SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 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, 4,945,056May 10, 2023, 6,264,286 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 (net of allowance for credit losses of $132 at March 31, 2023) Restricted securities, at cost Loans, net of allowance for credit losses, 2023, $8,717; 2022, $7,446 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, 2023, 6,280,378 shares; 2022, 6,264,912 shares Surplus Retained earnings Accumulated other comprehensive loss, 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 March 31, March 31, 2023 2022 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 credit losses Net interest income after provision for credit 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 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 March 31, March 31, 2023 2022 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 Income (Loss) (Unaudited) (in thousands) Three Months Ended March 31, March 31, 2023 2022 Net income Other comprehensive income (loss), net of tax, Unrealized holding gains (losses) on available for sale securities, net of tax of $576 and ($3,786) for the three months ended March 31, 2023 and 2022, respectively Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity, net of tax of $84 and $0 for the three months ended March 31, 2023 and 2022, respectively Change in fair value of cash flow hedges, net of tax ($60) and $146 for the three months ended March 31, 2023 and 2022, respectively Total other comprehensive income (loss) Total comprehensive income (loss) See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows (Unaudited) (in thousands) Three Months Ended Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment Amortization of core deposit intangibles Amortization of debt issuance costs Net losses 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 (Gains) losses on disposal of premises and equipment, net Deferred income tax expense (benefit) Changes in assets and liabilities: Decrease (increase) in interest receivable Decrease in other assets (Decrease) in accrued interest payable and other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from maturities, calls, principal payments, and sales of securities available for sale Proceeds from maturities, calls, and principal payments of securities held to maturity Purchases of securities available for sale Purchases of securities held to maturity Net redemption (purchase) of restricted securities Purchase of premises and equipment Proceeds from sale of premises and equipment Proceeds from sale of other real estate owned Proceeds from cash value of bank owned life insurance Net decrease (increase) in loans Net cash provided by (used in) investing activities See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows (Unaudited) (Continued) (in thousands) Three Months Ended Cash Flows from Financing Activities Net (decrease) increase in demand deposits and savings accounts Net increase (decrease) in time deposits Repayment of subordinated debt Cash dividends paid on common stock, net of reinvestment Repurchase of common stock, stock incentive plan Repurchase of common stock, stock repurchase plan Net cash (used in) provided by financing activities Increase (decrease) in cash and cash equivalents Cash and Cash Equivalents Beginning Ending Supplemental Disclosures of Cash Flow Information Cash payments for: Interest Supplemental Disclosures of Noncash Investing and Financing Activities Unrealized gains (losses) on securities available for sale Change in fair value of cash flow hedges Transfer from other real estate owned to premises and equipment 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, December 31, 2021 Net income Other comprehensive loss Cash dividends on common stock ($0.14 per share) Stock-based compensation Issuance of 2,757 shares of common stock, dividend reinvestment plan Issuance of 27,134 shares of common stock, stock incentive plan Repurchase of 8,283 shares of common stock, stock incentive plan Balance, March 31, 2022 Common Stock Surplus Retained Earnings Accumulated Other Comprehensive (Loss) Total Balance, December 31, 2022 Adoption of new accounting standard (ASU 2016-13) Net income Other comprehensive income Cash dividends on common stock ($0.15 per share) Stock-based compensation Issuance of 2,216 shares of common stock, dividend reinvestment plan Issuance of 21,302 shares of common stock, stock incentive plan Repurchase of 1,557 shares of common stock, stock repurchase plan Repurchase of 6,495 shares of common stock, stock incentive plan Balance, March 31, 2023 See Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements (Unaudited) Note 1. General Basis of Presentation 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 Adoption of New Accounting Pronouncements ASU 2016-13:On January 1, 2023, the Company adopted Accounting Standards Update (ASU) No.2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (Accounting Standards Codification (ASC) 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not that they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $2.2 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $153 thousand, which is recorded within other liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $132 thousand, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net decrease to retained earnings of $2.0 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchase credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As of March 31, 2023, the Company had no loans classified as PCD. The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporary impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not required. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. January 1, 2023 December 31, 2022 As reported Under Pre-ASC 326 Impact of ASC (dollars in thousands) ASC 326 Adoption 326 Adoption Assets: Allowance for credit losses on held to maturity securities: Corporate securities Allowance for credit losses on loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial loans Consumer and other loans Allowance for credit losses on loans Liabilities: Allowance for credit losses for unfunded commitments Allowance for Credit Losses – Held-to-Maturity Securities The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a Probability of Default/Loss Given Default (“PD/LGD”) methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit ratings, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. The Company’s held-to-maturity securities with credit risk are municipal bonds and corporate debt securities. