SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended SeptemberJune 30, 2017
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number: 0-23976
(Exact name of registrant as specified in its charter)
Virginia | 54-1232965 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
112 West King Street, Strasburg, Virginia | 22657 | |
(Address of principal executive offices) | (Zip Code) | |
(540) 465-9121
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, par value $1.25 per share | FXNC | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | Smaller reporting company | ☒ | ||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 13, 2017, 4,945,056August 11, 2022, 6,252,147 shares of common stock, parpar value $1.25 per share, of the registrant were outstanding.
Page Item 1. Item 2. Item 3. Item 4. Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6. Item 1. Financial Statements FIRST NATIONAL CORPORATION Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) 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, 2022, $70,492; 2021, $33,617) Restricted securities, at cost Loans, net of allowance for loan losses, 2022, $6,202; 2021, $5,710 Other real estate owned, net of valuation allowance Premises and equipment, net Accrued interest receivable Bank owned life insurance Goodwill Core deposit intangibles, net Other assets Total assets Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing demand deposits Savings and interest-bearing demand deposits Time deposits Total deposits Subordinated debt, net of issuance cost 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, 2022, 6,252,147 shares; 2021, 6,228,176 shares Surplus Retained earnings Accumulated other comprehensive (loss) income, net Total shareholders’ equity Total liabilities and shareholders’ equity *Derived from audited consolidated financial statements. See Notes to Consolidated Financial Statements Consolidated Statements of Income (Unaudited) (in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 Interest and Dividend Income Interest and fees on loans Interest on deposits in banks 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 Provision for (recovery of) loan losses Net interest income after provision for (recovery of) 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 mortgage loans held for sale Other operating income Total noninterest income Noninterest Expense Salaries and employee benefits Occupancy Equipment Marketing Supplies Legal and professional fees ATM and check card expense FDIC assessment Bank franchise tax Data processing expense Amortization expense Other real estate owned expense, net Other operating expense Total noninterest expense See Notes to Consolidated Financial Statements Consolidated Statements of Income (Unaudited) (Continued) (in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 Income before income taxes Income tax expense Net income Earnings per common share Basic Diluted See Notes to Consolidated Financial Statements Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (in thousands) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 Net income Other comprehensive (loss), net of tax, Unrealized holding gains (losses) on available for sale securities, net of tax ($2,595) and $78 for the three months and ($6,381) and ($354) for the six months ended June 30, 2022 and 2021, respectively Reclassification adjustment for gains included in net income, net of tax $0 and ($8) for the six months ended June 30, 2022 and 2021. There were no reclassification adjustments for the three month periods. Change in fair value of cash flow hedges, net of tax $120 and ($101) for the three months and $267 and $95 for the six months ended June 30, 2022 and 2021, respectively Total other comprehensive (loss) Total comprehensive (loss) income See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows (Unaudited) (in thousands) Six Months Ended Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of premises and equipment Amortization of core deposit intangibles Amortization of debt issuance costs Origination of mortgage loans held for sale Proceeds from sale of mortgage loans held for sale Net gains on sales of mortgage loans held for sale Provision for (recovery of) loan losses Net gains on securities available for sale Net losses (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 loan discounts, net Stock-based compensation Excess tax benefits on stock-based compensation Losses (gains) on disposal of premises and equipment, net Deferred income tax benefit Changes in assets and liabilities: (Increase) decrease in interest receivable Decrease (increase) in other assets (Decrease) in accrued interest payable and other liabilities Net cash provided by (used in ) 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 (purchase) redemption of restricted securities Purchase of premises and equipment Proceeds from sale of premises and equipment Proceeds from sale of other real estate owned Net (decrease) increase in loans Net cash used in investing activities See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows (Unaudited) (Continued) (in thousands) Six Months Ended Cash Flows from Financing Activities Net increase in demand deposits and savings accounts Net decrease in time deposits Repayment of subordinated debt Cash dividends paid on common stock, net of reinvestment Repurchase of common stock, stock incentive plan Net cash provided by financing activities (Decrease) 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 Investing and Financing Activities Unrealized (losses) on securities available for sale Change in fair value of cash flow hedges Transfer from other real estate owned to premises and equipment Transfer from loans to other real estate owned Issuance of common stock, dividend reinvestment plan See Notes to Consolidated Financial Statements Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (in thousands, except share and per share data) Common Stock Surplus Retained Earnings Total Balance, March 31, 2021 Net income Other comprehensive loss Cash dividends on common stock ($0.12 per share) Stock-based compensation Issuance of 1,997 shares common stock, dividend reinvestment plan Balance, June 30, 2021 Common Stock Surplus Retained Earnings Accumulated Other Comprehensive (Loss) Total Balance, March 31, 2022 Net income Other comprehensive loss Cash dividends on common stock ($0.14 per share) Stock-based compensation Issuance of 2,363 shares common stock, dividend reinvestment plan Balance, June 30, 2022 Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income Total Balance, December 31, 2020 Net income Other comprehensive loss Cash dividends on common stock ($0.24 per share) Stock-based compensation Issuance of 4,208 shares common stock, dividend reinvestment plan Issuance of 8,073 shares common stock, stock incentive plan Repurchase of 2,221 shares common stock, stock incentive plan Balance, June 30, 2021 Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance, December 31, 2021 Net income Other comprehensive loss Cash dividends on common stock ($0.28 per share) Stock-based compensation Issuance of 5,120 shares common stock, dividend reinvestment plan Issuance of 27,134 shares common stock, stock incentive plan Repurchase of 8,283 shares common stock, stock incentive plan Balance, June 30, 2022 See Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements (Unaudited) Note 1. General The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial Recent Accounting Pronouncements Notes to Consolidated Financial Statements (Unaudited) Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. In March 2020, the FASB issued ASU No.2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). These amendments provide temporary optional guidance to ease the potential burden in In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective Note 2. Securities The Company invests in U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, June 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value 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 Corporate debt securities Total securities held to maturity Total securities December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value 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 Notes to Consolidated Financial Statements (Unaudited) At June 30, 2022 Less than 12 months 12 months or more Total Fair Value Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) 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 Corporate debt securities Total securities held to maturity Total securities December 31, 2021 Less than 12 months 12 months or more Total Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) 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 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 The amortized cost and fair value of securities at Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Due within one year Due after one year through five years Due after five years through ten years Due after ten years 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 The composition of restricted securities at June 30, 2022 December 31, 2021 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 $566 thousand and $504 thousand at June 30, 2022 and December 31, 2021, respectively. Notes to Consolidated Financial Statements (Unaudited) Note 3. Loans Loans at June 30, 2022 December 31, 2021 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 loans Allowance for loan losses Loans, net Net deferred loan fees included in the above loan Risk characteristics of each loan portfolio class that are considered by the Company include: • 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. 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. Other loans included in this category include loans to states and political subdivisions. Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of 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 The following tables provide a summary of loan classes and an aging of past due loans as of June 30, 2022 30-59 Days Past Due 60-89 Days Past Due Total Past Due Current 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, 2021 30-59 Days Past Due 60-89 Days Past Due Total Past Due Current 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 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 Mention – Substandard – Doubtful – Loss – The following tables provide an analysis of the credit risk profile of each loan class as of June 30, 2022 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, 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 Notes to Consolidated Financial Statements (Unaudited) Note 4. Allowance for Loan Losses The following tables present, as of June 30, 2022 Total Allowance for loan losses: Beginning Balance, December 31, 2021 Charge-offs Recoveries Provision for (recovery of) loan losses Ending Balance, June 30, 2022 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment Loans: Ending Balance Individually evaluated for impairment Collectively evaluated for impairment 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 June 30, 2021 Total Allowance for loan losses: Beginning Balance, December 31, 2020 Charge-offs Recoveries Provision for (recovery of) loan losses Ending Balance, June 30, 2021 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 June 30, 2022 Real estate loans: Secured by 1-4 family residential Other real estate loans Commercial and industrial Total December 31, 2021 Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial Total June 30, 2021 Real estate loans: Construction and land development Secured by 1-4 family residential 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 For the three and During the Note Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table presents the computation of basic and diluted earnings per share for the three and Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 (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 There were 0 antidilutive shares of common stock for the three months and six months ended June 30, 2022 and 2021. Note 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. Notes to Consolidated Financial Statements (Unaudited) 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). Notes to Consolidated Financial Statements (Unaudited) The following tables present the balances of assets measured at fair value on a recurring basis as of Fair Value Measurements at June 30, 2022 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, 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 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: 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. Other Certain assets such as OREO are Notes to Consolidated Financial Statements The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis during the periods (dollars in thousands): Fair Value Measurements at June 30, 2022 Description Other real estate owned, net Fair Value Measurements at December 31, 2021 Description Other real estate owned, net Impaired loans, net Quantitative information about Level 3 Fair Value Measurements for June 30, 2022 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (1) Other real estate owned, net Property appraisals Selling cost Quantitative information about Level 3 Fair Value Measurements for December 31, 2021 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (1) Other real estate owned, net Property appraisals Selling cost Impaired loans, net Present value of cash flows Discount rate 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 June 30, 2022 Using Fair Value Financial Assets Cash and interest-bearing deposits in banks Securities available for sale Securities held to maturity Restricted securities 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, 2021 Using Fair Value Financial Assets Cash and interest-bearing deposits in banks 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 Notes to Consolidated Financial Statements (Unaudited) 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 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. Compensation expense related to stock awards totaled 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 During the first quarter of A summary of the activity for the Company’s restricted stock units for the period indicated is presented in the following table: Six Months Ended June 30, 2022 Shares Unvested, beginning of year Granted Vested Forfeited Unvested, end of period At Notes to Consolidated Financial Statements (Unaudited) Note Changes in each component of accumulated other comprehensive Net Unrealized Gains (Losses) on Securities Change in Fair Value of Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) Balance at March 31, 2021 Unrealized holding gains (net of tax, $78) Change in fair value of cash flow hedge (net of tax, ($100)) Change during period Balance at June 30, 2021 Balance at March 31, 2022 Unrealized holding losses (net of tax, ($2,595)) Change in fair value of cash flow hedge (net of tax, $120) Change during period Balance at June 30, 2022 Net Unrealized (Losses) on Securities Change in Fair Value of Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2020 Unrealized holding losses (net of tax, ($354)) Reclassification adjustment (net of tax, ($8)) Change in fair value of cash flow hedges (net of tax, $95) Change during period Balance at June 30, 2021 Balance at December 31, 2021 Unrealized holding losses (net of tax, ($6,381)) Change in fair value of cash flow hedge (net of tax, $267) Change during period Balance at June 30, 2022 The following Details About Accumulated Other Comprehensive Income (Loss) Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statements of Income Three Months Ended June 30, 2022 June 30, 2021 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 Details About Accumulated Other Comprehensive (Loss) Income Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Six Months Ended June 30, 2022 June 30, 2021 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 Notes to Consolidated Financial Statements (Unaudited) Note 9. 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 Fees for other customer services Fees for other customer services include fees for brokered loans, check ordering charges, merchant services income, safe deposit box rental fees, and other service charges. Check ordering charges are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Merchant services income mainly represent fees charged to merchants to process their debit and credit card transactions. The Company's performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 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 Notes to Consolidated Financial Statements (Unaudited) Note 10. Derivative Financial Instruments On April 21, 2020, the Company entered into 2 interest rate swap agreements related to its outstanding junior subordinated debt. One swap agreement was related to the Company’s junior subordinated debt with a redemption date of June 17, 2034, which became effective on March 17, 2020. The notional amount of the interest rate swap was $5.0 million and terminates on June 17, 2034. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.79% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The other swap agreement was related to the Company’s junior subordinated debt with a redemption date of October 1, 2036, which became effective on April 1, 2020. The notional amount of the interest rate swap was $4.0 million and terminates on October 1, 2036. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.82% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The Company expects the junior subordinated debt instruments to transition from a LIBOR-indexed floating rate of interest to a SOFR-indexed floating rate by June 30, 2023. The Company entered into interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converted variable rate debt into fixed rate debt. Alternatively, the Company may enter into interest rate swap agreements to convert fixed rate debt into variable rate debt. Interest differentials paid or received under interest rate swap agreements are reflected as adjustments to interest expense. The Company designated the interest rate swaps as hedging instruments in qualifying cash flow hedges. Changes in fair value of these designated hedging instruments is reported as a component of other comprehensive (loss) income. