 million, or 11%, from a 14% increase in average loan balances, which was partially offset by a 12-basis point decrease in the yield on total loans to 4.61%. Accretion on deferred PPP fee income, net of costs, was included in interest and fees on loans, which totaled $2.0 million for the year ended December 31, 2021, compared to $824 thousand in the prior year. The total amount of deferred PPP income, net of origination costs, not yet recognized through interest and fees on loans totaled $367 thousand at December 31, 2021. As a result, the Bank expects accretion of deferred PPP income, net of origination costs, to decrease significantly in future periods, when compared to income recognized in 2021 and 2020. Accretion of loan discounts, net of premium amortization, on acquired loans was also included in interest and fees on loans and totaled $408 thousand for the year ended December 31, 2021. There was no accretion or amortization of discounts or premiums on acquired loans during 2020. Interest and dividends on securities increased $960 thousand, or 30%, during 2021 from a 57% increase in average securities balances, which was partially offset by a 39-basis point decrease in the yield on total securities to 1.96%. Total interest expense The following table provides information on average interest-earning assets and interest-bearing liabilities for the years ended December 31, Average Balances, Income and Expense, Yields and Rates (Taxable Equivalent Basis) Years Ending December 31, 2021 2020 Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate Assets Interest-bearing deposits in other banks Securities: Taxable Tax-exempt (1) Restricted Total securities Loans: (2) Taxable Tax-exempt (1) Total loans Federal funds sold Total earning assets Less: allowance for loan losses Total nonearning assets Total assets Liabilities and Shareholders’ Equity Interest-bearing deposits: Checking Money market accounts Savings accounts Certificates of deposit: Less than $100 Greater than $100 Brokered deposits Total interest-bearing deposits Federal funds purchased Subordinated debt Junior subordinated debt Other borrowings Total interest-bearing liabilities Noninterest-bearing liabilities Demand deposits Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest income Interest rate spread Cost of funds Interest expense as a percent of average earning assets Net interest margin (1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of (2) Loans placed on a non-accrual status are reflected in the balances. Volume and Rate Years Ending December 31, 2021 Volume Effect Rate Effect Change in Income/Expense Interest-bearing deposits in other banks Loans, taxable Loans, tax-exempt Securities, taxable Securities, tax-exempt Securities, restricted Federal funds sold Total earning assets Checking Money market accounts Savings accounts Certificates of deposits: Less than $100 Greater than $100 Brokered deposits Federal funds purchased Subordinated debt Junior subordinated debt Other borrowings Total interest-bearing liabilities Change in net interest income Provision for Loan Losses Recovery of loan losses Recovery of loan losses of $650 thousand and net charge offs of $1.1 million resulted The Noninterest Income Noninterest income Noninterest Expense Noninterest expense increased $8.9 million, or 38%, to $32.7 million for the year ending December 31, 2021, compared to the Merger and acquisition expenses totaled $1.3 million for the three month period Income Taxes Income tax expense increased General Total assets increased At December 31, 2021, total liabilities increased $406.4 million to $1.3 billion compared to $866.0 million at December 31, 2020. The increase was attributable to the acquisition of Fincastle, on July 1, 2021, which added total liabilities of $238.0 million, and growth of the Bank's deposit portfolio. Total deposits increased by Total shareholders' equity increased $32.1 million to $117.0 million at December 31, 2021, compared to $84.9 million at December 31, 2020. The increase was primarily attributable to the Loans The Bank is an active lender with a loan portfolio that Loans, net of allowance for loan losses, increased The following table sets forth the maturities of the loan portfolio at December 31, Maturity/Repricing Schedule of Loans Held for Investment December 31, 2021 Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total Variable Rate: Within 1 year 1 to 5 years 5 to 15 years After 15 years Fixed Rate: Within 1 year 1 to 5 years 5 to 15 years After 15 years Asset Quality Management classifies non-performing assets as non-accrual loans and Non-performing assets totaled At December 31, There were no loans greater During the fourth quarter of 2020 and 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 $11.5 million at December 31, 2021, which were all in the Bank’s commercial real estate loan portfolio. All modified loans were either performing under their modified terms or resumed regular loan payments as of December 31, 2021. The allowance for loan For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above. Recoveries of loan losses of Impaired loans 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 Allowance for loan losses Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total For the year ended December 31, 2020: Balance at beginning of year Charge-offs Recoveries Provision for (recovery of) loan losses Balance at end of year Average loans Ratio of net (recoveries) charge-offs to average loans For the year ended December 31, 2021: Balance at beginning of year Charge-offs Recoveries Provision for (recovery of) loan losses Balance at end of year Average loans Ratio of net (recoveries) charge-offs to average loans The following table shows the balance of the Bank’s allowance for loan losses allocated to each major category of loans and the ratio of related outstanding loan balances to total loans (dollars in thousands). Allocation of Allowance for Loan Losses At December 31, 2021 2020 Allocation of Allowance for Loan Losses: Real estate loans: Construction and land development Secured by 1-4 family Other real estate loans Commercial and industrial Consumer and other loans Total allowance for loan losses Ratios of loans to total period-end loans: Real estate loans: Construction and land development Secured by 1-4 family Other real estate loans Commercial and industrial Consumer and other loans The following table provides information on the Bank’s non-performing assets at the dates indicated (dollars in thousands). Non-performing Assets At December 31, 2021 2020 Non-accrual loans Other real estate owned Total non-performing assets Loans past due 90 days accruing interest Total non-performing assets and past due loans Troubled debt restructurings Non-performing assets to period end loans The following table summarizes the Company's credit ratios on a consolidated basis as of December 31, 2021 and 2020. Consolidated Credit Ratios December 31, 2021 2021 2020 Total Loans Nonaccrual loans Allowance for loan losses (ALL) Nonaccrual loans to total loans ALL to total loans ALL to nonaccrual loans Securities Securities totaled $324.8 million at December 31, The following table shows the maturities of debt and Securities Portfolio Maturity Distribution/Yield Analysis At December 31, 2021 Total U.S. Treasury securities Amortized cost Market value Weighted average yield U.S. agency and mortgage-backed securities Amortized cost Market value Weighted average yield Obligations of state and political subdivisions Amortized cost Market value Weighted average yield Corporate debt securities Amortized cost Market value Weighted average yield Restricted securities Amortized cost Market value Weighted average yield Total portfolio Amortized cost Market value Weighted average yield (1) (1) Yields on tax-exempt securities have been calculated on a tax-equivalent The above table was prepared using the contractual maturities for all securities with the exception of mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO). Both MBS and CMO securities were recorded using the yield book prepayment model that incorporates four causes of prepayments including home sales, refinancing, defaults, and curtailments/full payoffs. As of December 31, Deposits At December 31, The following tables include a summary of average deposits and average rates paid Average Deposits and Rates Paid Year Ended December 31, 2021 2020 Amount Rate Amount Rate Noninterest-bearing deposits Interest-bearing deposits: Interest checking Money market Savings Time deposits: Less than $100 Greater than $100 Brokered deposits Total interest-bearing deposits Total deposits The table above includes brokered deposits greater than $100 thousand. As of December 31, 2021 the estimated amount of total uninsured deposits was $246.0 million. Maturities of the estimated amount of uninsured time deposits at December 31, 2021 are presented in the table below. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank’s regulatory reporting requirements. Maturities of Uninsured Time Deposits December 31, 2021 3 months or less 3-6 months 6-12 months Over 12 months Liquidity 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 December 31, Subordinated Debt See Note 9 to the Junior Subordinated Debt See Note 10 to the 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. At December 31, 2021 2020 Commitments to extend credit and unfunded commitments under lines of credit Stand-by letters of credit Commitments to extend credit 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 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 December 31, 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 for periods that end between June 2034 and October 2036. The cash flow hedges’ total notional amount is $9.0 million. At December 31, 2021, the cash flow hedges had a fair value of $941 thousand, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive 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 24 to the Consolidated Financial Statements included in this Form 10-K. Capital Resources 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 obligated to report consolidated regulatory capital. Effective January 1, 2015, the The The following table summarizes the Bank’s regulatory capital and related ratios at December 31, Analysis of Capital At December 31, 2021 2020 Common equity Tier 1 capital Tier 1 capital Tier 2 capital Total risk-based capital Risk-weighted assets Capital ratios: Common equity Tier 1 capital ratio Tier 1 capital ratio Total capital ratio Leverage ratio (Tier 1 capital to average assets) Capital conservation buffer ratio(1) (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital. The lowest of the three measures represents the Bank’s capital conservation buffer ratio. The 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 would not be required to report or calculate risk-based capital. Although the Bank did not opt into the CBLR framework at December 31, 2021, it may opt into the CBLR framework in a future quarterly period. For further discussion regarding the CARES Act, see "Supervision and Regulation" included in Item 1 of this Form 10-K. During the fourth quarter of 2019, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company may have repurchased up to $5.0 million of its outstanding common stock through December 31, 2020. During 2020, 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’s stock repurchase plan was suspended in the second quarter of 2020, and remained suspended until it ended on December 31, 2020. The Company has not authorized another stock repurchase plan as of December 31, 2021. The Company continues 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. 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 was able to use the proceeds of the issuance for general corporate purposes. The subordinated debt issued consisted 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 considering several factors, including the overall risk profile and capital adequacy of the Company and the Bank, on January 1, 2022, the Company repaid $5.0 million of subordinated debt with a fixed interest rate of 6.75% that was issued in 2015. The capital planning process also included consideration of whether to continue the Company’s cash dividend payments to common shareholders. The Company continued to pay quarterly cash dividends on its common stock throughout the pandemic. The Company acquired Fincastle on July 1, 2021 and their 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 First Bank acquired SmartBank’s Richmond, Virginia office and hired a team of their employees on September 30, 2021, which included the office’s loan portfolio and certain fixed assets. First Bank also assumed SmartBank’s office lease during the fourth quarter of 2021. The acquisition of the SmartBank loans resulted in goodwill that was excluded from the regulatory capital of First Bank. For the three-month and twelve-month periods ended December 31, 2021, the Company recorded merger and acquisition related expenses of $101 thousand in connection with the acquisition of the SmartBank loans. The Company does not anticipate incurring any additional SmartBank acquisition related costs in future periods. First Bank remained well-capitalized at December 31, 2021. Recent Accounting Pronouncements See Note 1 to the Quantitative and Qualitative Disclosures About Market Risk Not required. Financial Statements and Supplementary Data The Consolidated Financial Statements and related footnotes of the Company are presented below followed by the financial statements of the Parent. To the Shareholders March First National Corporation Strasburg, Virginia MANAGEMENT’S REPORT REGARDING THE EFFECTIVENESS OF INTERNAL CONTROLS OVER FINANCIAL REPORTING The management of First National Corporation (the Company) is responsible for the preparation, integrity and fair presentation of the financial statements included in the annual report as of December 31, Management is also responsible for establishing and maintaining an effective internal control structure over financial reporting. The Company’s internal control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process, summarize and report reliable financial data. The internal control system contains monitoring mechanisms, and appropriate actions are taken to correct identified deficiencies. Management believes that internal controls over financial reporting, which are subject to scrutiny by management and the Company’s internal auditor, support the integrity and reliability of the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. In addition, because of changes in conditions and circumstances, the effectiveness of internal control over financial reporting may vary over time. In order to ensure that the Company’s internal control structure over financial reporting is effective, management assessed these controls as they conformed to accounting principles generally accepted in the United States of America and related call report instructions as of December 31, The Management believes that all representations made to the independent auditors were valid and appropriate. The resulting report from YHB accompanies the consolidated financial statements. The Board of Directors of the Company, acting through its Audit Committee (the Committee), is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditors and approves decisions regarding the appointment or removal of members of the internal audit function. The Committee meets periodically with management, the independent auditors, and the internal auditor to insure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditor have full and unlimited access to the Audit Committee, with or without the presence of the management of the Company, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee. /s/ Scott C. Harvard /s/ M. Shane Bell Scott C. Harvard M. Shane Bell President Executive Vice President Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors First National Corporation Strasburg, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First National Corporation and subsidiary (the Company) as of December 31, Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical AuditMatters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Loan Losses – Loans Collectively Evaluated for Impairment – Qualitative Factors Description of the Matter As described in Note 1 (Nature of Banking Activities and Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) to the consolidated financial statements, the Company establishes an allowance for loan losses that represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The Company’s allowance for loan losses consists of specific and general components. The general component covers loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors. At December 31, 2021, the general component represented $5,655,000 of the total allowance for loan losses of $5,710,000. The qualitative factors are assigned by management by loan type based on delinquencies and asset quality, national and local economic trends, effects of changes in the value of underlying collateral, trends in the volume and nature of loans, effects of changes in lending policy, experience and depth of management, concentrations of credit, quality of the loan review system, and effect of external factors such as competition and regulatory requirements. Qualitative factors can change from period to period based on management’s assessment and the relative weights given to each factor. Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: Business Combinations – Fair Value of Acquired Loans Description of the Matter As described in Note 1 (Nature of Banking Activities and Significant Accounting Policies) and Note 25 (Acquisitions), the Company completed acquisitions of The Bank of Fincastle (total consideration $33,821,000) and certain loans and other assets of SmartBank (total consideration $83,745,000) during 2021. The transactions were accounted for as business combinations using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed were recorded at fair value on the acquisition date, including acquired loans. As disclosed by management, determining the acquired fair values, particularly in relation to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. In determining the fair value of loans acquired, management must determine whether or not acquired loans have evidence of credit deterioration at acquisition, the amount and timing of cash flows expected to be collected, and market discount rates, among other assumptions. Changes in these assumptions could have a significant impact on the fair value of the loans acquired and the amount of goodwill recorded. We identified the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate is especially complex and requires subjective auditor judgment. Auditing this estimate required a high level of judgment in evaluating management’s determination of whether or not acquired loans had evidence of credit deterioration, the need for specialized skill in development and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolios. How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: • Evaluating and testing management’s process for determining whether or not acquired loans had evidence of credit deterioration. • Substantively testing management’s process, including the use of our own valuation specialist to assess the management’s methods and significant assumptions utilized in determining the fair value of the acquired loan portfolios and evaluating whether the assumptions used were reasonable with respect to market participant views and other factors. • Testing the accuracy of the data utilized in the development of acquisition date fair values by confirming, on a sample basis, select data. /s/ YOUNT, HYDE & BARBOUR, P.C. We have served as the Company's auditor since 1988. Winchester, Virginia March 30, 2022 FIRST NATIONAL CORPORATION Consolidated Balance Sheets December 31, (in 2021 2020 Assets Cash and due from banks Interest-bearing deposits in banks Securities available for sale, at fair value Securities held to maturity, at amortized cost (fair value, 2021, $33,617; 2020, $14,743) Restricted securities, at cost Loans held for sale Loans, net of allowance for loan losses, 2021, $5,710, 2020, $7,485 Other real estate owned, net of valuation allowance, 2021, $139, 2020, $0 Premises and equipment, net Accrued interest receivable Bank owned life insurance Core deposit intangibles, net Goodwill Other assets Total assets Liabilities & Shareholders’ Equity Liabilities Deposits: Noninterest-bearing demand deposits Savings and interest-bearing demand deposits Time deposits Total deposits Subordinated debt Junior subordinated debt Accrued interest payable and other liabilities Total liabilities Commitments and contingencies Shareholders’ Equity Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2021, 6,228,176 shares, 2020, 4,860,399 shares Surplus Retained earnings Accumulated other comprehensive income, net Total shareholders’ equity Total liabilities and shareholders’ equity See Notes to Consolidated Financial Statements FIRST NATIONAL CORPORATION Consolidated Statements of Income Years Ended December 31, (in thousands, except per share data) 2021 2020 Interest and Dividend Income Interest and fees on loans Interest on deposits in banks Interest on federal funds sold Interest and dividends on securities: Taxable interest Tax-exempt interest Dividends Total interest and dividend income Interest Expense Interest on deposits Interest on subordinated debt Interest on junior subordinated debt Total interest expense Net interest income (Recovery of) provision for loan losses Net interest income after (recovery of) provision for loan losses Noninterest Income Service charges on deposit accounts ATM and check card fees Wealth management fees Fees for other customer services Brokered mortgage fees Income from bank owned life insurance Net gains on securities available for sale Net gains on sale of loans Net gains on disposal of premises and equipment Other operating income Total noninterest income See Notes to Consolidated Financial Statements Consolidated Statements of Income (Continued) Years Ended December 31, (in thousands, except per share data) 2021 2020 Noninterest Expense Salaries and employee benefits Occupancy Equipment Marketing Supplies Legal and professional fees ATM and check card expenses FDIC assessment Bank franchise tax Data processing expense Amortization expense Other real estate owned expense, net Other operating expense Total noninterest expense Income before income taxes Income tax expense Net income Earnings per common share Basic Diluted See Notes to Consolidated Financial Statements FIRST NATIONAL CORPORATION Consolidated Statements of Comprehensive Income Years Ended December 31, (in thousands) 2021 2020 Net income Other comprehensive income, net of tax: Unrealized holding (loss) gains on available for sale securities, net of tax ($923) and $629, respectively Reclassification adjustment for (losses) included in net income, net of tax ($8) and ($8), respectively Change in fair value of cash flow hedges, net of tax $107 and $91, respectively Total other comprehensive (loss) income Total comprehensive income See Notes to Consolidated Financial Statements FIRST NATIONAL CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, (in thousands) 2021 2020 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment Amortization of core deposit intangibles Amortization of debt issuance costs Origination of loans held for sale Proceeds from sale of loans held for sale Net gains on sales of loans held for sale (Recovery of) provision for loan losses Fair value adjustments on other real estate owned Gains on securities available for sale Net gains on sale of other real estate owned Increase in cash value of bank owned life insurance Accretion of discounts and amortization of premiums on securities, net Accretion of premium on time deposits Accretion of certain acquisition-related discounts, net Stock-based compensation Excess tax benefits on stock-based compensation (Gains) on disposal of premises and equipment Deferred income tax benefit Changes in assets and liabilities: Decrease (increase) in interest receivable (Increase) decrease in other assets (Decrease) increase in accrued expenses and other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from maturities, calls, principal payments, and sales of securities available for sale Proceeds from maturities, calls, and principal payments of securities held to maturity Purchases of securities available for sale Purchases of securities held to maturity Net redemption (purchase) of restricted securities Purchase of premises and equipment, net Proceeds from sale of premises and equipment Proceeds from sale of other real estate owned Net cash paid in acquisition of SmartBank Net cash acquired in acquisition of The Bank of Fincastle Net (decrease) increase in loans Net cash used in investing activities See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows (Continued) Years Ended December 31, (in thousands) 2021 2020 Cash Flows from Financing Activities Net increase in demand deposits and savings accounts Net decrease in time deposits Proceeds from subordinated debt, net of issuance costs Cash dividends paid on common stock, net of reinvestment Repurchase of common stock, stock incentive plan Repurchase of common stock, stock repurchase plan Net cash provided by financing activities Increase in cash and cash equivalents Cash and Cash Equivalents Beginning Ending Supplemental Disclosures of Cash Flow Information Cash payments for: Interest Income taxes Supplemental Disclosures of Noncash Transactions Unrealized (losses) gains on securities available for sale Change in fair value of cash flow hedges Transfer from loans to other real estate owned Issuance of common stock, dividend reinvestment plan Supplemental Disclosures of Noncash Transactions Related to Acquisitions Assets acquired Liabilities assumed See Notes to Consolidated Financial Statements FIRST NATIONAL CORPORATION Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, (in thousands, except share and per share data) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income Total Balance, December 31, 2019 Net income Other comprehensive income Cash dividends on common stock ($0.44 per share) Stock-based compensation Issuance of 9,449 shares common stock, dividend reinvestment plan Issuance of 12,492 shares common stock, stock incentive plan Repurchase of 2,223 shares of common stock, stock incentive plan Repurchase of 129,035 shares of common stock, stock repurchase plan Balance, December 31, 2020 Common Stock Surplus Retained Earnings Total Balance, December 31, 2020 Net income Other comprehensive (loss) Cash dividends on common stock ($0.48 per share) Shares issued to shareholders of The Bank of Fincastle, net of costs (1,348,065 shares) Stock-based compensation Issuance of 7,861 shares common stock, dividend reinvestment plan Issuance of 14,073 shares common stock, stock incentive plan Repurchase of 2,221 shares of common stock, stock incentive plan Balance, December 31, 2021 See Notes to Consolidated Financial Statements FIRST NATIONAL CORPORATION Notes to Consolidated Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies First National Corporation (the Company) is the bank holding company of First Bank (the Bank), First National (VA) Statutory Trust II (Trust II), and First National (VA) Statutory Trust III (Trust The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to accepted practices within the banking industry. Risks and Uncertainties 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. While there has been no material impact to the Company’s employees to date, COVID-19 could 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 provided an additional $1.9 trillion in spending to address the continued impact of COVID-19. The goal of these legislative measures was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. 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. Results of Operations 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 extend 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. A 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 and ATM and check card income decreased during 2020 and may continue to decrease in future periods from less customer spending and or higher balances of customer deposits. 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 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-19may have an unfavorable impact on net interest income, noninterest income, noninterest expense, and loan customers' ability to repay loans, in future periods. Capital and Liquidity 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 the year until it ended on December 31, 2020. 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. Processes, Controls and Business Continuity Plan 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. Lending Operations and Accommodations to Borrowers 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. During the fourth quarter of 2020, 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 ranging between 6 and 24 months. All loans modified were in the Bank’s commercial real estate loan portfolio and totaled $11.5 million at December 31, 2021. All related loans were in the lodging 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 $12.5 million at December 31, 2021, with $159 thousand scheduled to mature in the second and third quarters of 2022, and $12.3 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. Asset Quality 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 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. Principles of Consolidation The consolidated financial statements of First National Corporation include the accounts of all six companies. All material intercompany balances and transactions have been eliminated in consolidation, except for balances and transactions related to the Trusts. The subordinated debt of these Trusts is reflected as a liability of the Company. Use of Estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located within the Shenandoah Valley, Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company has defined cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-bearing deposits in banks.” Securities Investments in debt securities with readily determinable fair values are classified as either held to maturity (HTM), available for sale (AFS), or trading based on management’s intent. Currently, all of the Company’s debt securities are classified as either AFS or HTM. Equity investments in the FHLB, the Federal Reserve Bank of Richmond, and Community Bankers Bank are separately classified as restricted securities and are carried at cost. AFS securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income, Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either the Company For equity securities carried at cost, such as restricted securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. The Company regularly reviews each security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity, and the likelihood that the Company would be required to sell the security before recovery. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Company, through its banking subsidiary, requires a firm purchase commitment from a permanent investor before loans held for sale can be closed, thus limiting interest rate risk. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Bank enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Bank commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Bank is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Bank determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments. Loans 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 loans, and consumer and other loans. Real estate loans are further divided into the following classes: Construction and Land Development; Real Real Real CommercialandIndustrialLoans: 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. Consumer 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 be impacted by the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their 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. 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. 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. Loans Acquired in a Business Combination Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. There were 0 acquired loans classified as PCI in the acquisition of Fincastle and the SmartBank loan portfolio acquisition during the third quarter of 2021. Purchased performing loans are those for which there is no evidence of credit deterioration and it is probable at the date of acquisition that the Company will collect all contractually required principal and interest payments. When determining fair value, purchased performing loans are evaluated individually on the date of the acquisition. Premiums or discounts recorded on the acquired loans are amortized or accreted into income evenly over the life of the loans through interest and fees on loans. The Company calculates required allowance for loan losses for each of the acquired loans quarterly. Provision for loan losses is recorded for the purchased performing loans for the amount of the required allowance for loan losses that exceeds any unaccreted discount. All loans acquired from Fincastle and SmartBank in the third quarter of 2021 were considered purchased performing loans. Impaired Loans 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. Troubled Debt Restructurings (TDR) 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 Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance 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. 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. 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 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: • 1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral. • Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project. • Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project. • Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability. • Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area. 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 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. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from three years to forty years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over its estimated useful life ranging from three to seven years. Depreciation and amortization are recorded on the straight-line method. Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations. Other Real Estate Owned Other real estate owned (OREO) consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans and properties originally acquired for branch operations or expansion but no longer intended to be used for that purpose. OREO is initially recorded at fair value less estimated costs to sell to establish a new cost basis. OREO is subsequently reported at the lower of cost or fair value less costs to sell, determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors or recent developments, such as changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustments to the collateral value estimates indicated in the appraisals. Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its distressed asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned. Management reviews the value of other real estate owned each quarter, if any, and adjusts the values as appropriate. Revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned Bank-Owned Life Insurance The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans, including healthcare. The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and any increase in cash surrender value is recorded as income from bank owned life insurance on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company receives a death benefit which is also recorded as income from bank owned life insurance. The Company Intangible assets consist of a core deposit intangible asset arising from the acquisition of the Bank of Fincastle which is amortized on an accelerated method over its estimated useful life of ten years. The Company also recorded goodwill as a result of the acquisition of the Bank of Fincastle and SmartBank in 2021. Goodwill and Other Intangible Assets 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 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 Derivative Financial Instruments The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in its Consolidated Balance Sheets. The Company’s derivative financial instruments are comprised of interest rate swaps that qualify and are designated as cash flow hedges on the Company’s junior subordinated debt. Gains or losses on the Company’s cash flow hedges are reported as a component of other comprehensive income, net of deferred income taxes, 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 24. Stock Based Compensation Compensation cost is recognized for restricted stock units and other stock awards issued to employees and directors based on the fair value of the awards at the date of grant. The market price of the Company’s common stock at the date of grant is used to estimate the fair value of restricted stock units and other stock awards. Retirement Plans Employee Transfers of Financial Assets Transfers of financial assets, including loan participations, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when Income Taxes Deferred income When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the Wealth Management Department Securities and other property held by the wealth management department in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements. Earnings Per Common Share 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 reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to restricted stock units and are determined using the treasury method. See Note 14 for further information regarding earnings per common share. Advertising Costs The Company follows the policy of charging the production costs of advertising to expense as incurred. Total advertising expense incurred for Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements. Business Combination 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 Adoption of New Accounting Standards In December 2019, the In 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 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 In 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. Note 2. Securities The Company invests in U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of states and political subdivisions, 2021 Securities available for sale: U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total securities available for sale Securities held to maturity: U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities held to maturity Total securities 2020 Securities available for sale: U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale Securities held to maturity: U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total securities held to maturity Total securities At December 31, 2021 Less than 12 months 12 months or more Total Fair Value Fair Value Fair Value Securities available for sale: U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale Securities held to maturity: U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities held to maturity Total securities 2020 Less than 12 months 12 months or more Total Fair Value Fair Value Fair Value Securities available for sale: U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale 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 At December 31, The amortized cost and fair value of securities at December 31, Available for Sale Held to Maturity Due within one year Due after one year through five years Due after five years through ten years Due after ten years Proceeds from maturities, calls, principal payments, and sales of Proceeds from maturities, calls, and principal payments Securities having a fair value of 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 December 31, The composition of restricted securities at December 31, 2021 2020 Federal Home Loan Bank stock Federal Reserve Bank stock Community Bankers’ Bank stock 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 investments were $504 thousand and $529 thousand at December 31, 2021 and 2020, respectively. Note 3. Loans Loans at December 31, 2021 2020 Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate Commercial and industrial loans Consumer and other loans Total loans Allowance for loan losses Loans, net Net deferred loan fees included in the above loan categories were The following tables provide a summary of loan classes and an aging of past due loans as of December 31, December 31, 2021 Current Real estate loans: Construction and land development 1-4 family residential Other real estate loans Commercial and industrial Consumer and other loans Total December 31, 2020 Current Real estate loans: Construction and land development 1-4 family residential Other real estate loans Commercial and industrial Consumer and other loans Total Credit Quality Indicators 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 Special Substandard Doubtful Loss The following tables provide an analysis of the credit risk profile of each loan class as of December 31, December 31, 2021 Pass Substandard Doubtful Total Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial Consumer and other loans Total December 31, 2020 Pass Substandard Doubtful Total Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial Consumer and other loans Total 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 December 31, 2021 of loans acquired in business combinations were as follows: Acquired Loans- Purchased (Dollars in thousands) Performing Outstanding principal balance Carrying amount Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial loans Consumer and other loans Total acquired loans Note 4. Allowance for Loan Losses The following tables present, as of December 31, December 31, 2021 Total Allowance for loan losses: Beginning Balance, December 31, 2020 Charge-offs Recoveries Provision for (recovery of) loan losses Ending Balance, December 31, 2021 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment Loans: Ending Balance Individually evaluated for impairment Collectively evaluated for impairment December 31, 2020 Total Allowance for loan losses: Beginning Balance, December 31, 2019 Charge-offs Recoveries Provision for (recovery of) loan losses Ending Balance, December 31, 2020 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment Loans: Ending Balance Individually evaluated for impairment Collectively evaluated for impairment Impaired loans and the related allowance at December 31, December 31, 2021 Real estate loans: Construction and land development Secured by 1-4 family Other real estate loans Commercial and industrial Total December 31, 2020 Real estate loans: Construction and land development Secured by 1-4 family Other real estate loans Commercial and industrial Total 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 December 31, 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 December 31, 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 December 31, 2021, loans that were modified totaled $11.5 million. These loans were not considered TDRs because they were modified in accordance with relief provisions of the CARES Act. For the years ended December 31, There were Note 5. Other Real Estate Owned Changes in the balance for OREO 2021 2020 Balance at the beginning of year, gross Transfers in Acquired in merger Sales proceeds Gain on disposition Balance at the end of year, gross Less: valuation allowance Balance at the end of year, net There were Note 6. Premises and Equipment Premises and equipment are summarized as follows at December 31, 2021 2020 Land Buildings and leasehold improvements Furniture and equipment Construction in process Less accumulated depreciation Depreciation expense included in operating expenses for Note 7. Deposits The aggregate amount of time deposits, in denominations of The Bank obtains certain deposits through the efforts of At December 31, 2022 2023 2024 2025 2026 Thereafter Note 8. Other Borrowings The Company had an unsecured line of credit totaling $5.0 million with a non-affiliated bank at December 31, 2021. There were 0 borrowings outstanding on the line of credit at December 31, 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 25, 2026. The Bank had unused lines of credit totaling Note 9. Subordinated Debt 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 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 Note 10. Junior Subordinated Debt 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 December 31, 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 December 31, Note 11. Income Taxes The Company is subject to U.S. federal and Virginia income tax as well as bank franchise tax in the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to Net deferred tax assets consisted of the following components at December 31, 2021 2020 Deferred Tax Assets Allowance for loan losses Acquisition accounting adjustments, net Post-retirement benefits Core deposit intangible Unvested stock-based compensation Reserve for letter of credit losses Limited partnership investments Lease liability Housing tax credit Unrealized loss on securities available for sale NOL carryover - acquired from Fincastle Loan origination fees, net Deferred Tax Liabilities Depreciation Right of use asset Housing equity fund Unrealized gains on securities available for sale Other real estate owned Cash flow hedges Net deferred tax assets The income tax expense for the years ended December 31, 2021 2020 Current tax expense Deferred tax benefit The income tax expense differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2021 2020 Computed tax expense at statutory federal rate Increase in income taxes resulting from: Merger expenses Other Decrease in income taxes resulting from: Tax-exempt interest and dividend income Income from bank owned life insurance Note 12. Funds Restrictions and Reserve Balance Transfers of funds from the banking subsidiary to the parent company in the form of loans, advances, and cash dividends are restricted by federal and state regulatory authorities. At December 31, The Bank Note 13. Benefit Plans 401(k) Plan The Company maintains a Supplemental Executive Retirement Plans On Note 14. Earnings per Common Share 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 years ended December 31, 2021 2020 (Numerator): Net income (Denominator): Weighted average shares outstanding – basic Potentially dilutive common shares – restricted stock units Weighted average shares outstanding – diluted Income per common share Basic Diluted Note 15. Commitments and Unfunded Credits The Company, through its banking subsidiary, 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. At December 31, 2021 2020 Commitments to extend credit and unfunded commitments under lines of credit Stand-by letters of credit Commitments to extend credit 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 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 December 31, The Bank has cash accounts in other commercial banks. The amount on deposit at these banks at December 31, Note 16. Transactions with Related Parties During the year, executive officers and directors (and companies controlled by them) were customers of and had transactions with the Company in the normal course of business. In management’s opinion, these transactions were made on substantially the same terms as those prevailing for other customers. At December 31, Deposits from related parties held by the Bank at December 31, Note 17. Lease Commitments Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and, if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor. Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than twelve months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. Three of the Company's leases provide known escalators that are included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease. Options to extend, residual value guarantees, and restrictions and covenants Of the Company's eight leases, six leases offer the option to extend the lease. The calculation of the lease liability includes the additional time and lease payments for options which the Company The following table presents the operating lease right-of-use asset and operating lease liability as of December 31, 2021 and 2020 (in thousands): Classification in the Consolidated Balance Sheets 2021 2020 Operating lease right-of-use asset Other assets Operating lease liability Accrued interest payable and other liabilities The following table presents the weighted average remaining operating lease term and the weighted average discount rate for operating leases 2021 2020 Weighted average remaining lease term, in years Weighted average discount rate The following table presents the components of operating lease expense and supplemental cash flow information for the years ended December 31, 2021 and 2020 (in thousands): 2021 2020 Lease Expense Operating lease expense Short-term lease expense Total lease expense (1) Cash paid for amounts included in lease liability (1) Included in occupancy expense in the Company's consolidated statements of income. The following table presents a maturity schedule of undiscounted cash flows that contribute to the operating lease liability as of December 31, 2021 (in thousands): Twelve months ending December 31, 2022 Twelve months ending December 31, 2023 Twelve months ending December 31, 2024 Twelve months ending December 31, 2025 Twelve months ending December 31, 2026 Total undiscounted cash flows Less: discount Operating lease liability The contracts in which the Company is lessee are with parties external to the Company and not related parties. Note 18. Dividend Reinvestment Plan The Company has in effect a Dividend Reinvestment Plan (DRIP) which provides an automatic conversion of dividends into common stock for enrolled shareholders. The Company may issue common shares to the DRIP or purchase on the open market. Common shares are purchased at a price which is based on the average closing prices of the shares as quoted on the The Note 19. Fair Value Measurements Determination of Fair Value 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. Fair Value Hierarchy 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. Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires a significant management judgment or estimation. 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 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 Derivative asset/liability - cash flow hedges 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 December 31, Fair Value Measurements at December 31, 2021 Description Assets: Securities available for sale U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total securities available for sale Derivatives - cash flow hedges Total assets Fair Value Measurements at December 31, 2020 Description Assets: Securities available for sale U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale Derivatives - cash flow hedges Total assets 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 Loans held for sale are carried at the lower of cost or market value. These loans currently consist of Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan 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 The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, Fair Value Measurements at December 31, 2021 Description Impaired loans, net Fair Value Measurements at December 31, 2020 Description Impaired loans, net Quantitative information about Level 3 Fair Value Measurements for December 31, 2021 Fair Value Valuation Technique Unobservable Input Impaired loans, net Present value of cash flows Discount rate Quantitative information about Level 3 Fair Value Measurements for December 31, 2020 Fair Value Valuation Technique Unobservable Input Impaired loans, net Property appraisals Selling cost (1) Unobservable inputs were weighted by the relative fair value of the instruments. 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 Fair Value Measurements at December 31, 2021 Using Fair Value Financial Assets Cash and short-term investments Securities available for sale Securities held to maturity Restricted securities Loans held for sale Loans, net Bank owned life insurance Accrued interest receivable Derivatives - cash flow hedges Financial Liabilities Deposits Subordinated debt Junior subordinated debt Accrued interest payable Fair Value Measurements at December 31, 2020 Using Fair Value Financial Assets Cash and short-term investments Securities available for sale Securities held to maturity Restricted securities Loans held for sale Loans, net Bank owned life insurance Accrued interest receivable Derivatives - cash flow hedges Financial Liabilities Deposits Subordinated debt Junior subordinated debt Accrued interest payable 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. Note 20. Regulatory Matters 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 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 December 31, As of December 31, A comparison of the capital of the Bank at December 31, Actual Amount Ratio Amount Ratio Amount Ratio December 31, 2021: Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2020: Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) 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. Note 21. Accumulated Other Comprehensive Changes in each component of accumulated other comprehensive Balance at December 31, 2019 Unrealized holding gains (net of tax, $629) Reclassification adjustment (net of tax, $8) Change in fair value (net of tax, $91) Change during period Balance at December 31, 2020 Unrealized holding losses (net of tax, ($923)) Reclassification adjustment (net of tax, ($8)) Change in fair value (net of tax, $107) Change during period Balance at December 31, 2021 The following table presents information related to reclassifications from accumulated other comprehensive Details About Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statements of Income 2021 2020 Securities available for sale: Net securities gains reclassified into earnings Net gains on securities available for sale Related income tax expense Income tax expense Total reclassifications Net of tax Note 22. Stock Compensation Plans 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. Stock Awards 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 award. During Restricted Stock Units 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. On February 23, 2021, 13,094 restricted stock units were granted to employees with A summary of the activity for the Company’s restricted stock units for the period indicated is presented in the following table: 2021 Shares Unvested, January 1, 2021 Granted Vested Forfeited Unvested, December 31, 2021 At December 31, Note 23. Revenue Recognition Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of 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 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 and check card fees 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 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 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 Fees for other customer services include 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 years ended December 31, 2021 and 2020 (in thousands): 2021 2020 Noninterest Income Service charges on deposit accounts ATM and check card fees Wealth management fees Brokered mortgage fees Fees for other customer services Noninterest income (in-scope of Topic 606) Noninterest income (out-of-scope of Topic 606) Total noninterest income Note 24. Derivative Financial Instruments 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 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, as discussed in Note 1 to the Consolidated Financial Statements. Changes in fair value of these designated hedging instruments is reported as a component of other comprehensive 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 December 31, 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 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 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 December 31, 2021 and 2020 (in thousands): 2021 Notional Amount Assets Liabilities Collateral Pledged(1) Cash Flow Hedges Interest rate swap contracts Cash Flow Hedges Interest rate swap contracts (1) Collateral pledged may be comprised of cash or securities. Note 25. Acquisitions Acquisition of the Bank of Fincastle Acquisition of SmartBank Loan Portfolio 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 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. Amounts for the Bank of Fincastle acquisition are as of July 1, 2021. Amounts for (Dollars in thousands) Bank of Fincastle SmartBank Total Purchase price: Cash paid Common stock issued Total purchase price Identifiable assets acquired: Cash and due from banks Federal funds sold Securities, AFS, at fair value Restricted securities Loans, net of ALLL Bank premises and equipment Accrued interest receivable OREO BOLI Other assets Total identifiable assets acquired Identifiable liabilities assumed: Demand deposits & savings accounts Time deposits Accrued expenses and other liabilities Total identifiable liabilities assumed Net identifiable assets acquired at fair value Goodwill resulting from acquisitions 3,030 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 Unaudited Pro Forma Unaudited Pro Forma Twelve Months Ended Twelve Months Ended (Dollars in thousands, except per share amounts) December 31, 2021 December 31, 2020 Total revenues (net interest income plus noninterest income) Net income Net income per share, basic Net income per share, diluted The revenue and earnings amounts specific to SmartBank since the acquisition date that are included in the consolidated results for 2021 and 2020 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 and SmartBank combined totaled $3.5 million through December 31, 2021. These costs included the integration of systems and operations and legal and consulting expenses, which have been expensed as incurred. Additional merger related expenses of $20 thousand are expected to be incurred throughout the first and second quarters of 2022. Note 26. Subsequent Events 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 had a fixed interest rate of 6.75% per annum and a maturity date of October 1,2025. The Company prepaid the note in full on January 1, 2022. Note FIRST NATIONAL CORPORATION (Parent Company Only) Balance Sheets December 31, (in thousands) 2021 2020 Assets Cash Investment in subsidiaries, at cost, plus undistributed net income Other assets Total assets Liabilities and Shareholders’ Equity Subordinated debt Junior subordinated debt Other liabilities Total liabilities Preferred stock Common stock Surplus Retained earnings Accumulated other comprehensive income, net Total shareholders’ equity Total liabilities and shareholders’ equity (Parent Company Only) Statements of Income Years Ended December 31, (in thousands) 2021 2020 Income Dividends from subsidiary Total income Expense Interest expense Supplies Legal and professional fees Data processing Management fee-subsidiary Other expense Total expense Income before allocated tax benefits and undistributed income of subsidiary Allocated income tax benefit Income before equity in undistributed income of subsidiary Equity in undistributed income of subsidiary Net income (Parent Company Only) Statements of Cash Flows Years Ended December 31, (in thousands) 2021 2020 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed income of subsidiary Stock-based compensation Amortization of debt issuance costs (Increase) decrease in other assets Increase in other liabilities Net cash (used in) provided by operating activities Cash Flows from Investing Activities Net cash paid in acquisition of The Bank of Fincastle Net cash used in investing activities Cash Flows from Financing Activities Proceeds from subordinated debt, net of issuance costs Cash dividends paid on common stock, net of reinvestment Repurchase of common stock Net cash (used in) provided by financing activities (Decrease) increase in cash and cash equivalents Cash and Cash Equivalents Beginning Ending Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Controls and Procedures Disclosure Controls and Procedures The Management’s Report on Internal Control over Financial Reporting Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on the assessment, management believes that, as of December 31, 2021, the Company's internal control over financial reporting was effective based on those criteria. 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 Changes in Internal Controls There were no changes in the None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. Directors, Executive Officers and Corporate Governance Information required by this Item is set forth under the headings “Election of Directors – Nominees,” “Executive Officers Who Are Not Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Conduct and Ethics,” “Committees” and “Director Selection Process” in the Company’s Proxy Statement for the Executive Compensation Information required by this Item is set forth under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement, which information is incorporated herein by reference. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item is set forth under the heading “Stock Ownership of Directors and Executive Officers” and “Stock Ownership of Certain Beneficial Owners” in the Proxy Statement, which information is incorporated herein by reference. Certain Relationships and Related Transactions, and Director Independence Information required by this Item is set forth under the headings “Certain Relationships and Related Party Transactions” and “Director Independence” in the Proxy Statement, which information is incorporated herein by reference. Principal Information required by this Item is set forth under the headings “Auditor Fees and Services” and “Policy for Approval of Audit and Permitted Non-Audit Services” in the Proxy Statement, which information is incorporated herein by reference. The Independent Registered Public Accounting Firm for the financial statements as of December 31, 2021 and for the two years then ended was Yount, Hyde & Barbour, P.C., (U.S. PCAOB Auditor Firm I.D.: 613), located in Winchester, Virginia. Exhibits, Financial Statement Schedules (a) (1) The response to this portion of Item 15 is included in Item 8 above. (2) The response to this portion of Item 15 is included in Item 8 above. (3) The following documents are attached hereto or incorporated herein by reference to Exhibits: 3.1 3.3 4.1 Specimen of Common Stock Certificate (incorporated herein by reference to Exhibit 1 to the Company’s Form 10 filed with SEC on May 2, 1994) (paper filing). 10.1 10.2 10.4 10.8 10.9 10.10 10.11 10.12 14.1 21.1 23.1 31.1 31.2 32.1 32.2 101 The following materials from First National Corporation’s Annual Report on Form 10-K for the year ended December 31, (b) Exhibits See Item 15(a)(3) above. (c) Financial Statement Schedules See Item 15(a)(2) above. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. FIRST NATIONAL CORPORATION By: /s/ Scott C. Harvard President and Chief Executive Officer (on behalf of the registrant and as principal executive officer) Date: March Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Scott C. Harvard Date: March President & Chief Executive Officer Director (principal executive officer) /s/ M. Shane Bell Date: March 30, 2022 Executive Vice President & Chief Financial Officer (principal financial officer and principal accounting officer) /s/ Elizabeth H. Cottrell Date: March 30, 2022 Chairman of the Board of Directors /s/ Gerald F. Smith, Jr. Date: March 30, 2022 Vice Chairman of the Board of Directors /s/ Jason C. Aikens Date: March 30, 2022 Director /s/ Emily Marlow Beck Date: March 30, 2022 Director /s/ Boyce E. Brannock Date: March 30, 2022 Director /s/ W. Michael Funk Date: March 30, 2022 Director /s/ James R. Wilkins, III Date: March 30, 2022 Director
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:conditions in the financial markets and economic conditions may adversely affect the Company’s business;the inability of the Company to successfully manage its growth or implement its growth strategy;difficulties in combining the operations of new or acquired bank branches or entities with the Company’s own operations;the Company’s inability to successfully obtain the expected benefits of new or acquired bank branches or entities;intense competition from other businesses both in making loans and attracting deposits;the composition of the loan and deposit portfolio, including the types of accounts and customers, may change, which could impact the amount of net interest income and noninterest income in future periods, including revenue from service charges on deposits;consumers may increasingly decide not to use the Company to complete their financial transactions;limited availability of financing or inability to raise capital;exposure to operational, technological, and organizational risk;reliance on other companies to provide key components of their business infrastructure;the Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses;operational functions of business counterparties over which the Company may have limited or no control may experience disruptions;nonperforming assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition;allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio;the concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets;legislative or regulatory changes or actions, or significant litigation;the limited trading market for the Company’s common stock; it may be difficult to sell shares;unexpected loss of management personnel;losses that could arise from breaches in cyber-security and theft of customer account information;increases in FDIC insurance premiums could adversely affect the Company’s profitability;the ability to retain customers and secondary funding sources if the Company’s reputation would become damaged;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; andother factors identified in Item 1A, “Risk Factors”, below.• the ability of the Company and the Bank to realize the anticipated benefits of the Merger, including expected revenue synergies and cost savings that may not be fully realized or realized within the expected time frame; • revenues following the Merger that may be lower than expected; • customer and employee relationships and business operations may be impacted by disruptions caused by the Merger; • the effects of the COVID-19 pandemic, including its potential adverse effect on economic conditions and the Company's employees, customers, credit quality, and financial performance; the Company’s branch and market expansions, technology initiatives and other strategic initiatives; the level of net charge-offs on loans and the adequacy of the allowance for loan losses; • • 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 Item 1. First Bank (the Bank). The Bank owns:First Bank Financial Services, Inc.Shen-Valley Land Holdings, LLCFirst National (VA) Statutory Trust II (Trust II)First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts)• Bank of Fincastle Services, Inc. • ESF, LLC wasand ESF, LLC were formed to hold other real estate owned and future office sites. Bank of Fincastle Services, Inc. owns an entity that provides mortgage services. 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 Federal Reserve) and the Virginia State Corporation Commission’s Bureau of Financial Institutions to convert to a state chartered bank with membership in the Federal Reserve System. On June 1, 1994, the Bank consummated such conversion and changed its name to First Bank.andthe Roanoke Valley, central regions of Virginia.Virginia, and the city of Richmond. Within this market area, there are variousdiverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal government, hospitality, and higher education.areare delivered through 1520 bank branch offices, located throughout the Shenandoah Valley and central regions of Virginia, a loan production office and a customer service center in a retirement village. The branch offices are comprised of 14 full service retail banking offices and one drive-thru express banking office. For the locationlocation and general character of each of these offices, see Item 2 of this Form 10-K. The Bank recently entered a new market in the central region of Virginia by opening a branch office in the city of Richmond during the fourth quarter of 2017. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area.itsits communities. The Company’s2017,2021, the Bank was ranked third overall in its market area with 10.44%12.37% of theits total deposit market. Since the Bank did not expand into the Richmond market until the fourth quarter of 2017, the deposit data for the Richmond market was not included in the information above.2017,2021, the Bank employed a total of 160 full-time210 full-time equivalent employees. The Company considers relations with its employees to be excellent. certain regulations, proposed regulations, and the potential impacts on the Company and the Bank. To the extent statutory or regulatory provisions or proposals are described in this report, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.Regulatory Reform – The Dodd-Frank ActThe Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), enacted in 2010, implemented and continues to implement significant changes to the regulationCentralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the CFPB), with broad rulemaking, supervisory and enforcement authority with respect to a wide range of consumer protection laws that apply to providers of consumer financial products and services. Smaller financial institutions, including the Bank, continue to be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies.Require the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction.Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital.Implement corporate governance revisions, including advisory votes on executive compensation by stockholders.Established extensive requirements applicable to mortgage lending, including detailed requirements concerning mortgage originator compensation and underwriting, high-cost mortgages, servicing, appraisals, counseling and other matters.Make permanent the $250,000 limit for federal deposit insurance.Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.The Dodd-Frank Act also amended the Bank Holding Company Act of 1956, as amended (the BHCA) to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. The Federal Reserve Board issued final rules implementing the Volcker Rule on December 10, 2013. The Volcker Rule became effective on July 21, 2012 and the final rules were effective April 1, 2014, but the Federal Reserve Board issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2017. The implementation of the Volcker Rule has not had a material effect on the operations of the holding company or the Bank, as we generally do not engage in activities or hold investments impacted by the Volcker Rule.Many aspects of the Dodd-Frank Act still remain subject to rulemaking by various regulatory agencies and could take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. The changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent capital requirements, liquidity and leverage ratio requirements, or otherwise adversely affect the business of the Company and the Bank. These changes may also require the Company to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.Future Legislation and RegulationCongress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of any proposed legislation could impact the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank are difficult to predict, and could have a material, adverse effect on the business, financial condition and results of operations of the Company and the Bank.The Tax Cuts and Jobs ActThe Tax Cuts and Jobs Act (the Act) was enacted into law on December 22, 2017 and significantly changes the income tax laws of the United States. The Act reduces the corporate income tax rate to 21%, creates a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings), broadens the tax base, and allows for immediate capital expensing of certain qualified property. The Act also requires companies to pay minimum taxes on foreign earnings and subjects certain payments from corporations to foreign related parties to additional taxes.When changes in tax rates and laws are enacted, the Company must recognize the changes in the period in which the enactment occurs. Since the Act reduces the Company's corporate tax rate from 34% to 21%, the Company recorded a $752 thousand charge to income tax expense in 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% corporate tax rate.BHCA,Bank Holding Company Act of 1956 (the BHCA), the Company is subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve). The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation, and examination by the Virginia State Corporation Commission (the SCC).Federal Deposit Insurance Corporation (the FDIC)FDIC insurance fund in the event of a depository institution default. For example, under the Federal Deposit Insurance Company Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. The Federal Reserve imposes certain capital requirements on Pursuant to the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies underwith total consolidated assets of less than $3 billion, such as the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying”Company, are not subject to consolidated regulatory capital requirements. Certain capital requirements applicable to risk-weighted assets. These requirementsthe Bank are described below under “The Bank-Capital Requirements”. Subject to its capital requirements and certain other restrictions, the Company is able to borrow money to make a capital contribution to the Bank, and such loans may be repaid from dividends paid by the Bank to the Company.a superior ownership positionright of payment compared to its common stock and all current and future junior subordinated debt obligations. Following the occurrence of any event of default on its subordinated debt, the Company may not make any payments on its junior subordinated debt; declare or pay any dividends on its common stock; redeem or otherwise acquire any of its common stock; or make any other distributions with respect to its common stock or set aside any monies or properties for such purposes. The Company is current in its interest payments on subordinated debt.ourits junior subordinated debt. Interest must be paid on the junior subordinated debt before dividends may be paid to common shareholders. The Company is current in its interest payments on junior subordinated debt; however, it has the right to defer distributions on its junior subordinated debt, during which time no dividends may be paid on its common stock. If the Company does not have sufficient earnings in the future and begins to defer distributions on the junior subordinated debt, it will be unable to pay dividends on its common stock until it becomes current on those distributions. The Company meets eligibility criteria of a smallholding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital.In July 2013, the U.S. banking regulators adopted a final rule which implementsimplementing the Basel III regulatory capital reforms fromadopted by the Basel Committee on Banking Supervision (the Basel Committee), and certain changes required by the Dodd-Frank Act. The final rule established an integrated regulatory capital framework and introduces the “Standardized Approach” for risk-weighted assets, which replaced the Basel I risk-based guidance for determining risk-weighted assets as rules included new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank under the final rules wereare as follows: a new common equity Tier 1 capital ratio of 4.5%; a Tier 1 capital ratio of 6% (increased from 4%); a total capital ratio of 8% (unchanged from previous rules); 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 is being phased-in over four years, which began on January 1, 2016, as follows: the maximum buffer was 0.625%requirements of 2.5% of risk-weighted assets for 2016 and 1.25% for 2017, and will be 1.875% for 2018 and 2.5% for 2019 and thereafter.assets. This will resultresulted 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 bonuses 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 December 31, 20172021 and December 31, 2016,2020, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.2017: 13.1214.76 % 12.0914.09 % 12.0914.09 % 8.468.82 % ratio(1)5.12%6.76 % (1) final rules also contain revisions to the prompt corrective action framework, which 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 now increased capital level requirements in order to qualify as “well capitalized:” a new common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8% (increased from 6%); a total capital ratio of 10% (unchanged from previous rules); and a Tier 1 leverage ratio of 5% (unchanged from previous rules).In September 2017, The Bank met the federal bank regulatory agencies proposedrequirements to revisequalify as "well capitalized" as of December 31, 2021 and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Bank, that are not subject to the advanced approaches requirements. In November 2017, the regulatory agencies revised the capital rules enacted in 2013 to extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the standardized approach, which the Bank uses to calculate its capital ratios.IV”4”). Among other things, these standards reviserevised the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provideprovided a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally beare to become effective on January 1, 2022,2023, with an aggregate output floor phasing-in through January 1, 2027.2028. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV4 on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.On April 1, 2011, theThe deposit insurance assessment base changed from total deposits tois based on average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. On February 7, 2011, the FDIC introduced three possible adjustments to an institution’s initial base assessment rate: (i) a decrease adopted a final rule to amend how small banks are assessed deposit insurance. The final rule, which was effective the quarter after the DIF reached 1.15%, revised the calculation of deposit insurance assessments for insured institutions with less than $10 billion in assets that have been FDIC insured for at least five years (established small. The rule updated the data are calculated based on risk-based assessments using examination rulings and revised the methodology that the FDIC uses to determine risk-based assessmentsfinancial modeling to better capture the risk that an established small bank poses to the DIF and to ensure that institutions that take on greater risks have higher assessments. The rule eliminated the previous risk categories in favor of an assessment schedule based on examination ratings and financial modeling. The DIF reached 1.15% effective as of June 30, 2016, lowering the assessment rates to between 1.5 and 16 basis points for institutions in the lowest risk category and 3 to 30 basis points for institutions in the higher risk categories. Due to the Bank’s examination ratings and financial ratios, the Bank experienced lower deposit insurance assessment rates as a result of the changes put into effect on July 1, 2016.In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately one basis point of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature through 2019.2017.Community Reinvestment Act of 1977.CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low and moderate income neighborhoods. If the Bank receives a rating from the Federal Reserve of less than satisfactory"satisfactory" under the CRA, restrictions on operating activities could be imposed. recent regulations issued by federal banking agencies also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer.USAPatriotActof2001In October 2001,The Bank is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PatriotPATRIOT Act of 2001, (the Patriot Act) was enacted in response to the September 11, 2001 terrorist attacks. The Patriot Act was intended to strengthen U. S. law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism.Anti-Money Laundering Act of 2020. The continuing impact on financial institutionsAnti-Money Laundering Act of 2020, the Patriot Act and related regulations and policies is significant and wide ranging. The Patriot Act containsmost sweeping anti-money laundering legislation in 20 years, requires various federal agencies to promulgate regulations implementing a number of its provisions.transparency laws, and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperationinstitutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and law enforcement entitiesbank merger applications, to identify persons whotake into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.be involved in terrorism or money laundering.2017,2021, the Company had not been made aware of any instances of non-compliance with the guidance.• Small Business Administration (SBA) Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, funds were authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, including the Bank, that process loan applications and service the loans. To The Company’s BusinessThe Company’sto our Lending Activities and Economic Conditionsmay be adversely affected by conditions in the financial marketsis subject to various lending and other economic conditions generally.The community banking industry is directly affected by national, regional, and local economic conditions. The economies in the Company’s market areas continued to show improvement during 2017. Management allocates significant resources to mitigate and respond to risks associated with the current economic conditions; however, such conditions cannot be predicted or controlled. Therefore, such conditions, including a reduction in federal government spending, a flatter yield curve, and extended low interest rates,that could adversely affect the credit quality of the Company’s loans, and/or the Company’sour results of operations and financial condition. The Company’s financial performancedependent on the business environmentdirectly affected by general economic and market conditions; broad trends in industry and finance; legislative and regulatory changes; changes in governmental monetary and fiscal policies; and inflation, all of which are beyond our control. A deterioration in economic conditions, in particular a prolonged economic slowdown within our geographic region or a broader disruption in the markets whereeconomy, including as a result of a pandemic or other widespread public health emergency, could result in the Company operates,following consequences, any of which could hurt our business materially: an increase in particular, the ability of borrowers to pay interest onloan delinquencies; an increase in problem assets and repay principal of outstanding loansforeclosures; a decline in demand for our products and services; a deterioration in the value of collateral securing those loans, as well as demand for loans made by our various business segments; and other products and serviceschanges in the Company offers. In addition, the Company holds securities which can be significantly affected by various factors including credit ratings assigned by third parties. An adverse credit rating in securitiesfair value of financial instruments held by the Company could resultor its subsidiaries. a reduction of the fair value of its securities portfolio and have an adverse impact on its financial condition. While general economic conditions in Virginia and the U.S. continued to improveour market areas or adverse conditions in 2017, there can be no assurance that this improvement will continue.The inability of the Company to successfully manage its growth or implement its growth strategy mayan industry on which a local market in which we do business is dependent could adversely affect the Company’sour results of operations and financial conditions.The Company may not be able to successfully implement its growth strategy if it is unable to expandcondition.share in existing locations, identify attractiveareas, which include the Shenandoah Valley, Roanoke Valley, Richmond, and central regions of Virginia. Our loan and deposit activities are directly affected by, and our financial success depends on, economic conditions within these markets, locations, or opportunities to expandas well as conditions in the future. In addition, the ability to manage growth successfully dependsindustries on whether the Company can maintain adequate capital levels, maintain cost controls, effectively manage asset quality, and successfully integrate any expanded business divisionswhich those markets are economically dependent. A deterioration in local economic conditions or acquired businesses into the organization.As the Company continues to implement its growth strategy by opening new branches or acquiring branches or banks, it expects to incur increased personnel, occupancy, and other operating expenses. In the case of new branches, the Company must absorb those higher expenses while it begins to generate new deposits. In the case of acquired branches, the Company must absorb higher expenses while it begins deploying the newly assumed deposit liabilities. With either new branches opened or branches acquired, there would be a time lag involved in deploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, the Company’s plans to expand could depress earnings in the short run, even if it efficiently executes a branching strategy leading to long-term financial benefits.Difficulties in combining the operations of new or acquired bank branches or entities with the Company’s own operations may prevent the Company from achieving the expected benefits from acquisitions.The Company may not be able to achieve fully the strategic objectives and operating efficiencies expected in opening a new branch or through an acquisition. Inherent uncertainties exist in integrating the operations of a new or acquired entity or acquired branches. In addition, the markets and industries in which the Company and its potential new branch locations or acquisition targets operate are highly competitive. The Company may lose customers or the customers of acquired entities as a resultcondition of an acquisition; the Company may lose key personnel, either from the acquired entity or from itself; and the Company may not be able to control the incremental increase in noninterest expense arising fromindustry on which a new branch location or acquisition in a manner that improves its overall operating efficiencies. These factors could contribute to the Company’s not achieving the expected benefits from its new branch locations or acquisitions within desired time frames, if at all. Future business acquisitions could be material to the Company and it may issue additional shares of common stock to support those acquisitions, which would dilute current shareholders’ ownership interests. Acquisitions could also require the Company to use substantial cash or other liquid assets or to incur debt; the Company could therefore become more susceptible to economic downturns and competitive pressures.New lines of business or new products and services may subject the Company to additional risk.From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as competitive alternatives and shiftinglocal market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, strategic planning remains important as the Company adopts innovative products, services, and processes in response to the evolving demands for financial services and the entrance of new competitors, such as out-of-market banks and financial technology firms. Any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls, so the Company must responsibly innovate in a manner that is consistent with sound risk management and is aligned with the Bank’s overall business strategies. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.The Company faces substantial competition thatdepends could adversely affect the Company’s growth and/or operating results.The Company operatessuch factors as unemployment rates, business formations and expansions and housing market conditions. Adverse developments in a competitive market for financial services and faces intense competition from other businesses both in making loans and attracting deposits which can greatly affect pricing for its products and services. The Company’s primary competitors include community, regional, and national banks as well as credit unions and mortgage companies. Manyany of these financial institutions have been in business for many years, are significantly larger, have established customer bases and have greater financial resources and higher lending limits. In addition, credit unions are exempt from corporate income taxes, providing a significant competitive pricing advantage. Accordingly, some of the Company’s competitors in its market have the ability to offer products and services that it is unable to offer or to offer at more competitive rates.Consumers may increasingly decide not to use the Company to complete their financial transactions, which would have a material adverse impact on the Company’s financial condition and operations.Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. The activity and prominence of so-called marketplace lenders and other technological financial service companies have grown significantly over recent years and are expected to continue growing. In addition, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,”factors could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.The carrying value of intangible assets, such as goodwill and core deposit intangibles, may be adversely affected.When a Company completes an acquisition, intangibles, such as goodwill and core deposit intangibles, are recorded on the date of acquisition as an asset. Current accounting guidance requires an evaluation for impairment, and the Company would perform such impairment analysis at least annually. A significant adverse change in expected future cash flows, sustained adverse change in the Company’s common stock, oramong other things, a decline in core deposit balances could require the asset to become impaired. If impaired, the Company would incurloan demand, a charge to earnings that could have a significant impact on the results of operations.The Company is subject to claims and litigation pertaining to fiduciary responsibility.From time to time, customers make claims and take legal action pertaining to the performance of the Company’s fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company’s fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer’s audited financial statements conform to U.S. generally accepted accounting principles (GAAP) and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the customer. The Company’s financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.The Company’s dependency on its management team and the unexpected loss of any of those personnel could adversely affect operations.The Company has assembled an experienced management team and continues to build the depth of that team. Although management development plans are in place, the unexpected loss of key employees could have a material adverse effect on the Company’s business and may result in lower revenues or greater expenses.Failure to maintain effective systems of internal and disclosure controls could have a material adverse effect on the Company’s results of operation and financial condition.Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud, and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal controls, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.The Company continually works on improving its internal controls. However, the Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement of the Company’s internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company’s reputation, or cause investors to lose confidencereduction in the Company’s reported financial information, allnumber of which could havecredit-worthy borrowers seeking loans, an increase in delinquencies, defaults and foreclosures, an increase in classified and nonaccrual loans, a material adverse effect on the Company’s results of operation and financial condition.The Company’s risk-management framework may not be effective in mitigating risk and loss.The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance, and litigation. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gapsdecrease in the Company’s risk-management program, or if its controls break down, the Company’s resultsvalue of operationsloan collateral, and financial condition may be adversely affected.Negative public opinion could damage our reputation and adversely impact liquidity and profitability.As a financial institution, the Company’s earnings, liquidity, and capital are subject to risks associated with negative public opinion of the Company and of the financial services industry as a whole. Negative public opinion could result from our actual or alleged conductdecline in any number of activities, including lending practices, the failure of any product or service sold by us to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep, attract and/or retain customers and can expose us to litigation and regulatory action. Actual or alleged conduct by one of our businesses can result in negative public opinion about our other businesses. Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.Negative perception of the Company through social media may adversely affect the Company’s reputation and business.The Company’s reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company’s business, is based in part on trust and confidence. The Company’s reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social media channels. The Company’s reputation could also be affected by the Company’s association with clients affected negatively through social media distribution, or other third parties, or by circumstances outside of the Company’s control. Negative publicity, whether true or untrue, could affect the Company’s ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.Changes in interest rates could adversely affect the Company’s income and cash flows.The Company’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities, such as deposits and borrowings. These rates are highly sensitive to many factors beyond the Company’s control, including general economic conditions and the policies of the Federal Reserve and other governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment of loans, the purchase of investments, the generation of deposits, and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if the Company does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. In addition, the Company’s ability to reflect such interest rate changes in pricing its products is influenced by competitive pressures. Fluctuations in these areas may adversely affect the Company and its shareholders. The Company is often at a competitive disadvantage in managing its costs of funds compared to the large regional or national banks that have access to the national and international capital markets.The Company generally seeks to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that it may reasonably maintain its net interest margin; however, interest rate fluctuations, loan prepayments, loan production, deposit flows, and competitive pressures are constantly changing and influence the ability to maintain a neutral position. Generally, the Company’s earnings will be more sensitive to fluctuations in interest rates depending upon the variance in volume of assets and liabilities that mature and re-price in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of changes in interest rates, shape and slope of the yield curve, and whether the Company is more asset sensitive or liability sensitive. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company’s net interest margin may be affected.Limited availability of financing or inability to raise capital could adversely impact the Company.The amount, type, source, and cost of the Company’s funding and capital directly impacts the ability to grow assets. The ability to raise funds through deposits, borrowings and other sources, or raise capital could become more difficult, more expensive, or altogether unavailable. A number of factors could make such financing more difficult, more expensive or unavailable including: the financial condition of the Company atborrowers and guarantors, any given time; rate disruptions in the capital markets; the reputation for soundness and security of the financial services industry as a whole; and, competition for funding from other banks or similar financial service companies, some of which could be substantially larger or be more favorably rated.The soundness of other financial institutions could adversely affect the Company.The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations.The Company’s exposure to operational, technological, and organizational risk may adversely affect the Company.Similar to other financial institutions, the Company is exposed to many types of operational and technological risk, including reputation, legal, and compliance risk. The Company’s ability to grow and compete is dependent on its ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while it expands and integrates acquired businesses. Operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, occurrences of fraud by employees or persons outside of theCompany, and exposure to external events. The Company is dependent on its operational infrastructure to help manage these risks. From time to time, it may need to change or upgrade its technology infrastructure. The Company may experience disruption, and it may face additional exposure to these risks during the course of making such changes. If the Company would acquire another financial institution or bank branch operations, it would face additional challenges when integrating different operational platforms. Such integration efforts may be more disruptive to the business and/or more costly than anticipated.The Company relies on other companies to provide key components of its business infrastructure.Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections, and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in communication services provided by a vendor and failure to handle current or higher volumes, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business, and may harm its reputation. Financial or operational difficulties of a third party vendor could also hurt the Company’s operations if those difficulties affect the vendor’s ability to serve the Company. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company’s business operations.The Company continually encounters technological change which could affect its ability to remain competitive.The financial services industry is continually undergoing change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company continues to invest in technology and connectivity to automate functions previously performed manually, to facilitate the ability of customers to engage in financial transactions, and otherwise to enhance the customer experience with respect to its products and services. The Company’s continued success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that satisfy customer demands and create efficiencies in its operations. A failure to maintain or enhance a competitive position with respect to technology, whether because of a failure to anticipate customer expectations or because the Company’s technological developments fail to perform as desired or are not rolled out in a timely manner, may cause the Company to lose market share or incur additional expense.The operational functions of business counterparties over which the Company may have limited or no control may experience disruptions that could adversely impact the Company.Multiple major U.S. retailers have recently experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of the retailers’ customers. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including the Company. Although the Company’s systems are not breached in retailer incursions, these events can cause the Company to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Company and its customers. In some cases, the Company may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (“cloud”) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers.The Company’s operations may be adversely affected by cyber security risks.In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance, and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers, and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect its business. Furthermore, as cyber threats continue to evolve and increase, the Company may be required to expend significant additional resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.Nonperforming assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition.The Company’s nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases loan administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases the Company’s risk profile and may affect the capital levels that the Company believes are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers’ performance orour financial condition could adversely affect the Company’s business, results of operations, and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including origination of new loans. There can be no assurance that theor business. will avoid further increases in nonperforming loans in the future.The Company’s’s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio.If the Company’s valuation allowance on OREO becomes inadequate, results of operations may be adversely affected. maintains a valuation allowance that it believes is a reasonable estimate of known losses in OREO. The Company obtains appraisals on all OREO properties on an annual basis and adjusts the valuation allowance accordingly. The carrying value of OREO is susceptible to changes in economic and real estate market conditions. Although the Company believes the valuation allowance is a reasonable estimate of known losses, such losses and the adequacy of the allowance cannot be fully predicted. Excessive declines in market values could have a material impact on financial performance.The Company’s’s concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets.concentration of creditsignificant exposure in commercial real estate, and loans with this type of collateral are viewed as having more risk of default.Company’sCompany’s loan portfolio contains construction and development loans, and a decline in real estate values and economic conditions would adversely affect the value of the collateral securing the loans and have an adverse effect on the Company’sCompany’s financial condition.Company’sCompany’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses.consumercommercial loans and carry risks associated with the borrower, changes in the economic environment, and the vendor themselves. 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 with the Company's vendor management program. While these policies are designed to manage the risks associated with these loans, there can be no assurance that such measures will be effective in avoiding undue credit risk.Company’sCompany’s focus on lending to small to mid-sized community-based businesses may increase its credit risk.Dodd-Frank Act substantially changesCompany depends on the regulationaccuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.itservices, which may require substantial initial investment to be implemented, including the cost of modifying or adapting existing products, systems and services. The Company invests in new technology to enhance customer service, and to increase efficiency and reduce operating costs. Our future success will depend in part upon our ability to create synergies in our operations through the use of technology and to facilitate the ability of customers to engage in financial transactions in a manner that enhances the customer experience. We cannot give any assurance that technological improvements will increase operational efficiency or that we will be able to effectively implement new technology-driven products, systems and services or be successful in marketing new products and services to our customers. A failure to maintain or enhance a competitive position with respect to technology, whether because of a failure to anticipate customer expectations, substantially fewer resources to invest in technological improvements than larger competitors, or because our technological developments fail to perform as desired or are not implemented in a timely manner, could result in higher operating costs, decreased customer satisfaction, and lower market share. An inability to effectively implement new technology and realize operational efficiencies could result in the loss of initial investments in such projects and higher operating costs. Either of these outcomes could have a material adverse impact on our financial condition and results of operations.Company.Dodd-Frank Act provides wide-ranging changesunexpected loss of services of one or more of these key employees could have a material adverse effect on operations and possibly result in reduced revenues or increased expenses.way banksCompany’s net income. In addition, the process of identifying and financial services firms generally are regulatedrecruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy, and we may not be able to effectively integrate these individuals into our operations. Our inability to identify, recruit and retain talented personnel to manage our operations effectively and in a timely manner could limit our growth, which could materially adversely affect our business.wayoperations of new or acquired bank branches, loan production offices or entities with the Company’s own operations may prevent the Company from achieving the expected benefits from acquisitions.counterparties doemployees or achieve the anticipated benefits of the Merger. If the Company experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized, fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause the Company to lose customers or cause customers to withdraw their deposits from Fincastle or the Bank, or other unintended consequences that could have a material adverse effect on the Company’s results of operations or financial condition after the Merger. These integration matters could have an adverse effect on the Company for an indeterminate period after consummation of the Merger.with each other. Amongof the Bank. If the Bank is unable to successfully integrate Fincastle, the Bank may not be able to realize expected operating efficiencies and eliminate redundant costs.it requires increased capital and regulatory oversight for banks and their holding companies, changesresult in losses from fraud or error, harm the deposit insurance assessment system, changes responsibilities among regulators, establishes the CFPB, and makes various changesCompany’s reputation, or cause investors to lose confidence in the securities laws and corporate governance that affect public companies, including the Company. The Dodd-Frank Act also requires numerous studies and regulations related to its implementation. The Company is continually evaluating the effectsCompany’s reported financial information, all of the Dodd-Frank Act, together with implementing the regulations that have been proposed and adopted. The ultimate effects of the Dodd-Frank Act and the resulting rulemaking cannot be predicted at this time, but it has increased the Company’s operating and compliance costs in the short-term, and itwhich could have a material adverse effect on the Company’s results of operation and financial condition.banks and bank holding companiesbanking organizations, such as the Bank, that are based on the Basel III regulatory capital reforms. These stricter capital requirements are being phased-in over a four-year period, which began on January 1, 2015, until they are fully-implementedwere fully implemented on January 1, 2019. The application ofWhile the Economic Growth Act and recent federal banking regulations established a simplified leverage capital framework for smaller banks, these more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital and adversely affect future growth opportunities. In addition, if the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, the Company’s financial condition could be materially and adversely affected.Current and proposed regulation addressing consumer privacy and data use and security could increase the Company’s costs and impact its reputation.The Company is subject to a number of laws concerning consumer privacy and data use and securities, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement, and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches. New regulations in these areas may increase compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy and data use and security laws and regulations to which the Company is subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties, or other adverse consequences and loss of consumer confidence, which could materially adversely affect our results of operations, overall business, and reputation. could include increased insurance premiums, increased compliance costs, reductions of noninterest income, and limitations on services that can be provided. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse to the Company and its shareholders.United States Securities Exchange Commission (the SEC),SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also impact the capital levels of the Company and the Bank or require the Company to incur additional personnel or technology costs. Most notably, new guidance on the calculation of credit reserves using current expected credit losses, referred to as CECL, was finalized in June 2016. The standard will be effective for the Company beginning January 1, 2020.2023. To implement the new standard, the Company will incur costs related to data collection and documentation, technology and training. ImplementationFor additional information, see "Recent Accounting Pronouncements" included in Note 1 to the Consolidated Financial Statements included in this Form 10-K. If the Company is required to materially increase the level of the new standardallowance for loan losses or incurs additional expenses to determine the appropriate level of the allowance for loan losses, such changes could impactadversely affect the required credit reserves, reported earnings, andCompany’s capital levels, financial condition and results of the Company.operations.isare examined to determine the difference between its book basis and its tax basis. The difference between the book basis and the tax basis of each asset and liability is multiplied by the Company’s marginal tax rate to determine the net deferred tax asset or liability. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.companyCompany will recognize the changes in the period in which they occur. On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law, which reduces the Company's corporate tax rate from 34% to 21%. The Company recorded a $752 thousand charge to income tax expense in 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% corporate tax rate. For a more detailed discussion of the Tax Cuts and Jobs Act and how it affects the Company, see the section of this report entitled "Supervision and Regulation." Further changesChanges in tax rates and laws could impair the Company’s deferred tax assets and result in an expense associated with the change in deferred tax assets and liabilities.full impactCompany may be required to transition from the use of the Act may differ fromLIBOR index in the foregoingfuture.from our expectations, possibly materially, duetwo-month LIBOR offered rates will cease after December 31, 2021, but the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to changescease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in interpretations orany event by December 31, 2021.assumptions that we have made or that we make in 2018, guidance or regulations thatfloating rate instruments. At this time, it is not possible predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of any such alternatives may be promulgated,on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, subordinated notes, trust preferred securities, or other securities or financial arrangements. The implementation of a substitute index or indices for the calculation of interest rates under the Company’s loan agreements with borrowers, subordinated notes that it has issued, or other financial arrangements may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on the Company’s results of operations.actionsstakeholders with respect to environmental, social and governance (ESG) practices may impose additional costs on the Company or expose it to new or additional risks.we may take ascould significantly impact the Company’s business.legislation.Comptroller of the Currency (OCC) published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.Company’sCompany’s common stock; it may be difficult to sell shares.Company’sCompany’s common stock could adversely affect the market price of the common stock and could be dilutive.Company’sCompany’s common stock value.Company’sCompany’s subordinated debt and junior subordinated debt are superior to its common stock, which may limit its ability to pay dividends on common stock in the future.Company’sCompany’s governing documents and Virginia law contain anti-takeover provisions that could negatively affect its shareholders.The Company may deregister under the Exchange Act, which would result in a reduction in the amount and frequencyThe Jumpstart Our Business Startups Act (the JOBS Act) may allow the Company to terminate the registration of its common stock under the Exchange Act if it has fewer than 1,200 shareholders of record. If the Company is able to and determines to deregister its common stock under the Exchange Act, it would enable it to save significant expenses relating to its public disclosure and reporting requirements under the Exchange Act. However, a de-registration of common stock also would result in a reduction in the amount and frequency of publicly-available information about the Company and the Bank, which could adversely effect the liquidity and market price of the Company's common stock.Item 1B. Item 2. 2017,2021, the BankBank operated 1520 branches throughout the Shenandoah Valley, central regions of Virginia, and the central Virginia regions.Richmond and Roanoke market areas. The Bank also operates a loan production office in the Shenandoah Valley region of Virginia, as well asand a customer service center in a retirement community.community in the Shenandoah Valley region. The Company’s operations center is in Strasburg, Virginia. All of the Company’s properties are in good operating condition and are adequate for the Company’s present and future needs. See Note 1, “Nature of Banking Activities and Significant Accounting Policies,” Note 6, “Premises and Equipment,” and Note 17, "Lease Commitments," in the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K for information with respect to the amounts at which Bank premises and equipment are carried and commitments under long-term leases.Item 3. Item 4. for Registrant’s Common Equity, Related Stockholder MattersInformation and Issuer Purchases of EquitySecuritiesMarket Prices and Dividendsover-the-counter (OTC) market and quoted on the OTC Markets GroupNasdaq Capital Market stock exchange under the symbol “FXNC.” AsAs of March 16, 201818, 2022 the CompanyCompany had 565784 shareholders of recordrecord and approximately 606 additional beneficial918 beneficial owners of shares of common stock.Following are the high and low prices of sales of common stock known to the Company, along with the dividends that were paid quarterly in 2016 and 2017 (per share). Market Prices and Dividends Sales Price ($) Dividends ($) High Low 2016: 1st quarter 9.10 8.70 0.03 2nd quarter 9.75 8.84 0.03 3rd quarter 11.14 9.50 0.03 4th quarter 13.13 10.65 0.03 2017: 15.55 12.85 0.035 15.20 13.75 0.035 15.50 14.25 0.035 18.03 15.35 0.035 ourits common stock, which may limit ourthe Company's ability to pay dividends on common stock in the future.”Stockdidhas not authorized another stock repurchase any sharesplan and there were no purchases of its common stock during 2017.the three months ended December 31, 2021.Item 6. Selected Financial DataThe following is selected financial data for the Company for the last five years. This information has been derived from audited financial information included in Item 8 As of and for the years ended December 31, 2017 2016 2015 2014 2013 Results of Operations Interest and dividend income $ 27,652 $ 25,237 $ 22,165 $ 20,399 $ 21,157 Interest expense 2,386 1,982 1,441 1,778 2,709 Net interest income 25,266 23,255 20,724 18,621 18,448 Provision for (recovery of) loan losses 100 — (100 ) (3,850 ) (425 ) Net interest income after provision for (recovery of) loan losses 25,166 23,255 20,824 22,471 18,873 Noninterest income 8,292 8,493 8,342 7,444 6,931 Noninterest expense 23,284 23,488 25,555 18,785 20,750 Income before income taxes 10,174 8,260 3,611 11,130 5,054 Income tax expense (benefit) 3,726 2,353 956 3,499 (4,820 ) Net income 6,448 5,907 2,655 7,631 9,874 Effective dividend and accretion on preferred stock — — 1,113 1,138 913 Net income available to common shareholders $ 6,448 $ 5,907 $ 1,542 $ 6,493 $ 8,961 Key Performance Ratios Return on average assets 0.89 % 0.84 % 0.41 % 1.45 % 1.85 % Return on average equity 11.57 % 12.00 % 4.58 % 13.49 % 21.87 % Net interest margin 3.77 % 3.61 % 3.52 % 3.86 % 3.72 % Efficiency ratio(1) 66.42 % 71.05 % 80.92 % 73.96 % 74.79 % Dividend payout 10.73 % 10.01 % 31.84 % 5.67 % — % Equity to assets 7.87 % 7.28 % 6.64 % 11.50 % 10.24 % Per Common Share Data Net income, basic $ 1.30 $ 1.20 $ 0.31 $ 1.32 $ 1.83 Net income, diluted 1.30 1.20 0.31 1.32 1.83 Cash dividends 0.14 0.12 0.10 0.08 — Book value at period end 11.76 10.58 9.35 9.17 7.96 Financial Condition Assets $ 739,110 $ 716,000 $ 692,321 $ 518,165 $ 522,890 Loans, net 516,875 480,746 433,475 371,692 346,449 Securities 139,033 149,748 173,469 84,658 105,105 Deposits 664,980 645,570 627,116 444,338 450,711 Shareholders’ equity 58,154 52,151 45,953 59,564 53,560 Average shares outstanding, diluted 4,944 4,928 4,913 4,902 4,901 Capital Ratios(2) Leverage 8.46 % 8.48 % 8.12 % 12.90 % 10.68 % Risk-based capital ratios: Common equity Tier 1 capital 12.09 % 12.38 % 12.62 % N/A N/A Tier 1 capital 12.09 % 12.38 % 12.62 % 17.88 % 15.35 % Total capital 13.12 % 13.47 % 13.86 % 19.14 % 16.62 % (1)The efficiency ratio 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 U.S. generally accepted accounting principles (GAAP) and should not be construed as such. Management believes 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 generally accepted accounting principles, or “GAAP.” See “Non-GAAP Financial Measures” included in Item 7 of this Form 10-K.(2)All capital ratios reported are for the Bank.Item 7. 20172021 and 20162020 should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included in Item 8 of this Form 10-K.First Bank (the Bank). The Bank owns:First Bank Financial Services, Inc.Shen-Valley Land Holdings, LLCFirst National (VA) Statutory Trust II (Trust II)First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts)• Bank of Fincastle Services, Inc. • ESF, LLC wasand ESF, LLC were formed to hold other real estate owned and future office sites. Bank of Fincastle Services, Inc. owns an entity that provides mortgage services. 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.andRoanoke Valley, central regions of Virginia.Virginia, and the Richmond market areas. Within thisthese market area,areas, there are variousdiverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal government, hospitality, and higher education.1520 bank branch offices, located throughout the Shenandoah Valley and central regions of Virginia, a loan production office, and a customer service center in a retirement village. The branch offices are comprised of 14 full service retail banking offices and one drive-thru express banking office. For the location and general character of each of these offices, see Item 2 of this Form 10-K. The Bank recently entered a new market in the central region of Virginia by opening a branch office in the city of Richmond during the fourth quarter of 2017. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area.and ATM and check card fees, and brokered mortgage fees.comprised 56%comprised 54% of noninterest expenses during 2017,2021, followed by occupancy and equipment expense, which comprised 13%12% of noninterest expenses. Historically,expenses. Although the Company recorded a recovery of loan losses in 2021, the provision for loan losses hasis also beentypically 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,$541 thousand$1.5 million to $6.4$10.4 million, or $1.30$1.86 per basic and diluted share, for the year ended December 31, 2017,2021, compared to $5.9$8.9 million, or $1.20$1.82 per basic and diluted share, for the same period in 2016.2020. Return on average assets was 0.89%0.88% and return on average equity was 11.57%10.30% for the year ended December 31, 2017,2021, compared to 0.84%0.98% and 12.00%10.92%, respectively, for the year ended December 31, 2016. In the fourth quarter of 2017, a $752 thousand charge to income tax expense was recorded related to the re-measurement of net deferred tax assets resulting from the new 21% federal corporate income tax rate established by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017.$541 thousand$1.5 million increase in net income for the year ended December 31, 20172021 resulted primarily from a $2.0$5.4 million or 9%, increase in net interest income, a $3.7 million decrease in provision for loan losses and a $204 thousand,$1.9 million, or 1%24%, decreaseincrease in noninterest expenses,income, compared to the same period of 2016.2020. These favorable variances were partially offset by a $100 thousandan $8.9 million, or 38%, increase in provision for loan losses, a $201 thousand, or 2% decrease in noninterest income,expense and a $1.4 million$537 thousand increase in income tax expense.from a higher net interest margin and from higher average earning asset balances. Average earning asset balances increased 4% and the net interest margin increased 16 basis points to 3.77%$5.4 million for the year ended December 31, 2017,2021 from a $4.3 million increase in total interest income and a $1.1 million decrease in total interest expense, compared to 3.61% for the same period of 2020. Although the net interest margin decreased by 37-basis points to 3.13%, net interest income increased as the impact of the lower net interest margin was offset by a $274.0 million, or 32%, increase in 2016. Noninterestaverage earning assets, a $1.3 million increase in accretion of deferred PPP loan income, net of origination costs, and $408 thousand of accretion of loan discounts, net of premium amortization, on acquired loans. Total interest expense decreased by $1.1 million, or 32%, primarily from lower service chargesa decrease in interest expense on deposits as the Bank lowered interest rates paid on deposit accounts. Noninterest expense decreased primarily from lower FDIC assessment, lower supplies expense,The merger of The Bank of Fincastle with and lower amortization expense of core deposit intangibles. Basedinto First Bank on management’s analysis andJuly 1, 2021 contributed to the supporting allowanceincrease in average earning assets. loss calculation, alosses decreased $3.7 million, which resulted from $650 thousand of recovery of loan losses in 2021 and provision for loan losses of $100$3.0 million in 2020. The allowance for loan losses totaled $5.7 million, or 0.69% of total loans at December 31, 2021, compared to $7.5 million, or 1.19% of total loans at December 31, 2020. The specific reserve decreased $2.2 million, which was partially offset by a $392 thousand was recordedincrease in the general reserve. Net charge-offs totaled $1.1 million in 2021 and $449 thousand in 2020.yearyear. Several noninterest expense categories increased as a result of the merger. The $3.5 million of merger related expenses contributed to the increases in salaries and employee benefits, marketing, supplies, legal and professional fees, data processing, and other operating expense.2017. A provision for loan losses was not required during the year ended December 31, 2016. 2021 and 2020. This information has been derived from audited financial information included in Item 8 of this Form 10-K (in thousands, except ratios and per share amounts). $ 37,144 $ 32,851 2,304 3,383 34,840 29,468 (650 ) 3,000 35,490 26,468 10,172 8,225 32,717 23,786 12,945 10,907 2,586 2,049 $ 10,359 $ 8,858 0.88 % 0.98 % 10.30 % 10.92 % 3.13 % 3.50 % 64.44 % 62.52 % 25.69 % 24.23 % 8.42 % 8.93 % $ 1.87 $ 1.82 1.86 1.82 0.48 0.44 18.28 17.47 $ 1,389,437 $ 950,932 819,408 622,429 324,749 156,334 1,248,752 842,461 117,039 84,916 5,559 4,880 8.82 % 8.80 % 14.09 % 14.57 % 14.09 % 14.57 % 14.76 % 15.82 % see "Provisionon 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 expects cost savings to be realized as Fincastle's operations are fully integrated during 2022.Losses" below.IncludedPortfolio$1.4 million increase in income tax expense was the $752fourth quarter of 2021. The Company incurred expenses totaling $101 thousand charge to income tax expense related to the re-measurementacquisition of net deferred taxloans and fixed assets resulting fromof SmartBank in the new federal corporate income tax rate established byfourth quarter of 2021. Tax Cut and Jobs Act (the Act). For a more detailed discussionestimated lives of the Act, seeloans. A provision for loan losses may be required as fair value discounts accrete to lower amounts than the section of this report entitled "Supervisionrequired reserves for purchased loans and Regulation."income,expense, amortization of intangibles, merger expenses, and lossesgains/(losses) on disposal of premises and equipment, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities losses/(gains).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 U.S. generally accepted accounting principles (GAAP)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). $ 32,732 $ 23,815 (26 ) — (28 ) (151 ) (3,514 ) — $ 29,164 $ 23,664 $ 35,120 $ 29,666 10,172 8,225 (37 ) (40 ) $ 45,255 $ 37,851 64.44 % 62.52 % Efficiency Ratio 2017 2016 Noninterest expense $ 23,284 $ 23,488 Add: other real estate owned income, net 186 120 Subtract: amortization of intangibles (621 ) (771 ) Subtract: losses on disposal of premises and equipment (252 ) (8 ) $ 22,597 $ 22,829 Tax-equivalent net interest income $ 25,638 $ 23,646 Noninterest income 8,292 8,493 Add/(Subtract): securities losses/(gains), net 90 (8 ) $ 34,020 $ 32,131 Efficiency ratio 66.42 % 71.05 % 20172021 and 20162020 is 34%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). 2017 2016 GAAP measures: Interest income - loans $ 24,082 $ 21,662 Interest income - investments and other 3,570 3,575 Interest expense - deposits (1,723 ) (1,353 ) Interest expense – federal funds purchased — (3 ) Interest expense – subordinated debt (360 ) (361 ) Interest expense – junior subordinated debt (303 ) (259 ) Interest expense - other borrowings — (6 ) Total net interest income $ 25,266 $ 23,255 Non-GAAP measures: Tax benefit realized on non-taxable interest income - loans $ 72 $ 101 Tax benefit realized on non-taxable interest income - municipal securities 300 290 Total tax benefit realized on non-taxable interest income $ 372 $ 391 Total tax-equivalent net interest income $ 25,638 $ 23,646 Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income $ 32,797 $ 29,497 4,347 3,354 (1,415 ) (2,589 ) (619 ) (501 ) (270 ) (293 ) $ 34,840 $ 29,468 $ 32 $ 34 248 164 $ 280 $ 198 $ 35,120 $ 29,666 (“Critical(Critical Accounting Policies”)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.ourthe 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.1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances.Statements.Other Real Estate Owned (OREO)Other real estate owned (OREO) consistsStatements included in this Form 10-K.