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one if its agencies. Change in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company recorded an allowance for credit losses on held-to-maturity securities of $132 thousand upon adoption of ASC 326 and the allowance was unchanged as of March 31, 2023. Allowance for Credit Losses – Available-for-Sale Securities Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available-for-sale portfolio. Accrued interest receivable on available-for-sale securities totaled $803 thousand at March 31, 2023 and was excluded from the estimate of credit losses. The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following eight quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversity classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model. Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy. Notes to Consolidated Financial Statements (Unaudited) Allowance for Credit Losses – Unfunded Commitments Financial Instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records all allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statement of Income. The allowances for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit losses model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheet. Accrued Interest Receivable The Company has elected to exclude the accrued interest from the amortized cost basis in its determination of the allowance for credit losses for both loans and held-to-maturity securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $4.4 million on loans and $600 thousand on held-to-maturity securities at March 31, 2023, and is included in “Accrued Interest Receivable” on the Company’s Consolidated Balance Sheets. On January 1, 2023, the Company adopted ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. The Company adopted ASU 2022-01 prospectively and it did not have a material impact on its consolidated financial statements. ASU 2022-02:On January 1, 2023, the Company adopted ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standards (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings (TDR's) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the financial statements. Recent Accounting Pronouncements In In In March 2023, the In March 2023, the Financial Notes to Consolidated Financial Statements (Unaudited) Note 2. Securities The Company invests in U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, March 31, 2023 Amortized Cost Gross Unrealized Gross Unrealized Fair Value Allowance for Credit Losses 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. Treasury securities 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, 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 Total securities available for sale Securities held to maturity: U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total securities held to maturity Total securities Information pertaining to securities with gross unrealized losses aggregated by investment category and March 31, 2023 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 December 31, 2022 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. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities 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 Accrued interest receivable on securities available for sale and securities held to At On September 1, 2022, the Notes to 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 composition of restricted securities at March 31, 2023 December 31, 2022 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 $636 thousand and $599 thousand at March 31, 2023 and December 31, 2022, respectively. Credit Quality Indicators & Allowance for Credit Losses - HTM The Company monitors the credit quality of the debt securities held to maturity through the use of credit ratings from Moody's, S&P, and Egan-Jones. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held to maturity at March 31, 2023, aggregated by credit quality indicators. U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total Held to Maturity Securities March 31, 2023 Aaa Aa1 / Aa2 / Aa3 Baa1 / Baa2 / Baa3 Not rated - Agency (1) Total December 31, 2022 Aaa Aa1 / Aa2 / Aa3 Baa1 / Baa2 / Baa3 Not rated - Agency (1) Total (1) Generally considered not to have credit risk given the implied governmental guarantees associated with these agencies The following table summarizes the change in the allowance for credit losses on held to maturity securities for the three months ended March 31, 2023. U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Corporate debt securities Total Held to Maturity Securities Balance, December 31, 2022 Adjustment for adoption of ASU 2016-13 Provision for credit losses Charge-offs of securities Recoveries Balance, March 31, 2023 At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal and interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the three months ended March 31, 2023. Notes to Consolidated Financial Statements (Unaudited) Note 3. Loans Loans at March 31, 2023 December 31, 2022 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 credit 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. Commercial and industrial loans also include purchased loans which could have been originated outside of the Company's market area. • Consumer and other loans carry risks 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 accounting. The principal balance of purchased loans is included in the March 31, 2023 December 31, 2022 Acquired Loans- Acquired Loans- Non-Purchased Non-Purchased (Dollars in thousands) Credit Deteriorated Credit Deteriorated 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 Notes to Consolidated Financial Statements (Unaudited) The following tables provide a summary of loan classes and an aging of past due loans as of March 31, 2023 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, 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 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 – Notes to Consolidated Financial Statements (Unaudited) The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023 (in thousands). Term Loans by Year of Origination 2023 2022 2021 2020 2019 Prior Revolving Total Construction and land development Pass Special Mention Substandard Doubtful Total Construction and land development Current period gross write-offs Secured by 1-4 family residential Pass Special Mention Substandard Doubtful Total Secured by 1-4 family residential Current period gross write-offs Other real estate loans Pass Special Mention Substandard Doubtful Total Other real estate loans Current period gross write-offs Commercial and industrial Pass Special Mention Substandard Doubtful Total Commercial and industrial Current period gross write-offs Consumer and other loans Pass Special Mention Substandard Doubtful Total Consumer and other loans Current period gross write-offs The following tables provide an analysis of the credit risk profile of each loan class as of December 31, 2022 Pass Special Mention 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 The following