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported as earnings. As of June 30, 2022, the Company has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2034 and October 2036. The notional amounts of the interest rate swaps were not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates. All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant. Unrealized gains or losses recorded in other comprehensive (loss) income related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive (loss) income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months. The following table summarizes key elements of the Company's derivative instruments at June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 Notional Amount Assets Liabilities Collateral Pledged(1) Cash Flow Hedges Interest rate swap contracts December 31, 2021 Notional Amount Assets Liabilities Collateral Pledged(1) Cash Flow Hedges Interest rate swap contracts Cautionary Statement Regarding Forward-Looking Statements First National Corporation (the Company) makes forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding profitability, liquidity, adequacy of capital, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and the impact of the Company’s acquisitions of The Bank of Fincastle (Fincastle) and the SmartBank loan portfolio, including the expected benefits of the acquisition of Fincastle (Merger) and the potential impact of the acquisitions on the Company’s and First Bank’s (the Bank) 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: • • • the Company’s branch and market expansions, technology initiatives and other strategic initiatives; • 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; • the level of net charge-offs on loans and the adequacy of the allowance for loan losses; • 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; • • • 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 of the Company’s Form 10-K for the year ending December 31, 2021. Because of these and other uncertainties, actual 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. Bank of Fincastle Services, Inc. owns an entity that provides mortgage 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, and ATM and check card fees. Primary expense categories are salaries and employee benefits, which comprised The following items had the most significant impact on financial performance, when comparing the second quarter of 2022 to the same period in 2021. ● The acquisition of The Bank of Fincastle (Fincastle) had a significant impact on balance sheet growth. On July 1, 2021, the acquisition date, Fincastle had total assets of $267.9 million, interest-bearing deposits in banks of $43.5 million, total securities of $12.0 million, loans, net of the allowance for loan losses, of $191.5 million, and total deposits of $236.3 million. ● The acquisition of the SmartBank loan portfolio from its Richmond-area branch impacted the composition of the Bank’s earning assets. On September 30, 2021, the acquisition date, the loan portfolio totaled $82.6 million. The Bank funded the acquisition of the loan portfolio with cash, which decreased interest-bearing deposits in banks in the third quarter of 2021. ● The provision for loan losses totaled $400 thousand for the second quarter of 2022, which was a $1.4 million increase compared to the recovery of loan losses of $1.0 million in the second quarter of 2021. ● Total loans increased $43.7 million, during the three-month period ending June 30, 2022. ● Accretion of PPP income, net of costs decreased to $35 thousand for the second quarter of 2022, compared to $509 thousand for the same period in the prior year. ● Accretion of purchased loan discounts, net of premium amortization, totaled $351 thousand for the second quarter of 2022, compared to no purchased loan accretion for the same period in the prior year Net income increased by The The $3.8 million, or 51%, increase in net interest income resulted from an increase in total interest income and no change in total interest expense. Net interest income increased as the net interest margin expanded by 32 basis points and average earning assets increased by 37%. The margin expansion resulted from an increase in earning asset yields, a change in the earning asset composition, and a decrease in the cost of funds. Earning asset yields increased by 25 basis points from a higher interest rate environment during the second quarter of 2022, while the cost of funds decreased by 7 basis points, primarily from lower interest rates paid on deposits and subordinated debt. The change in the earning asset composition favorably impacted the net interest margin as average total securities increased and average interest-bearing deposits in banks decreased. The growth in earning assets resulted from both the acquisition of Fincastle and from deposit growth. The provision for loan losses totaled $400 thousand for the second quarter of 2022 in contrast to the second quarter of 2021 when the Bank recorded a $1.0 million recovery of loan losses. The allowance for loan losses totaled $6.2 million, or 0.70% of total loans on June 30, 2022, 0.69% of total loans on December 31, 2021, and 0.89% of total loans on June 30, 2021. The $345 thousand, or 14%, year-over-year quarterly increase in noninterest income was primarily a result of a $251 thousand increase in service charges on deposits, followed by increases in ATM and check card fees, wealth management fees, and an increase in fees for other customer services. The merger with Fincastle contributed to all increased income categories, except for wealth management fees. The increases were partially offset by Noninterest expense increased $2.3 million, or For a more detailed discussion of the Company's quarterly performance, see "Net Interest Income,” “Provision for Loan Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below. 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. 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 have been operating as First Bank since the system conversion. For the three and six months ended June 30, 2022, the Company recorded merger related expenses of $20 thousand in connection with the acquisition of Fincastle. 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 The Company expected to benefit from cost savings after the acquisition of Fincastle. As of June 30, 2022, the Company had substantially achieved all expected cost savings related to the merger of Fincastle with and into First Bank. Acquisition of SmartBank Loan On September 30, 2021, the Bank acquired $82.6 million of loans and certain fixed assets from SmartBank related to Non-GAAP Financial Measures This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding Efficiency Ratio Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Noninterest expense Add/(Subtract): other real estate owned (expense), net Subtract: amortization of intangibles Add: gains on disposal of premises and equipment, net Subtract: loss on disposal of premises and equipment, net 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 Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 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 3 and 4 to the Consolidated Financial Statements included in this Form 10-Q. The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 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 Loans acquired from Fincastle and SmartBank were recorded at fair value. There was $254 thousand of Loans Acquired in a Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or PCI loans are those for which there is Goodwill and Other Intangible Assets Goodwill arises from business combinations and is determined as the Other intangible assets consist of core deposit intangible assets arising from whole bank and branch There have been Results of Operations 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, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consists of income from service charges on deposit accounts, revenue from wealth management services, ATM and check card income, revenue from other customer services, income from bank owned life insurance, general and administrative expenses, amortization expense, and other real estate owned expense. Net Income Three Month Period Ended June 30, 2022 Net income increased by $493 thousand, or The increase in Six Month Period Ended June 30, 2022 Net income increased by $1.8 million, or 31%, to $7.6 million, or $1.21 per diluted share, for the six months ended June 30, 2022, compared to $5.8 million, or $1.19 per diluted share, for the same period in 2021. Return on average assets was 1.07% and return on average equity was 14.16% for the six months ended June 30, 2022, compared to 1.15% and 13.44%, respectively, for the same period in 2021. The increase in net income resulted primarily from a Net Interest Income Three Month Period Ended June 30, 2022 Net interest income increased $3.8 million, or 51%, comparing the second quarter of 2022 to the same period of 2021, and was positively impacted by a higher interest rate environment, a significant increase in average earning assets, and a change in the Company’s earning asset composition. During the second quarter of 2022, the high-end of the Federal funds target increased from 0.50% to 1.75%, compared to a Federal funds rate that remained at 0.25% throughout the second quarter of 2021. The higher rate environment resulted in a 14-basis point increase in the yield on loans and a 72-basis point increase in the yield on interest-bearing deposits in other banks, while the total cost of interest-bearing deposits decreased two basis points. The cost of subordinated debt decreased by 64-basis points from the redemption of $5.0 million of higher rate subordinated debt on January 1, 2022. Although the Federal funds rate increased by 150 basis points, the Company’s total cost of funds decreased seven basis points, when comparing the periods. Average earning assets increased $358.0 million, or 37%, as a result of the acquisition of Fincastle in the third quarter of 2021 and growth of the Bank’s deposit portfolio over the last twelve months. Additionally, the composition of earning assets contributed to the increase in total interest and dividend income as total average securities increased from 20% to 27% of average earning assets, while average interest-bearing deposits in other banks decreased from 16% to 9%. Average loans were unchanged at 64% of average earning assets when comparing the same periods. The $3.8 million increase in net interest income resulted from a $3.8 million, or 47%, increase in total interest and dividend income, while total interest expense was unchanged. The increase in total interest and dividend income was attributable to a $2.9 million increase in interest income and fees on loans, a $214 thousand increase in interest on deposits in banks, and a $691 thousand increase in interest income and dividends on securities. There was no change in total interest expense as an increase in interest expense on deposits was offset by a decrease in interest expense on subordinated debt. The net interest margin increased to 3.42%, a 32-basis point increase from 3.10% in the same period one year ago. Accretion of PPP income, net of costs, and accretion of discounts on purchased loans, net of premiums, were included in interest and fees on loans. Net accretion of PPP income totaled $35 thousand in the second quarter of 2022, compared to $509 thousand for the same period of 2021. Net accretion of discounts on purchased loans totaled $351 thousand in the second quarter of 2022. There were no purchased loans in the second quarter of 2021, and as a result, there was no net accretion of discounts on purchased loans during the period. Six Month Period Ended June 30, 2022 Net interest income increased $6.8 million, or 46%, comparing the six months ended June 30, 2022, to the same period of 2021, and was positively impacted by a higher interest rate environment, a significant increase in average earning assets, and a change in the Company’s earning asset composition. During the six months ended June 30, 2022, the high-end of the Federal funds target increased from 0.25% to 1.75%, compared to a Federal funds rate that remained at 0.25% throughout the same period of 2021. The higher rate environment resulted in a 11-basis point increase in the yield on loans and a 34-basis point increase in the yield on interest-bearing deposits in other banks, while the cost of interest-bearing deposits decreased six basis points. The cost of subordinated debt decreased by 133-basis points from the redemption of $5.0 million of higher rate subordinated debt on January 1, 2022. Although the Federal funds rate increased by 150 basis points, the Company’s total cost of funds decreased nine basis points, when comparing the periods. Average earning assets increased $353.8 million, or 37%, as a result of the acquisition of Fincastle in the third quarter of 2021 and growth of the Bank’s deposit portfolio over the last twelve months. Additionally, the composition of earning assets contributed to the increase in total interest and dividend income as total average securities increased from 18% to 24% of average earning assets, while average interest-bearing deposits in other banks decreased from 16% to 12% and average loans decreased from 66% to 64%. The $6.8 million increase in net interest income resulted from a $6.7 million, or 42%, increase in total interest and dividend income, while total interest expense decreased by $108 thousand. The increase in total interest and dividend income was attributable to a $5.2 million increase in interest income and fees on loans, a $251 thousand increase in interest on deposits in banks, and a $1.2 million increase in interest income and dividends on securities. The decrease in total interest expense resulted from a $170 thousand decrease in interest expense on subordinated debt, which was partially offset by a Accretion of PPP income, net of costs, and accretion of discounts on purchased loans, net of premiums, were included in interest The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands): Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) Three Months Ended June 30, 2022 June 30, 2021 Assets Securities: Taxable Tax-exempt (1) Restricted Total securities Loans: (2) Taxable Tax-exempt (1) Total loans Federal funds sold Interest-bearing deposits with other institutions Total earning assets Less: allowance for loan losses Total non-earning assets Total assets Liabilities and Shareholders’ Equity Interest bearing deposits: Checking Regular savings Money market accounts Time deposits: $100,000 and over Under $100,000 Brokered Total interest-bearing deposits Federal funds purchased Subordinated debt Junior subordinated debt Total interest-bearing liabilities Non-interest 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 Six Months Ended June 30, 2022 June 30, 2021 Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate Assets Securities: Taxable Tax-exempt (1) Restricted Total securities Loans: (2) Taxable Tax-exempt (1) Total loans Federal funds sold Interest-bearing deposits with other institutions Total earning assets Less: allowance for loan losses Total non-earning assets Total assets Liabilities and Shareholders’ Equity Interest bearing deposits: Checking Regular savings Money market accounts Time deposits: $100,000 and over Under $100,000 Brokered Total interest-bearing deposits Federal funds purchased Subordinated debt Junior subordinated debt Other borrowings Total interest-bearing liabilities Non-interest 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 Three Month Period Ended June 30, 2022 The The $1.0 million recovery of loan losses for the second quarter of 2021 resulted from the resolution of a previously impaired loan and a related decrease of the specific reserve component of the allowance for loan losses during the period. The allowance for loan losses totaled $6.2 million, or 0.70% of total loans at June 30, 2022, compared to $5.5 million, or 0.89% of total loans at June 30, 2021. The net discount on purchased loans totaled $2.9 million, or 0.33% of total loans at June 30, 2022. There were no discounts on purchased loans at June 30, 2021. Six Month Period Ended June 30, 2022 The provision for loan losses also totaled $400 thousand for the six months ended June 30, 2022, compared to a $1.0 million recovery of loan losses for the same period of 2021. Like the second quarter ended June 30, 2022, the provision for loan losses for the six-month period resulted primarily from an increase in the general reserve Noninterest Income Three Month Period Ended June 30, 2022 Noninterest income The increases in service charges on deposits, ATM and check card fees, and fees for other customer services were favorably impacted by an increase in customer transactions and additional deposit accounts that resulted from the acquisition of Fincastle. The increase in wealth management income was attributable to an increase in the number of client accounts. Brokered mortgage fees and net gains on sale of loans held for sale decreased from a reduction in the number of mortgage loans originated, as well as an increase in the number of mortgage loans retained in the Bank’s loan portfolio and not sold or brokered when comparing the periods. The decrease in Six Month Period Ended June 30, 2022 Noninterest income increased $913 thousand, The increases in service charges on Noninterest Expense Three Month Period Ended June 30, 2022 Noninterest expense increased $2.3 million, or 35%, to $8.9 million for the three-month period ended June 30, 2022, compared to the The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle and the acquisition of the loan portfolio, branch assets and the addition of employees from the SmartBank office. The increase in marketing was also related to the timing of campaigns and promotion activities. The decrease in legal and professional fees was primarily attributable to merger related costs in the second quarter of 2021. Although there were no merger expenses in the second quarter of 2022, merger expenses totaled $277 thousand in the second quarter of 2021. Six Month Period Ended June 30, 2022 Noninterest expense increased $4.3 million, or 32%, to $17.6 million for the six-month period ended June 30, 2022, compared to the same period one year ago. The increase was primarily attributable to a $3.0 million, or 41% increase in salaries and employee benefits, a $315 thousand, or 36%, increase in equipment expense, a $271 thousand, or 32%, increase in occupancy expense, a $151 thousand, or 30%, increase in ATM and check card expense, a $137 thousand, or 93%, increase in FDIC assessment, a $130 thousand, or 53%, increase in marketing, a $114 thousand, or 34%, increase in bank franchise tax, and a $510 thousand, or 40%, increase in other operating expense. These increases were partially offset by a $506 thousand, or 41%, decrease in legal and professional fees. The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from Income Taxes Three Month Period Ended June 30, 2022 Income tax expense decreased $41 thousand for the second quarter of 2022, compared to the same period one year ago. The effective tax rate for the second quarter of 2022 was 19.3% compared to 22.3% for the same period in 2021. The reduced effective tax rate for 2022 was the result of Six Month Period Ended June 30, 2022 Income tax expense increased $276 thousand, or 18%, for the first six months of 2022 compared with the same period in 2021. The effective tax rate for the first six months of 2022 was 19.2% compared with 20.9% for the same period in 2021. Like the three month period ended June 30, 2022, the reduced effective tax rate for 2022 was also the result of lower non-deductible expenses in 2022 compared to 2021. General Total assets increased At June 30, 2022, total liabilities increased $42.0 million to $1.3 billion compared to December 31, 2021. The increase was primarily attributable to an increase in savings and interest-bearing demand deposits of $41.1 million and in increase in noninterest-bearing deposits of $18.1 million. These increases were partially offset by a decrease in time deposits Total shareholders’ equity decreased $16.7 million to $100.3 million at June 30, 2022, compared to $117.0 million at December 31, Loans Loans, net of the allowance for loan losses, increased 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. During the fourth quarter of 2020, the Bank modified terms of certain loans for customers that continued to be negatively impacted by the 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. Loans greater than 90 days past due and still accruing totaled 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. 