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 properties obtained through a foreclosure proceedingacquisition. 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 may be evaluated individually or through an in-substance foreclosure in satisfactionmay be aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and properties originally acquired for branch operations or expansion but no longer intendedevidence 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 usedcollected 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.that purpose. OREOwhich there is no evidence of credit deterioration. When determining fair value for purchased performing loans acquired from the Bank of Fincastle and SmartBank during 2021, First Bank evaluated the loans individually and they were initially recorded at fair value less estimated costs to sell to establish a new cost basis. OREO is subsequently reported at the lower of cost or fair value less costs to sell, determined on the basisdate of current appraisals,comparable sales,the acquisitions. Overall, there were net discounts recorded for the acquired loans, which are being accreted into income over the life of the loans through interest and other estimatesfees on loans. The Bank calculates a required allowance for loan loss for each purchased performing loan on a quarterly basis. Provision for loan losses are recorded for purchased performing loans for the amount of fair value obtained principally from independent sources, adjustedthe required allowance for estimated selling costs. Management also considers other factors or recent developments, such as changesloan losses that exceeds the unaccreted discount.
The Company's goodwill was recognized in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustments to the collateral value estimates indicatedconnection with business combinations that occurred in the appraisals. Significant judgments and complex estimates are required in estimatingthird quarter of 2021. The Company will review the faircarrying value of other real estate owned, andgoodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economicCompany may first consider
qualitative factors management may utilize liquidation sales as part of its distressed asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine whether the fair valueexistence of other real estate owned. Management reviews the value of other real estate owned each quarter and adjusts the values as appropriate. Revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned income.Other-Than-Temporary Impairment of SecuritiesImpairment of securities occurs when the fair value ofevents or circumstances lead to a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either the Company (1) intends to sell the security or (2)determination that it is more likely than not that it will be required to sell the security before recoveryfair value of a reporting unit is less than its amortized cost basis.carrying amount. If, however,after assessing the Company does not intend to sell the securitytotality of events and circumstances, we conclude that it is not more-than-likelymore 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 will be required to sellis more likely than not that the security before recovery,fair value of a reporting unit is less than its carrying amount, then the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the presentfair value of the cash flows expectedreporting unit will be compared with its carrying value to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporarydetermine whether an impairment exists, and the credit loss must be recognized in net income and the remaining portionexists.Core Deposit IntangiblesAcquired intangible assets (such as core deposit intangibles) are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life. The Company amortizes intangible assets arising from branch transactions over their useful life. Core deposit intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.their authority. The Board Loan Committee approves all loans which exceed the authority of the Management Loan Committee. The full Board of Directors must approve loans which exceed the authority of the Board Loan Committee, up to the Bank’sBank's legal lending limit. The Board Loan Committee reviews all loans greater than $1.0 million. The Board Loan Committee currently consists of foursix directors, threefive of which are non-management directors. The Board Loan Committee approves the Bank’s Loan Policy and reviewsreviews risk management reports, including watch list reports, and concentrations of credit. Thecredit, policy exceptions, and risk grade migration. The Board Loan Committee meets on a monthly basisat least two times per quarter and the Chairman of the Committee then reports to the Board of Directors.purchaseshas 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 who have been pre-approved by the Board Loan Committee.2017,2021, commitments to extend credit, stand-by letters of credit, and rate lock commitments totaled $91.2 million.have an average life of approximatelymature in one year and re-price as key rates change.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, in addition to analyzinganalyzes the cost of the project and the creditworthiness of its borrowers.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.fixed rate mortgage loans with the intent to sell to correspondent lenders or broker to wholesale lenders, the Bank originates balloon and other mortgage loans for the portfolio. Depending on the financial goals of the Company, the Bank occasionallyalso originates and retains these loans.businessand 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.depreciabledepreciating 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.noninterestincome tax expense are the other components that determine net income. Noninterest income and expense primarily consists of income from service charges on deposit accounts, ATM and check card income, 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 and amortization expense, and other real estate owned income.2017, 2021, net interest income increased $2.0$5.4 million, or 9%18%, to $25.3$34.8 million compared to $23.3 million for the same period in 2016. The increase resulted primarily from higher average earning asset balances, as well as a higher net interest margin. Average earning asset balances increased 4%, and the net interest margin increased 16 basis points to 3.77% for the year ended December 31, 2017,2021, compared to 3.61%net interest income of $29.5 million for the same period in 2016.prior year. The 16 basis point increase in the net interest margin resulted fromincome was primarily attributable to a 21 basis point$274.0 million, or 32%, increase in the yield on total earningaverage earnings assets, which was partially offset by a 5 basis37-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 interest expense as a percentaverage deposit balances resulted in growth of average earning assets.higher yield on earning assetsdecrease in the net interest margin was attributable to an increasedecreases in yields from all earning asset classesyields and a change in the composition of average earning assets. Yields increased onAverage loans, securities, and interest-bearing deposits in banks by 8 basis points, 15 basis points, and 43 basis points, respectively. A change inwhich was the asset composition also favorably impacted the earning assetyield, as average loan balances increasedhighest yielding category, decreased to 74%64% of average earning assets for the year ended December 31, 2017,2021, compared to 71% of average earning assets69% for the same period of 2020. Although average loans increased $88.8 million, increases in 2016. Loan yields were higher than yields onlower yielding asset categories also experienced growth, as average securities increased $81.3 million and Federal funds sold and interest-bearing deposits in other banks.asdecreased by $1.1 million, or 32%, to $2.3 million, primarily from interest expense on deposits, which decreased $1.2 million, or 45%, from a percent26-basis point decrease in the cost of interest-bearing deposits. The decrease in the cost of interest-bearing deposits was partially offset by the impact of a $145.6 million, or 26%, increase in average earning assetsinterest-bearing deposit balances. The decrease in the cost of interest-bearing deposits was primarily attributable to highera reduction in interest rates paid on interest-bearingchecking, money market and time deposits. The Bank lowered interest rates paid on deposits with that largest impact coming fromin 2020 and 2021, after the cost of interest-bearing checking accounts, which increasedFederal Reserve lowered the Federal Funds rate by 16150 basis points comparingin March 2020 in response to the periods.COVID-19 pandemic.2017, 2016,2021 and 2015,2020 as well as amounts and rates of tax equivalent interest earned and interest paid (dollars in thousands). The volume and rate analysis table analyzes the changes in net interest income for the periods broken down by their rate and volume components (in thousands).Average Balances, Income and Expense, Yields and Rates (Taxable Equivalent Basis) Years Ending December 31, 2017 2016 2015 Interest Interest Interest Assets Interest-bearing deposits in other banks $ 30,624 $ 335 1.09 % $ 35,812 $ 238 0.66 % $ 64,395 $ 197 0.31 % Securities: Taxable 117,580 2,569 2.19 % 131,805 2,692 2.04 % 116,441 2,358 2.03 % Tax-exempt (1) 25,138 883 3.51 % 24,054 854 3.55 % 16,412 599 3.65 % Restricted 1,565 83 5.33 % 1,564 81 5.17 % 1,435 77 5.39 % Total securities 144,283 3,535 2.45 % 157,423 3,627 2.30 % 134,288 3,034 2.26 % Loans: (2) Taxable 500,259 23,942 4.79 % 455,847 21,467 4.71 % 391,963 18,934 4.83 % Tax-exempt (1) 5,012 212 4.23 % 6,828 296 4.33 % 7,116 309 4.34 % Total loans 505,271 24,154 4.78 % 462,675 21,763 4.70 % 399,079 19,243 4.82 % Federal funds sold — — — % 3 — 0.52 % 1 — 0.21 % Total earning assets 680,178 28,024 4.12 % 655,913 25,628 3.91 % 597,763 22,474 3.76 % Less: allowance for loan losses (5,382 ) (5,577 ) (6,270 ) Total nonearning assets 53,136 54,936 51,485 Total assets $ 727,932 $ 705,272 $ 642,978 Liabilities and Shareholders’ Equity Interest-bearing deposits: Checking $ 163,553 $ 687 0.42 % $ 150,412 $ 392 0.26 % $ 135,976 $ 195 0.14 % Money market accounts 63,326 187 0.30 % 61,086 105 0.17 % 46,161 59 0.13 % Savings accounts 127,887 101 0.08 % 126,434 105 0.08 % 114,632 96 0.08 % Certificates of deposit: Less than $100 80,274 388 0.48 % 87,828 382 0.44 % 83,280 326 0.39 % Greater than $100 44,229 358 0.81 % 45,925 366 0.80 % 49,511 470 0.95 % Brokered deposits 566 2 0.31 % 600 3 0.45 % 767 4 0.50 % Total interest-bearing deposits 479,835 1,723 0.36 % 472,285 1,353 0.29 % 430,327 1,150 0.27 % Federal funds purchased 1 — 1.25 % 336 3 1.03 % 213 2 0.72 % Subordinated debt 4,939 360 7.28 % 4,921 361 7.33 % 855 62 7.26 % Junior subordinated debt 9,279 303 3.27 % 9,279 259 2.79 % 9,279 224 2.41 % Other borrowings — — — % 1,235 6 0.49 % 1,211 3 0.28 % Total interest-bearing liabilities 494,054 2,386 0.48 % 488,056 1,982 0.41 % 441,885 1,441 0.33 % Noninterest-bearing liabilities Demand deposits 174,225 161,882 138,193 Other liabilities 3,911 6,110 4,972 Total liabilities 672,190 656,048 585,050 Shareholders’ equity 55,742 49,224 57,928 Total liabilities and shareholders’ equity $ 727,932 $ 705,272 $ 642,978 Net interest income $ 25,638 $ 23,646 $ 21,033 Interest rate spread 3.64 % 3.50 % 3.43 % Cost of funds 0.36 % 0.30 % 0.25 % Interest expense as a percent of average earning assets 0.35 % 0.30 % 0.24 % Net interest margin 3.77 % 3.61 % 3.52 % $ 164,118 $ 213 0.13 % $ 81,193 $ 190 0.23 % 173,363 3,100 1.79 % 112,146 2,448 2.18 % 47,570 1,184 2.49 % 27,557 781 2.83 % 1,926 88 4.56 % 1,844 99 5.36 % 222,859 4,372 1.96 % 141,547 3,328 2.35 % 709,347 32,677 4.61 % 620,250 29,367 4.73 % 3,389 152 4.49 % 3,664 164 4.49 % 712,736 32,829 4.61 % 623,914 29,531 4.73 % 20,934 10 0.05 % 9 — 0.10 % 1,120,647 37,424 3.34 % 846,663 33,049 3.90 % (6,316 ) (6,137 ) 68,105 60,690 $ 1,182,436 $ 901,216 $ 254,077 $ 424 0.17 % $ 193,870 $ 690 0.36 % 168,932 187 0.11 % 149,029 701 0.47 % 164,768 107 0.07 % 111,693 67 0.06 % 69,904 310 0.44 % 59,726 453 0.76 % 52,304 385 0.74 % 50,176 677 1.35 % 650 2 0.34 % 579 1 0.26 % 710,635 1,415 0.20 % 565,073 2,589 0.46 % 1 — 0.47 % 1 — 1.58 % 9,992 619 6.20 % 7,527 501 6.65 % 9,279 270 2.91 % 9,279 293 3.16 % — — — % 0 — 0.00 % 729,907 2,304 0.32 % 581,880 3,383 0.58 % 348,829 236,061 3,104 2,182 1,081,840 820,123 100,596 81,093 $ 1,182,436 $ 901,216 $ 35,120 $ 29,666 3.02 % 3.32 % 0.21 % 0.41 % 0.21 % 0.40 % 3.13 % 3.50 % (1)34%21%. The tax-equivalent adjustment was $372 thousand, $391 thousand, and $309$280 thousand for 2017, 2016,2021, and 2015, respectively.$198 thousand for 2020(2) 2017 2016 Interest-bearing deposits in other banks $ (27 ) $ 124 $ 97 $ (27 ) $ 68 $ 41 Loans, taxable 2,108 367 2,475 2,989 (456 ) 2,533 Loans, tax-exempt (77 ) (7 ) (84 ) (12 ) (1 ) (13 ) Securities, taxable (385 ) 262 (123 ) 322 12 334 Securities, tax-exempt 38 (9 ) 29 271 (16 ) 255 Securities, restricted — 2 2 7 (3 ) 4 Federal funds sold — — — — — — Total earning assets $ 1,657 $ 739 $ 2,396 $ 3,550 $ (396 ) $ 3,154 Checking $ 37 $ 258 $ 295 $ 22 $ 175 $ 197 Money market accounts 3 79 82 24 22 46 Savings accounts (4 ) — (4 ) 9 — 9 Certificates of deposits: Less than $100 (91 ) 97 6 17 39 56 Greater than $100 (12 ) 4 (8 ) (33 ) (71 ) (104 ) Brokered deposits — (1 ) (1 ) (1 ) — (1 ) Federal funds purchased (4 ) 1 (3 ) 1 — 1 Subordinated debt 1 (2 ) (1 ) 298 1 299 Junior subordinated debt — 44 44 — 35 35 Other borrowings (3 ) (3 ) (6 ) — 3 3 Total interest-bearing liabilities $ (73 ) $ 477 $ 404 $ 337 $ 204 $ 541 Change in net interest income $ 1,730 $ 262 $ 1,992 $ 3,213 $ (600 ) $ 2,613 $ 22 $ — $ 22 4,019 (709 ) 3,310 (12 ) — (12 ) 971 (318 ) 653 484 (80 ) 404 5 (15 ) (10 ) 10 (2 ) 8 $ 5,499 $ (1,124 ) $ 4,375 $ 380 $ (646 ) $ (266 ) 109 (622 ) (513 ) 30 10 40 97 (240 ) (143 ) 30 (323 ) (293 ) — — — — — — 149 (31 ) 118 — (23 ) (23 ) — — — $ 795 $ (1,875 ) $ (1,080 ) $ 4,704 $ 751 $ 5,455 The provision forrepresents management’s analysis of the existing loan portfolio and related credit risks. The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio.The Bank recorded a provision for loan losses of $100totaled $650 thousand for 2017, which resulted in a total allowance for loan losses of $5.3 million, or 1.02% of total loans, atthe year ended December 31, 2017. The Bank did not record a provision for loan losses for 2016, which2021 and resulted in an allowance for loan losses of $5.3that totaled $5.7 million, or 1.09%0.69% of total loans, at the prior year end.Theloans. This compared to a provision for loan losses of $3.0 million for the year ended December 31, 20172020 and an allowance for loan losses of $7.5 million, or 1.19% of total loans at December 31, 2020. The allowance for loan losses decreased primarily as a result of purchased loan accounting related to the Bank of Fincastle and SmartBank acquisitions.from an increase in a $1.8 million decrease in the allowance for loan losses during 2021. The specific reserve component of the allowance for loan losses decreased $2.2 million, while the general reserve component of the allowance for loan losses that was partially offset by aincreased $392 thousand. The decrease in the specific reserve component. Net charge-offs totaled $95 thousand forwas primarily attributable to the year ended December 31, 2017, compared to $203 thousandresolution of net charge-offs for the same period of 2016.a previously impaired loan. The increase in the general reserve resulted primarily from the impact of $36.1 million ofwas attributable to loan growth, an increase in historical losses, and higher historical loss rates during the year. The impact of loan growth and higher historical loss ratesreserves on the general reserve waspurchased loans. These increases were partially offset by improvements into the asset quality and economic qualitative adjustment factors that had been increased during the year. pandemic.improvementsBank recorded provision for loan losses of $3.0 million for prior year ended December 31, 2020, which was attributable to net charge-offs totaling $449 thousand and increases in qualitative adjustment factors resulted from improved asset quality inboth the 1-4 family residential, other real estate,general and commercial and industrial loan classes and improved economic conditions. The specific reserve components of the allowance for loan losses. The general reserve component decreased primarily from the Bank's decision to charge-off loan amounts included in the specific reserve calculation.There were notable changes amongof the allowance for loan losses allocated to individual loan classes when comparing December 31, 2017 to December 31, 2016. The allowance for loan losses allocated to the consumer and other loans portfolio increased by $432 thousand during 2017, which was offset by a $244 thousand decrease in the allowance for loan losses allocated to the 1-4 family residential loan portfolio and a $194 thousand decrease in the allowance for loan losses allocated to the other real estate portfolio. The increase in the allocation to the consumer and other loans portfolio resulted from higher historical loss rates and increases in loan balances. Consumer and other loan balances increased primarily from purchases ofconsumer loans at their origination at par value. Purchased consumer loans totaled $5.9 million at December 31, 2017. The Bank did not have any purchased consumer loans at December 31, 2016. The decrease in the allocationadjustments to the 1-4 family residential loan portfolioqualitative factors, which resulted from a decreasethe Bank’s observation of unfavorable changes in historical loss rateseconomic indicators impacted by the pandemic, consideration of risks associated with loans modified for interest-only payments in accordance with the CARES Act, and improvements to the qualitative adjustment factors for improved asset quality, as evidenced by overall positive trendsan increase in substandard past due, and non-accrual loans, and economic conditions.loan amounts. The decrease in the allocation to the other real estate portfolio resulted from improvements to the qualitative adjustment factors for improved asset quality and economic conditions.For the year ended December 31, 2016, the Bank did not record a provision for loan losses as a decreaseincrease in the specific reserve component of the allowance for loan losses was offset by an increase in the general reserve component, when comparing the allowance for loan losses at December 31, 2016 and 2015. The decrease in the specific reserve resulted from improvements in collateral positionsincluded reserves placed on impaired loans, principal payments received, and the resolution of certainnewly identified impaired loans during 2016. The increase in the general reserve resulted primarily from the impact of $47.1 million of loan growth during the year. The impactThe Company has consistently applied its allowance for loan loss methodology and regularly reviews the three year historical charge-off look back period to ensure it is indicative of the risk that remains in the loan portfolio. The Company has no reason to believe that net charge-offs experienced in 2018 will be significantly different from the prior three year look back period. For more detail of net charge-offs, see the allowance for loan losses table appearing in the Asset Quality section.decreased $201 thousand,increased $1.9 million, or 2%24%, to $8.3$10.2 million for the year endedending December 31, 2017,2021, compared to $8.5 million for the same period in 2016.prior year. The decrease in noninterest incomeincrease was primarily attributable to a $484$616 thousand, or 14%, decrease in service charges on deposit accounts and net losses on sales of securities of $90 thousand during 2017. The decrease in service charges on deposit accounts was a result of lower overdraft revenue. These decreases were partially offset by a $103 thousand, or 5%27%, increase in ATM and check card fees, an $85a $504 thousand, or 6%23%, increase in wealth management fees, and a $193$343 thousand, or 37%35%, increase in income from bank owned life insurance.fees for other customer services, and a $442 thousand increase in other operating income. The increase in ATM and check card fees was primarily attributable to volume related payments received forthe addition of new customer deposit accounts through the Merger with Fincastle and an increase in customer check card usage.transactions. Wealth management revenue increased from a higher amount of assets under management. The increase in wealth management fees resultedbrokered mortgage fee income was attributable to an increase in customer refinance activity. Other operating income increased primarily from higher balances of assets under management during 2017income from investments in partnerships that provide title insurance and finance small businesses.sameprior year. Merger and acquisition expenses totaled $3.5 million for the year and were comprised of $1.2 million of salaries and employee benefits, $69 thousand of marketing expense, $75 thousand of supplies, $1.8 million of legal and professional fees, $81 thousand data processing fees, and $290 thousand of other operating expense. In addition, several noninterest expense categories increased during the year 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, and also from the acquisition of SmartBank’s loan portfolio, employees and loan production office located in the Richmond, Virginia market on September 30, 2021. Expenses that increased during the year as a result of the growth of the Company after the Merger included salaries and employee benefits, occupancy, equipment, marketing, supplies, ATM and check card expense, FDIC assessment, data processing, and other operating expense. Expenses that increased as a result of the acquisition of the SmartBank loan portfolio, Richmond-area office, and employees included salaries and employee benefits, occupancy, equipment, marketing, supplies, data processing, and other operating expense. one year ago. The increase in income from bank owned life insurance resulted fromending December 31, 2021. life insurance death benefits recorded$537 thousand during 2017.Noninterest ExpenseNoninterest expense decreased $204 thousand, or 1%, to $23.3 million for the year ended December 31, 2017, compared to $23.5 million for the same period in 2016. The decrease in noninterest expense was primarily attributable to an $85 thousand, or 19%, decrease in supplies expense, a $61 thousand, or 7%, decrease in ATM and check card fees, a $110 thousand, or 26%, decrease in FDIC assessment, a $150 thousand, or 19%, decrease in amortization expense, and a $66 thousand, or 55%, increase in other real estate owned income, when comparing the periods. These improvements were partially offset by a $64 thousand, or 17%, increase in bank franchise tax and a $244 thousand increase in net losses on disposal of premises and equipment.The decreases in supplies expense and ATM and check card fees resulted primarily from efforts to lower operating costs. The decrease in FDIC assessment resulted from lower FDIC deposit insurance assessment rates as a result of changes put into effect by the FDIC combined with the Bank's financial condition. Amortization expense decreased due to the accelerated amortization method of core deposit intangibles compared to 2016. The increase in income related to other real estate owned resulted primarily from lower negative adjustments to the carrying value of OREO property and lower expenses related to maintaining OREO property,2021 compared to the prior year.The increase in bank franchise tax resulted from the Bank's higher taxable capital compared to 2016. Net losses on disposal of premises and equipment increased primarily as a result of the Bank's decision to sell a former bank branch located in Woodstock, Virginia.Income TaxesIncome tax expense increased by $1.4 million for the year ended December 31, 2017, compared to the same period of 2016. Included in the increase in income tax expense was a $752 thousand charge to income tax expense related to the re-measurement of net deferred tax assets resulting from the new 21% federal corporate income tax rate established by the Tax Cut and Jobs Act (the Act). For a more detailed discussion of the Act, see the section of this report entitled "Supervision and Regulation."yearsyear ended December 31, 20172021 and 2016.2020. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income and income from bank owned life insurance. For aA more detailed discussion of the Company’s tax calculation seeis contained in Note 11 to the consolidated financial statements,Consolidated Financial Statements included in Item 8 of this Form 10-K.by $23.1$438.5 million to $739.1$1.4 billion at December 31, 2021, compared to $950.9 million at December 31, 2017 compared to $716.0 million at December 31, 2016.2020. The increase was primarily attributable to a $36.1$197.0 million increase in net loans, when comparing the periods.a $168.4 million increase in securities, and a $43.1 million increase in interest-bearing deposits in banks. The increase in netthe loan portfolio was impacted by $194.5 million of loans was partially offset by a $10.7acquired on July 1, 2021 through the acquisition of Fincastle, an $82.0 million loan portfolio acquisition from SmartBank on September 30, 2021, and an $82.5 million decrease in securities since PPP loan balances during the year ended December 31, 2016.$19.4$406.3 million, which included $236.3 million in total deposits acquired from Fincastle. Proceeds from PPP loan originations and the receipt of government stimulus checks by customers during the year contributed to $665.0 million at December 31, 2017 compared to $645.6 million at December 31, 2016.the increase in deposits. Noninterest-bearing demand deposits and savings and interest-bearing deposits increased $12.8$150.0 million and $12.4$211.0 million, respectively, when comparingwhile time deposits decreased $45.4 million. periods. Theseissuance of common stock in the amount of $1.7 million and surplus of $25.4 million in the acquisition of Fincastle. Other notable increases wereinclude a $7.7 million increase in retained earnings. This increase was partially offset by a $5.8$3.1 million decrease in time deposits since December 31, 2016.includesincludes commercial and residential real estate loans, commercial loans, consumer loans, construction and land development loans, and home equity loans. The Bank’s lending activity is concentrated on individuals, small and medium-sized businesses, and local governmental entities primarily in its market area.areas. As a provider of community-oriented financial services, the Bank does not attempt to further geographically diversify its loan portfolio by undertaking significant lending activity outside itsits market area.areas. 