tables present, as of March 31, 2023 Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total Allowance for credit losses: Beginning Balance, December 31, 2022 Adjustment to allowance for adoption of ASU 2016-13 Charge-offs Recoveries Provision for (recovery of) credit losses Ending Balance, March 31, 2023 Ending Balance: Individually evaluated Collectively evaluated Loans: Ending Balance Individually evaluated Collectively evaluated December 31, 2022 Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total Allowance for loan losses: Beginning Balance, December 31, 2021 Charge-offs Recoveries Provision for (recovery of) loan losses Ending Balance, December 31, 2022 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment Loans: Ending Balance Individually evaluated for impairment Collectively evaluated for impairment March 31, 2022 Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total Allowance for loan losses: Beginning Balance, December 31, 2021 Charge-offs Recoveries (Recovery of) provision for loan losses Ending Balance, March 31, 2022 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment Loans: Ending Balance Individually evaluated for impairment Collectively evaluated for impairment Nonaccrual loans The following is a summary of the Company's nonaccrual loans by major categories for the periods indicated (in thousands): CECL Incurred Loss March 31, 2023 December 31, 2022 Nonaccrual Loans with No Allowance Nonaccrual loans with an Allowance Total Nonaccrual Loans Nonaccrual Loans Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial Total Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans included loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower's capacity to pay, which included such factors as the borrower's current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans and troubled debt restructurings. The tables below include information on all loans deemed impaired. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. Impaired loans and the related allowance December 31, 2022 Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Commercial and industrial Total March 31, 2022 Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized Real estate loans: 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 Collateral-Dependent Loans The Company may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the • • Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. The following table presents the amortized cost of collateral-dependent loans (in thousands): March 31, 2023 (Dollars in thousands) Real Estate Secured Non-Real Estate Secured Total Collateral-Dependent Loans Real estate loans: Construction and land development Secured by 1-4 family residential Other real estate loans Total At March 31, 2023, there was no allowance for credit losses on collateral-dependent loans. Notes to Consolidated Financial Statements (Unaudited) Modifications Made to Borrowers Experiencing Financial Difficulty The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Term Extension (Dollars in thousands) Amortized Cost Basis % of Total Loan Type Financial Effect Real estate loans: Construction and land development Secured by 1-4 family residential Converted HELOC to 15 year term loan. Other real estate loans Commercial and industrial Total Principal Forgiveness (Dollars in thousands) Amortized Cost Basis % of Total Loan Type Financial Effect Real estate loans: Construction and land development Secured by 1-4 family residential Reduced the amortized cost basis of the loan by $29 thousand. Other real estate loans Commercial and industrial Total Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. For the three months ended March 31, 2023 and 2022, there were no payment defaults of modified loans that were modified during the previous twelve months. Unfunded Commitments The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described in Note On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $153 thousand for the adoption of ASC Topic 326. For the three months ended March 31, 2023, the Company did not record a provision for credit losses for unfunded commitments. At March 31, 2023, the liability for credit losses on off-balance-sheet exposures included in 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 Three Months Ended March 31, 2023 March 31, 2022 (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 Restricted stock units for 882 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2023 because they were antidilutive. There were restricted stock units for 193 shares of common stock considered antidilutive for the three months ended March 31, 2023 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. 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 March 31, 2023 Description Balance as of March 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Securities available for sale U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale Derivatives - cash flow hedges Total assets Fair Value Measurements at December 31, 2022 Description Balance as of December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Securities available for sale U.S. Treasury securities U.S. agency and mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale Derivatives - cash flow hedges Total assets Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements: Collateral Dependent Loans In accordance with ASC 326, the Company Other Real Estate Owned Certain assets such as OREO are measured at fair value less Notes to Consolidated Financial Statements (Unaudited) 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 March 31, 2023 Description Balance as of March 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Other real estate owned Collateral dependent loans Fair Value Measurements at December 31, 2022 Description Balance as of December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Other real estate owned Impaired loans, net Quantitative information about Level 3 Fair Value Measurements for March 31, 2023 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (1) Other real estate owned Property appraisals Selling cost Collateral dependent loans Present value of cash flows Discount rate Quantitative information about Level 3 Fair Value Measurements for December 31, 2022 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (1) Other real estate owned Property appraisals Selling cost Impaired loans, net Present value of cash flows Discount rate Notes to Consolidated Financial Statements (Unaudited) 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 March 31, 2023 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, 2022 Using Carrying Amount Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Fair Value 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 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: Three Months Ended March 31, 2023 Shares Weighted Average Grant Date Fair Value Unvested, beginning of year Granted Vested Forfeited Unvested, end of period At On May 11, 2023, the Company’s shareholders approved the First National Corporation 2023 Stock Incentive Plan, which makes available up to 325,000 shares of 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 December 31, 2021 Unrealized holding losses (net of tax, ($3,786)) Change in fair value of cash flow hedge (net of tax, $146) Change during period Balance at March 31, 2022 Balance at December 31, 2022 Unrealized holding losses (net of tax, $576) Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity (net of tax of $84) Change in fair value of cash flow hedge (net of tax, ($60)) Change during period Balance at March 31, 2023 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 March 31, 2023 March 31, 2022 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 months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 March 31, 2022 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 two interest rate swap agreements related to its outstanding junior subordinated debt. One swap agreement was related to the Company’s junior subordinated debt with a redemption date of June 17, 2034, which became effective on March 17, 2020. The notional amount of the interest rate swap was $5.0 million and terminates on June 17, 2034. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.79% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The other swap agreement was related to the Company’s junior subordinated debt with a redemption date of October 1, 2036, which became effective on April 1, 2020. The notional amount of the interest rate swap was $4.0 million and terminates on October 1, 2036. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.82% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The Company expects the junior subordinated debt instruments to transition from a LIBOR-indexed floating rate of interest to a SOFR-indexed floating rate by June 30, 2023. The Company entered into interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converted variable rate debt into fixed rate debt. Alternatively, the Company may enter into interest rate swap agreements to convert fixed rate debt into variable rate debt. Interest differentials paid or received under interest rate swap agreements are reflected as adjustments to interest expense. The Company designated the interest rate swaps as hedging instruments in qualifying cash flow hedges. Changes in fair value of these designated hedging instruments is reported as a component of other comprehensive (loss) income. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported as earnings. As of March 31, 2023, 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 March 31, 2023 and December 31, 2022 (in thousands): March 31, 2023 Notional Amount Assets Liabilities Collateral Pledged(1) Cash Flow Hedges Interest rate swap contracts December 31, 2022 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 • • • 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 or the Industry's reputation were to 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 value of the Company’s securities portfolio and its 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, 2022. 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. 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 Net income increased The Net interest income increased by $628 thousand from a $2.5 million, or 23%, increase in total interest income, and was partially offset by a $1.9 million, or 394%, increase in total interest expense. Although total average earning assets decreased by 6% in the first quarter of 2023 compared to the same period of Accretion of discounts on purchased loans, net of premium amortization, and accretion of fee income on Paycheck Protection Program (PPP) loans, net of costs, which were recorded in interest income and fees on loans, both decreased comparing the periods. Net accretion of discounts on purchased loans totaled $145 thousand in the first quarter of 2023, compared to $367 thousand in the first quarter of 2022, and net accretion from PPP fee income, net of costs, totaled $8 thousand in the first quarter of 2023, compared to $323 thousand in the first quarter of 2022. There was no provision for credit losses in the first quarter of 2023 or 2022. The allowance for credit losses on loans totaled $8.7 million, or 0.95% of total loans, on March 31, 2023, 0.81% of total loans on December 31, 2022, and 0.70% of total loans on March 31, 2022. Although net charge-offs of loans totaled $915 thousand in the first quarter of 2023, there was no impact on the provision for credit losses as the Bank established adequate specific reserves for the charged-off portion of the loans in its allowance for loan losses in a prior period. In addition to the allowance for credit losses on loans, the Bank established a $132 thousand allowance for credit losses on securities held to maturity along with the adoption of CECL on January 1, 2023. The allowance for credit losses on securities held to maturity was unchanged at $132 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses on securities held to maturity in the first quarter of 2023. The Bank also recorded an allowance for credit losses on off-balance sheet credit exposures of $153 thousand upon adoption of CECL on January 1, 2023. The allowance for credit losses on off-balance sheet credit exposures was unchanged at $153 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses on off-balance sheet credit exposures in the first quarter of 2023. Total noninterest income increased $67 thousand, or Total noninterest expense increased $556 thousand, or 6%, primarily from increases in salaries and employee benefits, marketing, ATM and check card expense, bank franchise tax, and other operating expense, which were partially offset by decreases in occupancy, FDIC assessment, and For a more detailed discussion of the Non-GAAP Financial Measures This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding Efficiency Ratio Three Months Ended March 31, 2023 March 31, 2022 Noninterest expense Add/(Subtract): other real estate owned expense, net Subtract: amortization of intangibles Subtract: merger related expenses Tax-equivalent net interest income Noninterest income 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 March 31, 2023 March 31, 2022 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 The Company’s consolidated financial statements Critical accounting policies Lending Policies There have been no material changes in the 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 Net Income Net income increased by $120 thousand, or The increase in net income resulted from a $628 thousand, or 6%, increase in net