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. The recorded investment in impaired loans totaled 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 loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status, and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to Asset Quality Management classifies non-performing assets as non-accrual loans and Non-performing assets totaled $2.1 million and $4.2 million at June 30, 2022 and December 31, 2021, representing At June 30, Loans greater than 90 days past due and still accruing totaled The allowance for loan losses represents management’s analysis of the existing loan portfolio and related credit risks. The provision for loan losses is based upon management’s current estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses totaled Recoveries of loan losses of Impaired loans totaled Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio. For each period presented, the provision for loan losses charged to expense was based on management’s judgment after taking into consideration all factors connected with the collectability of the existing portfolio. Management considers economic conditions, historical loss factors, past due percentages, internally generated loan quality reports, and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that an additional provision for loan losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for loan losses, see “Critical Accounting Policies” above. The securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value. Restricted Securities at At Deposits At June 30, 2022, deposits totaled $1.3 billion, an increase of $47.4 million, from $1.2 billion at December 31, 2021. There was 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 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 Effective January 1, 2015, the The The following table shows the Bank’s regulatory capital ratios at 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 ratio (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 will not be required to report or calculate risk-based capital. Although, the Company did not opt into the CBLR framework at June 30, 2022, it may opt into the CBLR framework in a future quarterly period. During the fourth quarter of 2019, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company was authorized to repurchase up to $5.0 million of the Company’s 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 June 30, 2022. Contractual Obligations There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, Off-Balance Sheet Arrangements The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit, which amounted to 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 On April 21, 2020, the Company entered into interest rate swap agreements related to its outstanding junior subordinated debt. The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. The interest rate swaps qualified and are designated as cash flow hedges. The Company’s cash flow hedges effectively modify the Company’s exposure to interest rate risk by converting variable rates of interest on $9.0 million of the Company’s junior subordinated debt to fixed rates of interest. The cash flow hedges end and the junior subordinated debt matures between June 2034 and October 2036. The cash flow hedges’ total notional amount is $9.0 million. At Not required. The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or to which the property of the Company is subject. There were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, None None None None The following documents are attached hereto as Exhibits: 31.1 Certification of Chief Executive Officer, Section 302 31.2 Certification of Chief Financial Officer, Section 302 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 101 The following materials from First National Corporation’s Quarterly Report on Form 10-Q for the quarter ended Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST NATIONAL CORPORATION (Registrant) /s/ Scott C. Harvard August 15, 2022 Scott C. Harvard Date President and Chief Executive Officer /s/ M. Shane Bell M. Shane Bell Date Executive Vice President and Chief Financial OfficerTABLE OF CONTENTSPagePART I – FINANCIAL INFORMATION June 30, December 31, 2022 2021* $ 19,886 $ 18,725 104,529 157,281 264,750 289,495 77,151 33,441 1,908 1,813 873,887 819,408 1,665 1,848 22,118 22,403 4,154 3,903 24,569 24,294 3,030 3,030 145 154 16,898 13,642 $ 1,414,690 $ 1,389,437 $ 431,292 $ 413,188 731,125 689,998 133,733 145,566 $ 1,296,150 $ 1,248,752 4,994 9,993 9,279 9,279 3,952 4,374 $ 1,314,375 $ 1,272,398 $ 0 $ 0 7,815 7,785 32,398 31,966 82,804 76,990 (22,702 ) 298 $ 100,315 $ 117,039 $ 1,414,690 $ 1,389,437 (unaudited) September 30,
2017 December 31,
2016*Assets Cash and due from banks $ 9,162 $ 10,106 Interest-bearing deposits in banks 24,480 30,986 Securities available for sale, at fair value 93,102 94,802 Securities held to maturity, at amortized cost (fair value, 2017, $49,416; 2016, $52,709) 49,376 53,398 Restricted securities, at cost 1,570 1,548 Loans held for sale 660 337 Loans, net of allowance for loan losses, 2017, $5,301; 2016, $5,321 509,406 480,746 Other real estate owned, net of valuation allowance, 2017, $0; 2016, $0 250 250 Premises and equipment, net 20,510 20,785 Accrued interest receivable 1,886 1,746 Bank owned life insurance 14,232 13,928 Core deposit intangibles, net 1,071 1,551 Other assets 5,798 5,817 Total assets $ 731,503 $ 716,000 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing demand deposits $ 179,351 $ 168,076 Savings and interest-bearing demand deposits 350,879 349,067 Time deposits 126,032 128,427 Total deposits $ 656,262 $ 645,570 Subordinated debt 4,943 4,930 Junior subordinated debt 9,279 9,279 Accrued interest payable and other liabilities 3,485 4,070 Total liabilities $ 673,969 $ 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, 4,945,056 shares; 2016, 4,929,403 shares 6,181 6,162 Surplus 7,238 7,093 Retained earnings 44,368 39,756 Accumulated other comprehensive loss, net (253 ) (860 ) Total shareholders’ equity $ 57,534 $ 52,151 Total liabilities and shareholders’ equity $ 731,503 $ 716,000 FIRST NATIONAL CORPORATION $ 9,963 $ 7,074 $ 19,459 $ 14,217 251 37 321 70 1,295 697 2,427 1,414 309 215 614 395 21 22 42 44 $ 11,839 $ 8,045 $ 22,863 $ 16,140 $ 413 $ 328 $ 753 $ 691 69 154 138 308 67 68 134 134 $ 549 $ 550 $ 1,025 $ 1,133 $ 11,290 $ 7,495 $ 21,838 $ 15,007 400 (1,000 ) 400 (1,000 ) $ 10,890 $ 8,495 $ 21,438 $ 16,007 $ 698 $ 447 $ 1,307 $ 889 797 682 1,547 1,283 760 657 1,563 1,300 188 150 421 331 58 157 152 262 131 99 275 212 0 0 0 37 0 18 0 25 148 225 226 239 $ 2,780 $ 2,435 $ 5,491 $ 4,578 $ 5,086 $ 3,693 $ 10,210 $ 7,248 545 399 1,117 846 620 433 1,179 864 223 138 374 244 131 77 267 165 381 483 714 1,220 347 268 650 499 132 78 284 147 238 172 454 340 221 216 457 420 5 5 9 19 41 0 69 0 948 668 1,778 1,268 $ 8,918 $ 6,630 $ 17,562 $ 13,280 Three Months Ended Nine Months Ended September 30,
2017 September 30,
2016 September 30,
2017 September 30,
2016Interest and Dividend Income Interest and fees on loans $ 6,138 $ 5,500 $ 17,717 $ 16,106 Interest on deposits in banks 92 73 239 183 Interest and dividends on securities: Taxable interest 637 613 1,933 2,037 Tax-exempt interest 148 136 436 425 Dividends 21 20 62 60 Total interest and dividend income $ 7,036 $ 6,342 $ 20,387 $ 18,811 Interest Expense Interest on deposits $ 446 $ 338 $ 1,234 $ 1,000 Interest on federal funds purchased — — — 3 Interest on subordinated debt 91 91 269 270 Interest on junior subordinated debt 79 65 223 190 Interest on other borrowings — 1 — 6 Total interest expense $ 616 $ 495 $ 1,726 $ 1,469 Net interest income $ 6,420 $ 5,847 $ 18,661 $ 17,342 Provision for loan losses — — — — Net interest income after provision for loan losses $ 6,420 $ 5,847 $ 18,661 $ 17,342 Noninterest Income Service charges on deposit accounts $ 760 $ 941 $ 2,250 $ 2,635 ATM and check card fees 516 529 1,544 1,532 Wealth management fees 359 339 1,061 1,009 Fees for other customer services 131 143 408 427 Income from bank owned life insurance 117 123 304 316 Net gains on calls and sales of securities available for sale 11 4 24 10 Net gains on sale of loans 54 50 121 102 Other operating income 69 182 224 335 Total noninterest income $ 2,017 $ 2,311 $ 5,936 $ 6,366 Noninterest Expense Salaries and employee benefits $ 3,221 $ 3,183 $ 9,585 $ 10,042 Occupancy 379 380 1,094 1,169 Equipment 400 406 1,208 1,232 Marketing 138 125 410 �� 352 Supplies 81 108 277 312 Legal and professional fees 216 179 658 646 ATM and check card fees 205 229 596 655 FDIC assessment 84 106 240 354 Bank franchise tax 111 89 325 282 Telecommunications expense 95 110 313 339 Data processing expense 153 160 455 434 Postage expense 62 56 197 182 Amortization expense 151 187 480 592 Other real estate owned expense (income), net — 1 6 (120 ) Net losses on disposal of premises and equipment — 8 — 8 Other operating expense 511 526 1,419 1,374 Total noninterest expense $ 5,807 $ 5,853 $ 17,263 $ 17,853 4 $ 4,752 $ 4,300 $ 9,367 $ 7,305 917 958 1,803 1,527 $ 3,835 $ 3,342 $ 7,564 $ 5,778 $ 0.61 $ 0.69 $ 1.21 $ 1.19 $ 0.61 $ 0.69 $ 1.21 $ 1.19 Three Months Ended Nine Months Ended September 30,
2017 September 30,
2016 September 30,
2017 September 30,
2016Income before income taxes $ 2,630 $ 2,305 $ 7,334 $ 5,855 Income tax expense 798 611 2,203 1,629 Net income $ 1,832 $ 1,694 $ 5,131 $ 4,226 Earnings per common share Basic $ 0.37 $ 0.34 $ 1.04 $ 0.86 Diluted $ 0.37 $ 0.34 $ 1.04 $ 0.86 FIRST NATIONAL CORPORATION $ 3,835 $ 3,342 $ 7,564 $ 5,778 (9,762 ) 292 (24,005 ) (1,333 ) 0 0 0 (29 ) 452 (376 ) 1,005 362 (9,310 ) (84 ) (23,000 ) (1,000 ) $ (5,475 ) $ 3,258 $ (15,436 ) $ 4,778 Three Months Ended Nine Months Ended September 30,
2017 September 30,
2016 September 30,
2017 September 30,
2016Net income $ 1,832 $ 1,694 $ 5,131 $ 4,226 Other comprehensive (loss) income, net of tax, Unrealized holding (losses) gains on available for sale securities, net of tax ($76) and $78 for the three months and $321 and $593 for the nine months ended September 30, 2017 and 2016, respectively (150 ) 155 623 1,151 Reclassification adjustment for gains included in net income, net of tax ($4) and ($1) for the three months and ($8) and ($3) for the nine months ended September 30, 2017 and 2016, respectively (7 ) (3 ) (16 ) (7 ) Total other comprehensive (loss) income (157 ) 152 607 1,144 Total comprehensive income $ 1,675 $ 1,846 $ 5,738 $ 5,370 FIRST NATIONAL CORPORATIONNine Months Ended September 30, 2017 and 2016 June 30, June 30, 2022 2021 $ 7,564 $ 5,778 747 642 9 19 1 1 0 (1,586 ) 0 1,856 0 (25 ) 400 (1,000 ) 0 (37 ) 39 (9 ) (275 ) (212 ) 629 448 (122 ) (6 ) (718 ) 0 541 119 3 3 2 (26 ) 73 337 (251 ) 55 4,054 (4,992 ) (422 ) (1,950 ) $ 12,274 $ (585 ) $ 14,929 $ 21,962 5,271 3,288 (21,147 ) (106,060 ) (49,033 ) 0 (95 ) 244 (404 ) (205 ) 0 32 84 139 (54,161 ) 11,416 $ (104,556 ) $ (69,184 ) September 30,
2017 September 30,
2016Cash Flows from Operating Activities Net income $ 5,131 $ 4,226 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 1,037 1,010 Amortization of core deposit intangibles 480 592 Amortization of debt issuance costs 13 13 Origination of loans held for sale (7,298 ) (7,331 ) Proceeds from sale of loans held for sale 7,096 6,703 Net gains on sales of loans held for sale (121 ) (102 ) Net gains on calls and sales of securities available for sale (24 ) (10 ) Provision for other real estate owned — 27 Net gains on sale of other real estate owned — (193 ) Income from bank owned life insurance (304 ) (316 ) Accretion of discounts and amortization of premiums on securities, net 481 656 Accretion of premium on time deposits (81 ) (133 ) Stock-based compensation 129 72 Excess tax benefits on stock-based compensation (14 ) — Losses on disposal of premises and equipment — 8 Deferred income tax (benefit) expense (158 ) 347 Changes in assets and liabilities: (Increase) decrease in interest receivable (140 ) 30 Increase in other assets (136 ) (655 ) (Decrease) increase in accrued expenses and other liabilities (571 ) 1,195 Net cash provided by operating activities $ 5,520 $ 6,139 Cash Flows from Investing Activities Proceeds from maturities, calls, principal payments, and sales of securities available for sale $ 11,182 $ 18,554 Proceeds from maturities, calls, principal payments, and sales of securities held to maturity 3,863 11,025 Purchases of securities available for sale (8,860 ) — Net purchase of restricted securities (22 ) (157 ) Purchase of premises and equipment (762 ) (754 ) Proceeds from sale of premises and equipment — 23 Proceeds from sale of other real estate owned — 2,882 Purchase of bank owned life insurance — (2,000 ) Proceeds from cash value of bank owned life insurance — 250 Net increase in loans (28,660 ) (31,786 ) Net cash used in investing activities $ (23,259 ) $ (1,963 ) 7Nine Months Ended September 30, 2017 and 2016 June 30, June 30, 2022 2021 $ 59,231 $ 76,309 (11,711 ) (4,459 ) (5,000 ) 0 (1,646 ) (1,092 ) (183 ) (39 ) $ 40,691 $ 70,719 $ (51,591 ) $ 950 $ 176,006 $ 127,297 $ 124,415 $ 128,247 $ 1,184 $ 1,168 $ 1,040 $ 1,205 $ (30,386 ) $ (1,724 ) $ 1,272 $ 457 $ 60 $ 0 $ 0 $ 130 $ 104 $ 77 September 30,
2017 September 30,
2016Cash Flows from Financing Activities Net increase in demand deposits and savings accounts $ 13,087 $ 23,073 Net decrease in time deposits (2,314 ) (9,314 ) Cash dividends paid on common stock, net of reinvestment (484 ) (412 ) Net cash provided by financing activities $ 10,289 $ 13,347 (Decrease) increase in cash and cash equivalents $ (7,450 ) $ 17,523 Cash and Cash Equivalents Beginning $ 41,092 $ 39,334 Ending $ 33,642 $ 56,857 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 1,807 $ 1,628 Income Taxes $ 2,577 $ 1,276 Supplemental Disclosures of Noncash Investing and Financing Activities Unrealized gains on securities available for sale $ 920 $ 1,734 Transfer from loans to other real estate owned $ — $ 37 Transfer from premises and equipment to other real estate owned $ — $ 250 Issuance of common stock, dividend reinvestment plan $ 35 $ 31 FIRST NATIONAL CORPORATIONNine Months Ended September 30, 2017 and 2016 Accumulated Other Comprehensive Income $ 6,086 $ 6,214 $ 71,144 $ 2,482 $ 85,926 0 0 3,342 0 3,342 0 0 0 (84 ) (84 ) 0 0 (585 ) 0 (585 ) 0 45 0 0 45 2 36 0 0 38 $ 6,088 $ 6,295 $ 73,901 $ 2,398 $ 88,682 $ 7,812 $ 32,298 $ 79,845 $ (13,392 ) $ 106,563 0 0 3,835 0 3,835 0 0 0 (9,310 ) (9,310 ) 0 0 (876 ) 0 (876 ) 0 56 0 0 56 3 44 0 0 47 $ 7,815 $ 32,398 $ 82,804 $ (22,702 ) $ 100,315 $ 6,075 $ 6,151 $ 69,292 $ 3,398 $ 84,916 0 0 5,778 0 5,778 0 0 0 (1,000 ) (1,000 ) 0 0 (1,169 ) 0 (1,169 ) 0 119 0 0 119 5 72 0 0 77 10 (10 ) 0 0 0 (2 ) (37 ) 0 0 (39 ) $ 6,088 $ 6,295 $ 73,901 $ 2,398 $ 88,682 $ 7,785 $ 31,966 $ 76,990 $ 298 $ 117,039 0 0 7,564 0 7,564 0 0 0 (23,000 ) (23,000 ) 0 0 (1,750 ) 0 (1,750 ) 0 541 0 0 541 6 98 0 0 104 34 (34 ) 0 0 0 (10 ) (173 ) 0 0 (183 ) $ 7,815 $ 32,398 $ 82,804 $ (22,702 ) $ 100,315 PreferredStock CommonStock Surplus RetainedEarnings AccumulatedOtherComprehensiveLoss Total Balance, December 31, 2015 $ — $ 6,145 $ 6,956 $ 34,440 $ (1,588 ) $ 45,953 Net income — — — 4,226 — 4,226 Other comprehensive income — — — — 1,144 1,144 Cash dividends on common stock ($0.09 per share) — — — (443 ) — (443 ) Stock-based compensation — — 72 — — 72 Issuance of 3,192 shares common stock, dividend reinvestment plan — 4 27 — — 31 Issuance of 7,224 shares common stock, stock incentive plan — 9 (9 ) — — — Balance, September 30, 2016 $ — $ 6,158 $ 7,046 $ 38,223 $ (444 ) $ 50,983 PreferredStock CommonStock Surplus RetainedEarnings AccumulatedOtherComprehensiveLoss Total Balance, December 31, 2016 $ — $ 6,162 $ 7,093 $ 39,756 $ (860 ) $ 52,151 Net income — — — 5,131 — 5,131 Other comprehensive income — — — — 607 607 Cash dividends on common stock ($0.105 per share) — — — (519 ) — (519 ) Stock-based compensation — — 129 — — 129 Issuance of 2,389 shares common stock, dividend reinvestment plan — 3 32 — — 35 Issuance of 13,264 shares common stock, stock incentive plan — 16 (16 ) — — — Balance, September 30, 2017 $ — $ 6,181 $ 7,238 $ 44,368 $ (253 ) $ 57,534 9FIRST NATIONAL CORPORATIONinformation.information and in accordance with guidance provided by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP.GAAP for annual year-end financial statements. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at SeptemberJune 30, 20172022 and December 31, 2016,2021, the statements of income and comprehensive (loss) income for the three and ninesix months ended SeptemberJune 30, 2017 2022 and 2016 and2021, the cash flows for the six months ended June 30, 2022 and2021, and the changes in shareholders’ equity for the ninethree and six months ended SeptemberJune 30, 2017 2022 and 2016.2021. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K10-K for the year ended December 31, 2016.2021. Operating results for the three and ninesix months ended SeptemberJune 30, 20172022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.In 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.