8%, or $36.1$197.0 million to $516.9$819.4 million at December 31, 2017,2021, compared to $480.7$622.4 million at December 31, 2016.2020. The growthincrease was attributable to the acquisition of Fincastle and the SmartBank loan portfolio, which added loans totaling $194.5 million and $82.0 million, respectively. The increase in loans from the acquisitions was partially offset by a $52.2 million decrease in PPP loan balances during 2021. Commercial real estate loans increased by $118.0 million, residential real estate loans increased by $56.2 million, construction loans and other loans increased by $28.4 million and $4.1 million, respectively. These increases were partially offset by commercial and industrial and consumer loans that decreased by $10.0 million and $1.5 million, respectively. The decrease in commercial and industrial loans was a result of increases$82.5 million decrease in commercial, financial, and agriculturalPPP loans residential real estate loans, other real estate loans, and consumer loans, which combined, increased $36.7 million during 2017.The Bank’s loan portfolio is summarized in the table below for the periods indicated (dollars in thousands). 2017 2016 2015 2014 2013 Commercial, financial, and agricultural $ 38,763 7.42 % $ 29,981 6.17 % $ 24,048 5.48 % $ 21,166 5.59 % $ 22,803 6.39 % Real estate - construction 35,927 6.88 % 34,699 7.14 % 33,135 7.55 % 29,475 7.79 % 34,060 9.54 % Real estate - mortgage: Residential (1-4 family) 208,177 39.87 % 198,763 40.89 % 189,286 43.12 % 163,727 43.27 % 141,961 39.76 % Other real estate loans 222,256 42.56 % 211,210 43.45 % 181,447 41.33 % 151,802 40.12 % 145,968 40.87 % Consumer 12,333 2.36 % 4,875 1.00 % 4,312 0.98 % 5,070 1.34 % 5,214 1.46 % All other loans 4,745 0.91 % 6,539 1.35 % 6,771 1.54 % 7,170 1.89 % 7,087 1.98 % Total loans $ 522,201 100 % $ 486,067 100 % $ 438,999 100 % $ 378,410 100 % $ 357,093 100 % Less: allowance for loan losses 5,326 5,321 5,524 6,718 10,644 Loans, net of allowance for loan losses $ 516,875 $ 480,746 $ 433,475 $ 371,692 $ 346,449 There was no category20172021 (in thousands): Total Commercial, financial, and agricultural $ 10,978 $ 22,774 $ 5,011 $ 38,763 Real estate construction and land development 14,923 16,375 4,629 35,927 Real estate - mortgage: Residential (1-4 family) 15,932 30,855 161,390 208,177 Other real estate loans 16,131 33,134 172,991 222,256 Consumer 590 11,252 491 12,333 All other loans 4,321 424 — 4,745 Total loans $ 62,875 $ 114,814 $ 344,512 $ 522,201 For maturities over one year: Fixed rates $ 317,867 Variable rates 141,459 $ 459,326 $ 11,802 $ 7,254 $ 13,065 $ 13,104 $ 489 $ 45,714 4,435 7,715 811 873 32 13,866 9,690 94,604 111,809 8,252 4,019 228,374 1,091 46,748 68,853 882 — 117,574 12,160 3,675 17,157 9,434 770 43,196 6,418 14,297 55,947 41,913 7,175 125,750 10,125 72,881 85,333 22,672 196 191,207 — 44,816 11,946 2,675 — 59,437 $ 55,721 $ 291,990 $ 364,921 $ 99,805 $ 12,681 $ 825,118 other real estate owned (OREO).OREO. 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 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’sBank had $1.8 million in assets classified as OREO totaled $326 thousand at December 31, 2017 and $250 thousand2021. The Bank did not have any assets classified as OREO at December 31, 2016. There was no valuation allowance for other real estate owned at December 31, 2017 or December 31, 2016.$1.3$4.2 million and $1.8$6.7 million at December 31, 20172021 and 2016,2020, representing 0.17%approximately 0.30% and 0.25%0.71% of total assets, respectively. Non-performing assets included $937 thousandconsisted of $1.8 million of OREO and $2.3 million of non-accrual loans at December 31, 2021. Non-performing assets consisted only of non-accrual loans at December 31, 2020. The decrease in non-accrual loans and $326 thousandwas 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 $1.8 million in properties formerly classified as bank premises by the Bank of Fincastle, which were classified as OREO at December 31, 2017. This compares to $1.5 million in non-accrual loans and $250 thousand in OREO at 2021.2016.At December 31, 2017, 32%2021, 78.1% of non-performing assets related towere commercial and industrial loans, 18.5% were residential real estate loans, 26% related to properties originally used for branch operations which are no longer used for that purpose, 21% related to construction and land development loans, and 21% related to residential3.4% were other real estate loans. Non-performing assets could increase due to the deterioration of 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 $8.9$1.1 million and $8.1$1.4 million at December 31, 20172021 and December 31, 2016,2020, respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing oura customers’ ability to meet their debt requirements.thanthan 90 days past due and still accruing totaled $183 thousand at December 31, 2017, which was comprised of four loans expected to pay all principal and interest amounts contractually due to the Bank and two purchased consumer loans. Consumer loans purchased at origination are charged-off when they are greater than 120 days past due.2021. There were $116$302 thousand of loans greater than 90 days past due and still accruing at December 31, 2016.2020.losseslosses 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 $5.3$5.7 million at December 31, 20172021 and $7.5 million at December 31, 2016,2020, representing 1.02%0.69% and 1.09%1.19% of total loans, respectively.respectively. After analyzing theimprovementschanges in asset quality during recent years, the Company determined that the three year loss period and the qualitative adjustment factors that established the general reserve component of the allowance for loan losses were appropriate at December 31, 2017. 2021. The allowance for loan losses as a percentage of total loans decreased to 0.69% at December 31, 2021 compared to 1.19% at December 31, 220 primarily as a result of purchased loan accounting related to the Bank of Fincastle and SmartBank acquisitions.$38 thousand, $420$737 thousand and $244$67 thousand were recorded in the construction and land development, 1-4 family residential, and other real estate loan and commercial and industrial loan classes, respectively, during the year ended December 31, 2017. The recoveries of loan losses in the construction and land development and 1-4 family residential loan classes resulted from net recoveries of loans charged-off in prior periods and improvements in the historical loss rate and qualitative adjustment factors.2021. The recovery of loan losses in the other real estate loan class resulted primarily from net recoveries of loans charged-off in prior periods and improvementsa decrease in the qualitative adjustment factors. Improvementsspecific reserve. The decrease in qualitative adjustment factorsthe specific reserve for the construction and land developmentother real estate loan class resulted from improving economic conditions. Improvements in qualitative adjustment factors for the 1-4 family residential and other real estate loan classes resulted from improving asset quality and economic conditions. These recoveries were offset by provision for loan losses experienced in the commercial and industrial and consumer and other loan class.resolution of a previously impaired loan. The provision forrecovery of loan losses in the commercial and industrial loan class resulted primarily from an increasea decrease in the general reserve requirement due to growth in the loan portfolio. Thespecific reserve. These recoveries were offset by provision for loan losses totaling $154 thousand in the construction and land development, 1-4 family residential, and consumer and other loan class resulted primarily from an increaseclasses. For more detailed information regarding the provision for loan losses, see Note 4 to the Consolidated Financial Statements included in the general reserve requirement due to growth in the loan portfolio and higher historical loss rates.totaled $3.8totaled $2.3 million and $6.7 million at December 31, 2017, compared to $4.9 million at December 31, 2016. There was not a related allowance for loan losses provided for these loans at December 31, 2017.2021 and 2020, respectively. The related allowance for loan losses providedrequired for impairedthese loans totaled $37$55 thousand and $2.2 million at December 31, 2016.2021 and December 31, 2020, respectively. The average recorded investment in impaired loans during 20172021 and 2016 2020 was $4.7 million$4.5 million and $7.0$3.9 million, respectively. Included in the impaired loans total are loans classified as troubled debt restructurings (TDRs)TDRs totaling $333 thousand$1.6 million and $460 thousand$6.0 million at December 31, 20172021 and 2016.2020, 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 December 31, 2017, $282 thousand2021, none of these TDRs were performing under the restructured terms and all were not considered non-performing assets.(recovery of) loan losses charged to (income) or 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 (recovery of) 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 following table shows a detail of loans charged-off, recovered, and the changes in the allowance for loan losses (dollars in thousands). 2017 2016 2015 2014 2013 Balance, beginning of period $ 5,321 $ 5,524 $ 6,718 $ 10,644 $ 13,075 Loans charged-off: Commercial, financial and agricultural — — 59 43 37 Real estate-construction and land development — — — 91 2,962 Real estate-mortgage Residential (1-4 family) 126 83 142 272 260 Other real estate loans — 165 1,125 203 1,070 Consumer 607 540 512 318 163 All other loans — — — — — Total loans charged off $ 733 $ 788 $ 1,838 $ 927 $ 4,492 Recoveries: Commercial, financial and agricultural $ 10 $ 11 $ 72 $ 18 $ 179 Real estate-construction and land development 11 4 4 80 — Real estate-mortgage Residential (1-4 family) 302 293 373 15 823 Other real estate loans 50 2 2 509 1,304 Consumer 263 275 293 229 180 All other loans 2 — — — — Total recoveries $ 638 $ 585 $ 744 $ 851 $ 2,486 Net charge-offs $ 95 $ 203 $ 1,094 $ 76 $ 2,006 Provision for (recovery of) loan losses 100 — (100 ) (3,850 ) (425 ) Balance, end of period $ 5,326 $ 5,321 $ 5,524 $ 6,718 $ 10,644 Ratio of net charge-offs during the period to average loans outstanding during the period 0.02 % 0.04 % 0.27 % 0.02 % 0.53 % $ 464 $ 776 $ 2,296 $ 562 $ 836 $ 4,934 — — — (69 ) (715 ) (784 ) 2 8 2 18 305 335 (160 ) 238 2,658 273 (9 ) 3,000 $ 306 $ 1,022 $ 4,956 $ 784 $ 417 $ 7,485 $ 32,528 $ 235,275 $ 247,527 $ 100,095 $ 8,489 $ 623,914 -0.01 % 0.00 % 0.00 % 0.05 % 4.83 % 0.07 % 306 1,022 4,956 784 417 7,485 — (15 ) (992 ) (6 ) (434 ) (1,447 ) 6 65 3 7 241 322 33 5 (737 ) (67 ) 116 (650 ) 345 1,077 3,230 718 340 5,710 $ 32,233 $ 265,900 $ 296,382 $ 107,964 $ 10,258 $ 712,737 -0.02 % -0.02 % 0.33 % 0.00 % 1.88 % 0.16 % $ 345 $ 306 1,077 1,022 3,230 4,956 718 784 340 417 $ 5,710 $ 7,485 6.8 % 4.3 % 35.4 % 37.4 % 44.2 % 39.3 % 12.1 % 17.4 % 1.5 % 1.6 % 100.0 % 100.0 % 2017 2016 2015 2014 2013 Commercial, financial and agricultural $ 418 7.42 % $ 380 6.17 % $ 306 5.48 % $ 310 5.59 % $ 442 6.39 % Real estate-construction and land development 414 6.88 % 441 7.14 % 1,532 7.55 % 1,403 7.79 % 2,710 9.54 % Real estate- mortgage Residential (1-4 family) 775 39.87 % 1,019 40.89 % 939 43.12 % 1,204 43.27 % 2,975 39.76 % Other real estate loans 2,948 42.56 % 3,142 43.45 % 2,534 41.33 % 3,658 40.12 % 4,418 40.87 % Consumer 725 2.36 % 267 1.00 % 140 0.98 % 67 1.34 % 24 1.46 % All other loans 46 0.91 % 72 1.35 % 73 1.54 % 76 1.89 % 75 1.98 % $ 5,326 100.0 % $ 5,321 100.0 % $ 5,524 100.0 % $ 6,718 100.0 % $ 10,644 100.0 % 2017 2016 2015 2014 2013 Non-accrual loans $ 937 $ 1,520 $ 3,854 $ 8,000 $ 11,678 Other real estate owned 326 250 2,679 1,888 3,030 Total non-performing assets $ 1,263 $ 1,770 $ 6,533 $ 9,888 $ 14,708 Loans past due 90 days accruing interest 183 116 92 — 49 Total non-performing assets and past due loans $ 1,446 $ 1,886 $ 6,625 $ 9,888 $ 14,757 Troubled debt restructurings $ 333 $ 460 $ 982 $ 1,918 $ 1,941 Allowance for loan losses to period end loans 1.02 % 1.09 % 1.26 % 1.77 % 2.98 % Non-performing assets to period end loans 0.24 % 0.36 % 1.49 % 2.61 % 4.12 % $ 2,304 $ 6,714 1,848 — $ 4,152 $ 6,714 — 302 $ 4,152 $ 7,016 $ 1,638 $ 5,976 0.50 % 1.07 % $ 825,118 $ 629,914 $ 2,304 $ 6,714 $ 5,710 $ 7,485 0.28 % 1.07 % 0.69 % 1.19 % 247.83 % 111.48 % 2017 totaled $139.0 million, a decrease2021, an increase of $10.7$168.5 million, or 7%108%, from $149.7$156.3 million at the end of 2016. The investment portfolio decreased during 2017 as loan growth was partially funded by cash flow received from the securities portfolio.2020. Investment securities are comprised of U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of December 31, 2017,2021, 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 totaled $153 thousand$2.0 million and $333 thousand$4.0 million at December 31, 20172021 and 2016,2020, respectively. Gross unrealized losses in the available for sale portfolio totaled $1.5$2.6 million and $1.6 million$82 thousand at December 31, 20172021 and 2016,2020, respectively. Gross unrealized gains in the held to maturity portfolio totaled $90$242 thousand and $19$509 thousand at December 31, 20172021 and 2016,2020, respectively. Gross unrealized losses in the held to maturity portfolio totaled $596 thousand and $708$66 thousand at December 31, 2017 and 2016, respectively.2021. There were no gross unrealized losses in the held to maturity portfolio at December 31, 2020. Investments in an unrealized loss position were considered temporarily impaired at December 31, 20172021 and 2016.2020. The change in the unrealized gains and losses of investment securities from December 31, 20162020 to December 31, 20172021 was related to changes in market interest rates and was not related to credit concerns of the issuers.The following table summarizes the Company’s securities portfolio on the dates indicated (in thousands). 2017 2016 2015 Securities available for sale, at fair value: U.S. agency and mortgage-backed securities $ 74,804 $ 80,171 $ 89,337 Obligations of state and political subdivisions 14,451 14,620 16,214 Corporate equity securities — 11 8 $ 89,255 $ 94,802 $ 105,559 Securities held to maturity, at carrying value U.S. agency and mortgage-backed securities $ 32,149 $ 37,269 $ 49,662 Obligations of state and political subdivisions 14,559 14,629 15,357 Corporate debt securities 1,500 1,500 1,500 $ 48,208 $ 53,398 $ 66,519 Restricted securities, at cost Federal Home Loan Bank stock $ 645 $ 623 $ 466 Federal Reserve Bank stock 875 875 875 Community Bankers’ Bank stock 50 50 50 $ 1,570 $ 1,548 $ 1,391 Total securities $ 139,033 $ 149,748 $ 173,469 equityrestricted securities at amortized cost and market value at December 31, 20172021 and approximate weighted average yields of such securities (dollars in thousands). Yields on state and political subdivision securities are shown on a tax equivalent basis, assuming a 34%21% federal income tax rate. The Company attempts to maintain diversity in its portfolio and maintain credit quality and re-pricing terms that are consistent with its asset/liability management and investment practices and policies. For further information on securities, see Note 2 to the consolidated financial statements,Consolidated Financial Statements included in Item 8 of this Form 10-K. Total U.S. agency and mortgage-backed securities Amortized cost $ — $ 8,655 $ 12,395 $ 87,173 $ 108,223 Market value $ — $ 8,576 $ 12,198 $ 85,628 $ 106,402 Weighted average yield — % 2.37 % 2.38 % 2.28 % 2.30 % Obligations of state and political subdivisions Amortized cost $ 600 $ 6,571 $ 9,185 $ 12,723 $ 29,079 Market value $ 601 $ 6,616 $ 9,218 $ 12,604 $ 29,039 Weighted average yield 1.40 % 3.19 % 3.24 % 3.54 % 3.32 % Corporate debt securities Amortized cost $ — $ — $ 1,500 $ — $ 1,500 Market value $ — $ — $ 1,516 $ — $ 1,516 Weighted average yield — % — % 6.73 % — % 6.73 % Restricted securities Amortized cost $ — $ — $ — $ 1,570 $ 1,570 Market value $ — $ — $ — $ 1,570 $ 1,570 Weighted average yield — % — % — % 5.33 % 5.33 % Total portfolio Amortized cost $ 600 $ 15,226 $ 23,080 $ 101,466 $ 140,372 Market value $ 601 $ 15,192 $ 22,932 $ 99,802 $ 138,527 1.40 % 2.72 % 3.01 % 2.48 % 2.59 % Less than One Year One to Five Years Five to Ten Years Greater than Ten Years and Equity Securities $ — $ 29,891 $ 9,980 $ — $ 39,871 $ — $ 29,745 $ 9,913 $ — $ 39,658 — % 1.02 % 1.28 % — % 1.09 % $ 2,000 $ 3,212 $ 38,312 $ 159,999 $ 203,523 $ 2,000 $ 3,271 $ 38,578 $ 158,993 $ 202,842 2.36 % 2.40 % 1.76 % 1.51 % 1.58 % $ 1,175 $ 6,356 $ 21,880 $ 48,675 $ 78,086 $ 1,178 $ 6,519 $ 22,003 $ 48,892 $ 78,592 2.41 % 2.89 % 2.37 % 2.27 % 2.35 % $ — $ — $ 2,019 $ — $ 2,019 $ — $ — $ 2,020 $ — $ 2,020 — % — % 2.84 — % 2.84 % $ — $ — $ — $ 1,813 $ 1,813 $ — $ — $ — $ 1,813 $ 1,813 — % — % — % 4.99 % 4.99 % $ 3,175 $ 39,459 $ 72,191 $ 210,487 $ 325,312 $ 3,178 $ 39,535 $ 72,514 $ 209,698 $ 324,925 2.38 % 1.43 % 1.91 % 1.72 % 1.73 % (1)basis.basis using the federal corporate income tax rate of 21 percent. The weighted average yield is calculated based on the relative amortized costs of the securities.2017,2021, the Company did not own securities of any issuer for which the aggregate book value of the securities of such issuer exceeded ten percent of shareholders’ equity.2017,2021, deposits totaled $665.0 million,$1.2 billion, an increase of $19.4$406.3 million, from $645.6$842.5 million at December 31, 2016.2020. The increase was attributable to the acquisition of Fincastle on July 1, 2021, which included $236.3 million of deposits, as well as growth in the Bank's deposit portfolio. There was not a significantslight change in the deposit mix when comparing the periods. At December 31, 2017,2021, noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits composed 27%33%, 54%55%, and 19%12% of total deposits, respectively, compared to 26%31%, 54%57%, and 20%12% at December 31, 2016.and maturities of CD’s greater than $100,000 (dollars in thousands). 2017 2016 2015 Amount Rate Amount Rate Amount Rate Noninterest-bearing deposits $ 174,225 — $ 161,882 — $ 138,193 — Interest-bearing deposits: Interest checking $ 163,553 0.42 % $ 150,412 0.26 % $ 135,976 0.14 % Money market 63,326 0.30 % 61,086 0.17 % 46,161 0.13 % Savings 127,887 0.08 % 126,434 0.08 % 114,632 0.08 % Time deposits: Less than $100 80,274 0.48 % 87,828 0.44 % 83,280 0.39 % Greater than $100 44,229 0.81 % 45,925 0.80 % 49,511 0.95 % Brokered deposits 566 0.31 % 600 0.45 % 767 0.50 % Total interest-bearing deposits $ 479,835 0.36 % $ 472,285 0.29 % $ 430,327 0.27 % Total deposits $ 654,060 $ 634,167 $ 568,520 Maturities of CD’s Greater than $100,000 Total At December 31, 2017 $ 7,138 $ 2,276 $ 9,661 $ 24,488 $ 43,563 $ 348,829 — % $ 236,061 — % $ 254,077 0.17 % $ 193,870 0.36 % 168,932 0.11 % 149,029 0.47 % 164,768 0.07 % 111,693 0.06 % 69,904 0.44 % 59,726 0.76 % 52,304 0.74 % 50,176 1.35 % 650 0.34 % 579 0.26 % $ 710,635 0.20 % $ 565,073 0.46 % $ 1,059,464 $ 801,134 $ 1,504 847 444 2,169 $ 4,964 2017,2021, cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, securities, and loans maturing within one year totaled $103.5 million.totaled $268.1 million. At December 31, 2017, 12%2021, 11% or $62.9 $88.9 million of the loan portfolio maturesis scheduled to mature within one year. Non-deposit sources of available funds totaled $134.1 milliontotaled $240.4 million at December 31, 2017,2021, which included $82.1 millionincluded $155.7 million of secured funds available from Federal Home Loan Bank of Atlanta (FHLB), $42.0 million $51.0 million of unsecured federal funds lines of credit with other correspondent banks, and $10.0 million $33.7 million available through the Federal Reserve Discount Window.consolidated financial statements,Consolidated Financial Statements included in Item 8 of this Form 10-K, for discussion of subordinated debt.consolidated financial statements,Consolidated Financial Statements included in Item 8 of this Form 10-K, for discussion of junior subordinated debt.20172021 and 2016,2020, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands): 2017 2016 Commitments to extend credit and unfunded commitments under lines of credit $ 77,992 $ 71,421 Stand-by letters of credit 10,379 8,983 $ 161,428 $ 114,892 18,904 10,675 usually do not contain a specified maturity date and may or may not be drawn upon to the total extent to which the Bank is committed.2017,2021, the Bank had $2.8 millionhad $4.6 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.In July 2013,U.S. bankingBank became subject to capital rules adopted by federal bank regulators adopted a final rule which implementsimplementing the Basel III regulatory capital reforms fromadopted by the Basel Committee on Banking Supervision (the Basel Committee), and certain changes required by the Dodd-Frank Act. final rule established an integrated regulatory capital framework and introduces the “Standardized Approach” for risk-weighted assets, which replaced the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015, the date the Bank became subject to the new rules. Based on the Bank’s current capital composition and levels, the Bank believes it is in compliance with the requirements as set forth in the final rules.The rules included new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank under the final rules wereare as follows: a new common equity Tier 1 capital ratio of 4.5%; a Tier 1 capital ratio of 6% (increased from 4%); a total capital ratio of 8% (unchanged from previous rules); and a Tier 1 leverage ratio of 4%is beingwas phased-in over four years which began onand, as fully implemented effective January 1, 2016, as follows: the maximum2019, requires a buffer was 0.625%of 2.5% of risk-weighted assets for 2016 and 1.25% for 2017, and will be 1.875% for 2018 and 2.5% for 2019 and thereafter.assets. This will resultresults 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 bonuses 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 December 31, 20172021 and December 31, 2016,2020, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.The Bank’s capital ratios decreased during 2017 primarily due to the declaration and payment2017, 2016,2021, 2020, and 20152019 (dollars in thousands). 2017 2016 2015 Common equity Tier 1 capital $ 62,298 $ 60,269 $ 55,989 Tier 1 capital 62,298 60,269 55,989 Tier 2 capital 5,326 5,321 5,524 Total risk-based capital 67,624 65,590 61,513 Risk-weighted assets 515,483 486,885 443,717 Capital ratios: Common equity Tier 1 capital ratio 12.09 % 12.38 % 12.62 % Tier 1 capital ratio 12.09 % 12.38 % 12.62 % Total capital ratio 13.12 % 13.47 % 13.86 % Leverage ratio (Tier 1 capital to average assets) 8.46 % 8.48 % 8.12 % 5.12 % 5.47 % N/A $ 120,224 $ 84,032 120,224 84,032 5,710 7,211 125,934 91,243 852,959 576,612 14.09 % 14.57 % 14.09 % 14.57 % 14.76 % 15.82 % 8.82 % 8.80 % 6.76 % 7.82 % (1) final rules also contain revisions to the prompt corrective action framework which 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 now required to meet the following increased capital level requirements in order to qualify as “well capitalized:” a new common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8% (increased from 6%); a total capital ratio of 10% (unchanged from previous rules); and a Tier 1 leverage ratio of 5% (unchanged. The Bank met the requirements to qualify as "well capitalized" as of December 31, 2021 and 2020.previous rules).consolidated financial statements,Consolidated Financial Statements included in Item 8 of this Form 10-K, for discussion of recent accounting pronouncements.Quarterly ResultsThe table below lists the Company’s quarterly performance for the years ended December 31, 2017 and 2016 (in thousands, except per share data). 2017 Fourth Third Second First Total Interest and dividend income $ 7,265 $ 7,036 $ 6,819 $ 6,532 $ 27,652 Interest expense 660 616 570 540 2,386 Net interest income 6,605 6,420 6,249 5,992 25,266 Provision for loan losses 100 — — — 100 Net interest income after provision for loan losses 6,505 6,420 6,249 5,992 25,166 Noninterest income 2,356 2,017 1,978 1,941 8,292 Noninterest expense 6,021 5,807 5,705 5,751 23,284 Income before income taxes 2,840 2,630 2,522 2,182 10,174 Income tax expense 1,523 798 766 639 3,726 Net income $ 1,317 $ 1,832 $ 1,756 $ 1,543 $ 6,448 Net income per share, basic $ 0.27 $ 0.37 $ 0.36 $ 0.31 $ 1.30 Net income per share, diluted $ 0.27 $ 0.37 $ 0.36 $ 0.31 $ 1.30 2016 Fourth Third Second First Total Interest and dividend income $ 6,426 $ 6,342 $ 6,278 $ 6,191 $ 25,237 Interest expense 513 495 482 492 1,982 Net interest income 5,913 5,847 5,796 5,699 23,255 Provision for loan losses — — — — — Net interest income after provision for loan losses 5,913 5,847 5,796 5,699 23,255 Noninterest income 2,127 2,311 2,112 1,943 8,493 Noninterest expense 5,635 5,853 5,883 6,117 23,488 Income before income taxes 2,405 2,305 2,025 1,525 8,260 Income tax expense 724 611 592 426 2,353 Net income $ 1,681 $ 1,694 $ 1,433 $ 1,099 $ 5,907 Net income per share, basic $ 0.34 $ 0.34 $ 0.29 $ 0.22 $ 1.20 Net income per share, diluted $ 0.34 $ 0.34 $ 0.29 $ 0.22 $ 1.20 Item 7A. Item 8. 23, 201830, 2022 MANAGEMENT’S2017.2021. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.2017.2021. This assessment was based on criteria for effective internal control over financial reporting as described in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that the Company maintained effective internal controls over financial reporting as of December 31, 2017.2021. Management’s assessment did not determine any material weakness within the Company’s internal control structure. The Company’s annual report does not include an attestation report of the Company’s registered public accounting firm, Yount, Hyde & Barbour. P.C. (YHB), regarding internal control over financial reporting. Management’s report was not subject to attestation by YHB pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.20172021 end of year consolidated financial statements have been audited by the independent registered public accounting firm of Yount, Hyde & Barbour, P.C. (YHB). Personnel from YHB were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and Committees thereof. 