interest income and a $67 thousand, or 2%, increase in total noninterest income, which were partially offset by a $556 thousand, or 6%, increase in total noninterest expense and a $19 thousand increase in income tax expense. There was no provision for credit losses for the first quarter of 2023 or 2022. Net Interest Income Net interest income increased by $628 thousand from a $2.5 million increase in total interest income, which was partially offset by a $1.9 million increase in total interest expense. Although total average earning assets decreased by 6%, total interest income increased from a change in the composition of earning assets and from higher yields earned on interest-bearing deposits in banks, securities, and loans. The composition of earning assets changed as average loans increased $88.7 million, while average interest-bearing deposits in banks decreased $142.7 million. Interest income and fees on loans increased $2.0 million, or 21%, interest income on deposits in banks increased $274 thousand, or 391%, and interest income on total securities increased $214 thousand, or 15%. The increase in total interest expense resulted from a $1.9 million, or 552%, increase in interest expense on deposits. Interest expense on deposits increased as the Bank increased interest rates on certain deposit accounts while there were customer deposits that shifted from accounts paying lower interest rates to accounts paying higher interest rates. The unfavorable impact of the Bank’s increase of interest rates paid on deposits and the customers' shift of their deposits into accounts paying higher interest rates was partially offset by a $73.8 million decrease in average interest-bearing deposits. The net interest margin increased by 41-basis points from 3.19% in the first quarter of 2022 to 3.60% in the first quarter of 2023 and was partially offset by the 6% decrease in average earning assets. The increase in the net interest margin resulted from a The The 61-basis point increase in interest expense as a Accretion of discounts on purchased loans, net of premium amortization, and accretion of fee income on PPP loans, net of costs, was recorded in interest income and fees on loans and positively impacted net interest income. Net accretion of discounts on purchased loans totaled $145 thousand in the first quarter of 2023, compared to $367 thousand in the first quarter of 2022. Net accretion from PPP fee income, net of costs, totaled $8 thousand in the first quarter of 2023, compared to $323 thousand in the first quarter of 2022. 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 March 31, 2023 March 31, 2022 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 credit losses on loans Total non-earning assets Total assets Liabilities and Shareholders’ Equity Interest bearing deposits: Checking Regular savings Money market accounts Time deposits 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 Provision for There was no provision for credit losses in the first quarter of 2023 or 2022. The allowance for credit losses on loans totaled $8.7 million, or 0.95% of total loans on March 31, 2023, $7.4 million, or 0.81% of total loans on December 31, 2022, and $5.8 million, or 0.70% of total loans on March 31, 2022. Although net charge-offs of loans totaled $916 thousand in the first quarter of 2023, there was no impact on the provision for credit losses as the Bank established adequate specific reserves for the charged-off off portion of the loans in its allowance for loan losses in a prior period. There were no qualitative factor adjustments to the general reserve in the first quarter of 2023. The Bank Noninterest Income Total noninterest income increased $67 thousand, or 3%, primarily from an increase in service charges on deposits, ATM and check card fees, and other operating income, which were partially offset by decreases in fee income for other customer services and brokered mortgage fee income. Changes in the volume of customer transactions impacted service charges of deposits, ATM and check fees, fees for other customer services, and brokered mortgage fee income. The increase in other operating income was attributable to a death benefit payment received from a bank-owned life insurance policy. Noninterest Expense Total noninterest expense increased $556 thousand, or 6%, primarily from increases in salaries and employee benefits, marketing, ATM and check card expense, bank franchise tax, and other operating expense, which were partially offset by decreases in occupancy, FDIC assessment, and data processing expense. Other operating expense increased from recruiting, education and training, loan collections, and losses from fraudulent check and debit card activity in customer accounts. Salaries and employee benefits expense increased $222 thousand, or 4%, primarily from increases in employee salaries and wages. Marketing expenses increased $117 thousand, or 78%, primarily from the timing of marketing initiatives. ATM and check card expense increased $97 thousand, or 32%, from an increase in the volume of customer transactions and an increase in transaction costs. The $181 thousand increase in other operating expense was attributable to several items, including an increase in miscellaneous losses, education and training, director fees, loan collection expense, and an increase in losses related to customer account fraud. The increases were partially offset by decreases in occupancy, FDIC assessments, and data processing expense. Income Taxes Income tax expense increased $19 thousand for the first quarter of 2023, compared to General At March 31, 2023, assets Total liabilities decreased slightly by $548 thousand as total deposits increased by Total shareholders’ equity increased by Loans Loans totaled $918.0 million at March 31, 2023, which was a decrease of $2.6 million from December 31, 2022. Average loans 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 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. Asset Quality Management classifies non-performing assets as non-accrual loans and At March 31, 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 Securities 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 On March 31, 2023 securities totaled On September Deposits Deposits totaled $1.2 billion at March 31, 2023, which was an increase of Liquidity Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, and available lines of credit, totaled $471.2 million, $417.2 million, and $535.7 million at March 31, 2023, December 31, 2022, and March 31, 2022, respectively. Additionally, unpledged securities held-to-maturity, at par, that were eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program (the “BTFP” or the “Program”), The BTFP was first made available on March 13, 2023, and The Bank maintains on-balance sheet liquidity and