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), such as the Company, 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, which has analyzed gathered data, defined loan pools and segments, and selected methods for applying the concepts included in this ASU. The Company is in the process of testing selected models, building policy and process documentation, modeling the impact of the ASU on the capital and strategic plans, performing model validation, and finalizing policies and procedures. This guidance may result in material changes in the Company's accounting for credit losses of financial instruments.10NotesIn March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to Consolidated Financial Statements (Unaudited)During August 2016, thebetter align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU No. 2016-15, “Statement2017-12 to better align the economic results of Cash Flows (Topic 230): Classificationrisk management activities with hedge accounting. One of Certain Cash Receiptsthe major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and Cash Payments”, to address diversity in how certain cash receiptsother events affecting the timing and cash payments are presented and classified in the statementamount of cash flows. The amendments are effective forASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2017, 2022, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-152022-01 to have a material impact on its consolidated financial statements.During January 2017,In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifyingas part of its post-implementation review of the Definition of a Business”.credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments in this ASU clarifyeliminate the definition of a businessaccounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made 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.borrowers experiencing financial difficulty. 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 a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. For entities that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. Thehave adopted ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this2016-13, ASU are2022-02 is effective for annual periodsfiscal years beginning after December 15, 2017, 2022, including interim periods within those annual periods.fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.thisaccounting for reference rate reform. The ASU shouldprovides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be applieddiscontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No.2021-01 “Reference Rate Reform (Topic 848): Scope” (ASU 2021-01). This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively onto new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company's transition away from LIBOR for its loan and other financial instruments.date. No disclosures are required at transition.for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-012022-03 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 thebeginning 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 the impact that ASU 2017-12 will have on its consolidated financial statements.12Notes to Consolidated Financial Statements (Unaudited) corporate equity securities, and corporate debt securities. Amortized costs and fair values of securities at SeptemberJune 30, 20172022 and December 31, 20162021 were as follows (in thousands): $ 59,815 $ 0 $ (3,559 ) $ 56,256 164,623 120 (16,929 ) 147,814 69,258 27 (10,604 ) 58,681 2,003 0 (4 ) 1,999 $ 295,699 $ 147 $ (31,096 ) $ 264,750 $ 65,302 $ 0 $ (5,400 ) $ 59,902 8,849 2 (1,174 ) 7,677 3,000 0 (87 ) 2,913 $ 77,151 $ 2 $ (6,661 ) $ 70,492 $ 372,850 $ 149 $ (37,757 ) $ 335,242 $ 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 September 30, 2017 AmortizedCost GrossUnrealizedGains GrossUnrealized(Losses) FairValueSecurities available for sale: U.S. agency and mortgage-backed securities $ 78,039 $ 235 $ (767 ) $ 77,507 Obligations of states and political subdivisions 15,445 203 (68 ) 15,580 Corporate equity securities 1 14 — 15 Total securities available for sale $ 93,485 $ 452 $ (835 ) $ 93,102 Securities held to maturity: U.S. agency and mortgage-backed securities $ 33,300 $ 48 $ (234 ) $ 33,114 Obligations of states and political subdivisions 14,576 239 (1 ) 14,814 Corporate debt securities 1,500 — (12 ) 1,488 Total securities held to maturity $ 49,376 $ 287 $ (247 ) $ 49,416 Total securities $ 142,861 $ 739 $ (1,082 ) $ 142,518 12 December 31, 2016 AmortizedCost GrossUnrealizedGains GrossUnrealized(Losses) FairValueSecurities 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 13SeptemberJune 30, 20172022 and December 31, 2016,2021, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands): September 30, 2017 Less than 12 months 12 months or more Total Fair Value Unrealized(Loss) Fair Value Unrealized(Loss) Fair Value Unrealized(Loss)Securities available for sale: U.S. agency and mortgage-backed securities $ 44,941 $ (613 ) $ 4,689 $ (154 ) $ 49,630 $ (767 ) Obligations of states and political subdivisions 3,796 (68 ) — — 3,796 (68 ) Total securities available for sale $ 48,737 $ (681 ) $ 4,689 $ (154 ) $ 53,426 $ (835 ) Securities held to maturity: U.S. agency and mortgage-backed securities $ 22,814 $ (234 ) $ — $ — $ 22,814 $ (234 ) Obligations of states and political subdivisions 351 (1 ) — — 351 (1 ) Corporate debt securities 1,488 (12 ) — — 1,488 (12 ) Total securities held to maturity $ 24,653 $ (247 ) $ — $ — $ 24,653 $ (247 ) Total securities $ 73,390 $ (928 ) $ 4,689 $ (154 ) $ 78,079 $ (1,082 ) December 31, 2016 Less than 12 months 12 months or more Total Fair Value Unrealized(Loss) Fair Value Unrealized(Loss) Fair Value Unrealized(Loss)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) $ 56,256 $ (3,559 ) $ 0 $ 0 $ 56,256 $ (3,559 ) 114,629 (12,586 ) 24,426 (4,343 ) 139,055 (16,929 ) 48,145 (8,873 ) 6,296 (1,731 ) 54,441 (10,604 ) 1,999 (4 ) 0 0 1,999 (4 ) $ 221,029 $ (25,022 ) $ 30,722 $ (6,074 ) $ 251,751 $ (31,096 ) $ 59,902 $ (5,400 ) $ 0 $ 0 $ 59,902 $ (5,400 ) 6,767 (1,174 ) 0 0 6,767 (1,174 ) 2,913 (87 ) 0 0 2,913 (87 ) $ 69,582 $ (6,661 ) $ 0 $ 0 $ 69,582 $ (6,661 ) $ 290,611 $ (31,683 ) $ 30,722 $ (6,074 ) $ 321,333 $ (37,757 ) $ 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 ) (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.SeptemberJune 30, 2017,2022, there were fifty11 out of eighty-six12 U.S. Treasury securities, 124 out of 145 U.S. agency and mortgage-backed securities, eleven102 out of eighty-two116 obligations of states and political subdivisions, and onetwo out of two corporate debt securitysecurities in an unrealized loss position. OneOne hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-averageweighted-average re-pricing term of the portfolio was 4.36.1 years at Septemberat June 30, 2017.2022. At December 31, 2016,2021, there were sixty-fourweresix out of eighty-threeeight U.S. Treasury securities, 58 out of 135 U.S. agency and mortgage-backed securities fiftyand 37 out of seventy-eight118 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, 2016.2021. The weighted-average re-pricing term of the portfolio was 4.75.2 years at December 31, 2016.2021. The unrealized losses at SeptemberJune 30, 20172022 in the U.S. Treasury securities portfolio, U.S. agency and mortgage-backed securities portfolio, the obligations of states and political subdivisions portfolio, and the corporate debt securities portfolio were related to changes in market interest rates and not credit concerns of the issuers.For the nine months ended September 30, 2016, the Company sold one security from the held to maturity portfolio. The Company recognized no gain 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. There were no sales of securities from the held to maturity portfolio for the three and nine month periods ended September 30, 2017 and the three months ended September 30, 2016.SeptemberJune 30, 20172022 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. Corporate equity securities are not included in the maturity categories in the following maturity summary because they do not have a stated maturity date. Available for Sale Held to Maturity AmortizedCost FairValue AmortizedCost FairValueDue within one year $ 1,952 $ 1,968 $ — $ — Due after one year through five years 13,828 13,909 6,190 6,228 Due after five years through ten years 12,689 12,652 14,198 14,342 Due after ten years 65,015 64,558 28,988 28,846 Corporate equity securities 1 15 — — $ 93,485 $ 93,102 $ 49,376 $ 49,416 $ 2,003 $ 1,999 $ 607 $ 610 57,501 54,848 6,511 6,308 62,062 57,133 19,173 17,970 174,133 150,770 50,860 45,604 $ 295,699 $ 264,750 $ 77,151 $ 70,492 SeptemberJune 30, 2017,2022, and no0 impairment has been recognized.SeptemberJune 30, 20172022 and December 31, 20162021 was as follows (in thousands): $ 796 $ 701 980 980 132 132 $ 1,908 $ 1,813 September 30,
2017 December 31,
2016Federal Home Loan Bank stock $ 645 $ 623 Federal Reserve Bank stock 875 875 Community Bankers’ Bank stock 50 50 $ 1,570 $ 1,548 1514SeptemberJune 30, 20172022 and December 31, 20162021 are summarized as follows (in thousands): September 30,
2017 December 31,
2016Real estate loans: Construction and land development $ 37,182 $ 34,699 Secured by 1-4 family residential 203,896 198,763 Other real estate loans 222,154 211,210 Commercial and industrial loans 34,447 29,981 Consumer and other loans 17,028 11,414 Total loans $ 514,707 $ 486,067 Allowance for loan losses (5,301 ) (5,321 ) Loans, net $ 509,406 $ 480,746 $ 49,118 $ 55,721 312,083 291,990 401,037 364,921 109,548 99,805 8,303 12,681 $ 880,089 $ 825,118 (6,202 ) (5,710 ) $ 873,887 $ 819,408 categoriescategories were $236$873 thousand and $142and $871 thousand at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Consumer and other loans included $196included $292 thousand and $264$175 thousand of demand deposit overdrafts at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.1-4the 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 budgetaccounting. The outstanding principal balance and the value carrying amount atJune 30, 2022of the collateral may, at any pointloans acquired 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 projectbusiness combinations were 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.follows: $ 188,626 $ 14,611 47,340 93,864 25,566 4,296 $ 185,677 SeptemberJune 30, 20172022 and December 31, 20162021 (in thousands): September 30, 2017 30-59Days PastDue 60-89DaysPast Due > 90Days PastDue TotalPast Due Current TotalLoans Non-accrualLoans 90 Daysor MorePast DueandAccruingReal estate loans: Construction and land development $ 345 $ 195 $ — $ 540 $ 36,642 $ 37,182 $ 1,081 $ — Secured by 1-4 family residential 468 131 430 1,029 202,867 203,896 610 51 Other real estate loans 562 587 — 1,149 221,005 222,154 430 — Commercial and industrial — 29 35 64 34,383 34,447 — 35 Consumer and other loans 74 — 3 77 16,951 17,028 — 3 Total $ 1,449 $ 942 $ 468 $ 2,859 $ 511,848 $ 514,707 $ 2,121 $ 89 December 31, 2016 30-59Days PastDue 60-89DaysPast Due > 90Days PastDue TotalPast Due Current TotalLoans Non-accrualLoans 90 Daysor MorePast DueandAccruingReal estate loans: Construction and land development $ — $ 40 $ — $ 40 $ 34,659 $ 34,699 $ 1,033 $ — Secured by 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 > 90 Days Past Due Total Loans Non-accrual Loans 90 Days or More Past Due and Accruing $ 0 $ 43 $ 47 $ 90 $ 49,028 $ 49,118 $ 0 $ 47 272 185 68 525 311,558 312,083 420 19 9 0 0 9 401,028 401,037 22 0 764 258 23 1,045 108,503 109,548 0 23 6 35 3 44 8,259 8,303 0 3 $ 1,051 $ 521 $ 141 $ 1,713 $ 878,376 $ 880,089 $ 442 $ 92 > 90 Days 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 SeptemberJune 30, 20172022 and December 31, 20162021 (in thousands): Special Mention $ 49,118 $ 0 $ 0 $ 0 $ 49,118 311,355 0 728 0 312,083 401,015 0 22 0 401,037 109,548 0 0 0 109,548 8,303 0 0 0 8,303 $ 879,339 $ 0 $ 750 $ 0 $ 880,089 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 September 30, 2017 Pass SpecialMention Substandard Doubtful Total Real estate loans: Construction and land development $ 31,743 $ 2,420 $ 3,019 $ — $ 37,182 Secured by 1-4 family residential 199,297 2,171 2,428 — 203,896 Other real estate loans 211,342 5,028 5,784 — 222,154 Commercial and industrial 34,281 58 108 — 34,447 Consumer and other loans 17,028 — — — 17,028 Total $ 493,691 $ 9,677 $ 11,339 $ — $ 514,707 December 31, 2016 Pass SpecialMention 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 1817Septemberand during the periods ended June 30, 2017, 2022, December 31, 20162021 and SeptemberJune 30, 2016,2021, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands): Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 0 (5 ) 0 (8 ) (200 ) (213 ) 7 10 4 146 138 305 (9 ) (40 ) 334 20 95 400 $ 343 $ 1,042 $ 3,568 $ 876 $ 373 $ 6,202 0 0 0 0 0 0 343 1,042 3,568 876 373 6,202 $ 49,118 $ 312,083 $ 401,037 $ 109,548 $ 8,303 $ 880,089 0 420 22 0 0 442 49,118 311,663 401,015 109,548 8,303 879,647 Construction and Land Development Secured 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 18 September 30, 2017 Constructionand LandDevelopment Secured by1-4 FamilyResidential Other RealEstate CommercialandIndustrial Consumerand OtherLoans Total Allowance for loan losses: Beginning Balance, December 31, 2016 $ 441 $ 1,019 $ 3,142 $ 380 $ 339 $ 5,321 Charge-offs — (125 ) — — (385 ) (510 ) Recoveries 11 290 50 8 131 490 Provision for (recovery of) loan losses (17 ) (422 ) (232 ) (1 ) 672 — Ending Balance, September 30, 2017 $ 435 $ 762 $ 2,960 $ 387 $ 757 $ 5,301 Ending Balance: Individually evaluated for impairment — — — — — — Collectively evaluated for impairment 435 762 2,960 387 757 5,301 Loans: Ending Balance $ 37,182 $ 203,896 $ 222,154 $ 34,447 $ 17,028 $ 514,707 Individually evaluated for impairment 1,959 1,654 1,319 63 — 4,995 Collectively evaluated for impairment 35,223 202,242 220,835 34,384 17,028 509,712 December 31, 2016 Constructionand LandDevelopment Secured by1-4 FamilyResidential Other RealEstate CommercialandIndustrial Consumerand OtherLoans 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 19 Construction and Land Development Secured 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 0 (992 ) 0 (159 ) (1,151 ) 0 4 1 4 122 131 (32 ) (11 ) (893 ) (30 ) (34 ) (1,000 ) $ 274 $ 1,015 $ 3,072 $ 758 $ 346 $ 5,465 0 0 0 78 0 78 273 1,015 3,072 680 347 5,387 $ 25,035 $ 235,158 $ 245,455 $ 102,966 $ 8,734 $ 617,348 0 410 158 1,534 0 2,102 25,035 234,748 245,297 101,432 8,734 615,246 19 September 30, 2016 Constructionand LandDevelopment Secured by1-4 FamilyResidential Other RealEstate CommercialandIndustrial Consumerand OtherLoans Total Allowance for loan losses: Beginning Balance, December 31, 2015 $ 1,532 $ 939 $ 2,534 $ 306 $ 213 $ 5,524 Charge-offs — (53 ) — — (398 ) (451 ) Recoveries 4 290 1 10 232 537 Provision for (recovery of) loan losses (1,084 ) (173 ) 1,002 13 242 — Ending Balance, September 30, 2016 $ 452 $ 1,003 $ 3,537 $ 329 $ 289 $ 5,610 Ending Balance: Individually evaluated for impairment — 33 223 — — 256 Collectively evaluated for impairment 452 970 3,314 329 289 5,354 Loans: Ending Balance $ 34,518 $ 196,492 $ 202,843 $ 25,851 $ 11,130 $ 470,834 Individually evaluated for impairment 2,749 2,094 1,991 79 — 6,913 Collectively evaluated for impairment 31,769 194,398 200,852 25,772 11,130 463,921 20at Septemberas of and for the periods ended June 30, 2017, 2022, December 31, 20162021 and SeptemberJune 30, 2016,2021, were as follows (in thousands): September 30, 2017 UnpaidPrincipalBalance RecordedInvestmentwith NoAllowance RecordedInvestmentwithAllowance TotalRecordedInvestment RelatedAllowance AverageRecordedInvestment InterestIncomeRecognizedReal estate loans: Construction and land development $ 2,429 $ 1,959 $ — $ 1,959 $ — $ 1,904 $ 40 Secured by 1-4 family 1,808 1,654 — 1,654 — 1,697 47 Other real estate loans 1,512 1,319 — 1,319 — 1,084 68 Commercial and industrial 82 63 — 63 — 70 4 Total $ 5,831 $ 4,995 $ — $ 4,995 $ — $ 4,755 $ 159 December 31, 2016 UnpaidPrincipalBalance RecordedInvestmentwith NoAllowance RecordedInvestmentwithAllowance TotalRecordedInvestment RelatedAllowance AverageRecordedInvestment InterestIncomeRecognizedReal 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 September 30, 2016 UnpaidPrincipalBalance RecordedInvestmentwith NoAllowance RecordedInvestmentwithAllowance TotalRecordedInvestment RelatedAllowance AverageRecordedInvestment InterestIncomeRecognizedReal estate loans: Construction and land development $ 2,992 $ 2,749 $ — $ 2,749 $ — $ 2,599 $ 40 Secured by 1-4 family 2,114 2,006 88 2,094 33 2,045 73 Other real estate loans 2,596 1,447 544 1,991 223 2,808 24 Commercial and industrial 97 79 — 79 — 87 — Total $ 7,799 $ 6,281 $ 632 $ 6,913 $ 256 $ 7,539 $ 137 Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized $ 552 $ 420 $ 0 $ 420 $ 0 $ 650 $ 0 34 22 0 22 0 26 0 0 0 0 0 0 1,241 0 $ 586 $ 442 $ 0 $ 442 $ 0 $ 1,917 $ 0 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 $ 0 $ 0 $ 0 $ 0 $ 0 $ 273 $ 0 544 410 0 410 0 429 0 169 158 0 158 0 4,447 1 1,653 0 1,534 1,534 78 1,548 0 $ 2,366 $ 568 $ 1,534 $ 2,102 $ 78 $ 6,697 $ 1 SeptemberJune 30, 2017,2022, loans classified as troubled debt restructurings (TDRs) and included in impaired loans in the disclosure above totaled $340$116 thousand. At SeptemberJune 30, 2017, $287 thousand2022, none of the loans classified as TDRs were performing under the restructured terms and all were not considered non-performing assets. There were $460 thousand$1.6 million in TDRs at December 31, 2016, $3002021, $7 thousand of which were performing under the restructured terms. Modified terms under TDRs may include rate reductions, extension of terms that are considered to be below market, conversion to interest only, and other actions21Notes to Consolidated Financial Statements (Unaudited)intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. There were no0 loans modified under TDRs during the three and nine month periodssix months ended SeptemberJune 30, 2017. There was one loan secured by 1-4 family residential real estate classified as a TDR during the three2022 and nine month periods ended September 30, 2016 because principal was forgiven as part of the loan modification. The recorded investment for this loan prior to modification totaled $138 thousand and the recorded investment after the modification totaled $88 thousand.2021.ninesix months ended SeptemberJune 30, 2017 2022 and 2016,2021, there were no troubled debt restructurings0 TDRs that subsequently defaulted within twelve months of the loan modification. Management defines default as over ninety days past due or the foreclosure and repossession of the collateral or charge-off of the loan during the twelve month period subsequent to the modification.Note 5. Other Real Estate Owned (OREO)Changes inbalancefourth quarter of 2020, the Company modified terms of certain loans for OREO are as follows (in thousands): Nine Months Ended Year Ended September 30,