20172021 and 2016,2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.• Obtain an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments. • Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included: /s/ Yount, Hyde & Barbour, P.C.• Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors. We have served as•Evaluating the Company's auditor since 1988. Winchester, Virginia•Evaluating the qualitative factors for directional consistency and for reasonableness. March 23, 2018• Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. 20172021 and 2016 $ 18,725 $ 13,115 157,281 114,182 289,495 140,225 33,441 14,234 1,813 1,875 — 245 819,408 622,429 1,848 0 22,403 19,319 3,903 2,717 24,294 17,916 154 19 3,030 0 13,642 4,656 $ 1,389,437 $ 950,932 $ 413,188 $ 263,229 689,998 479,035 145,566 100,197 $ 1,248,752 $ 842,461 9,993 9,991 9,279 9,279 4,374 4,285 $ 1,272,398 $ 866,016 $ 0 $ 0 7,785 6,075 31,966 6,151 76,990 69,292 298 3,398 $ 117,039 $ 84,916 $ 1,389,437 $ 950,932 2017 2016 Assets Cash and due from banks $ 11,358 $ 10,106 Interest-bearing deposits in banks 28,628 30,986 Securities available for sale, at fair value 89,255 94,802 Securities held to maturity, at carrying value (fair value, 2017, $47,702; 2016, $52,709) 48,208 53,398 Restricted securities, at cost 1,570 1,548 Loans held for sale 438 337 Loans, net of allowance for loan losses, 2017, $5,326, 2016, $5,321 516,875 480,746 Other real estate owned, net of valuation allowance, 2017, $0, 2016, $0 326 250 Premises and equipment, net 19,891 20,785 Accrued interest receivable 1,916 1,746 Bank owned life insurance 13,967 13,928 Core deposit intangibles, net 930 1,551 Other assets 5,748 5,817 Total assets $ 739,110 $ 716,000 Liabilities & Shareholders’ Equity Liabilities Deposits: Noninterest-bearing demand deposits $ 180,912 $ 168,076 Savings and interest-bearing demand deposits 361,417 349,067 Time deposits 122,651 128,427 Total deposits $ 664,980 $ 645,570 Subordinated debt 4,948 4,930 Junior subordinated debt 9,279 9,279 Accrued interest payable and other liabilities 1,749 4,070 Total liabilities $ 680,956 $ 663,849 Shareholders’ Equity Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding $ — $ — Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2017, 4,945,702 shares, 2016, 4,929,403 shares 6,182 6,162 Surplus 7,260 7,093 Retained earnings 45,670 39,756 Accumulated other comprehensive loss, net (958 ) (860 ) Total shareholders’ equity $ 58,154 $ 52,151 Total liabilities and shareholders’ equity $ 739,110 $ 716,000 20172021 and 2016 $ 32,797 $ 29,497 213 190 10 0 3,100 2,448 936 617 88 99 $ 37,144 $ 32,851 $ 1,415 $ 2,589 619 501 270 293 $ 2,304 $ 3,383 $ 34,840 $ 29,468 (650 ) 3,000 $ 35,490 $ 26,468 $ 2,061 $ 2,028 2,930 2,314 2,712 2,208 787 627 539 356 526 469 37 40 25 70 15 29 555 113 $ 10,187 $ 8,254 2017 2016 Interest and Dividend Income Interest and fees on loans $ 24,082 $ 21,662 Interest on deposits in banks 335 238 Interest and dividends on securities: Taxable interest 2,569 2,692 Tax-exempt interest 583 564 Dividends 83 81 Total interest and dividend income $ 27,652 $ 25,237 Interest Expense Interest on deposits $ 1,723 $ 1,353 Interest on federal funds purchased — 3 Interest on subordinated debt 360 361 Interest on junior subordinated debt 303 259 Interest on other borrowings — 6 Total interest expense $ 2,386 $ 1,982 Net interest income $ 25,266 $ 23,255 Provision for loan losses 100 — Net interest income after provision for loan losses $ 25,166 $ 23,255 Noninterest Income Service charges on deposit accounts $ 3,028 $ 3,512 ATM and check card fees 2,140 2,037 Wealth management fees 1,447 1,362 Fees for other customer services 570 581 Income from bank owned life insurance 720 527 Net (losses) gains on securities available for sale (90 ) 8 Net gains on sale of loans 172 144 Other operating income 305 322 Total noninterest income $ 8,292 $ 8,493 20172021 and 2016 $ 17,792 $ 13,321 1,856 1,666 1,910 1,707 666 355 509 394 2,537 1,152 1,145 980 346 247 665 637 2,156 759 28 151 26 0 3,096 2,446 $ 32,732 $ 23,815 $ 12,945 $ 10,907 2,586 2,049 $ 10,359 $ 8,858 $ 1.87 $ 1.82 $ 1.86 $ 1.82 2017 2016 Noninterest Expense Salaries and employee benefits $ 12,923 $ 12,939 Occupancy 1,482 1,533 Equipment 1,636 1,634 Marketing 576 562 Supplies 365 450 Legal and professional fees 886 884 ATM and check card fees 805 866 FDIC assessment 316 426 Bank franchise tax 436 372 Telecommunications expense 416 451 Data processing expense 620 593 Postage expense 211 238 Amortization expense 621 771 Other real estate owned income, net (186 ) (120 ) Net losses on disposal of premises and equipment 252 8 Other operating expense 1,925 1,881 Total noninterest expense $ 23,284 $ 23,488 Income before income taxes $ 10,174 $ 8,260 Income tax expense 3,726 2,353 Net income $ 6,448 $ 5,907 Earnings per common share Basic $ 1.30 $ 1.20 Diluted $ 1.30 $ 1.20 20172021 and 2016 $ 10,359 $ 8,858 (3,474 ) 2,366 (29 ) (32 ) 403 340 (3,100 ) 2,674 $ 7,259 $ 11,532 2017 2016 Net income $ 6,448 $ 5,907 Other comprehensive income, net of tax: Unrealized holding losses on available for sale securities, net of tax ($43) and ($341), respectively (82 ) (663 ) Reclassification adjustment for losses (gains) included in net income, net of tax $31 and ($3), respectively 59 (5 ) Pension liability adjustment, net of tax $43 and $719, respectively 83 1,396 Total other comprehensive income 60 728 Total comprehensive income $ 6,508 $ 6,635 20172021 and 2016 $ 10,359 $ 8,858 1,377 1,316 28 151 2 18 (1,586 ) (4,152 ) 1,856 4,144 (25 ) (70 ) (650 ) 3,000 139 0 (37 ) (40 ) (8 ) 0 (526 ) (469 ) 1,078 687 (179 ) (23 ) (408 ) 0 354 290 3 (2 ) (15 ) (29 ) (1,682 ) (923 ) 545 (652 ) (1,714 ) 828 (1,043 ) 2,159 $ 7,868 $ 15,091 $ 54,551 $ 34,057 4,732 3,283 (197,074 ) (50,881 ) (24,049 ) 0 245 (69 ) (835 ) (909 ) 32 50 288 0 (83,745 ) 0 39,406 0 80,145 (56,017 ) $ (126,304 ) $ (70,486 ) 2017 2016 Cash Flows from Operating Activities Net income $ 6,448 $ 5,907 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 1,386 1,356 Amortization of core deposit intangibles 621 771 Amortization of debt issuance costs 18 17 Origination of loans held for sale (9,789 ) (9,281 ) Proceeds from sale of loans held for sale 9,860 9,411 Net gains on sales of loans held for sale (172 ) (144 ) Provision for loan losses 100 — Net losses (gains) on securities available for sale 90 (8 ) Charitable donation of securities available for sale 13 — Provision for other real estate owned — 27 Net gains on sale of other real estate owned (191 ) (193 ) Increase in cash value of bank owned life insurance (408 ) (425 ) Accretion of discounts and amortization of premiums on securities, net 631 842 Accretion of premium on time deposits (104 ) (167 ) Stock-based compensation 141 113 Excess tax benefits on stock-based compensation (14 ) — Losses on disposal of premises and equipment 252 8 Deferred income tax expense 1,283 428 Changes in assets and liabilities: Increase in interest receivable (170 ) (85 ) (Increase) decrease in other assets (1,202 ) 26 (Decrease) increase in accrued expenses and other liabilities (2,224 ) 406 Net cash provided by operating activities $ 6,569 $ 9,009 Cash Flows from Investing Activities Proceeds from maturities, calls, principal payments, and sales of securities available for sale $ 28,157 $ 22,826 Proceeds from maturities, calls, principal payments, and sales of securities held to maturity 4,981 12,821 Purchases of securities available for sale (23,170 ) (13,615 ) Net purchase of restricted securities (22 ) (157 ) Purchase of premises and equipment, net (1,070 ) (1,033 ) Proceeds from sale of premises and equipment — 23 Proceeds from sale of other real estate owned 441 2,882 Purchase of bank owned life insurance (11 ) (2,011 ) Proceeds from cash value of bank owned life insurance 380 250 Net increase in loans (36,229 ) (47,308 ) Net cash used in investing activities $ (26,543 ) $ (25,322 ) 20172021 and 2016 $ 176,387 $ 153,386 (6,698 ) (17,344 ) 0 4,990 (2,505 ) (2,007 ) (39 ) (47 ) 0 (2,071 ) $ 167,145 $ 136,907 $ 48,709 $ 81,512 127,297 45,785 $ 176,006 $ 127,297 $ 2,464 $ 3,457 $ 2,025 $ 3,088 $ (4,434 ) $ 2,955 $ 510 $ 431 $ 130 $ 0 $ 156 $ 142 $ 306,171 $ 0 $ 237,913 $ 0 2017 2016 Cash Flows from Financing Activities Net increase in demand deposits and savings accounts $ 25,186 $ 31,128 Net decrease in time deposits (5,672 ) (12,507 ) Cash dividends paid on common stock, net of reinvestment (646 ) (550 ) Net cash provided by financing activities $ 18,868 $ 18,071 (Decrease) increase in cash and cash equivalents $ (1,106 ) $ 1,758 Cash and Cash Equivalents Beginning 41,092 39,334 Ending $ 39,986 $ 41,092 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 2,486 $ 2,172 Income taxes $ 3,377 $ 1,974 Supplemental Disclosures of Noncash Transactions Unrealized losses on securities available for sale $ (35 ) $ (1,012 ) Change in pension liability $ 126 $ 2,115 Transfer from loans to other real estate owned $ — $ 37 Transfer from premises and equipment to other real estate owned $ 326 $ 250 Issuance of common stock, dividend reinvestment plan $ 46 $ 41 20172021 and 2016 $ 6,212 $ 7,700 $ 62,583 $ 724 $ 77,219 0 0 8,858 0 8,858 0 0 0 2,674 2,674 0 0 (2,149 ) 0 (2,149 ) 0 290 0 0 290 11 131 0 0 142 16 (16 ) 0 0 0 (3 ) (44 ) 0 0 (47 ) (161 ) (1,910 ) 0 0 (2,071 ) $ 6,075 $ 6,151 $ 69,292 $ 3,398 $ 84,916 Accumulated Other Comprehensive Income $ 6,075 $ 6,151 $ 69,292 $ 3,398 $ 84,916 0 0 10,359 0 10,359 0 0 0 (3,100 ) (3,100 ) 0 0 (2,661 ) 0 (2,661 ) 1,685 25,369 0 0 27,054 0 354 0 0 354 9 147 0 0 156 18 (18 ) 0 0 0 (2 ) (37 ) 0 0 (39 ) $ 7,785 $ 31,966 $ 76,990 $ 298 $ 117,039 Surplus Total Balance, December 31, 2015 $ — $ 6,145 $ 6,956 $ 34,440 $ (1,588 ) $ 45,953 Net income — — — 5,907 — 5,907 Other comprehensive income — — — — 728 728 Cash dividends on common stock ($0.12 per share) — — — (591 ) — (591 ) Stock-based compensation — — 113 — — 113 Issuance of 3,949 shares common stock, dividend reinvestment plan — 5 36 — — 41 Issuance of 9,324 shares common stock, stock incentive plan — 12 (12 ) — — — Balance, December 31, 2016 $ — $ 6,162 $ 7,093 $ 39,756 $ (860 ) $ 52,151 Surplus Total Balance, December 31, 2016 $ — $ 6,162 $ 7,093 $ 39,756 $ (860 ) $ 52,151 Net income — — — 6,448 — 6,448 Other comprehensive income — — — — 60 60 Cash dividends on common stock ($0.14 per share) — — — (692 ) — (692 ) Stock-based compensation — — 141 — — 141 Issuance of 3,035 shares common stock, dividend reinvestment plan — 4 42 — — 46 Issuance of 13,264 shares common stock, stock incentive plan — 16 (16 ) — — — Reclassification of tax effects stranded in accumulated other comprehensive loss by tax rate change — — — 158 (158 ) — Balance, December 31, 2017 $ — $ 6,182 $ 7,260 $ 45,670 $ (958 ) $ 58,154 III)III and, together with Trust II, the Trusts). 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 owns First Bank Financial Services, Inc., which invests in entities that provide title insurance and investment services. The Bank owns Shen-Valley Land Holdings, LLC and ESF, LLC which holdswere formed to hold other real estate owned. Theowned and future office sites. Bank of Fincastle Services, Inc. owns an entity that provides mortgage services. The Bank offers loan, deposit, and wealth management and other products and services in the Shenandoah Valley, and central regions of Virginia.Virginia, Roanoke Valley, and the city of Richmond. 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, individual retirement accounts, certificates of deposit, and cashindividual retirement accounts. Wealth management accounts.services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. The Bank offers other services, including internet banking, mobile banking, remote deposit capture, and other traditional banking services.
There were 0 loans remaining in the program at December 31, 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.
The Bank recognized $2.0 million and $824 thousand of accretion on deferred PPP income, net of origination costs, through interest and fees on loans for the year ended December 31, 2021 and 2020, respectively. The total amount of deferred PPP income, net of origination costs, that has not yet been recognized through interest and fees on loans totaled $367 thousand at December 31, 2021.are particularly susceptible to significant change inrequire the near termmost subjective or complex judgments relate to the determination offair value measurements, the allowance for loan losses valuation ofand goodwill and other real estate owned, valuation of core deposit intangibles, and other-than-temporary impairment of securities.and central regions of Virginia.Virginia, and the Richmond and Roanoke market areas. The types of lending that the Company engages in are included in Note 3. The Company has a concentration of credit risk in commercial real estate, but does not have a significant concentration to any one customer or industry.(loss), and HTM securities are carried at amortized cost. When an individual AFS security is sold, the Company releases the income tax effects associated with the AFS security from accumulated other comprehensive loss.income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the sale of securities are recorded on the trade date using the amortized cost of the specific security sold.(1)(1) intends to sell the(2)(2) it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss).1-41-4 Family Residential; and Other Real Estate Loans. Descriptions of the Company’s loan classes are as follows:one-to-fourone-to-four family residences.1-41-4Family: This class of loans includes loans secured by one-to-fourone-to-four family homes. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.$333 thousand$1.6 million and $460 thousand$6.0 million in loans classified as TDRs as of December 31, 20172021 and 2016,2020, respectively.ourthe 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.1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area.third-partythird-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.income.recorded $312 thousand and $102 thousand of death benefits received as income from bank owned life insurance under these policies for the years ended December 31, 2017 and 2016, respectively. The Company is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy.whichand are amortized on an accelerated method over their estimated useful lives, which range from six6 to nine10 years.Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. 401(k)401(k) and profit sharing plan expense is the amount of matching contributions and Bank discretionary matches.(1)(1) the assets have been isolated from the Company, (2)(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3)(3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.The Company accounts for taxes in accordance with ASC Topic 740, “Income Taxes”. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measureddetermined using enactedthe asset and liability (or balance sheet) method. Under this method, the net deferred tax rates that will apply to taxable income inasset or liability is determined based on the years in which thosetax effects of the temporary differences are expected to be recovered or settled. The effect on deferredbetween the book and tax bases of the various balance sheet assets and liabilities of a changeand gives current recognition to changes in tax rates is recognized as income or expense in the period that includes the enactment date. The Tax Cuts and Jobs Act (the Act), which was enacted into law on December 22, 2017, reduces the corporate income tax rate to 21%. Since the Act reduces the Company's corporate tax rate from 34% to 21%, the Company recorded a $752 thousand charge to income tax expense in 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% corporate tax rate. See Note 11 for details on the Company’s income taxes.The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment oflaws. Deferred taxes are reduced by a valuation allowance is necessary. If based onwhen, in the available evidence,opinion of management, it is more likely than not that allsome portion or a portionall of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies, and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.more-likely-than-notmore-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There was no liability for unrecognized tax benefits20172021 and 2016.2020. Interest and penalties associated with unrecognized tax benefits, if any, are classified as additional income taxes in the consolidated statements of income.20172021 and 20162020 was $379$487 thousand and $402$208 thousand, respectively.pension liability adjustments,changes in fair values of cash flow hedges, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
the fixed assets for an amount equal to SmartBank’s book value. Additional information about these acquisitions is presented in Note 25.ReclassificationsSome items in prior year financial statements were reclassifiedFinancial 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 conformreduce cost and complexity related to the current presentation. Reclassifications had noaccounting 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 prior year net income or shareholders’ equity.Recent Accounting PronouncementsMay 2014, January 2020, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: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 606.” This321, Topic 323, and Topic 815” (ASU 2020-01). The ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard updates that resulted in technical corrections, improvements, andis based on a one-year deferral
consensus of the effective dateEmerging Issues Task Force and is expected to January 1, 2018. The guidance, as amended, is applicableincrease comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated withaccounting for financial instruments, including interest income, loan origination fees, and credit card fees, is outsideproviding an entity the scopeability 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 guidance. Gains and lossessame 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 investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The Company adopted this guidance on the effective date, January 1, 2018 via the modified retrospective approach. 2021. The Company has completed its assessment of the adoption of this ASU, noting the standard will result in expanded disclosures related to non-interest income and enhance the qualitative disclosuresdid not have a material effect on the revenuesCompany's consolidated financial statements.
period. ASU 2020-08 was effective for the new guidance. The Company does not expect theon January 1, 2021. The adoption of ASU 2014-09 tothis standard did not have a material impacteffect on itsthe Company's consolidated financial statements.