off-balance sheet liquidity to fund loan growth and meet the potential demand from its deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $212.3 million at March 31, 2023, $261.7 million at December 31, The Bank’s on-balance sheet liquidity was comprised of interest-bearing deposits in banks and unpledged securities, available for sale, at fair value, and totaled $142.1 million at March 31, 2023, $129.4 million at December 31, 2022, and $294.6 at March 31, 2022. The following table provides on-balance sheet liquidity information at the periods ended (dollars in thousands): March 31, 2023 December 31, 2022 March 31, 2022 Interest-bearing deposits in banks Securities, available for sale, at fair Pledged securities, available for sale, at fair value Unpledged securities, available for sale, at fair value Totals The Bank also has access to The following table provides information about off-balance sheet liquidity available to the Bank March 31, 2023 December 31, 2022 March 31, 2022 Available unsecured Federal funds lines Available secured lines of credit: Federal Home Loan Bank of Atlanta Federal Reserve Bank Discount Window Total available secured lines of credit Totals Additionally, unpledged securities, held to maturity, at par, that were eligible to be pledged as collateral to the BTFP, totaled $91.2 million at March 31, 2023. The BTFP was first made available on March 13, 2023, and 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 During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could repurchase up to $5.0 million of its outstanding common stock through December 31, 2023. The Company repurchased 1,557 shares under this plan during the first quarter of 2023 at an average price of $16.06 per share. 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 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 On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $153 thousand for the adoption of ASC Topic 326. For the three months ended March 31, 2023, the Company did not record a provision for credit losses for unfunded commitments. At March 31, 2023, the liability for credit losses on off-balance sheet exposures included in other liabilities was $153 thousand. 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 Effective January 1, 2023, the Company adopted ASC 326, Financial Instruments – Credit Losses. We implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASC 326. Many controls under this new standard mirror controls under prior GAAP. New controls were established over the review of economic forecasting projections obtained from an independent third party. Except as related to the adoption of ASC 326, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our 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, Issuer Purchases of Equity Securities During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could repurchase up to $5.0 million of its outstanding common stock. The repurchase plan was publicly announced on October 23, 2022. Repurchases under the plan can be made through privately negotiated transactions or in the open market in accordance with Securities and Exchange Commission rules. The Company's Board of Directors authorized the purchase plan through December 31, 2023, unless the entire amount authorized to repurchase has been acquired before that date. The following table summarizes the Company's purchases of its common stock during the three months ended March 31, 2023 (dollars in thousands, except per share data): Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan March 1, 2023 - March 31, 2023 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 May 15, 2023 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 March 31, �� December 31, 2023 2022* $ 17,950 $ 20,784 59,851 46,130 162,355 162,907 151,301 153,158 1,803 1,908 909,250 913,077 184 184 21,637 21,876 4,389 4,543 24,424 24,531 3,030 3,030 131 136 16,027 17,119 $ 1,372,332 $ 1,369,383 $ 410,019 $ 427,344 676,875 677,139 154,631 136,849 $ 1,241,525 $ 1,241,332 4,996 4,995 9,279 9,279 4,721 5,417 $ 1,260,521 $ 1,261,023 $ — $ — 7,851 7,831 32,937 32,716 91,239 90,284 (20,216 ) (22,471 ) $ 111,811 $ 108,360 $ 1,372,332 $ 1,369,383 (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 $ 11,512 $ 9,496 344 70 1,339 1,132 306 305 27 21 $ 13,528 $ 11,024 $ 2,216 $ 340 69 69 67 67 $ 2,352 $ 476 $ 11,176 $ 10,548 — — $ 11,176 $ 10,548 $ 646 $ 609 800 750 776 803 196 233 — 94 149 144 211 78 $ 2,778 $ 2,711 $ 5,346 $ 5,124 528 572 587 559 268 151 148 136 343 333 400 303 106 152 254 216 202 236 5 4 3 28 1,010 830 $ 9,200 $ 8,644 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 $ 4,754 $ 4,615 905 886 $ 3,849 $ 3,729 $ 0.61 $ 0.60 $ 0.61 $ 0.60 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 $ 3,849 $ 3,729 2,162 (14,243 ) 316 — (223 ) 553 2,255 (13,690 ) $ 6,104 $ (9,961 ) 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 March 31, March 31, 2023 2022 $ 3,849 $ 3,729 398 378 5 4 1 1 — 12 (149 ) (144 ) 249 320 (25 ) (67 ) (145 ) (367 ) 338 485 4 4 (2 ) 2 325 200 154 (153 ) 400 4,660 (849 ) (440 ) $ 4,553 $ 8,624 $ 3,056 $ 7,422 2,109 813 — (21,147 ) — (49,034 ) 105 (95 ) (159 ) (195 ) 2 — — 9 256 — 1,786 (10,820 ) $ 7,155 $ (73,047 ) 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 March 31, March 31, 2023 2022 $ (17,589 ) $ 48,641 17,807 (4,434 ) — (5,000 ) (901 ) (817 ) (113 ) (183 ) (25 ) — $ (821 ) $ 38,207 $ 10,887 $ (26,216 ) $ 66,914 $ 176,006 $ 77,801 $ 149,790 $ 2,186 $ 486 $ 2,738 $ (18,030 ) $ (283 ) $ 699 $ — $ 60 $ 41 $ 57 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 (Loss) $ 7,785 $ 31,966 $ 76,990 $ 298 $ 117,039 — — 3,729 — 3,729 — — — (13,690 ) (13,690 ) — — (874 ) — (874 ) — 485 — — 485 3 54 — — 57 34 (34 ) — — — (10 ) (173 ) — — (183 ) $ 7,812 $ 32,298 $ 79,845 $ (13,392 ) $ 106,563 $ 7,831 $ 32,716 $ 90,284 $ (22,471 ) $ 108,360 — — (1,952 ) — (1,952 ) — — 3,849 — 3,849 — — — 2,255 2,255 — — (942 ) — (942 ) — 338 — — 338 3 38 — — 41 27 (27 ) — — — (2 ) (23 ) — — (25 ) (8 ) (105 ) — — (113 ) $ 7,851 $ 32,937 $ 91,239 $ (20,216 ) $ 111,811 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 September 30, 2017March 31, 2023 and December 31, 2016,2022, the statements of income and comprehensive income (loss) for the three and nine months ended September 30, 2017 March 31, 2023 and 2016 and2022, the cash flows for the three months ended March 31, 2023 and2022, and the changes in shareholders’ equity for the ninethree months ended September 30, 2017 March 31, 2023 and 2016.2022. 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, 2016.2022. Operating results for the three and nine months ended September 30, 2017March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2023. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders' equity.