2017 December 31,
2016Balance at the beginning of year, gross $ 250 $ 2,903 Transfers in — 287 Charge-offs — (251 ) Sales proceeds — (2,882 ) Gain on disposition — 193 Balance at the end of period, gross $ 250 $ 250 Less: valuation allowance — — Balance at the end of period, net $ 250 $ 250 There were no residential real estate properties included in the ending OREO balances above at September 30, 2017 and December 31, 2016. The Bank did not have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2017.Changes in the valuation allowance are as follows (in thousands): Nine Months Ended Year Ended September 30,
2017 September 30,
2016 December 31,
2016Balance at beginning of year $ — $ 224 $ 224 Provision for losses — 27 27 Charge-offs, net — (251 ) (251 ) Balance at end of period $ — $ — $ — Net expenses applicablecustomers that continued to OREO, other than the provision for losses, were $6 thousand and $46 thousand for the nine months ended September 30, 2017 and 2016, respectively and $46 thousand for the year ended December 31, 2016.22Notes to Consolidated Financial Statements (Unaudited)Note 6. Other BorrowingsThe Bank had unused lines of credit totaling $131.1 million and $125.6 million available with non-affiliated banks at September 30, 2017 and December 31, 2016, respectively. These amounts primarily consist of a blanket floating lien agreement with the Federal Home Loan Bank of Atlanta (FHLB) in which the Bank can borrow up to 19% of its total assets. The unused line of credit with FHLB totaled $80.2 million at September 30, 2017. The Bank had collateral pledged on the borrowing line at September 30, 2017 and December 31, 2016 including real estate loans totaling $107.5 million and $103.9 million, respectively, and Federal Home Loan Bank stock with a book value of $645 thousand and $623 thousand, respectively. The Bank did not have borrowings from the FHLB at September 30, 2017 and December 31, 2016.Note 7. Capital RequirementsThe Bank is subject to various regulatory capital requirements administeredbe negatively impacted by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryCOVID-19 pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6 and possibly additional discretionary actions by regulators24 months. As of June 30, 2022, loans that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelineswere modified totaled $4.7 million. All modified loans were performing 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 actionwere not considered TDRs because they were modified in accordance with relief 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 being phased in over a multi-year schedule, and becoming 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 being phased-in over four years, which began on January 1, 2016.Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total (as defined in the regulations), Tier 1 (as defined), and common equity Tier 1 capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital to average assets. Management believes, as of September 30, 2017 and December 31, 2016, that the Bank met all capital adequacy requirements to which it is subject.As of September 30, 2017, 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.CARES Act.2320Notes to Consolidated Financial Statements (Unaudited)A comparison of the capital of the Bank at September 30, 2017 and December 31, 2016 with the minimum regulatory guidelines were as follows (dollars in thousands): Actual Minimum CapitalRequirement MinimumTo Be WellCapitalized UnderPrompt CorrectiveAction Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2017 Total Capital (to Risk-Weighted Assets) $ 71,318 13.91 % $ 41,029 8.00 % $ 51,286 10.00 % Tier 1 Capital (to Risk-Weighted Assets) $ 66,017 12.87 % $ 30,772 6.00 % $ 41,029 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) $ 66,017 12.87 % $ 23,079 4.50 % $ 33,336 6.50 % Tier 1 Capital (to Average Assets) $ 66,017 9.06 % $ 29,154 4.00 % $ 36,442 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 % 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. 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 1.250% and 0.625% at September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, the capital conservation buffer of the Bank was 5.91% and 5.47%, respectively.8. Subordinated DebtOn 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). The Note bears interest at a fixed rate of 6.75% per annum. The Note qualifies as Tier 2 capital for regulatory capital purposes and at September 30, 2017, the total amount of subordinated debt issued was included in the Company’s Tier 2 capital. Unamortized debt issuance costs related to the Note were $57 thousand and $70 thousand at September 30, 2017 and December 31, 2016, respectively.The Note has a maturity date of October 1, 2025. Subject to regulatory approval, the Company may prepay the Note, in part or in full, beginning on October 30, 2020. 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 Agreement contains customary events of default such as the bankruptcy of the Company and the non-payment of principal or interest when due. The holder of the Note may accelerate the repayment of the Note only in the event of bankruptcy or similar proceedings and not for any other event of default.24Notes to Consolidated Financial Statements (Unaudited)Note 9. Junior Subordinated DebtOn June 8, 2004, First National (VA) Statutory Trust II (Trust II), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities. On June 17, 2004, $5.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at September 30, 2017 and December 31, 2016 was 3.92% and 3.59%, respectively. The securities have a mandatory redemption date of June 17, 2034, and were subject to varying call provisions that began September 17, 2009. The principal asset of Trust II is $5.2 million of the Company’s junior subordinated debt with maturities and interest rates comparable to the trust preferred securities. The Trust’s obligations under the trust preferred securities are fully and unconditionally guaranteed by the Company. The Company is current on its interest payments on the junior subordinated debt.On July 24, 2006, First National (VA) Statutory Trust III (Trust III), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On July 31, 2006, $4.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at September 30, 2017 and December 31, 2016 was 2.90% and 2.45%, respectively. The securities have a mandatory redemption date of October 1, 2036, and were subject to varying call provisions that began October 1, 2011. The principal asset of Trust III is $4.1 million of the Company’s junior subordinated debt with maturities and interest rates comparable to the trust preferred securities. The Trust’s obligations under the trust preferred securities are fully and unconditionally guaranteed by the Company. The Company is current on its interest payments on the junior subordinated debt.While these securities are debt obligations of the Company, they are included in capital for regulatory capital ratio calculations. Under present regulations, the junior subordinated debt may be included in Tier 1 capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier 1 capital, including total junior subordinated debt. The portion of the junior subordinated debt not considered as Tier 1 capital, if any, may be included in Tier 2 capital. At September 30, 2017 and December 31, 2016, the total amount of junior subordinated debt issued by the Trusts was included in the Company’s Tier 1 capital.Note 10. Benefit PlansThe Bank has 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 are generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank’s funding practice has been 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 plans to distribute all plan assets on February 1, 2018. The funding status of the plan on February 1, 2018 is not expected to be significantly different from the funded status disclosed in Note 13 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The benefit obligation and the fair value of assets are not expected to change significantly prior to the distribution of plan assets. Pension plan assets are expected to remain in cash and equivalents through the distribution date.25Notes to Consolidated Financial Statements (Unaudited)Components of the net periodic benefit cost of the plan for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands): Three Months Ended Nine Months Ended September 30,
2017 September 30,
2016 September 30,
2017 September 30,
2016Service cost $ — $ 102 $ — $ 307 Interest cost 21 83 62 249 Expected return on plan assets (9 ) (74 ) (27 ) (223 ) Recognized net actuarial loss — 21 — 63 Net periodic benefit cost $ 12 $ 132 $ 35 $ 396 The Company previously disclosed in its consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016, that it expected to make a contribution of $2.1 million upon termination.In addition to the defined benefit pension plan, the Company maintains a 401(k) plan and an employee stock ownership plan (ESOP) for eligible employees. 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 benefit of participants and their beneficiaries.See Note 13 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information about the Company’s benefit plans.Note 11.5. Earnings per Common Shareninesix months ended SeptemberJune 30, 2017 2022 and 20162021 (dollars in thousands, except per share data): $ 3,835 $ 3,342 $ 7,564 $ 5,778 6,250,329 4,868,901 6,244,682 4,866,376 7,149 4,385 5,991 6,330 6,257,478 4,873,286 6,250,673 4,872,706 $ 0.61 $ 0.69 $ 1.21 $ 1.19 $ 0.61 $ 0.69 $ 1.21 $ 1.19 Three Months Ended Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 (Numerator): Net income $ 1,832 $ 1,694 $ 5,131 $ 4,226 (Denominator): Weighted average shares outstanding – basic 4,943,301 4,925,753 4,939,905 4,923,598 Potentially dilutive common shares – restricted stock units 2,827 4,169 2,284 2,782 Weighted average shares outstanding – diluted 4,946,128 4,929,922 4,942,189 4,926,380 Income per common share Basic $ 0.37 $ 0.34 $ 1.04 $ 0.86 Diluted $ 0.37 $ 0.34 $ 1.04 $ 0.86 26Notes to Consolidated Financial Statements (Unaudited)12.6. Fair Value Measurements211)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 or27Notes to Consolidated Financial Statements (Unaudited)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).22SeptemberJune 30, 20172022 and December 31, 20162021 (in thousands). Fair Value Measurements at September 30, 2017 Description Balance as of September 30,
2017 QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Securities available for sale U.S. agency and mortgage-backed securities $ 77,507 $ — $ 77,507 $ — Obligations of states and political subdivisions 15,580 — 15,580 — Corporate equity securities 15 15 — — $ 93,102 $ 15 $ 93,087 $ — Fair Value Measurements at December 31, 2016 Description Balance as of December 31,
2016 QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)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 June 30, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 56,256 $ 0 $ 56,256 $ 0 147,814 0 147,814 0 58,681 0 58,681 0 1,999 0 1,999 0 $ 264,750 $ 0 $ 264,750 $ 0 2,213 0 2,213 0 $ 266,963 $ 0 $ 266,963 $ 0 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 Loans held for saleLoans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during nine months ended September 30, 2017 and the year ended December 31, 2016.28Notes to Consolidated Financial Statements (Unaudited)Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2)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.real estate ownedLoansReal Estate Ownedtransferredmeasured at fair value less cost to other real estate owned whensell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the collateral securing them is foreclosed on or acquired throughCompany markets the property with a deedrealtor, estimated selling costs reduce the fair value, resulting in lieu of foreclosure. The measurement of loss associated with other real estate owned isa valuation based on the appraisal documents and assessed the same way as impaired loans described above. Any fair value adjustments are recorded in the period incurred as other real estate owned expense (income) on theLevel 3 inputs.of Income.(Unaudited) Balance as of June 30, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 1,665 $ 0 $ 0 $ 1,665 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) $ 1,848 $ 0 $ 0 $ 1,848 1,454 0 0 1,454 $ 1,665 10.00 % $ 1,848 10.00 % 1,454 6.50 % (1) Unobservable inputs were weighted by the relative fair value of the instruments. 24 Fair Value Measurements at September 30, 2017 Description Balance as of September 30,
2017 QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Other real estate owned 250 — — 250 Fair Value Measurements at December 31, 2016 Description Balance as of December 31,
2016 QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Impaired loans, net $ 116 $ — $ — $ 116 Other real estate owned 250 — — 250 Quantitative information about Level 3 Fair Value Measurements for September 30, 2017 Fair Value Valuation Technique Unobservable Input Range(Weighted-Average)Other real estate owned $ 250 Property appraisals Selling cost — % 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 — % 29The amount disclosed as fair value of other real estate owned at September 30, 2017 and 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.30Notes to Consolidated Financial Statements (Unaudited)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 September 30, 2017 and December 31, 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 SeptemberJune 30, 20172022 and December 31, 20162021 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 $ 124,415 $ 124,415 $ 0 $ 0 $ 124,415 264,750 0 264,750 0 264,750 77,151 0 70,492 0 70,492 1,908 0 1,908 0 1,908 873,887 0 0 871,253 871,253 24,569 0 24,569 0 24,569 4,154 0 4,154 0 4,154 2,213 0 2,213 0 2,213 $ 1,296,150 $ 0 $ 1,162,417 $ 129,645 $ 1,292,062 4,994 0 0 5,483 5,483 9,279 0 0 7,547 7,547 115 0 115 0 115 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 0 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 25 Fair Value Measurements at September 30, 2017 Using CarryingAmount QuotedPrices inActiveMarkets forIdenticalAssetsLevel 1 SignificantOtherObservableInputsLevel 2 SignificantUnobservableInputsLevel 3 Fair Value Financial Assets Cash and short-term investments $ 33,642 $ 33,642 $ — $ — $ 33,642 Securities available for sale 93,102 15 93,087 — 93,102 Securities held to maturity 49,376 — 47,928 1,488 49,416 Restricted securities 1,570 — 1,570 — 1,570 Loans held for sale 660 — 660 — 660 Loans, net 509,406 — — 508,911 508,911 Bank owned life insurance 14,232 — 14,232 — 14,232 Accrued interest receivable 1,886 — 1,886 — 1,886 Financial Liabilities Deposits $ 656,262 $ — $ 530,230 $ 124,801 $ 655,031 Subordinated debt 4,943 — — 4,756 4,756 Junior subordinated debt 9,279 — — 9,632 9,632 Accrued interest payable 95 — 95 — 95 31 Fair Value Measurements at December 31, 2016 Using CarryingAmount QuotedPrices inActiveMarkets forIdenticalAssetsLevel 1 SignificantOtherObservableInputsLevel 2 SignificantUnobservableInputsLevel 3 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 13.7. Stock Compensation PlansDuring the first quarter of 2017, 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. During the third quarter of 2017, the Company granted and issued 2,728 shares of common stock to members of the Board of Directors for their dedicated service and support. $72$0 and $351 thousand for the ninethree months ended Septemberand six months ended June 30, 2017.2022, respectively. The Company did not have compensation expense related to stock awards for the ninethree months and six months ended SeptemberJune 30, 2016.32Notes to Consolidated Financial Statements (Unaudited)2022 and 2021.oneone share of common stock on a specified issuance date.In2017, 3,9392022, 10,110 restricted stock units were granted to employees, with 1,3173,375 units vesting immediately, and 2,6226,735 units subject to a two year vesting schedule with one half of the units vesting each year on the grant date anniversary.year. The recipient does not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until vesting has occurred and the recipient becomes the record holder of those shares. The unvested restricted stock units will vest on the established schedule if the employees remain employed by the Company on future vesting dates. Nine Months Ended September 30, 2017 Shares WeightedAverageGrant DateFair ValueUnvested, beginning of year 10,259 $ 8.88 Granted 3,939 15.20 Vested (8,536 ) 9.89 Forfeited — — Unvested, end of period 5,662 $ 11.76 Weighted Average Grant Date Fair Value 30,781 $ 19.79 10,110 22.19 (11,643 ) 20.58 0 0 29,248 $ 20.31 SeptemberJune 30, 2017,2022, based on restricted stock unit awards outstanding at that time, the total unrecognized pre-taxpre-tax compensation expense related to unvested restricted stock unit awards was $37$423 thousand. This expense is expected to be recognized through 2019.2026. Compensation expense related to restricted stock unit awards recognized for the ninethree and six months ended SeptemberJune 30, 2017 2022 and 20162021 totaled $57$56 thousand and $72$190 thousand, respectively. As of September 30, 2017, the Company does not expect the forfeiture of any unvestedCompensation expense related to restricted stock units.unit awards recognized for the three andsix months ended June 30, 2022 and 2021 totaled $45 thousand and $119 thousand, respectively. 2614.8. Accumulated Other Comprehensive LossIncome (Loss)lossincome (loss) were as follows (in thousands): Net Unrealized Gains (Losses) on Securities Adjustments Related to Pension Benefits Accumulated Other Comprehensive Loss Balance at December 31, 2015 $ (192 ) $ (1,396 ) $ (1,588 ) Unrealized holding gains (net of tax, $593) 1,151 — 1,151 Reclassification adjustment (net of tax, ($3)) (7 ) — (7 ) Change during period 1,144 — 1,144 Balance at September 30, 2016 $ 952 $ (1,396 ) $ (444 ) Balance at December 31, 2016 $ (860 ) $ — $ (860 ) Unrealized holding gains (net of tax, $321) 623 — 623 Reclassification adjustment (net of tax, ($8)) (16 ) — (16 ) Change during period 607 — 607 Balance at September 30, 2017 $ (253 ) $ — $ (253 ) 33Notes to Consolidated Financial Statements (Unaudited) $ 1,404 $ 1,078 $ 2,482 292 0 292 0 (376 ) (376 ) 292 (376 ) (84 ) $ 1,696 $ 702 $ 2,398 $ (14,688 ) $ 1,296 $ (13,392 ) (9,762 ) 0 (9,762 ) 0 452 452 (9,762 ) 452 (9,310 ) $ (24,450 ) $ 1,748 $ (22,702 ) $ 3,058 $ 340 $ 3,398 (1,333 ) 0 (1,333 ) (29 ) 0 (29 ) 0 362 362 (1,362 ) 362 (1,000 ) $ 1,696 $ 702 $ 2,398 $ (445 ) $ 743 $ 298 (24,005 ) 0 (24,005 ) 0 1,005 1,005 (24,005 ) 1,005 (23,000 ) $ (24,450 ) $ 1,748 $ (22,702 ) tables presenttable presents information related to reclassifications from accumulated other comprehensive loss(loss) income for the three and nine month periodssix months ended SeptemberJune 30, 2017 2022 and 20162021 (in thousands).: $ 0 $ 0 0 0 $ 0 $ 0 $ 0 $ (37 ) 0 8 $ 0 $ (29 ) 27Details About Accumulated Other Comprehensive Loss Amount Reclassified fromAccumulated OtherComprehensive LossAffected Line Item in the ConsolidatedStatements of Income Three Months Ended September 30,