information about the impact of the COVID-19 pandemic on the Company, see "Risks and Uncertainties" above.JanuaryJune 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1)Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.In February 2016 the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements. The Company has analyzed its current lease commitments, along with reasonable assumptions to project lease activity in future periods, to measure the potential impact on net income and relevant capital and financial ratios.During June 2016, the FASB issued ASU No. 2016-13,-13, “Financial Instruments – Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments.”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 amendmentsFASB has issued multiple updates to ASU 2016-13 as codified in this ASUTopic 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) and all other entities who do not file with the SEC are effective for SEC filersrequired to apply the guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 2022. The Company is currently assessing the impact that ASU 2016-132016-13 will have on its consolidated financial statements. The Company has formed a committee to address the compliance requirements of this ASU, and is currently in the process of analyzingwhich has analyzed gathered data, definingdefined loan pools and segments, and selectingselected methods for applying the concepts included in this ASU. During 2018,The Company is in the Company plans to testprocess of testing selected models, buildbuilding policy and processprocessing documentation, and modelmodeling the impact of the ASU on the capital and strategic plans.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.During August 2016, 2016-15, “Statement2020-04, “Reference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Classificationthe Effects of Certain Cash ReceiptsReference 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 Cash Payments”,hedging relationships, subject to address diversity in howmeeting certain cash receipts and cash payments are presented and classified incriteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the statement of cash flows.global market-wide reference rate transition period. The amendments areguidance is effective for public businessall 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 848for fiscal years beginning after December 15, 2017,contract modifications and interim periods within those fiscal years.hedge accounting apply to derivatives that are affected by the discounting transition. The amendments should be applied using a retrospective transition methodASU also amends the expedients and exceptions in Topic 848 to each period presented. If retrospective application is impractical for somecapture the incremental consequences of the issues addressedscope clarification and to tailor the existing guidance to derivative instruments affected by the update,discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the amendmentsinterest rate used for those issues wouldmargining, 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 applied prospectivelyissued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the earliest date practicable. Early adoption is permitted, including adoption in anbeginning of the interim period. period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR and plans to modify these financial instruments prior to December 31, 2022. The Company does not expect the adoptionmodification of ASU 2016-15the financial instruments to have a material impact on itsthe Company's consolidated financial statements.During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to theability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.During March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.During March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its consolidated financial statements.During May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.During August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing ASU 2020-04 and its impact on the impact that ASU 2017-12 will have onCompany's transition away from LIBOR for its consolidatedloan and other financial statements.instruments.During February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): ReclassificationTable of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has elected to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act in the consolidated financial statements for the period ending December 31, 2017. The amount of this reclassification in 2017 was $158 thousand. corporate equity securities, and corporate debt securities. Amortized costs and fair values of securities at December 31, 20172021 and 20162020 were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ 39,871 $ 37 $ (250 ) $ 39,658 177,131 1,085 (1,837 ) 176,379 71,037 910 (509 ) 71,438 2,019 1 0 2,020 $ 290,058 $ 2,033 $ (2,596 ) $ 289,495 $ 26,392 $ 124 $ (53 ) $ 26,463 7,049 118 (13 ) 7,154 $ 33,441 $ 242 $ (66 ) $ 33,617 $ 323,499 $ 2,275 $ (2,662 ) $ 323,112 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ 98,848 $ 2,830 $ (80 ) $ 101,598 37,507 1,122 (2 ) 38,627 $ 136,355 $ 3,952 $ (82 ) $ 140,225 $ 9,588 $ 264 $ 0 $ 9,852 3,146 140 0 3,286 1,500 105 0 1,605 $ 14,234 $ 509 $ 0 $ 14,743 $ 150,589 $ 4,461 $ (82 ) $ 154,968 2017 Securities available for sale: U.S. agency and mortgage-backed securities $ 76,074 $ 67 $ (1,337 ) $ 74,804 Obligations of states and political subdivisions 14,520 86 (155 ) 14,451 Total securities available for sale $ 90,594 $ 153 $ (1,492 ) $ 89,255 Securities held to maturity: U.S. agency and mortgage-backed securities $ 32,149 $ — $ (551 ) $ 31,598 Obligations of states and political subdivisions 14,559 74 (45 ) 14,588 Corporate debt securities 1,500 16 — 1,516 Total securities held to maturity $ 48,208 $ 90 $ (596 ) $ 47,702 Total securities $ 138,802 $ 243 $ (2,088 ) $ 136,957 2016 Securities available for sale: U.S. agency and mortgage-backed securities $ 81,451 $ 177 $ (1,457 ) $ 80,171 Obligations of states and political subdivisions 14,654 146 (180 ) 14,620 Corporate equity securities 1 10 — 11 Total securities available for sale $ 96,106 $ 333 $ (1,637 ) $ 94,802 Securities held to maturity: U.S. agency and mortgage-backed securities $ 37,269 $ 1 $ (483 ) $ 36,787 Obligations of states and political subdivisions 14,629 18 (211 ) 14,436 Corporate debt securities 1,500 — (14 ) 1,486 Total securities held to maturity $ 53,398 $ 19 $ (708 ) $ 52,709 Total securities $ 149,504 $ 352 $ (2,345 ) $ 147,511 20172021 and 2016,2020, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands): 2017 Less than 12 months 12 months or more Total Fair Value Fair Value Fair Value Securities available for sale: U.S. agency and mortgage-backed securities $ 29,963 $ (286 ) $ 30,362 $ (1,051 ) $ 60,325 $ (1,337 ) Obligations of states and political subdivisions 4,469 (53 ) 1,961 (102 ) 6,430 (155 ) Total securities available for sale $ 34,432 $ (339 ) $ 32,323 $ (1,153 ) $ 66,755 $ (1,492 ) Securities held to maturity: U.S. agency and mortgage-backed securities $ 18,301 $ (205 ) $ 13,297 $ (346 ) $ 31,598 $ (551 ) Obligations of states and political subdivisions 6,889 (45 ) — — 6,889 (45 ) Total securities held to maturity $ 25,190 $ (250 ) $ 13,297 $ (346 ) $ 38,487 $ (596 ) Total securities $ 59,622 $ (589 ) $ 45,620 $ (1,499 ) $ 105,242 $ (2,088 ) 2016 Less than 12 months 12 months or more Total Fair Value Fair Value Fair Value Securities available for sale: U.S. agency and mortgage-backed securities $ 60,943 $ (1,249 ) $ 5,499 $ (208 ) $ 66,442 $ (1,457 ) Obligations of states and political subdivisions 5,130 (180 ) — — 5,130 (180 ) Total securities available for sale $ 66,073 $ (1,429 ) $ 5,499 $ (208 ) $ 71,572 $ (1,637 ) Securities held to maturity: U.S. agency and mortgage-backed securities $ 34,770 $ (483 ) $ — $ — $ 34,770 $ (483 ) Obligations of states and political subdivisions 12,724 (211 ) — — 12,724 (211 ) Corporate debt securities $ 1,486 $ (14 ) $ — $ — $ 1,486 $ (14 ) Total securities held to maturity $ 48,980 $ (708 ) $ — $ — $ 48,980 $ (708 ) Total securities $ 115,053 $ (2,137 ) $ 5,499 $ (208 ) $ 120,552 $ (2,345 ) Unrealized (Loss) Unrealized (Loss) Unrealized (Loss) $ 29,656 $ (250 ) $ 0 $ 0 $ 29,656 $ (250 ) 109,950 (1,335 ) 14,749 (502 ) 124,699 (1,837 ) 34,611 (500 ) 1,009 (9 ) 35,620 (509 ) $ 174,217 $ (2,085 ) $ 15,758 $ (511 ) $ 189,975 $ (2,596 ) $ 5,411 $ (53 ) $ 0 $ 0 $ 5,411 $ (53 ) 999 (13 ) 0 0 999 (13 ) $ 6,410 $ (66 ) $ 0 $ 0 $ 6,410 $ (66 ) $ 180,627 $ (2,151 ) $ 15,758 $ (511 ) $ 196,385 $ (2,662 ) Unrealized (Loss) Unrealized (Loss) Unrealized (Loss) $ 17,367 $ (80 ) $ 0 $ 0 $ 17,367 $ (80 ) 1,020 (2 ) 0 0 1,020 (2 ) $ 18,387 $ (82 ) $ 0 $ 0 $ 18,387 $ (82 ) (1)(1) intends to sell the security, (2)(2) more likely than not will be required to sell the security before recovering its cost, or (3)(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.2017,2021, there were sixty-eightsix out of eighty-twoeight U.S. Treasury securities, 58 out of 135 U.S. agency and mortgage-backed securities and thirty-nine37 out of eighty118 obligations of states and political subdivisions in an unrealized loss position. One hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-average re-pricing term of the portfolio was 4.7was 5.2 years at December 31, 2017.2021. At December 31, 2016,2020, there were sixty-fourseven out of eighty-three101 U.S. agency and mortgage-backedmortgage-backed securities fiftyand one out of seventy-eight84 obligations of states and political subdivisions and one corporate debt security in an unrealized loss position. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, 2016.2020. The weighted-averageweighted- average re-pricing term of the portfolio was 4.73.5 years at December 31, 2016.2020. The unrealized losses at December 31, 20172021 in the U.S. Treasury securities portfolio, U.S. agency and mortgage-backed securities portfolio and the obligations of states and political subdivisions portfolio were related to changes in market interest rates and not credit concerns of the issuers.20172021 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. Available for Sale Held to Maturity Due within one year $ 600 $ 601 $ — $ — Due after one year through five years 9,040 9,048 6,186 6,144 Due after five years through ten years 8,920 8,774 14,160 14,158 Due after ten years 72,034 70,832 27,862 27,400 $ 90,594 $ 89,255 $ 48,208 $ 47,702 Amortized Cost Fair Value Amortized Cost Fair Value $ 765 $ 766 $ 2,410 $ 2,412 37,128 37,119 2,332 2,415 65,837 66,087 6,288 6,362 186,328 185,523 22,411 22,428 $ 290,058 $ 289,495 $ 33,441 $ 33,617 securitiessecurities available for sale during 20172021 and 20162020 were $28.2$54.6 million and $22.8$34.1 million, respectively. Gross gains of $49$37 thousand and $22$40 thousand were realized on calls and sales during 20172021 and 2016,2020, respectively. GrossThe Company did not realize any gross losses of $152 thousand and $14 thousand were realized on calls andor sales during 2017 and 2016, respectively. For the year ended December 31, 2017, the Company donated one security from the available for sale portfolio to a not-for-profit organization. The Company recognized a gross gain of $13 thousand related to the charitable donation of the available for sale security during 2017. There were no donations of securities from the available for sale portfolio for the year ended December 31, 2016. and sales of securities held to maturity during 20172021 and 2016 were $5.02020 were $4.7 million and $12.8$3.3 million, respectively. There were zero0 sales of securities from the held to maturity portfolio for the yearyears ended December 31, 2017. For the year ended December 31, 2016, the Company sold one security from the held to maturity portfolio. The Company recognized no gain2021 or loss related to the sale as the carrying value of the security sold equaled the proceeds from the sale of $657 thousand. The sale of this security was in response to credit deterioration of the issuer.2020. The Company did not realize any gross gains or gross losses on held to maturity securities during 20172021 or 2016.$35.2$83.8 million and $27.7$66.5 million at December 31, 20172021 and 20162020 were pledged to secure public deposits and for other purposes required by law.2017,2021, and no0 impairment has been recognized.20172021 and 20162020 was as follows (in thousands): $ 701 $ 818 980 980 132 77 $ 1,813 $ 1,875 2017 2016 Federal Home Loan Bank stock $ 645 $ 623 Federal Reserve Bank stock 875 875 Community Bankers’ Bank stock 50 50 $ 1,570 $ 1,548 20172021 and 20162020 are summarized as follows (in thousands): 2017 2016 Real estate loans: Construction and land development $ 35,927 $ 34,699 Secured by 1-4 family residential 208,177 198,763 Other real estate 222,256 211,210 Commercial and industrial loans 38,763 29,981 Consumer and other loans 17,078 11,414 Total loans $ 522,201 $ 486,067 Allowance for loan losses (5,326 ) (5,321 ) Loans, net $ 516,875 $ 480,746 $ 55,721 $ 27,328 291,990 235,814 364,921 246,883 99,805 109,838 12,681 10,051 $ 825,118 $ 629,914 (5,710 ) (7,485 ) $ 819,408 $ 622,429 $301$871 thousand and $142 thousandand $1.6 million at December 31, 20172021 and 2016,2020, respectively. Consumer and other loans included $232$175 thousand and $264$143 thousand of demand deposit overdrafts at December 31, 20172021 and 2016,2020, respectively.20172021 and 20162020 (in thousands): 30-59 Days Past Due 60-89 Days Past Due >90 Days Past Due Total Past Due Total Loans Non-Accrual Loans 90 Days or More Past Due and Accruing $ 0 $ 115 $ 0 $ 115 $ 55,606 $ 55,721 $ 0 $ 0 1,293 100 372 1,765 290,225 291,990 766 0 186 0 0 186 364,735 364,921 29 0 1,474 0 0 1,474 98,331 99,805 1,509 0 56 11 0 67 12,614 12,681 0 0 $ 3,009 $ 226 $ 372 $ 3,607 $ 821,511 $ 825,118 $ 2,304 $ 0 30-59 Days Past Due 60-89 Days Past Due >90 Days Past Due Total Past Due Total Loans Non-Accrual Loans 90 Days or More Past Due and Accruing $ 47 $ 20 $ 0 $ 67 $ 27,261 $ 27,328 $ 276 $ 0 657 125 324 1,106 234,708 235,814 449 298 0 131 133 264 246,619 246,883 4,441 0 104 0 0 104 109,734 109,838 1,548 0 16 21 4 41 10,010 10,051 0 4 $ 824 $ 297 $ 461 $ 1,582 $ 628,332 $ 629,914 $ 6,714 $ 302 December 31, 2017 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
AccruingReal estate loans: Construction and land development $ 986 $ 30 $ 40 $ 1,056 $ 34,871 $ 35,927 $ 269 $ 40 1-4 family residential 606 203 148 957 207,220 208,177 267 106 Other real estate loans 2,042 170 10 2,222 220,034 222,256 401 10 Commercial and industrial 184 25 — 209 38,554 38,763 — — Consumer and other loans 51 49 27 127 16,951 17,078 — 27 Total $ 3,869 $ 477 $ 225 $ 4,571 $ 517,630 $ 522,201 $ 937 $ 183 December 31, 2016 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
AccruingReal estate loans: Construction and land development $ — $ 40 $ — $ 40 $ 34,659 $ 34,699 $ 1,033 $ — 1-4 family residential 980 170 410 1,560 197,203 198,763 413 84 Other real estate loans 321 701 — 1,022 210,188 211,210 74 — Commercial and industrial 36 309 32 377 29,604 29,981 — 32 Consumer and other loans 19 7 — 26 11,388 11,414 — — Total $ 1,356 $ 1,227 $ 442 $ 3,025 $ 483,042 $ 486,067 $ 1,520 $ 116 20172021 and 20162020 (in thousands): Special Mention $ 55,721 $ 0 $ 0 $ 0 $ 55,721 290,909 0 1,081 0 291,990 364,892 0 29 0 364,921 97,215 1,081 1,509 0 99,805 12,681 0 0 0 12,681 $ 821,418 $ 1,081 $ 2,619 $ 0 $ 825,118 Special Mention $ 26,896 $ 0 $ 432 $ 0 $ 27,328 235,035 0 779 0 235,814 242,441 0 4,442 0 246,883 107,383 0 2,455 0 109,838 10,051 0 0 0 10,051 $ 621,806 $ 0 $ 8,108 $ 0 $ 629,914 $ 216,706 $ 26,348 53,803 90,908 36,968 5,012 $ 213,039 December 31, 2017 Pass Special
Mention Substandard Doubtful Total Real estate loans: Construction and land development $ 31,553 $ 2,268 $ 2,106 $ — $ 35,927 Secured by 1-4 family residential 204,166 1,933 2,078 — 208,177 Other real estate loans 215,773 971 5,512 — 222,256 Commercial and industrial 38,606 53 104 — 38,763 Consumer and other loans 17,078 — — — 17,078 Total $ 507,176 $ 5,225 $ 9,800 $ — $ 522,201 December 31, 2016 Pass Special
Mention Substandard Doubtful Total Real estate loans: Construction and land development $ 29,416 $ 2,402 $ 2,881 $ — $ 34,699 Secured by 1-4 family residential 193,395 3,295 2,073 — 198,763 Other real estate loans 200,009 6,990 4,211 — 211,210 Commercial and industrial 29,456 386 139 — 29,981 Consumer and other loans 11,414 — — — 11,414 Total $ 463,690 $ 13,073 $ 9,304 $ — $ 486,067 20172021 and 2016,2020, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands). Construction and Land Development Secure by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans $ 306 $ 1,022 $ 4,956 $ 784 $ 417 $ 7,485 0 (15 ) (992 ) (6 ) (434 ) (1,447 ) 6 65 3 7 241 322 33 5 (737 ) (67 ) 116 (650 ) $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 0 0 0 55 0 55 345 1,077 3,230 663 340 5,655 55,721 291,990 364,921 99,805 12,681 825,118 0 765 30 1,509 0 2,304 55,721 291,225 364,891 98,296 12,681 822,814 Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans $ 464 $ 776 $ 2,296 $ 562 $ 836 $ 4,934 0 0 0 (69 ) (715 ) (784 ) 2 8 2 18 305 335 (160 ) 238 2,658 273 (9 ) 3,000 $ 306 $ 1,022 $ 4,956 $ 784 $ 417 $ 7,485 0 0 2,065 158 0 2,223 306 1,022 2,891 626 417 5,262 27,328 235,814 246,883 109,838 10,051 629,914 276 449 4,441 1,548 0 6,714 27,052 235,365 242,442 108,290 10,051 623,200 December 31, 2017 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, 2016 $ 441 $ 1,019 $ 3,142 $ 380 $ 339 $ 5,321 Charge-offs — (126 ) — — (607 ) (733 ) Recoveries 11 302 50 10 265 638 Provision for (recovery of) loan losses (38 ) (420 ) (244 ) 28 774 100 Ending Balance, December 31, 2017 $ 414 $ 775 $ 2,948 $ 418 $ 771 $ 5,326 Ending Balance: Individually evaluated for impairment — — — — — — Collectively evaluated for impairment 414 775 2,948 418 771 5,326 Loans: Ending Balance 35,927 208,177 222,256 38,763 17,078 522,201 Individually evaluated for impairment 1,150 1,307 1,289 65 — 3,811 Collectively evaluated for impairment 34,777 206,870 220,967 38,698 17,078 518,390 December 31, 2016 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, 2015 $ 1,532 $ 939 $ 2,534 $ 306 $ 213 $ 5,524 Charge-offs — (83 ) (165 ) — (540 ) (788 ) Recoveries 4 293 2 11 275 585 Provision for (recovery of) loan losses (1,095 ) (130 ) 771 63 391 — Ending Balance, December 31, 2016 $ 441 $ 1,019 $ 3,142 $ 380 $ 339 $ 5,321 Ending Balance: Individually evaluated for impairment — 37 — — — 37 Collectively evaluated for impairment 441 982 3,142 380 339 5,284 Loans: Ending Balance 34,699 198,763 211,210 29,981 11,414 486,067 Individually evaluated for impairment 1,973 1,828 984 75 — 4,860 Collectively evaluated for impairment 32,726 196,935 210,226 29,906 11,414 481,207 20172021 and 2016,2020, were as follows (in thousands): December 31, 2017 Unpaid
Principal
Balance Recorded
Investment
with No
Allowance Recorded
Investment
with
Allowance Total
Recorded
Investment Related
Allowance Average
Recorded
Investment Interest
Income
RecognizedReal estate loans: Construction and land development $ 1,627 $ 1,150 $ — $ 1,150 $ — $ 1,814 $ 63 Secured by 1-4 family 1,387 1,307 — 1,307 — 1,637 64 Other real estate loans 1,483 1,289 — 1,289 — 1,137 95 Commercial and industrial 78 65 — 65 — 68 10 Total $ 4,575 $ 3,811 $ — $ 3,811 $ — $ 4,656 $ 232 December 31, 2016 Unpaid
Principal
Balance Recorded
Investment
with No
Allowance Recorded
Investment
with
Allowance Total
Recorded
Investment Related
Allowance Average
Recorded
Investment Interest
Income
RecognizedReal estate loans: Construction and land development $ 2,388 $ 1,973 $ — $ 1,973 $ — $ 2,407 $ 66 Secured by 1-4 family 1,851 1,675 153 1,828 37 2,013 87 Other real estate loans 1,213 984 — 984 — 2,529 22 Commercial and industrial 93 75 — 75 — 85 1 Total $ 5,545 $ 4,707 $ 153 $ 4,860 $ 37 $ 7,034 $ 176 Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized $ 0 $ 0 $ 0 $ 0 $ 0 $ 91 $ 0 889 766 0 766 0 429 9 40 29 0 29 0 2,384 0 1,673 0 1,509 1,509 55 1,613 0 $ 2,602 $ 795 $ 1,509 $ 2,304 $ 55 $ 4,517 $ 9 Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized $ 325 $ 276 $ 0 $ 276 $ 0 $ 344 $ 0 568 449 0 449 0 517 1 4,492 171 4,270 4,441 2,065 2,623 109 1,582 0 1,548 1,548 158 393 77 $ 6,967 $ 896 $ 5,818 $ 6,714 $ 2,223 $ 3,877 $ 187 2017,2021, loans classified as troubled debt restructurings (TDRs)TDRs and included in impaired loans in the disclosure above totaled $333 thousand. $1.6 million. At December 31, 2017, $282 thousand2021, none of the loans classified as TDRs were performing under the restructured terms and all were not considered non-performingnon-performing assets. There were $460 thousand$6.0 million in TDRs at at December 31, 2016, $300 thousand2020, none 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.collateral. There were no0 loans modified underas TDRs during the year ended December 31, 2017. There was one loan secured by 1-4 family residential real estate classified as a TDR during the year ended December 31, 2016 because principal was forgiven as part of the loan modification.2021. The recorded investment for this loan prior to modification totaled $138 thousand and the recorded investment after the modification totaled $88 thousand. The TDRTDRs described above increased the specific reserve component of the allowance for loan losses by $32$55 thousand and resulted in a charge-off of $50 thousand during the year ended at December 31, 2016.20172021 and 2016,2020, there were no0 TDRs that subsequently defaulted within twelve months of the loan modification. ManagementManagement defines default as over 90 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.no0 non-accrual loans excluded from impaired loan disclosure at December 31, 20172021 and December 31, 2016.2020. Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income in the amountamount of $107$155 thousand and $271 thousand during the years ended December 31, 20172021 and 2016,2020, respectively.areduring the years ended December 31, 2021 and 2020 are as follows (in thousands): 2017 2016 Balance at the beginning of year, gross $ 250 $ 2,903 Transfers in 326 287 Charge-offs — (251 ) Sales proceeds (441 ) (2,882 ) Gain on disposition 191 193 Balance at the end of year, gross $ 326 $ 250 Less: valuation allowance — — Balance at the end of year, net $ 326 $ 250 $ 0 $ 0 130 0 2,137 0 (288 ) 0 8 0 $ 1,987 $ 0 (139 ) — $ 1,848 $ 0 no0 residential real estate properties included in the ending OREO balances above at at December 31, 20172021 and 2016. The2020. 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 December 31, 2017.Changes2021.
The Company acquired $2.1 million of OREO in the allowanceacquisition 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 OREO losses are as follows (in thousands): 2017 2016 Balance at beginning of year $ — $ 224 Provision for losses — 27 Charge-offs, net — (251 ) Balance at end of year $ — $ —
other than the provision for losses,valuation allowance and gain on disposition, were $5$34 thousand and $46 thousandfor the year ended December 31, 2021. The Bank did not have any expenses applicable to OREO for the yearsyear ended December 31, 2017 and 2016, respectively.2020. 20172021 and 20162020 (in thousands): 2017 2016 Land $ 4,717 $ 4,796 Buildings and leasehold improvements 18,510 18,524 Furniture and equipment 6,394 5,836 Construction in process 140 216 $ 29,761 $ 29,372 Less accumulated depreciation 9,870 8,587 $ 19,891 $ 20,785 $ 5,486 $ 4,717 22,158 19,816 8,814 7,550 0 16 $ 36,458 $ 32,099 14,055 12,780 $ 22,403 $ 19,319 20172021 and 20162020 was $1.4 million.million and $1.3 million, respectively.$250$250 thousand or more, was $14.1$19.3 million and $10.1$12.9 million at December 31, 20172021 and 2016,2020, respectively.third-partythird-party brokers. At December 31, 20172021 and 2016,2020, brokered deposits totaled $550$660 thousand and $601$596 thousand, respectively, and were included in time deposits on the Company’s consolidated financial statements.2017,2021, the scheduled maturities of time deposits were as follows (in thousands): $ 87,845 24,551 11,599 11,827 9,744 0 $ 145,566 2018 $ 59,833 2019 26,929 2020 16,381 2021 12,454 2022 6,745 Thereafter 309 $ 122,651 $134.1$240.4 million and $125.6$237.7 million available with non-affiliated banks at December 31, 20172021 and 2016,2020, 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 upup to 19% ofof its total assets. The unused line of credit with FHLB totaled $82.1$155.7 million at December 31, 2017.2021. The Bank had collateral pledged on the borrowing line at December 31, 20172021 and 20162020 including real estate loans totaling $117.7$205.8 million and $103.9$221.1 million, respectively, and FHLB stock with a book value of $645$701 thousand and $623$818 thousand, respectively. The Bank did not have borrowings from the FHLB at December 31, 20172021 and 2016.2020.million (the Note)million. The note had a fixed interest rate of 6.75% per annum. Debt issuance costs related to the note were fully amortized at December 31, 2021. The Notenote had a maturity date of October 1,2025. The Company prepaid the note in full on January 1, 2022.6.75%5.50% per annum. The Note qualifies as Tier 2 capital for regulatory capital purposes and at December 31, 2017, Beginning July 1, 2025, the total amount of subordinated debt issued was included ininterest rate shall reset quarterly to an interest rate per annum equal to the Company’s Tier 2 capital.current three-month Secured Overnight Financing Rate (SOFR), plus 510 basis points. Unamortized debt issuance costs related to the Notenote were $52 thousand$7 and $70$9 thousand at December 31, 20172021 and 2016, respectively.Notenote has a maturity date of OctoberJuly 1, 2025. 2030. Subject to regulatory approval, the Company may prepay the Note,note, in part or in full, beginning on October 30, 2020.July 1, 2025 through maturity, at the Company's option, on any scheduled interest payment date. The Note is an unsecured, subordinated obligation of the Company and ranks junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors. The Note ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the Note. The Note ranks senior to all current and future junior subordinated debt obligations, preferred stock, and common stock of the Company.The Note is not convertible into common stock or preferred stock. The Agreementnote 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 note may accelerate the repayment of the Notenote only in the event of bankruptcy or similar proceedings and not for any other event of default. The note is an unsecured, subordinated obligation of the Company and it ranks 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 note ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the note. The note ranks senior to all current and future junior subordinated debt obligations, preferred stock, and common stock of the Company. The note is not convertible into common stock or preferred stock, and is not callable by the holder.20172021 and 2016 2020was 4.20% and 3.59%2.82% 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.20172021 and 20162020 was 2.94%1.81% and 2.45%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 theWhile these securities are debt obligations2014.On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law, which reduces the Company's corporate tax rate from 34% to 21%. When changes in tax rates and laws are enacted, the Company must recognize the effects of changes in tax rates on deferred tax balances in the period in which the enactment occurs. Accordingly, the Company recorded a $752 thousand charge to income tax expense in 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% corporate tax rate.20172021 and 20162020 (in thousands): 2017 2016 Deferred Tax Assets Allowance for loan losses $ 1,118 $ 1,809 Securities available for sale 281 447 Accrued pension — 689 Accrued health insurance 11 — Core deposit intangible 317 371 Unvested stock-based compensation 9 19 Limited partnership investments 5 17 Loan origination fees, net 63 48 $ 1,804 $ 3,400 Deferred Tax Liabilities Depreciation $ 562 $ 708 Discount accretion — 2 Overfunded pension liability 27 — $ 589 $ 710 Net deferred tax assets $ 1,215 $ 2,690 $ 1,199 $ 1,572 822 0 156 101 309 381 45 31 66 0 8 8 60 72 24 0 118 0 1,548 0 183 328 $ 4,538 $ 2,493 $ 750 $ 663 61 73 12 0 0 813 158 0 198 91 $ 1,179 $ 1,640 $ 3,359 $ 853 20172021 and 20162020 consisted of the following (in thousands): $ 4,268 $ 2,972 (1,682 ) (923 ) $ 2,586 $ 2,049 2017 2016 Current tax expense $ 2,443 $ 1,925 Deferred tax expense (1) 1,283 428 $ 3,726 $ 2,353 (1)The deferred tax expense for the year ended December 31, 2017 includes $752 thousand of income taxes related to the re-measurement of net deferred tax assets.20172021 and 2016,2020, due to the following (in thousands): $ 2,718 $ 2,290 165 0 28 10 (214 ) (153 ) (111 ) (98 ) $ 2,586 $ 2,049 2017 2016 Computed tax expense at statutory federal rate $ 3,459 $ 2,808 Increase in income taxes resulting from re-measurement of net deferred tax assets 752 — Decrease in income taxes resulting from: Tax-exempt interest and dividend income (241 ) (254 ) Income from bank owned life insurance (244 ) (179 ) Other — (22 ) $ 3,726 $ 2,353 2017,2021, the aggregate amount of unrestricted funds which could be transferred from the banking subsidiary to the parent company, without prior regulatory approval, totaled $4.5$13.4 million. The amount of unrestricted funds is generally determined by subtracting the total dividend payments of the Bank from the Bank’s net income for that year, combined with the Bank’s retained net income for the preceding two years.mustis typically required to maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. ForThe Federal Reserve adopted a rule in March 2020 eliminating the final weekly reporting period in the years ended reserve requirement. There were 0 required balances at December 31, 2017 and 2016, the aggregate amounts of daily average required balances were approximately $7.4 million and $6.0 million, respectively.2021 or December 31, 2020PensionThe Bank had a noncontributory, defined benefit pension plan for all full-time employees over 21 years of age with at least one year of credited service and hired prior to May 1, 2011. Effective May 1, 2011, the plan was frozen to new participants. Only individuals employed on or before April 30, 2011 were eligible to become participants in the plan upon satisfaction of the eligibility requirements. Benefits were generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank’s funding practice was to make at least the minimum required annual contribution permitted by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.On September 14, 2016, the defined benefit pension plan was amended to be terminated. Under the amendment, benefit accruals ceased as of November 30, 2016. The Internal Revenue Service approved the termination on October 16, 2017 and the Company distributed all plan assets on March 8, 2018. The funding status of the plan on March 8, 2018 was not significantly different from the funded status disclosed in the table below. The benefit obligation and the fair value of assets did not change significantly prior to the distribution of plan assets. Pension plan assets remained in cash and equivalents through the distribution date.The following tables provide a reconciliation of the changes in the plan benefit obligation and the fair value of assets for the periods ended December 31, 2017 and 2016 (in thousands). 