Significant Accounting Policies and EstimatesApplication of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgements are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgements. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgements and as such may have a greater possibility of producing results that could be materially different than originally reported. Material estimates that are particularly susceptible to significant changes in the near term include estimates related to the determination of the allowance for credit losses.The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements and notes for the year ended December 31, 2022 and are contained in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following: - - 132 - 132 - 233 546 (313 ) 2,517 1,108 1,409 5,311 3,609 1,702 1,487 1,874 (387 ) 84 309 (225 ) 9,632 7,446 2,186 153 - 153 10Allowance for Credit Losses – LoansThe allowance for loan credit losses represents an amount which, in management’s judgement, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statement of Income. 11ASU 2022-01:January 2016, March 2020, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10)2020-04, “Reference Rate Reform (Topic 848): 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 consolidationFacilitation of the investee)Effects of Reference Rate Reform on Financial Reporting”. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be measured at fair value with changesdiscontinued. 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 fair value recognizedJanuary 2021, the FASB issued ASU No.2021-01 “Reference Rate Reform (Topic 848): Scope”. This ASU clarifies that certain optional expedients and exceptions in net income. 2) Requires public business entitiesTopic 848 for contract modifications and hedge accounting apply to usederivatives that are affected by the exitdiscounting 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 notion when measuringalignment retrospectively as of any date from the fair valuebeginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified loans and other financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilitiesthat are directly or indirectly influenced 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. LIBOR. The Company does not expect the adoption of ASU 2016-012020-04 to have a material impact on its consolidated financial statements.February 2016, June 2022, the FASB issued ASU No. 2016-02, “Leases2022-03, “Fair Value Measurement (Topic 842).820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” Among other things,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 the amendments inmeasuring fair value. The 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. years, beginning after December 15, 2023. Early applicationadoption 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.permitted. The Company does not expect the adoption of ASU 2016-022022-03 to have a material impact on its consolidated financial statements.During June 2016, FASBFinancial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial Instruments – Credit Losses2023-01, “Leases (Topic 326)842): Measurement of Credit Losses on Financial Instruments.”Common Control Arrangements”. These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. 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 amendments in this ASU areis effective for SEC filers for fiscal years andbeginning after December 15, 2023, including interim periods within those fiscal years,years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning after December 15, 2019.of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. The Company is currently assessingdoes not expect the impact thatadoption of ASU 2016-13 will2023-01 to have a material impact on its consolidated financial statements.10Notes to ConsolidatedStatements (Unaudited)During August 2016, the FASBAccounting Standards Board (FASB) issued ASU No. 2016-15, “Statement2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”,the program giving rise to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.related income tax credits. The amendments areASU is effective for public business entities for fiscal years beginning after December 15, 2017, and2023, including 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 adoptionfor all entities in anany interim period. The Company does not expect the adoption of ASU 2016-152023-02 to have a material impact on its consolidated financial statements.During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.During March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.During March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of 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 costscosts, gross unrealized gains and losses, allowance for credit losses, and fair values of debt securities at September 30, 2017March 31, 2023 and December 31, 20162022 were as follows (in thousands):
Gains
(Losses) $ 12,471 $ — $ (1,026 ) $ 11,445 $ — 106,764 86 (11,944 ) 94,906 — 64,301 16 (8,313 ) 56,004 — $ 183,536 $ 102 $ (21,283 ) $ 162,355 $ — $ 38,423 $ — $ (300 ) $ 38,123 $ — 98,048 — (7,866 ) 90,182 — 11,962 37 (1,045 ) 10,954 — 3,000 — (303 ) 2,697 (132 ) $ 151,433 $ 37 $ (9,514 ) $ 141,956 $ (132 ) $ 334,969 $ 139 $ (30,797 ) $ 304,311 $ (132 ) $ 12,468 $ — $ (1,239 ) $ 11,229 109,972 95 (13,149 ) 96,918 64,386 4 (9,630 ) 54,760 $ 186,826 $ 99 $ (24,018 ) $ 162,907 $ 38,211 $ — $ (568 ) $ 37,643 99,374 — (9,189 ) 90,185 12,573 — (1,252 ) 11,321 3,000 — (352 ) 2,648 $ 153,158 $ — $ (11,361 ) $ 141,797 $ 339,984 $ 99 $ (35,379 ) $ 304,704 13 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 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 13At September 30, 2017December 31, 2016, investmentslength of time that individual securities have been in an unrealizeda continuous loss position that were temporarily impaired wereis 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 ) $ — $ — $ 11,445 $ (1,026 ) $ 11,445 $ (1,026 ) 4,232 (55 ) 84,936 (11,889 ) 89,168 (11,944 ) 7,840 (116 ) 41,831 (8,197 ) 49,671 (8,313 ) $ 12,072 $ (171 ) $ 138,212 $ (21,112 ) $ 150,284 $ (21,283 ) $ 9,041 $ (932 ) $ 2,188 $ (307 ) $ 11,229 $ (1,239 ) 27,282 (1,945 ) 62,342 (11,204 ) 89,624 (13,149 ) 24,689 (2,581 ) 26,362 (7,049 ) 51,051 (9,630 ) $ 61,012 $ (5,458 ) $ 90,892 $ (18,560 ) $ 151,904 $ (24,018 ) $ 19,302 $ (258 ) $ 18,342 $ (310 ) $ 37,644 $ (568 ) 58,019 (6,848 ) 32,167 (2,341 ) 90,186 (9,189 ) 8,648 (1,008 ) 2,672 (244 ) 11,320 (1,252 ) 2,648 (352 ) — — 2,648 (352 ) $ 88,617 $ (8,466 ) $ 53,181 $ (2,895 ) $ 141,798 $ (11,361 ) $ 149,629 $ (13,924 ) $ 144,073 $ (21,455 ) $ 293,702 $ (35,379 ) for other-than-temporaryto determine whether the impairment is due to credit-related factors or noncredit-related factors at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. ImpairmentConsideration is consideredgiven to be other-than-temporary ifthe extent to which fair the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company (1) intends to sellretains its investment in the security (2) more likely than not will be requiredfor a period of time sufficient to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis. allow for any anticipated recovery in fair value. 