2017 September 30,
2016 Securities available for sale: Net securities gains reclassified into earnings $ (11 ) $ (4 ) Net gains on calls and sales of securities available for sale Related income tax expense 4 1 Income tax expense Total reclassifications $ (7 ) $ (3 ) Net of tax
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. $ 698 $ 447 $ 1,307 $ 889 797 682 1,547 1,283 760 657 1,563 1,300 58 157 152 262 188 150 421 331 $ 2,501 $ 2,093 $ 4,990 $ 4,065 279 342 501 513 $ 2,780 $ 2,435 $ 5,491 $ 4,578 28Details About Accumulated Other Comprehensive Loss Amount Reclassified fromAccumulated OtherComprehensive LossAffected Line Item in the ConsolidatedStatements of Income Nine Months Ended September 30,
2017 September 30,
2016 Securities available for sale: Net securities gains reclassified into earnings $ (24 ) $ (10 ) Net gains on calls and sales of securities available for sale Related income tax expense 8 3 Income tax expense Total reclassifications $ (16 ) $ (7 ) Net of tax $ 9,000 $ 2,213 $ 0 $ 0 $ 9,000 $ 941 $ 0 $ 0 (1) Collateral pledged may be comprised of cash or securities. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe Companyconditions 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 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 deposit portfolio, including the types of deposit accounts and customers, may change, which could impact 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 of the Company’s Form 10-K for the year ending December 31, 2016.• 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; general business conditions, as well as conditions within the financial markets; general economic conditions, including unemployment levels, inflation and slowdowns in economic growth; • demand for loan products; • deposit flows; 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; • 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 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. The following discussion and analysis of the financial condition at SeptemberJune 30, 20172022 and statements of income of the Company for the three andsix months ended June 30, 2022 and nine month periods ended September 30, 2017 and 20162021 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, 2016.2021. The statements of income for the three and nine month periodsandsix months ended SeptemberJune 30, 20172022 may not be indicative of the results to be achieved for the year.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)• Bank of Fincastle Services, Inc. • ESF, LLC wasand ESF, LLC were formed to hold other real estate owned and future office sites. The Trusts were formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities and are not included in the Company’s consolidated financial statements in accordance with authoritative accounting guidance because management has determined that the Trusts qualify as variable interest entities.andthe Roanoke Valley, central regions of Virginia.Virginia, and the city of Richmond. Within this market area,these markets, there are variousdiverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education.The Bank’s products and services are delivered through 1520 bank branch offices, located throughout the Shenandoah Valley and central regions of Virginia, twoa loan production offices,office and a customer service centercenters in atwo retirement village. The branch offices are comprised of 14 full service retail banking offices and one drive-thru express banking office. Thevillages. For the location and general character of each of these properties is further described in Part I,offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2016. 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 2017.2021. 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. 56% 58% of noninterest expenses for the nine month periodsix months ended SeptemberJune 30, 2017,2022, followed by occupancy and equipment expense, which comprisedcomprised 13% of noninterest expenses. Historically, theThe 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, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for loan losses.$138$493 thousand, or 15%, to $1.8$3.8 million, or $0.37$0.61 per basic and diluted share, for the three months ended SeptemberJune 30, 2017,2022, compared to $1.7$3.3 million, or $0.34$0.69 per basic and diluted share, for the same period in 2016.2021. Return on average assets was 1.00%1.08% and return on average equity was 12.78%15.04% for the thirdsecond quarter of 2017,2022, compared to 0.95%1.31% and 13.44%15.33%, respectively, for the same period in 2016.2021. $138 thousand increase in net income for the three month period ended September 30, 2017 resulted primarily from a $573 thousand,$3.8 million, or 10%51%, increase in net interest income and a $46$345 thousand, or 1%14%, decreaseincrease in total noninterest expenses,income, which were partially offset by a $2.3 million, or 35%, increase in total noninterest expense and an increase in the provision for loan losses. The provision for loan losses totaled $400 thousand for the second quarter of 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2016. These2021.a $294 thousand,decreases in brokered mortgage fees and other operating income.13%35%, decrease in noninterest income and a $187 thousandwas primarily attributable to the increase in income tax expense.Net interest income increasedthe number of employees, branch offices and customers that resulted from a higher net interest margin and from higher average earning asset balances. Average earning asset balances increased 3%,the acquisition of Fincastle and the net interest marginacquisition of the SmartBank loan portfolio. Salaries and employee benefits increased 22 basis points to 3.79% for the third quarter of 2017, compared to 3.57% for the same periodby $1.4 million, followed by increases in 2016. Noninterest income decreased primarily from lower service charges on deposit accountsoccupancy, equipment, and lower other operating income. Noninterest expense decreased primarily from lower supplies expense, lower ATM and check card fees, lower FDIC assessment, and lower amortization expense of core deposit intangibles. Based on management's allowance for loan loss analysis, a provision for loan losses was not required during the third quarter of 2017 or 2016. expense. 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.Losses” below.Year-to-Date PerformanceNet income increased by $905 thousandPortfolio$5.1its Richmond area branch, located in Glen Allen, Virginia. First Bank paid cash consideration of $83.7 million or $1.04 per basic and diluted share, for the nineloans 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 and acquired the remaining assets at the branch on December 31, 2021 and now operates a loan production office in the location of the former SmartBank branch. The Company incurred expenses totaling $101 thousand related to the acquisition of loans and fixed assets of SmartBank in the fourth quarter of 2021. There were no additional expenses related to the acquisition for the three and six months ended SeptemberJune 30, 2017, compared to $4.2 million, or $0.86 per basic and diluted share, for the same period in 2016. Return on average assets was 0.95% and return on average equity was 12.47% for the nine months ended September 30, 2017, compared to 0.80% and 11.62%, respectively, for the same period in 2016.The $905 thousand increase in net income for the nine month period ended September 30, 2017 resulted primarily from a $1.3 million, or 8%, increase in net interest income and a $590 thousand, or 3%, decrease in noninterest expenses, compared to the same period of 2016. These favorable variances were partially offset by a $430 thousand, or 7%, decrease in noninterest income and a $574 thousand increase in income tax expense.Net interest income increased 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 13 basis points to 3.74% for the nine months ended September 30, 2017, compared to 3.61% for the same period in 2016. Noninterest income decreased primarily from lower service charges on deposit accounts and lower other operating income. Noninterest expense decreased primarily from lower salaries and employee benefits expense, lower FDIC assessment, and lower amortization expense of core deposit intangibles. Based on management's allowance for loan loss analysis, a provision for loan losses was not required during the nine month period ended September 30, 2017 or 2016. For a more detailed discussion of the provision for loan losses, see “Provision for Loan Losses” below.2022.OREO (expense)/income, amortization of intangibles, and lossesnet gains on disposal of premises and equipment, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities gains. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with 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). $ 8,918 $ 6,630 $ 17,562 $ 13,280 (41 ) — (69 ) — (5 ) (5 ) (9 ) (19 ) — 14 — 26 — — (2 ) — — (277 ) (20 ) (682 ) $ 8,872 $ 6,362 $ 17,462 $ 12,605 $ 11,372 $ 7,560 $ 22,008 $ 15,128 2,780 2,435 5,491 4,578 — — — (37 ) $ 14,152 $ 9,995 $ 27,499 $ 19,669 62.69 % 63.65 % 63.50 % 64.09 % 33 Efficiency Ratio Three Months Ended Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 Noninterest expense $ 5,807 $ 5,853 $ 17,263 $ 17,853 Add/(Subtract): other real estate owned (expense)/income, net — (1 ) (6 ) 120 Subtract: amortization of intangibles (151 ) (187 ) (480 ) (592 ) Subtract: losses on disposal of premises and equipment, net — (8 ) — (8 ) $ 5,656 $ 5,657 $ 16,777 $ 17,373 Tax-equivalent net interest income $ 6,514 $ 5,943 $ 18,940 $ 17,637 Noninterest income 2,017 2,311 5,936 6,366 Subtract: securities gains, net (11 ) (4 ) (24 ) (10 ) $ 8,520 $ 8,250 $ 24,852 $ 23,993 Efficiency ratio 66.38 % 68.57 % 67.51 % 72.41 % 20172022 and 20162021 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). Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income Three Months Ended Nine Months Ended September 30,
2017 September 30,
2016 September 30,
2017 September 30,
2016GAAP measures: Interest income – loans $ 6,138 $ 5,500 $ 17,717 $ 16,106 Interest income – investments and other 898 842 2,670 2,705 Interest expense – deposits (446 ) (338 ) (1,234 ) (1,000 ) Interest expense – federal funds purchased — — — (3 ) Interest expense – subordinated debt (91 ) (91 ) (269 ) (270 ) Interest expense – junior subordinated debt (79 ) (65 ) (223 ) (190 ) Interest expense – other borrowings — (1 ) — (6 ) Total net interest income $ 6,420 $ 5,847 $ 18,661 $ 17,342 Non-GAAP measures: Tax benefit realized on non-taxable interest income – loans $ 18 $ 26 $ 55 $ 76 Tax benefit realized on non-taxable interest income – municipal securities 76 70 224 219 Total tax benefit realized on non-taxable interest income $ 94 $ 96 $ 279 $ 295 Total tax-equivalent net interest income $ 6,514 $ 5,943 $ 18,940 $ 17,637 $ 9,963 $ 7,074 $ 19,459 $ 14,217 1,876 971 3,404 1,923 (413 ) (328 ) (753 ) (691 ) (69 ) (154 ) (138 ) (308 ) (67 ) (68 ) (134 ) (134 ) $ 11,290 $ 7,495 $ 21,838 $ 15,007 $ - $ 8 $ 7 $ 16 82 57 163 105 $ 82 $ 65 $ 170 $ 121 $ 11,372 $ 7,560 $ 22,008 $ 15,128 (“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.34ourthe 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.factor.factor. For further information regarding the allowance for loan losses, see Note 4 to the Consolidated Financial Statements.Other Real Estate Owned (OREO)Other real estate owned (OREO) consistsStatements included in this Form 10-Q.properties obtained throughallowance for loan losses attributable to purchased loans at June 30, 2022. foreclosure proceedingBusiness Combinationthrough an in-substance foreclosure in satisfaction of(ii) purchased performing loans and properties originally acquired for branch operations or expansion but no longer intended to be used for that purpose. OREO is initiallyare recorded at fair value less estimated costs to sell to establish a new cost basis. OREOon the date of acquisition. subsequently reportedevidence of credit deterioration since origination and for which it is probable at the lowerdate of cost oracquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, less costs to sell, determinedPCI loans are aggregated into pools of loans based on common risk characteristics as of the basisdate 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,acquisition such as changes in absorption rates or marketconditions from the timeloan type, date of valuationorigination, 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 judgmentsevidence of credit quality deterioration such as internal risk grades and complex estimates arepast due and nonaccrual status. The difference between contractually required in estimating the fair value of other real estate owned,payments at acquisition 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 and adjusts the values as appropriate. Revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned expense (income).Other-Than-Temporary Impairment of SecuritiesImpairment 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 (1) intends to sell the security or (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 fromat acquisition is referred to as 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. For equity securities carried at cost, such as restricted securities, impairment isconsidered 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“nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to be collected from debt securities,as the Company’s intention with regard to holding“accretable yield” and is recognized as interest income over the security to maturityremaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. There were no acquired loans classified as PCI in the acquisition of the Fincastle and the likelihood thatSmartBank loan portfolios. Company would be required to sellexcess fair value of the security before recovery.Core Deposit IntangiblesAcquiredconsideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets (suchacquired 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 core deposit intangibles)the date to perform the annual impairment test. Intangible assets with finite useful lives are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over itstheir estimated useful life. The Company amortizeslives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.transactionsacquisitions and are amortized on an accelerated method over their estimated useful life. Core deposit intangibles are subjectlives, which range from 6 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.10 years.GeneralIn 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 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’s legal lending limit. The Board Loan Committee currently consists of four directors, three of which are non-management directors. The Board Loan Committee approves the Bank’s Loan Policy and reviews risk management reports, including watch list reports and concentrations of credit. The Board Loan Committee meets on a monthly basis and the Chairman of the Committee then reports to the Board of Directors.Residential loan originations are primarily generated by mortgage loan officer solicitations and referrals by employees, real estate professionals, and customers. Commercial real estate loan originations are 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. Loan quality is analyzed based on the Bank’s experience and credit underwriting guidelines depending on the type of loan involved. Real estate collateral is valued by independent appraisers whopre-approved byno material changes in the Board Loan Committee.As part ofCompany’s lending policies disclosed in the ongoing monitoring of the credit quality of the Bank’s loan portfolio, certain appraisals are analyzed by management or by an outsourced appraisal review specialist throughoutAnnual Report on Form 10-K for 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 September 30, 2017, commitments to extend credit, stand-by letters of credit and rate lock commitments totaled $93.4 million.Construction and Land Development LendingThe 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 have an average life of approximately one year and re-price as key rates change. 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 to 80% of the appraised value, in addition to analyzing the cost of the project and the creditworthiness of its borrowers. The Bank typically obtains a first lien on the property as security for its construction loans, typically requirespersonal guarantees from the borrower’s principal owners, and typically monitors the progress of the construction project during the draw period.1-4 Family Residential Real Estate Lending1-4 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 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 occasionally originates and retains these loans.Commercial Real Estate LendingCommercial 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 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 LendingCommercial and industrial loans generally may have a higher degree of risk than loans secured by real estate, but typically have higher yields. Commercial business 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.Consumer LendingLoans 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 depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on a proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the collateral in relation to the proposed loan amount.ended December 31, 2021.expense.Net Interest IncomeFor15%, to $3.8 million, or $0.61 per diluted share, for the three months ended SeptemberJune 30, 2017, net interest income increased $573 thousand, or 10%, to $6.4 million for the quarter ended September 30, 2017,2022, compared to $5.8$3.3 million, for the third quarter of 2016. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 3%, and the net interest margin increased 22 basis points to 3.79% for the quarter ended September 30, 2017, compared to 3.57%or $0.69 per diluted share, for the same period in 2016. 