2017 2016 Change in Benefit Obligation Benefit obligation, beginning of year $ 5,777 $ 8,107 Service cost — 410 Interest cost 82 331 Actuarial (gain) loss (145 ) 245 Benefits paid (431 ) (695 ) Gain due to curtailment — (2,621 ) Benefit obligation, end of year $ 5,283 $ 5,777 Changes in Plan Assets Fair value of plan assets, beginning of year $ 3,693 $ 4,264 Actual return on plan assets 16 124 Employer contributions 1,800 — Benefits paid (431 ) (695 ) Fair value of assets, end of year $ 5,078 $ 3,693 Funded Status, end of year $ (205 ) $ (2,084 ) Amount Recognized in Other Liabilities $ (205 ) $ (2,084 ) Amounts Recognized in Accumulated Other Comprehensive Loss, net of tax Net gain $ (126 ) $ — Deferred income tax expense 27 — Amount recognized $ (99 ) $ — Weighted Average Assumptions Used to Determine Benefit Obligation Discount rate used for disclosure First five years 1.96 % 1.47 % Five years to twenty years 3.58 % 3.34 % After twenty years 4.35 % 4.30 % Expected return on plan assets 1.00 % 7.50 % Rate of compensation increase N/A 3.00 % Components of Net Periodic Benefit Cost Service cost $ — $ 410 Interest cost 82 331 Expected return on plan assets (35 ) (297 ) Recognized net gain due to curtailment — (173 ) Recognized net actuarial loss — 84 Net periodic benefit cost $ 47 $ 355 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss) Net gain $ (126 ) $ (2,115 ) Total recognized in other comprehensive income (loss) $ (126 ) $ (2,115 ) Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income (Loss) $ (79 ) $ (1,760 ) 2017 2016 Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost Discount rate 1.47 % 4.25 % Expected return on plan assets 1.00 % 7.50 % Rate of compensation increase N/A 3.00 % The plan sponsor selected the expected rate of return on assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits.Because assets were held in a qualified trust, anticipated returns were not reduced for taxes. Further, solely for this purpose, the plan was assumed to continue in force and not terminate during the period during which assets were invested. However, consideration was given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).The process used to select the discount rate assumption took into account the benefit cash flow and the segmented yields on high-quality corporate bonds that were available to provide for the payment of the benefit cash flow. A single effective discount rate was then established that produced an equivalent discounted present value.The pension plan’s weighted-average asset allocations at the end of the plan year for 2017 and 2016, by asset category were as follows: 2017 2016 Asset Category Cash and equivalents 100 % 100 % Total 100 % 100 % It was the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs included, but were not limited to, management and custodial fees, consulting fees, transaction costs, and other administrative costs chargeable to the trust.The pension financial instruments measured and reported at fair value were classified and disclosed in one of the following categories:Level 1 Inputs to the valuation methodology were quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2 Inputs to the valuation methodology included quoted prices for similar assets and liabilities in active markets, and inputs that were observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.Level 3 Inputs to the valuation methodology were unobservable and significant to the fair value measurement.The following tables set forth by level, within the fair value hierarchy, the Company’s pension plan assets at fair value as of December 31, 2017 and 2016 (in thousands): Fair Value Measurements at December 31, 2017 Total Level 1 Level 2 Level 3 Cash and equivalents $ 5,078 $ 5,078 $ — $ — Total $ 5,078 $ 5,078 $ — $ — Fair Value Measurements at December 31, 2016 Total Level 1 Level 2 Level 3 Cash and equivalents $ 3,693 $ 3,693 $ — $ — Total $ 3,693 $ 3,693 $ — $ — The Company made a cash contribution of $1.8 million during the year ended December 31, 2017. The Company did not make a cash contribution during the year ended December 31, 2016. The Company made an additional contribution of $205 thousand upon the final distribution of plan assets on March 8, 2018. The accumulated benefit obligation for the defined benefit pension plan was $5.3 million and $5.8 million at December 31, 2017 and 2016, respectively.401(k) Plan401(k)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.Plan. The Company makes matching contributions, on a dollar-for dollar basis, for the firstone 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 Plan service years with the Company. The Company has the discretion to make a profit sharing contribution to the planPlan each year based on overall performance, profitability, and other economic factors. For the years ended December 31, 20172021 and 2016,2020, expense attributable to the Plan amounted to $740$965 thousand and $482$815 thousand, respectively.Employee Stock Ownership PlanJanuary 1, 2000, March 15, 2019, the Company established an employee stock ownership plan.entered into supplemental executive retirement plans and participation agreements with three of its employees. The ESOP provides an opportunityretirement benefits are fixed and provide for the Company to award shares of First National Corporation stock to employees at its discretion. Employees are eligible to participateretirement benefits payable in the ESOP effective immediately upon beginning service with the Company. Participants become 100% vested after two years of credited service.180 monthly installments. The Board of Directors may make discretionary contributions, within certain limitations prescribed by federal tax regulations. There was no compensationcontribution expense for the ESOPtotaled $264 thousand for the years ended December 31, 20172021 and 2016. Shares of the Company held2020, respectively, and was solely funded by the ESOP at December 31, 2017 and 2016 were 230,846 and 247,283, respectively.Company.On September 14, 2016, the ESOP was amended to freeze the plan to new participants and to cease all contributions, effective December 31, 2016. The amendment also directs matching contributions and certain other retirement contributions made by the Company to the 401(k) plan. The ESOP shall be maintained as a frozen plan and continue to be invested in Company stock and such other assets as permitted under the ESOP and Trust Agreement for the benefit20172021 and 20162020 (dollars in thousands, except per share data): $ 10,359 $ 8,858 5,550,589 4,878,139 8,492 2,127 5,559,081 4,880,266 $ 1.87 $ 1.82 $ 1.86 $ 1.82 2017 2016 (Numerator): Net income $ 6,448 $ 5,907 (Denominator): Weighted average shares outstanding – basic 4,941,233 4,924,636 Potentially dilutive common shares – restricted stock units 2,665 3,548 Weighted average shares outstanding – diluted 4,943,898 4,928,184 Income per common share Basic $ 1.30 $ 1.20 Diluted $ 1.30 $ 1.20 20172021 and 2016,2020, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands): 2017 2016 Commitments to extend credit and unfunded commitments under lines of credit $ 77,992 $ 71,421 Stand-by letters of credit 10,379 8,983 $ 161,428 $ 114,892 18,904 10,675 usually do not contain a specified maturity date and may or may not be drawn upon to the total extent to which the Bank is committed.2017,2021, the Bank had $2.8 million$4.6 million in locked-rate commitments to originate mortgage loans and $438 thousand inloans. There were 0 loans held for sale. sale at December 31, 2021. 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.20172021 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $11$22 thousand.20172021 and 2016,2020, these loans totaled $225 thousand and $148 thousand,totaled $1.6 million and $1.3 million, respectively. During 2017,2021, total principal additionsadditions were $99 thousand$9.2 million and total principal payments were $22 thousand.20172021 and 2016 amounted2020 amounted to $4.5$17.3 million and $5.6and $6.9 million, respectively.was obligated under noncancelableis reasonably certain it will exercise. None of the Company's leases provide for banking premises. Total rental expenseresidual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations. $ 290 $ 347 284 341 for 2017 and 2016 was $105 thousand and $90 thousand, respectively. Minimum rental commitments under noncancelable leases with terms in excess of one year as of December 31, 2017 were as follows2021 and 2020: 2.8 3.2 2.65 % 1.72 % $ 154 $ 135 14 2 $ 168 $ 137 $ 156 $ 138 $ 144 72 46 27 0 $ 289 (5 ) $ 284 2018 $ 124 2019 102 2020 79 2021 74 2022 and thereafter 54 $ 433 Over-the-Counter Markets GroupNasdaq Capital Market stock exchange for the 10 business days immediately preceding the dividend payment date.CompanyCompany issued 3,0357,861 and 3,9499,449 common shares to the DRIP during the years ended December 31, 20172021 and 2016,2020, respectively.1)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)2).20172021 and 20162020 (in thousands). 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) $ 39,658 $ 0 $ 39,658 $ 0 176,379 0 176,379 0 71,438 0 71,438 0 2,020 0 2,020 0 $ 289,495 $ 0 $ 289,495 $ 0 941 0 941 0 $ 290,436 $ 0 $ 290,436 $ 0 Fair Value Measurements at December 31, 2017 Description Securities available for sale U.S. agency and mortgage-backed securities $ 74,804 $ — $ 74,804 $ — Obligations of states and political subdivisions 14,451 — 14,451 — $ 89,255 $ — $ 89,255 $ — Fair Value Measurements at December 31, 2016 Description Securities available for sale U.S. agency and mortgage-backed securities $ 80,171 $ — $ 80,171 $ — Obligations of states and political subdivisions 14,620 — 14,620 — Corporate equity securities 11 11 — — $ 94,802 $ 11 $ 94,791 $ — 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) $ 101,598 $ 0 $ 101,598 $ 0 38,627 0 38,627 0 $ 140,225 $ 0 $ 140,225 $ 0 431 0 431 0 $ 140,656 $ 0 $ 140,656 $ 0 one-to-fourone-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)2). As such, the Company records any fair value adjustments on a nonrecurring basis. NoNaN nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 20172021 and 2016.2)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)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.Other real estate ownedLoans are transferred to other real estate owned when the collateral securing them is foreclosed on or acquired through a deed in lieu20172021 and 20162020 (dollars in thousands). 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) $ 1,454 $ 0 $ 0 $ 1,454 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) $ 3,595 $ 0 $ 0 $ 3,595 Range (Weighted Average) (1) 1,454 6.50 % Range (Weighted Average) (1) $ 2,205 10.00 % Fair Value Measurements at December 31, 2017 Description. Other real estate owned $ 326 $ — $ — $ 326 Fair Value Measurements at December 31, 2016 Description Impaired loans, net $ 116 $ — $ — $ 116 Other real estate owned 250 — — 250 Quantitative information about Level 3 Fair Value Measurements for December 31, 2017 Fair Value Valuation Technique Unobservable Input Range (Weighted-
Average)Other real estate owned $ 326 Contract Price Selling cost 7 % Quantitative information about Level 3 Fair Value Measurements for December 31, 2016 Fair Value Valuation Technique Unobservable Input Range (Weighted-
Average)Impaired loans, net $ 116 Property appraisals Selling cost 10 % Other real estate owned $ 250 Property appraisals Selling cost — % The amount disclosed as fair value of other real estate owned at December 31, 2016 represents the carrying value of the property. Since the appraised value of the property, net of selling costs, exceeded the Company’s carrying value on the date the property was transferred from premises and equipment to other real estate owned, the Company did not adjust the carrying value for selling costs.methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:Cash and Cash Equivalents and Federal Funds SoldThe carrying amounts of cash and short-term instruments approximate fair values.Securities Held to MaturityCertain debt securities that management has the positive intent and ability to hold until maturity are recorded at amortized cost. Fair values are determined in a manner that is consistent with securities available for sale.Restricted SecuritiesThe carrying value of restricted securities approximates fair value based on redemption provisions.LoansFor variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.Deposit LiabilitiesThe fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.Accrued InterestAccrued interest receivable and payable were estimated to equal the carrying value due to the short-term nature of these financial instruments.Borrowings and Federal Funds PurchasedThe carrying amounts of federal funds purchased and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of all other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.Bank Owned Life InsuranceBank owned life insurance represents insurance policies on officers, directors, and past directors of the Company. The cash values of these policies are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.Commitments and Unfunded CreditsThe fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2017 and 2016, fair value of loan commitments and standby letters of credit was immaterial.The carrying values and estimated fair values of the Company’s financial instruments at December 31, 20172021 and 20162020 are as follows (in thousands): Carrying Amount Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 $ 176,006 $ 176,006 $ 0 $ 0 $ 176,006 289,495 0 289,495 0 289,495 33,441 0 33,617 0 33,617 1,813 0 1,813 — 1,813 0 0 0 0 0 819,408 0 0 827,248 827,248 24,294 0 24,294 0 24,294 3,903 0 3,903 0 3,903 941 0 941 0 941 $ 1,248,752 $ 0 $ 1,103,186 $ 145,101 $ 1,248,287 9,993 0 0 8,932 8,932 9,279 0 0 8,145 8,145 152 0 152 0 152 Carrying Amount Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 $ 127,297 $ 127,297 $ 0 $ 0 $ 127,297 140,225 0 140,225 0 140,225 14,234 0 13,138 1,605 14,743 1,875 0 1,875 0 1,875 245 0 245 0 245 622,429 0 0 633,638 633,638 17,916 0 17,916 0 17,916 2,717 0 2,717 0 2,717 431 0 431 0 431 $ 842,461 $ 0 $ 742,264 $ 101,154 $ 843,418 9,991 0 0 10,304 10,304 9,279 0 0 10,364 10,364 134 0 134 0 134 Fair Value Measurements at December 31, 2017 Using Fair Value Financial Assets Cash and short-term investments $ 39,986 $ 39,986 $ — $ — $ 39,986 Securities available for sale 89,255 — 89,255 — 89,255 Securities held to maturity 48,208 — 46,186 1,516 47,702 Restricted securities 1,570 — 1,570 — 1,570 Loans held for sale 438 — 438 — 438 Loans, net 516,875 — — 514,013 514,013 Bank owned life insurance 13,967 — 13,967 — 13,967 Accrued interest receivable 1,916 — 1,916 — 1,916 Financial Liabilities Deposits $ 664,980 $ — $ 542,329 $ 120,834 $ 663,163 Subordinated debt 4,948 — — 5,004 5,004 Junior subordinated debt 9,279 — — 9,653 9,653 Accrued interest payable 98 — 98 — 98 Fair Value Measurements at December 31, 2016 Using Fair Value Financial Assets Cash and short-term investments $ 41,092 $ 41,092 $ — $ — $ 41,092 Securities available for sale 94,802 11 94,791 — 94,802 Securities held to maturity 53,398 — 51,223 1,486 52,709 Restricted securities 1,548 — 1,548 — 1,548 Loans held for sale 337 — 337 — 337 Loans, net 480,746 — — 481,475 481,475 Bank owned life insurance 13,928 — 13,928 — 13,928 Accrued interest receivable 1,746 — 1,746 — 1,746 Financial Liabilities Deposits $ 645,570 $ — $ 517,143 $ 127,179 $ 644,322 Subordinated debt 4,930 — — 4,715 4,715 Junior subordinated debt 9,279 — — 9,075 9,075 Accrued interest payable 95 — 95 — 95 being phased in over a multi-year schedule, and becomingbecame fully phased in by 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 is beingwas phased-in over four years, which began on January 1,2016 and was fully implemented on January 1, 2016.20172021 and December 31, 2016,2020, that the Bank met all capital adequacy requirements to which it is subject.2017,2021, 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.The Bank declared and paid cash dividends on common stock to the Company totaling $5.5 million during 2017. 20172021 and December 31, 20162020 with the minimum regulatory guidelines were as follows (dollars in thousands): Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions $ 125,934 14.76 % $ 68,237 8.00 % $ 85,296 10.00 % $ 120,224 14.09 % $ 51,178 6.00 % $ 68,237 8.00 % $ 120,224 14.09 % $ 38,383 4.50 % $ 55,442 6.50 % $ 120,224 8.82 % $ 54,497 4.00 % $ 68,121 5.00 % $ 91,243 15.82 % $ 46,129 8.00 % $ 57,661 10.00 % $ 84,032 14.57 % $ 34,597 6.00 % $ 46,129 8.00 % $ 84,032 14.57 % $ 25,948 4.50 % $ 37,480 6.50 % $ 84,032 8.80 % $ 38,187 4.00 % $ 47,733 5.00 % Actual Amount Ratio Amount Ratio Amount Ratio December 31, 2017: Total Capital (to Risk-Weighted Assets) $ 67,624 13.12 % $ 41,239 8.00 % $ 51,548 10.00 % Tier 1 Capital (to Risk-Weighted Assets) $ 62,298 12.09 % $ 30,929 6.00 % $ 41,239 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) $ 62,298 12.09 % $ 23,197 4.50 % $ 33,506 6.50 % Tier 1 Capital (to Average Assets) $ 62,298 8.46 % $ 29,457 4.00 % $ 36,821 5.00 % December 31, 2016: Total Capital (to Risk-Weighted Assets) $ 65,590 13.47 % $ 38,951 8.00 % $ 48,689 10.00 % Tier 1 Capital (to Risk-Weighted Assets) $ 60,269 12.38 % $ 29,213 6.00 % $ 38,951 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) $ 60,269 12.38 % $ 21,910 4.50 % $ 31,648 6.50 % Tier 1 Capital (to Average Assets) $ 60,269 8.48 % $ 28,432 4.00 % $ 35,540 5.00 % The buffer began applying to the Bank on January 1, 2016, and is subject to phase-in from 2016 to 2019 in equal annual installments of 0.625%. Accordingly, the Bank was required to maintain a capital conservation buffer of 1.25% and 0.625%2.50% at December 31, 20172021 and December 31, 2016,2020, respectively. 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 December 31, 20172021 and December 31, 2016,2020, the capital conservation buffer of the Bank was 5.12%6.76% and 5.47%7.82%, respectively.Losslossincome (loss) were as follows (in thousands): Balance at December 31, 2015 $ (192 ) $ (1,396 ) $ (1,588 ) Unrealized holding losses (net of tax, ($341)) (663 ) — (663 ) Reclassification adjustment (net of tax, ($3)) (5 ) — (5 ) Pension liability adjustment (net of tax, $719) — 1,396 1,396 Change during period (668 ) 1,396 728 Balance at December 31, 2016 $ (860 ) $ — $ (860 ) Unrealized holding losses (net of tax, ($43)) (82 ) — (82 ) Reclassification adjustment (net of tax, $31) 59 — 59 Pension liability adjustment (net of tax, $43) — 83 83 Reclassification of tax effects stranded in accumulated other comprehensive loss by tax rate change (174 ) 16 (158 ) Change during period (197 ) 99 (98 ) Balance at December 31, 2017 $ (1,057 ) $ 99 $ (958 ) Net Unrealized Gains (Losses) on Securities Change in Fair Value of Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) $ 724 $ 0 $ 724 2,366 0 2,366 (32 ) 0 (32 ) 0 340 340 2,334 340 2,674 $ 3,058 $ 340 $ 3,398 (3,474 ) 0 (3,474 ) (29 ) 0 (29 ) 0 403 403 (3,503 ) 403 (3,100 ) $ (445 ) $ 743 $ 298 lossincome (loss) for the years ended December 31, 20172021 and 20162020 (in thousands): Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the year ended December 31, $ (37 ) $ (40 ) 8 8 $ (29 ) $ (32 ) Details About Accumulated Other Comprehensive Loss 2017 2016 Securities available for sale: Net securities losses (gains) reclassified into earnings $ 90 $ (8 ) Net (losses) gains on securities available for sale Related income tax (benefit) expense (31 ) 3 Income tax expense Total reclassifications $ 59 $ (5 ) Net of tax 2017,2021, the Company granted and issued 2,000 shares of common stock to the Chief Executive Officer for his individual performance and dedicated service to the Company and 2,7286,000 shares of common stock to members of the Board of Directors for their dedicated service and support. Compensation expense related to stock awards totaled $72totaled $127 thousand and $25and $50 thousand for the years ended December 31, 20172021 and 2016,2020, respectively.In 2017, 3,939 restricted1,3172,026 units vesting immediately, and 2,6224,040 units subject to a two year vesting schedule with one half of the units vesting each year on the grant date anniversary.anniversary, and 7,028 units vesting after five years. On July 1, 2021, an additional 3,000 restricted stock units were granted to employees. These units are subject to a two year vesting schedule with 1,500 of the units vesting on February 23 of each year. On October 13, 2021, an additional 7,000 restricted stock units were granted to employees. These units are subject to a five year vesting schedule with 1,000 units vesting after three years and 6,000 units vesting after five years. The recipient does recipients do 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 becomesrecipients become 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. 2017 Shares Unvested, January 1, 2017 10,259 $ 8.88 Granted 3,939 15.20 Vested (8,536 ) 9.89 Forfeited — — Unvested, December 31, 2017 5,662 $ 11.76 Weighted Average Grant Date Fair Value 15,858 $ 20.40 23,094 19.39 (8,073 ) 19.84 (98 ) 18.41 30,781 $ 19.79 2017,2021, 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 $25$236 thousand. This expense is expected to be recognized through 2019.2024. Compensation expense related to restricted stock unit awards recognized for the years ended December 31, 20172021 and 20162020 totaled $69$226 thousand and $88$240 thousand, respectively. $ 2,061 $ 2,028 2,930 2,314 2,712 2,208 539 356 777 587 $ 9,019 $ 7,493 1,168 761 $ 10,187 $ 8,254 2017,2021, 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. $ 9,000 $ 941 $ 0 $ 0 2020 Notional Amount Assets Liabilities Collateral Pledged(1) $ 9,000 $ 431 $ 0 $ 0
On July 1, 2021, the Company completed its acquisition 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 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 million, total loans of $194.5 million and total deposits of $236.3 million. For the year ended December 31, 2021, the Company recorded merger related expenses of $3.4 million 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 $20 thousand of merger related expenses expected to be recorded in the first and second quarters of 2022.
On September 30, 2021, the Bank acquired $82.0 million of loans and certain fixed assets from SmartBank related to 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 expect assume any deposit liabilities from SmartBank in connection with the forfeituretransaction, and SmartBank closed their branch operation on December 31, 2021. First Bank assumed the facility lease at the branch on December 31, 2021 and now operates a loan production office in the location of the former SmartBank branch. First Bank’s assumption of the lease and acquisition of the remaining branch assets was completed in the fourth quarter of 2021. The Company incurred $101 thousand of expenses related to the acquisition of loans and fixed assets during 2021.unvested restricted stock units.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.
SmartBank are as of September 30, 2021. $ 6,752 $ 83,745 $ 90,497 27,069 0 27,069 $ 33,821 $ 83,745 $ 117,566 $ 46,158 $ 0 $ 46,158 120 0 120 12,112 0 12,112 183 0 183 194,617 81,637 276,254 3,471 172 3,643 1,588 143 1,731 2,137 0 2,137 5,852 0 5,852 4,259 0 4,259 $ 270,497 $ 81,952 $ 352,449 $ 184,535 $ 0 $ 184,535 52,246 0 52,246 1,132 0 1,132 $ 237,913 $ 0 $ 237,913 $ 32,584 $ 81,952 $ 114,536 $ 1,237 $ 1,793 $
the acquisition method, including certain fair value adjustments, this pro forma information is not indicative of what would have occurred had the acquisition actually taken place on January 1, 2020. Pro forma adjustments for the year ended December 31, 2021 and December 31, 2020 include the net impact of accretion of loan discounts related to market interest rates, amortization of premiums on deposits, amortization of intangible assets and related income taxes. Unaudited pro forma net income for the years ended December 31, 2021 and 2020 includes after tax merger related expenses of $3.4 million, or $(0.61) per share. These amounts include $629 thousand recorded by Fincastle prior to the merger, which was primarily related to fees paid for legal and financial advisors. Unaudited pro forma net income also includes provision for loan losses recorded by Fincastle for loans that were recorded by the Corporation at fair value upon acquisition and have no allowance for loan losses in the books of the Corporation. Additionally, the Company expects to achieve further operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below. $ 42,116 $ 43,234 $ 9,826 $ 7,660 $ 1.77 $ 1.57 $ 1.77 $ 1.57 23.27. Parent Company Only Financial Statements20172021 and 2016 $ 7,303 $ 16,440 122,964 87,109 6,256 740 $ 136,523 $ 104,289 $ 9,993 $ 9,991 9,279 9,279 212 103 $ 19,484 $ 19,373 $ 0 $ 0 7,785 6,075 31,966 6,151 76,990 69,292 298 3,398 $ 117,039 $ 84,916 $ 136,523 $ 104,289 2017 2016 Assets Cash $ 9,964 $ 5,690 Investment in subsidiaries, at cost, plus undistributed net income 62,094 60,344 Other assets 327 335 Total assets $ 72,385 $ 66,369 Liabilities and Shareholders’ Equity Subordinated debt $ 4,948 $ 4,930 Junior subordinated debt 9,279 9,279 Other liabilities 4 9 Total liabilities $ 14,231 $ 14,218 Preferred stock $ — $ — Common stock 6,182 6,162 Surplus 7,260 7,093 Retained earnings 45,670 39,756 Accumulated other comprehensive loss, net (958 ) (860 ) Total shareholders’ equity $ 58,154 $ 52,151 Total liabilities and shareholders’ equity $ 72,385 $ 66,369 20172021 and 2016 $ 6,000 $ 6,600 $ 6,000 $ 6,600 $ 889 $ 794 56 3 107 215 29 29 305 294 104 80 $ 1,490 $ 1,415 $ 4,510 $ 5,185 312 297 $ 4,822 $ 5,482 5,537 3,376 $ 10,359 $ 8,858 2017 2016 Income Dividends from subsidiary $ 5,500 $ 2,325 Other income 13 — Total income $ 5,513 $ 2,325 Expense Interest expense $ 663 $ 620 Marketing 13 — Supplies 3 2 Legal and professional fees 113 104 Data processing 62 61 Management fee-subsidiary 265 258 Other expense 8 17 Total expense $ 1,127 $ 1,062 Income before allocated tax benefits and undistributed income of subsidiary $ 4,386 $ 1,263 Allocated income tax benefit 379 361 Income before equity in undistributed income of subsidiary $ 4,765 $ 1,624 Equity in undistributed income of subsidiary 1,683 4,283 Net income $ 6,448 $ 5,907 20172021 and 2016 $ 10,359 $ 8,858 (5,537 ) (3,376 ) 354 290 2 18 (5,020 ) 3 1 4 $ 159 $ 5,797 $ (6,752 ) $ 0 $ (6,752 ) $ 0 $ 0 $ 4,990 (2,505 ) (2,007 ) (39 ) (2,118 ) $ (2,544 ) $ 865 $ (9,137 ) $ 6,662 16,440 9,778 $ 7,303 $ 16,440 2017 2016 Cash Flows from Operating Activities Net income $ 6,448 $ 5,907 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiary (1,683 ) (4,283 ) Amortization of debt issuance costs 18 17 (Increase) decrease in other assets (3 ) 74 Decrease in other liabilities (1 ) — Net cash provided by operating activities $ 4,779 $ 1,715 Cash Flows from Financing Activities Cash dividends paid on common stock, net of reinvestment $ (646 ) $ (550 ) Net proceeds from issuance of common stock 141 113 Net cash used in financing activities $ (505 ) $ (437 ) Increase in cash and cash equivalents $ 4,274 $ 1,278 Cash and Cash Equivalents Beginning 5,690 4,412 Ending $ 9,964 $ 5,690 Item 9. Item 9A. Company’sCompany's management, has evaluated, underincluding the supervision and with the participation of theCompany's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as of December 31, 2017 pursuant todefined in Rule 13a-15(b)13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)., as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017, the disclosure controls and procedures are effective in ensuring2021 to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act reports is (1) recorded, processed, summarized and reported within the time periods specified in a timely mannerSEC rules and (2)forms and that such information is accumulated and communicated to the Company’sCompany's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. ReferBecause of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company's disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiaries to Item 8disclose material information required to be set forth in the Company's periodic reports.report foracquisition. The integration of the “Management’s ReportSmartBank loan portfolio and certain fixed assets does not have a material effect on the Effectiveness ofour internal control over financial reporting. over Financial Reporting.”Company’sCompany's internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscalCompany's fourth quarter ended December 31, 2021 that have materially affected, or isare reasonably likely to materially affect, the Company's internal control over financial reporting.Item 10. 20182022 Annual Meeting of Shareholders (the Proxy Statement), which information is incorporated herein by reference.Item 11. Item 12. Item 13. Item 14. AccountingAccountant Fees and ServicesItem 15. (a)(1) 2.1 10.14.24.3 Form of 5.50% Fixed to Floating Rate Subordinated Note due 2030 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed July 6, 2020). 14.110.1310.14 Supplemental Executive Retirement Plan, dated March 15, 2019, for the benefit of Scott C. Harvard (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on March 21, 2019). 10.15 Supplemental Executive Retirement Plan, dated March 15, 2019, for the benefit of Dennis A. Dysart (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed on March 21, 2019). 10.16 Supplemental Executive Retirement Plan, dated March 15, 2019, for the benefit of M. Shane Bell (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed on March 21, 2019). 20172021 formatted in Inline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements. 104 The cover page from First National Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included with Exhibit 101). (b)Exhibits(c)None.23, 201830, 202223, 201830, 2022 /s/ M. Shane BellKirtesh Patel Date: March 23, 2018Executive Vice President & Chief Financial Officer(principal financial officer and principal accounting officer)/s/ Elizabeth H. CottrellDate:March 23, 2018Chairman of the Board of Directors/s/ Gerald F. Smith, Jr.Date:March 23, 2018Vice Chairman of the Board of Directors/s/ Emily Marlow BeckDate:March 23, 201830, 2022Director /s/ Boyce E. BrannockC. Ray Sprinkle Date: March 23, 201830, 2022Director /s/ Dr. Miles K. DavisGeorge E. Holt, III Date: March 23, 201830, 2022Director /s/ Christopher E. FrenchDate:March 23, 2018Director /s/ W. Michael FunkDate:March 23, 2018Director /s/ James R. Wilkins, IIIDate:March 23, 2018Director94