2021. Return on average assets was 1.08% and return on average equity was 15.04% for the second quarter of 2022, compared to 1.31% and 15.33%, respectively, for the same period in 2021.thenet income resulted primarily from a $3.8 million, or 51%, increase in net interest marginincome and a $345 thousand, or 14%, increase in total noninterest income, which were partially offset by a $2.3 million, or 35%, increase in total noninterest expense and an increase in the provision for loan losses. The provision for loan losses totaled $400 thousand for the second quarter of 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2021.28 basis$6.8 million, or 46%, increase in net interest income and a $913 thousand, or 20%, increase in total noninterest income, which were partially offset by a $4.3 million, or 32%, increase in total noninterest expense and an increase in the provision for loan losses. The provision for loan losses totaled $400 thousand for the six months ended June 30, 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2021.6 basis point$62 thousand increase in interest expense as a percent of average earning assets.on deposits. The higher yield on earning assets was primarily attributable to an increase in yields from all earning asset classes and a change in the composition of earning assets. Yields increased on loans, securities, and interest-bearing deposits in banks by 12 basis points, 17 basis points, and 66 basis points, respectively. A change in the asset composition also favorably impacted the earning asset yield, as average loan balancesnet interest margin increased to 75% of average earning assets for the quarter ended September 30, 2017, compared to 71% of average earning assets for3.39%, a 30-basis point increase from 3.19% in the same period in 2016.The increaseone year ago.expense as a percentand fees on loans. Net accretion of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits, withPPP income totaled $358 thousand for the largest impact coming from the cost of interest-bearing checking accounts, which increased by 17 basis points comparing the periods.For the ninesix months ended SeptemberJune 30, 2017, net interest income increased $1.3 million, or 8%, to $18.7 million,2022, compared to $17.3$1.1 million for the same period in 2016. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 4%, and the net interest margin increased 13 basis points to 3.74%of 2021. Net accretion of discounts on purchased loans totaled $718 thousand for the ninesix months ended SeptemberJune 30, 2017, compared to 3.61% for the same period in 2016. The 13 basis point increase2022. There were no purchased loans in the net interest margin resulted from a 17 basis point increase in the yield on total earning assets, which was partially offset by a 4 basis point increase in interest expensesix months ended June 30, 2021, and as a percentresult, there was no net accretion of average earning assets.The higher yielddiscounts on earning assets was attributable to an increase in yields from all earning asset classes and a change inpurchased loans during the compositionperiod.36The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits, with that largest impact coming from the cost of interest-bearing checking accounts, which increased by 16 basis points comparing the periods. Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate $ 296,318 $ 1,295 1.75 % $ 147,285 $ 697 1.90 % 55,908 391 2.81 % 42,712 271 2.54 % 1,908 21 4.48 % 1,631 22 5.37 % $ 354,134 $ 1,707 1.93 % $ 191,628 $ 990 2.07 % $ 858,045 $ 9,963 4.66 % $ 625,587 $ 7,044 4.52 % — — — 3,400 38 4.49 % $ 858,045 $ 9,963 4.66 % $ 628,987 $ 7,082 4.52 % — — — — — — 122,797 251 0.82 % 156,317 38 0.10 % $ 1,334,976 $ 11,921 3.58 % $ 976,932 $ 8,110 3.33 % (5,845 ) (7,466 ) 90,747 57,117 $ 1,419,878 $ 1,026,583 $ 300,473 $ 157 0.21 % $ 233,720 $ 100 0.17 % 209,513 26 0.05 % 134,266 20 0.06 % 220,182 75 0.14 % 160,462 45 0.11 % 62,346 80 0.51 % 40,212 83 0.83 % 75,025 75 0.40 % 55,485 80 0.57 % 553 — 0.12 % 578 — 0.20 % $ 868,092 $ 413 0.19 % $ 624,723 $ 328 0.21 % 2 — — % — — 0.00 % 4,994 69 5.56 % 9,992 155 6.20 % 9,279 67 2.91 % 9,279 67 2.91 % $ 882,367 $ 549 0.25 % $ 643,994 $ 550 0.34 % 431,995 292,960 3,247 2,187 $ 1,317,609 $ 939,141 102,269 87,442 $ 1,419,878 $ 1,026,583 $ 11,372 $ 7,560 3.33 % 2.99 % 0.17 % 0.24 % 0.16 % 0.23 % 3.42 % 3.10 % Three Months Ended September 30, 2017 September 30, 2016 AverageBalance Interest Income/Expense Yield/Rate AverageBalance Interest Income/Expense Yield/RateAssets Securities: Taxable $ 118,819 $ 637 2.13 % $ 124,634 $ 613 1.95 % Tax-exempt (1) 25,642 224 3.46 % 23,102 206 3.54 % Restricted 1,570 21 5.31 % 1,569 20 5.18 % Total securities $ 146,031 $ 882 2.40 % $ 149,305 $ 839 2.23 % Loans: (2) Taxable $ 503,625 $ 6,103 4.81 % $ 462,888 $ 5,452 4.69 % Tax-exempt (1) 4,906 53 4.22 % 6,799 74 4.33 % Total loans $ 508,531 $ 6,156 4.80 % $ 469,687 $ 5,526 4.68 % Federal funds sold 1 — 1.28 % — — — % Interest-bearing deposits with other institutions 27,237 92 1.34 % 42,632 73 0.68 % Total earning assets $ 681,800 $ 7,130 4.15 % $ 661,624 $ 6,438 3.87 % Less: allowance for loan losses (5,459 ) (5,686 ) Total non-earning assets 53,310 54,067 Total assets $ 729,651 $ 710,005 Liabilities and Shareholders’ Equity Interest bearing deposits: Checking $ 165,274 $ 184 0.44 % $ 152,441 $ 102 0.27 % Regular savings 127,672 25 0.08 % 127,472 27 0.08 % Money market accounts 63,108 49 0.31 % 62,979 26 0.17 % Time deposits: $100,000 and over 43,418 88 0.80 % 44,659 84 0.74 % Under $100,000 79,566 100 0.50 % 86,780 98 0.45 % Brokered 550 — 0.10 % 601 1 0.45 % Total interest-bearing deposits $ 479,588 $ 446 0.37 % $ 474,932 $ 338 0.28 % Subordinated debt 4,941 91 7.28 % 4,924 91 7.32 % Junior subordinated debt 9,279 79 3.38 % 9,279 65 2.78 % Other borrowings — — — % 489 1 0.97 % Total interest-bearing liabilities $ 493,808 $ 616 0.50 % $ 489,624 $ 495 0.40 % Non-interest bearing liabilities Demand deposits 175,249 164,254 Other liabilities 3,737 5,967 Total liabilities $ 672,794 $ 659,845 Shareholders’ equity 56,857 50,160 Total liabilities and Shareholders’ equity $ 729,651 $ 710,005 Net interest income $ 6,514 $ 5,943 Interest rate spread 3.65 % 3.47 % Cost of funds 0.37 % 0.30 % Interest expense as a percent of average earning assets 0.36 % 0.30 % Net interest margin 3.79 % 3.57 % (1)34%21%. The tax-equivalent adjustment was $94 thousand$82 and $96$65 thousand for the three months ended Septemberended June 30, 20172022 and 2016,2021, respectively.(2)placed on a non-accrual status are reflected in the balances.37Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) $ 257,529 $ 2,427 1.90 % $ 135,305 $ 1,413 2.11 % 58,647 777 2.67 % 38,856 499 2.59 % 1,867 42 4.60 % 1,738 44 5.12 % $ 318,043 $ 3,246 2.06 % $ 175,899 $ 1,956 2.24 % $ 841,608 $ 19,439 4.66 % $ 628,012 $ 14,157 4.55 % 1,106 27 4.49 % 3,412 76 4.49 % $ 842,714 $ 19,466 4.66 % $ 631,424 $ 14,233 4.55 % — — — 67 — 0.10 % 150,222 321 0.43 % 149,786 70 0.09 % $ 1,310,979 $ 23,033 3.54 % $ 957,176 $ 16,259 3.43 % (5,806 ) (7,475 ) 120,409 59,929 $ 1,425,582 $ 1,009,630 $ 295,005 $ 256 0.17 % $ 230,723 $ 217 0.19 % 208,163 51 0.05 % 130,262 39 0.06 % 233,496 126 0.11 % 157,902 88 0.11 % 63,429 163 0.52 % 41,392 182 0.88 % 76,566 154 0.40 % 55,667 164 0.60 % 558 3 1.03 % 586 1 0.43 % $ 877,217 $ 753 0.17 % $ 616,532 $ 691 0.23 % 2 — — 1 — 0.47 % 5,708 138 4.89 % 9,992 308 6.22 % 9,279 134 2.91 % 9,279 134 2.91 % — — — % — — 0.00 % $ 892,206 $ 1,025 0.23 % $ 635,804 $ 1,133 0.36 % 421,785 284,542 3,904 2,617 $ 1,317,895 $ 922,963 107,686 86,667 $ 1,425,581 $ 1,009,630 $ 22,008 $ 15,126 3.31 % 3.07 % 0.16 % 0.25 % 0.16 % 0.24 % 3.39 % 3.19 % Nine Months Ended September 30, 2017 September 30, 2016 AverageBalance Interest Income/Expense Yield/Rate AverageBalance Interest Income/Expense Yield/RateAssets Securities: Taxable $ 119,191 $ 1,933 2.17 % $ 133,659 $ 2,037 2.04 % Tax-exempt (1) 24,999 660 3.53 % 24,131 644 3.57 % Restricted 1,563 62 5.31 % 1,570 60 5.12 % Total securities $ 145,753 $ 2,655 2.44 % $ 159,360 $ 2,741 2.30 % Loans: (2) Taxable $ 495,120 $ 17,611 4.76 % $ 451,142 $ 15,960 4.73 % Tax-exempt (1) 5,060 161 4.23 % 6,853 222 4.33 % Total loans $ 500,180 $ 17,772 4.75 % $ 457,995 $ 16,182 4.72 % Federal funds sold — — — % 1 — — % Interest-bearing deposits with other institutions 31,159 239 1.03 % 35,847 183 0.68 % Total earning assets $ 677,092 $ 20,666 4.08 % $ 653,203 $ 19,106 3.91 % Less: allowance for loan losses (5,413 ) (5,586 ) Total non-earning assets 53,427 55,556 Total assets $ 725,106 $ 703,173 Liabilities and Shareholders’ Equity Interest bearing deposits: Checking $ 164,059 $ 500 0.41 % $ 150,042 $ 279 0.25 % Regular savings 128,530 76 0.08 % 125,671 78 0.08 % Money market accounts 61,489 111 0.24 % 61,109 76 0.17 % Time deposits: $100,000 and over 43,732 254 0.78 % 46,157 281 0.81 % Under $100,000 81,141 291 0.48 % 88,692 284 0.43 % Brokered 572 2 0.37 % 601 2 0.45 % Total interest-bearing deposits $ 479,523 $ 1,234 0.34 % $ 472,272 $ 1,000 0.28 % Federal funds purchased 1 — 1.20 % 447 3 1.03 % Subordinated debt 4,937 269 7.28 % 4,919 270 7.33 % Junior subordinated debt 9,279 223 3.21 % 9,279 190 2.73 % Other borrowings — — — % 1,650 6 0.49 % Total interest-bearing liabilities $ 493,740 $ 1,726 0.47 % $ 488,567 $ 1,469 0.40 % Non-interest bearing liabilities Demand deposits 172,443 160,152 Other liabilities 3,894 5,882 Total liabilities $ 670,077 $ 654,601 Shareholders’ equity 55,029 48,572 Total liabilities and Shareholders’ equity $ 725,106 $ 703,173 Net interest income $ 18,940 $ 17,637 Interest rate spread 3.61 % 3.51 % Cost of funds 0.35 % 0.30 % Interest expense as a percent of average earning assets 0.34 % 0.30 % Net interest margin 3.74 % 3.61 % (1)34%21%. The tax-equivalent adjustment was $279 thousand$170 and $295$121 thousand for the ninesix months ended Septemberended June 30, 20172022 and 2016,2021, respectively.(2)placed on a non-accrual status are reflected in the balances. Bank did not record a provision for loan losses duringtotaled $400 thousand for the thirdsecond quarter of 2017 or 2016, which resulted in2022, compared to a total allowance for$1.0 million recovery of loan losses for the same period of $5.3 million, or 1.03% of total loans, at September 30, 2017. This compared to an allowance for loan losses of $5.3 million, or 1.09% of total loans, at December 31, 2016, and $5.6 million, or 1.19% of total loans, at September 30, 2016. Although no provision expense was required, there were notable changes among the allowance for loan losses allocated to individual loan classes.2021. The allowance for loan losses allocated to the consumer and other loans portfolio increased by $417 thousand during the first nine months of 2017, which was offset by a $257 thousand decrease in the allowance for loan losses allocated to the 1-4 family residential loan portfolio and a $181 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 of consumer loans at their origination at par value. Purchased consumer loans totaled $5.8 million at September 30, 2017. The decrease in the allocation to the 1-4 family residential loan portfolio resulted from a decrease in historical loss rates and an improvement in prior periods to the qualitative adjustment factors for improved economic conditions. The decrease in the allocation to the other real estate portfolio resulted from an improvement in prior periods to the qualitative adjustment factors for improved economic conditions.The Bank did not record a provision for loan losses during the quarter. Both the general and specific reserve components of the allowance for loan losses decreased slightly as a result of $143 thousand of net charge-offs during the third quarter of 2017, compared to $124 thousand of net charge-offs for the same period in 2016.For the nine months ended September 30, 2017 or 2016, the Bank did not record a provision for loan losses. During 2017,resulted primarily from an increase in the general reserve component of the allowance for loan losses, which was offset by a decrease inattributable to loan growth during the quarter. There were no specific reserve component.reserves on impaired loans at June 30, 2022, compared to $78 thousand of specific reserves at June 30, 2021. Net charge-offs totaled $20$26 thousand forduring the first nine monthssecond quarter of 20172022, compared to $86 thousand$1.0 million of net recoveriescharge-offs for the same period of 2016. 2021.resulted primarily fromcomponent of the impactallowance for loan losses and was attributable to loan growth. There were net recoveries of $28.6 million of loan growth duringpreviously charged-off loans totaling $92 thousand for the first ninesix months of 2017. The impact of loan growth on the general reserve was partially offset by improvements in qualitative adjustment factors in prior periods. The improvements in qualitative adjustment factors resulted from improved asset quality in the 1-4 Family Residential, Other Real Estate, and Commercial and Industrial loan classes, as evidenced by lower substandard and past due loan amounts included in these respective classes, and improved economic conditions. The specific reserve component decreased primarily from the Bank's decision to partially charge-off certain loans included in the specific reserve calculation.Noninterest IncomeNoninterest income decreased $294 thousand, or 13%, to $2.0 million for the three months ended September 30, 2017,2022, compared to $2.3 million$1.0 of net charge-offs for the same period in 2016. The decrease in noninterestof 2021. was primarily attributable to a $181increased $345 thousand, or 19%14%, to $2.8 million for the second quarter of 2022, compared to the same period of 2021. Service charges on deposits increased $251 thousand, or 56%, ATM and check card fees increased $115 thousand, or 17%, fees for other customer services increased $38 thousand, or 25%, and wealth management fees increased $103 thousand, or 16%. The increases were partially offset by a $99 thousand, or 63%, decrease in service charges on deposit accountsbrokered mortgage fees, and a $113$77 thousand, or 62%34%, decrease in other operating income.service charges on deposit accountsother operating income was a result of lower overdraft revenue. The decreaseincome earned from an investment in other operating income was primarily attributable to a $102 thousand life insurance benefit recorded duringsmall business investment company partnership in the thirdsecond quarter of 2016, which was offset by a $1002021.death benefit paymentor 20%, to $5.5 million for the six months ended June 30, 2022, compared to the beneficiary recorded insame period of 2021. Service charges on deposits increased $418 thousand, or 47%, ATM and check card fees increased $264 thousand, or 21%, fees for other operating expense. These decreasescustomer services increased $90 thousand, or 27%, and wealth management fees increased $263 thousand, or 20%. The increases were partially offset by a $20 thousand increase in wealth management fees.For the nine months ended September 30, 2017, noninterest income decreased $430$110 thousand, or 7%42%, to $5.9 million, compared to $6.4 million for the same period in 2016. The decrease in noninterest income was primarily attributable tobrokered mortgage fees and a $385$25 thousand or 15%, decrease in gains on sale of loans held for sale.deposit accounts and a $111 thousand, or 33%, decrease in other operating income, when comparing the periods. The decrease in service charges on deposit accounts was a result of lower overdraft revenue. The decrease in other operating income was primarily attributable to a $102 thousand life insurance benefit recorded during 2016, which was offset by a $100 thousand death benefit payment to the beneficiary recorded in other operating expense. These decreases were partially offset by a $52 thousand increase in wealth management fees.Noninterest ExpenseNoninterest expense decreased $46 thousand, or 1%, to $5.8 million for the quarter ended September 30, 2017, compared to $5.9 million for the same period in 2016. The decrease in noninterest expense was primarily attributable to a $27 thousand decrease in supplies expense, a $24 thousand decrease indeposits, ATM and check card fees, a $22 thousand decrease in FDIC assessment, and a $36 thousand decrease in amortization expense, when comparing the periods. These decreasesfees for other customer services were partially offsetfavorably impacted by a $38 thousandan increase in salariescustomer transactions and employee benefits and an $37 thousand increase in legal and professional fees.Supplies expense and ATM and check card fees both decreased primarily from efforts to lower operating costs. The decrease in FDIC assessmentadditional deposit accounts that resulted from lower FDIC deposit insurance assessment rates as a resultthe acquisition of changes put into effect by the FDIC combined with the Bank's financial condition. Amortization expense decreased due to accelerated amortization of core deposit intangibles in prior quarters.Fincastle. The increase in salaries and employee benefits resulted primarily from higher health insurance expense and from the addition of employees during the quarterwealth management income was attributable to a new branch office in Richmond, Virginia. As a result of the new branch office, the Company expects noninterest expenses to increase in future periods. Expense categories most likely impacted in future periods include salaries and employee benefits, occupancy, and equipment.Legal and professional fees increased primarily from increases in consulting and professional fees, when comparing the periods. Consulting expenses increased primarily from an increase in investment advisory expensesthe number of client accounts. Brokered mortgage fees and net gains on sale of loans held for the wealth management department, which resulted from higher assets under management. Professional fees increased primarily from external loan review services.For the nine months ended September 30, 2017, noninterest expensesale decreased $590 thousand, or 3%, to $17.3 million, compared to $17.9 million for the same period in 2016. The decrease in noninterest expense was primarily attributable to a $457 thousand decrease in salaries and employee benefits, a $114 thousand decrease in FDIC assessment, and a $112 thousand decrease in amortization expense, when comparing the periods. These decreases were partially offset by a $126 thousand increase in net other real estate expense. Other real estate owned expense totaled $6 thousand for the nine months ended September 30, 2017, compared to other real estate income of $120 thousand for the same period in 2016.Salaries and employee benefits decreased $457 thousand primarily from lower salaries and wage expense and retirement plan expense, which decreased $243 thousand and $137 thousand, respectively. Salaries and wage expense decreased primarily from a reduction in the number of employees, which was related to the Company’s efforts to operate more efficiently. Retirement plan costs decreasedmortgage loans originated, as a result of fewer employees and changes to employee retirement plans. Changes to retirement plans included an amendment to the defined benefit pension plan and the Company’s intention to terminate the plan, which decreased pension expense. The decrease in pension expense was partially offset bywell as an increase in the amountnumber of employer contributionsmortgage loans retained in the Bank’s loan portfolio and not sold or brokered when comparing the periods.Company’s 401(k) defined contribution plan.same period one year ago. The increase was primarily attributable to a $1.4 million, or 38% increase in salaries and employee benefits, a $146 thousand, or 37%, increase in occupancy expense, a $187 thousand, or 43%, increase in equipment expense, an $85 thousand, or 62%, increase in marketing, a $79 thousand, or 30%, increase in ATM and check card expense, and a $280 thousand, or 42%, increase in other operating expense. These increases were partially offset by a $102 thousand decrease in legal and professional fees.lower FDIC deposit insurance assessment rates as athe acquisition of Fincastle and the acquisition of the loan portfolio, branch assets and the addition of employees from the SmartBank office. The increase in marketing was also related to the timing of campaigns and promotion activities. The decrease in legal and professional fees was primarily attributable to merger related costs during the first six months of 2021. Merger expenses totaled $20 thousand for the first six months of 2022 compared to $682 thousand for the same period of 2021.the changes put into effect by the FDIC combined with the Bank's financial condition. Amortization expense decreased duelower non-deductible expenses in 2022 compared to accelerated amortization of core deposit intangibles in prior years.Income Taxes2021. The Company’s income tax provisionexpense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended June 30, 2022, and nine month periods ended September 30, 2017 and 2016.2021. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income.income, income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 ofto the consolidated financial statementsConsolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021.by $15.5$25.3 million to $731.5 million$1.4 billion at SeptemberJune 30, 20172022, compared to $716.0 million at December 31, 2016.2021. The increase was primarily attributable to a $28.7an $54.5 million, or 7.0%, increase in loans, net loans, when comparing the periods. Theof allowance for loan losses, and a $43.7 million, or 130.7%, increase in net loans was partially offset by a $6.5 million decrease in interest-bearing deposits in banks and a $5.7 million decrease in securities since December 31, 2016.Total deposits increased by $10.7 millionheld to $656.3 million at September 30, 2017 compared to $645.6 million at December 31, 2016. Noninterest-bearing demand deposits and savings and interest-bearing deposits increased $11.3 million and $1.8 million, respectively, when comparing the periods.maturity. These increases were partially offset by a $2.4decrease in interest-bearing deposits in banks of $52.8 million, or 33.5%, and a decrease in securities available for sale of $24.7 million, or 8.5%, during the first quarter of 2022. since of $11.8 million during the first six months of 2022 and the Company's repayment of $5.0 million of subordinated debt on January 1, 2022.2016.2021. This was primarily attributable to a $23.0 million decrease in accumulated other comprehensive (loss) income (AOCI). The decrease in AOCI is related to unrealized losses in the securities portfolio stemming from market rate increases during the first quarter. This decrease was partially offset by a $5.8 million increase in retained earnings. The Company's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.$28.7$54.5 million or 6% to $509.4$873.9 million at SeptemberJune 30, 2017,2022, compared to $480.7$819.4 million at December 31, 2016. Growth of the loan portfolio2021. This change was led by otherprimarily due to increases in residential real estate, commercial real estate and commercial and industrial loans with balances that increased $10.9of $20.1 million, $36.1 million and $9.7 million, respectively, during the first ninesix months of 2017, followed by consumer and other loans with balances that increased by $5.6 million.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 industrial2022. Construction loans and consumer and other loans decreased by $6.6 million and $4.4 million, respectively, during the first six months of 2022.Real estate loansLoan fees received from the SBA are further dividedaccreted by the Bank into income evenly over the following classes: Construction and Land Development; 1-4 Family Residential; and Other Real Estate Loans. Descriptionslife of the Company’sloans, net of loan classes are as follows:Real Estate Loans – Constructionorigination costs, through interest and Land Development:fees on loans. PPP loans totaled $845 thousand at June 30, 2022, with $32 thousand scheduled to mature in the second and third quarters of 2022, and $813 thousand scheduled to mature in the first and second quarters of 2026. The total amount of deferred PPP income, net of origination costs, that has not yet been recognized through interest and fees on loans totaled $8 thousand at June 30, 2022. The Company originates constructionbelieves 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. acquisitionpandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6 and development24 months. All loans modified were in the lodging sector of land and construction of commercial buildings, condominiums, townhomes, and one-to-four family residences.Real Estate Loans – 1-4 Family: This class of loans includes loans secured by one-to-four family homes. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.Real Estate Loans – Other: This loan class consists primarily of loans secured by various types ofBank’s commercial real estate typically in the Bank’s market area, including multi-family residential buildings, office and retail buildings, industrial and warehouse buildings, hotels, and religious facilities.Commercial and Industrial Loans: Commercial loans may be unsecured or secured with non-real estate commercial property. The Company's banking subsidiary makes commercial loans to businesses located within its market area and also to businesses outside of its market area through loan participations with other financial institutions.Consumer and Other Loans: Consumer loans include all loans made to individuals for consumer or personal purposes. They include new and used automobile loans, unsecured loans, and lines of credit. The Company's banking subsidiary makes consumer loans to individuals located within its market area and also to individuals outside it market through the purchase of loans from another financial institution.A substantial portion of the loan portfolio is represented by residential and commercialtotaled $4.7 million at June 30, 2022. All modified loans secured by real estate throughout the Bank's market area. The abilitywere performing under their modified terms at June 30, 2022.41 Interest income includes amortization of purchase premiums and discounts, recognized evenly over the life of the loans.$89$92 thousand at Septemberat June 30, 2017, compared to $116 thousand at2022. There were no loans greater than 90 days past due and still accruing at December 31, 2016.2021. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.$5.0$586 thousand and $2.3 million and $4.9 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.beingbeing modified as a TDR and and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. There were $340 thousand and $460$116 thousand in loans classified as TDRs as of June 30, 2022 and $1.6 million as of September 30, 2017 and December 31, 2016, respectively.2021.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’s OREO totaled $250 thousand at September 30, 2017 and December 31, 2016. There was not a valuation allowance for other real estate owned at September 30, 2017 or December 31, 2016.Non-performing assets totaled $2.4Bank had $1.7 million at September 30, 2017 and $1.8 million in assets classified as OREO at June 30, 2022 and December 31, 2016,2021, respectively.0.32%approximately 0.15% and 0.25%0.30% of total assets, respectively. Non-performing assets consisted of OREO and non-accrual loans at June 30, 2022 and December 31, 2021. Non-performing assets included $2.1$1.7 million in non-accrual loans and $250 thousand in OREO at Septemberproperties formerly classified as bank premises by The Bank of Fincastle which are now classified as held for sale.2017. This compares to $1.5 million in non-accrual loans and $250 thousand in OREO at December 31, 2016.At September 30, 2017, 45%2022, 4% of non-performing assets related to construction and land development loans, 26% related to residential real estate loans, 18% related towere commercial real estate loans and 11%21% were residential real estate loans. Additionally, 79% was related to bank-owned properties originallyacquired from The Bank of Fincastle which will not be used in the Company's operations and are classified as held for branch operations which are no longer used for that purpose.sale. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $9.2 million$308 thousand and $8.1$1.1 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, 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.$89$92 thousand at SeptemberJune 30, 2017, which was comprised of two loans expected to pay all principal and interest amounts contractually due to the Bank and one purchased consumer and other loan. Consumer and other loans purchased at origination are charged-off when they are greater than 120 days past due.2022. There were $116 thousand ofno loans greater than 90 days past due and still accruing at December 31, 2016.2021.$5.3$6.2 million at SeptemberJune 30, 20172022 and $5.7 million December 31, 2016,2021, representing 1.03%0.70% and 1.09%0.69% of total loans, respectively. For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above.$17 thousand, $422 thousand, $232$9 thousand and $1$40 thousand were recorded in the construction and land development and 1-4 family residential other real estate, and commercial and industrial loanloans classes respectively, during the nine month periodsix months ended SeptemberJune 30, 2017. The recoveries of loan losses in the construction and land development, 1-4 family residential, and commercial and industrial loan classes resulted from net recoveries of loans charged-off in prior periods and improvements in the historical loss rate and qualitative adjustment factors. The2022. This recovery of loan losses in the other real estate loan class resulted from net recoveries of loans charged-off in prior periods and improvements in the qualitative adjustment factors. Improvements in qualitative adjustment factors for the construction and land development loan class resulted from improving economic conditions. Improvements in qualitative adjustment factors for the 1-4 family residential, other real estate, and commercial and industrial loan classes resulted from improving asset quality and economic conditions. These recoveries werewas offset by provision for loan losses experiencedtotaling $334 thousand, $20 thousand, and $95 thousand in the other real estate, commercial and industrial, and consumer and other loan class. Theclasses, respectively. For more detailed information regarding the (recovery of) provision for loan losses, insee Note 4 to the consumer and other loan class resulted primarily from an increase in the general reserve requirement due to growth in the loan portfolio and worsened historical loss rates.Consolidated Financial Statements.$5.0 million$586 thousand and $4.9$2.3 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. There was not ano related allowance for loan losses recorded for these loans at June 30, 2022. The related allowance for loan losses provided for these loans at September 30, 2017. The related allowance for loan losses provided for impaired loans totaled $37$55 thousand at December 31, 2016.2021. The average recorded investment in impaired loans during the ninesix months ended SeptemberJune 30, 20172022 and the year ended December 31, 20162021 was $4.8$1.9 million and $7.0$4.5 million, respectively. Included in the impaired loans total are loans classified as TDRs totaling $340$116 thousand and $460 thousand$1.6 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Loans classified as TDRs represent situations in which a modification to the contractual interest rate or repayment structure has been granted to address a financial hardship. As of SeptemberJune 30, 2017, $287 thousand2022, none of these TDRs were performing under the restructured terms and all were not considered non-performing assets.securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.SeptemberJune 30, 20172022 totaled $144.0$343.8 million, a decreasean increase of $5.7$18.9 million, or 4%6.0%, from $149.7$324.7 million at December 31, 2016. The investment portfolio decreased during the first nine months of 2017 as loan growth was partially funded by cash flow received from the securities portfolio.2021. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate equity securities, corporate debt securities, and restricted securities. As of SeptemberJune 30, 2017,2022, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio totaled $452$147 thousand and $333 thousand$2.0 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Gross unrealized losses in the available for sale portfolio totaled $835 thousand$31.1 million and $1.6$2.6 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Gross unrealized gains in the held to maturity portfolio totaled $287$2 thousand and $19$242 thousand at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Gross unrealized losses in the held to maturity portfolio totaled $247 thousand$6.7 million and $708$66 thousand at SeptemberJune 30, 20172022 and December 31, 2016, respectively.2021. Investments in an unrealized loss position were considered temporarily impaired at SeptemberJune 30, 20172022 and December 31, 2016.2021. The change in the unrealized gains and losses of investment securities from December 31, 20162021 to SeptemberJune 30, 20172022 was related to changes in market interest rates and was not related to credit concerns of the issuers.DepositsSeptemberJune 30, 2017, deposits totaled $656.32022, the securities portfolio was comprised of $264.8 million an increase of $10.7securities available for sale and $77.2 million from $645.6of securities held to maturity compared to $289.5 million and $33.4 million at December 31, 2016.2021, respectively. Securities held to maturity increased by $43.8 million during the first six months of 2022 from new purchases as a part of the Company's strategy to mitigate the risk of potential fluctuations in value and the related impact on shareholders' equity. The Company has not transferred any securities from available for sale to held to maturity during the first six months of 2022.not a significantslight change in the deposit mix when comparing the periods. At SeptemberJune 30, 2017,2022, noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits composed 27%33%, 54%57%, and 19%10% of total deposits, respectively, compared to 26%33%, 54%57%, and 20%10% at December 31, 2016.2021.SeptemberJune 30, 2017,2022, cash, interest-bearing and noninterest-bearing deposits with banks, securities, and loans maturing within one year totaled $106.3$210.8 million. At SeptemberJune 30, 2017, 14%2022, 9.5% or $70.7$83.7 million of the loan portfolio maturesmatured within one year. Non-deposit sources of available funds totaled $131.1$385.0 million at SeptemberJune 30, 2017,2022, which included $80.2$287.8 million of secured funds available from Federal Home Loan Bank of Atlanta (FHLB), $42.0$46.2 million of secured funds available through the Federal Reserve Discount Window, and $51.0 million of unsecured federal funds lines of credit with other correspondent banks and $8.9 million available through the Federal Reserve Discount Window.banks.no longernot obligated to report consolidated regulatory capital.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% 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 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, is 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 SeptemberJune 30, 20172022 and December 31, 2016,2021, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.SeptemberJune 30, 2017:2022: 13.9114.23 % 12.8713.56 % 12.8713.56 % 9.068.87 % 5.91%6.23 % (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 from previous rules). The Bank met the requirements to qualify as "well capitalized" as of June 30, 2022 and December 31, 2021.2016.2021.$75.5$161.3 million at SeptemberJune 30, 2017,2022, and $71.4$161.4 million at December 31, 2016,2021, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.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.SeptemberJune 30, 20172022 and December 31, 2016,2021, the Bank had $10.9$18.1 million and $9.0$18.9 million in outstanding standby letters of credit, respectively.SeptemberJune 30, 2017,2022, the Bankcash flow hedges had $7.0a fair value of $2.2 million, which is recorded in locked-rate commitmentsother assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive (loss) income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 16 to 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.Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresSeptemberJune 30, 20172022 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.PART II – OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk Factors2016.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other Information31.1CertificationCertification.CertificationCertification.13501350.13501350.SeptemberJune 30, 20172022 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive (Loss) Income (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.104 The cover page from First National Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included with Exhibit 101). 48November 13, 2017November 13, 2017August 15, 2022EXHIBIT INDEX49NumberDocumentCertification of Chief Executive Officer, Section 302 CertificationCertification of Chief Financial Officer, Section 302 CertificationCertification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350101The following materials from First National Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in eXtensible Business Reporting Language (XBRL): (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 Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.56