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.14NotesConsolidated Financial Statements (Unaudited)maturity totaled $803 thousand and $600 thousand, respectively at March 31, 2023. Accrued interest on debt securities is included in accrued interest receivable on the Company's consolidated balance sheets.September 30, 2017,March 31, 2023, there were fifty3 out of eighty-six3 U.S. Treasury securities, 94 out of 109 U.S. agency and mortgage-backed securities, elevenand 80 out of eighty-two98 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 is considered investment grade. The weighted-average weighted-average re-pricing term of the portfolio was 4.36.5 years at September 30, 2017. At December at March 31, 2016, there were sixty-four out of eighty-three U.S. agency and mortgage-backed securities, fifty out of seventy-eight obligations of states and political subdivisions, and one corporate debt security in an unrealized loss position.2023. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, 2016.2022. The weighted-average re-pricing term of the portfolio was 4.76.5 years at December 31, 2016.2022. The unrealized losses at September 30, 2017March 31, 2023 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 nine months ended September 30, 2016, the Company sold one security from theBank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity portfolio.maturity. The Company recognized no gain orunrealized loss relatedis being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $316 thousand for the first quarter of 2023. The securities selected for transfer had larger potential decreases in their fair market values in higher interest rate environments than most of the other securities in the available for sale asportfolio and included U.S. Treasury, agency, municipal and commercial mortgage-backed securities. The securities were transferred to mitigate the potential unfavorable impact that higher market interest rates may have on the carrying value of the security sold equaledsecurities and on the proceeds from the salerelated accumulated other comprehensive loss. 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.Consolidated Financial Statements (Unaudited)September 30, 2017March 31, 2023 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 $ 500 $ 500 $ 19,949 $ 19,779 20,323 19,219 27,721 27,181 40,251 37,157 24,100 21,910 122,462 105,479 79,663 73,086 $ 183,536 $ 162,355 $ 151,433 $ 141,956 The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017, and no impairment has been recognized.September 30, 2017March 31, 2023 and December 31, 20162022 was as follows (in thousands): $ 691 $ 796 980 980 132 132 $ 1,803 $ 1,908 $ 38,423 $ 22,763 $ 2,911 $ — $ 64,097 — — 9,051 — 9,051 — — — 3,000 3,000 — 75,285 — — 75,285 $ 38,423 $ 98,048 $ 11,962 $ 3,000 $ 151,433 $ 38,211 $ 22,706 $ 3,126 $ — $ 64,043 — — 9,447 — 9,447 — — — 3,000 3,000 — 76,668 — — 76,668 $ 38,211 $ 99,374 $ 12,573 $ 3,000 $ 153,158 $ — $ — $ — $ — $ — — — — 132 132 — — — — — — — — — — — — — — — $ — $ — $ — $ 132 $ 132 15 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 15September 30, 2017March 31, 2023 and December 31, 20162022 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 $ 48,610 $ 51,840 334,302 331,421 416,001 418,456 110,937 111,225 8,117 7,581 $ 917,967 $ 920,523 (8,717 ) (7,446 ) $ 909,250 $ 913,077 categoriescategories were $236$864 thousand and $142and $838 thousand at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Consumer and other loans included $196included $179 thousand and $264$197 thousand of demand deposit overdrafts at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively.1-4collateral.Real estate construction and land developmentallowance for credit losses calculation. The remaining net discount on purchased loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budgetat March 31, 2023 was $2.4 million. The outstanding principal balance and the value carrying amount atMarch 31, 2023 and December 31, 2022 of 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.follows: $ 178,664 $ 187,017 $ 9,876 $ 9,823 41,013 42,915 99,115 103,521 22,737 24,661 3,531 3,560 $ 176,272 $ 184,480 16Other 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.16September 30, 2017March 31, 2023 and December 31, 20162022 (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 $ 427 $ — $ 1,003 $ 1,430 $ 47,180 $ 48,610 $ 1,044 $ — 1,422 16 82 1,520 332,782 334,302 474 — 17 — 109 126 415,875 416,001 73 47 5 16 — 21 110,916 110,937 — — 3 14 — 17 8,100 8,117 — — $ 1,874 $ 46 $ 1,194 $ 3,114 $ 914,853 $ 917,967 $ 1,591 $ 47 > 90 Days Past Due Total Loans Non-accrual Loans 90 Days or More Past Due and Accruing $ 115 $ 20 $ 1,045 $ 1,180 $ 50,660 $ 51,840 $ 1,045 $ — 1,033 60 207 1,300 330,121 331,421 530 — 109 — — 109 418,347 418,456 13 — 31 130 1,085 1,246 109,979 111,225 1,085 — 26 25 — 51 7,530 7,581 — — $ 1,314 $ 235 $ 2,337 $ 3,886 $ 916,637 $ 920,523 $ 2,673 $ — 17Notes to Consolidated Financial Statements (Unaudited)17 March 31, 2023 $ 627 $ 3,598 $ 8,074 $ 2,695 $ 2,327 $ 3,863 $ 26,382 $ 47,566 — — — — — — — — — — — — — 1,044 — 1,044 — — — — — — — — $ 627 $ 3,598 $ 8,074 $ 2,695 $ 2,327 $ 4,907 $ 26,382 $ 48,610 $ — $ — $ — $ — $ — $ — $ — $ — $ 8,910 $ 65,912 $ 65,803 $ 41,706 $ 32,203 $ 74,313 $ 44,685 $ 333,532 — — — — — — — — — — — — — 770 — 770 — — — — — — — — $ 8,910 $ 65,912 $ 65,803 $ 41,706 $ 32,203 $ 75,083 $ 44,685 $ 334,302 $ — $ — $ — $ — $ — $ — $ — $ — $ 2,488 $ 94,258 $ 88,542 $ 42,553 $ 41,713 $ 135,868 $ 9,137 $ 414,559 — — — 1,369 — — — 1,369 — — — — — 73 — 73 — — — — — — — — $ 2,488 $ 94,258 $ 88,542 $ 43,922 $ 41,713 $ 135,941 $ 9,137 $ 416,001 $ — $ — $ — $ — $ — $ — $ — $ — $ 5,659 $ 35,448 $ 29,514 $ 4,743 $ 7,709 $ 11,446 $ 16,349 $ 110,868 — — — 69 — — — 69 — — — — — — — — — — — — — — — — $ 5,659 $ 35,448 $ 29,514 $ 4,812 $ 7,709 $ 11,446 $ 16,349 $ 110,937 $ — $ — $ — $ 623 $ — $ 228 $ — $ 851 $ 1,365 $ 2,028 $ 606 $ 1,643 $ 2,344 $ 96 $ 35 $ 8,117 — — — — — — — — — — — — — — — — — — — — — — — — $ 1,365 $ 2,028 $ 606 $ 1,643 $ 2,344 $ 96 $ 35 $ 8,117 $ 82 $ 26 $ 1 $ 14 $ — $ 3 $ — $ 126 September 30, 2017 and December 31, 20162022 (in thousands): $ 50,795 $ — $ 1,045 $ — $ 51,840 330,590 — 831 — 331,421 416,559 1,884 13 — 418,456 110,065 75 1,085 — 111,225 7,581 — — — 7,581 $ 915,590 $ 1,959 $ 2,974 $ — $ 920,523 18 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 18LoanCredit LossesSeptember 30, 2017, and during the periods ended March 31, 2023, December 31, 20162022 and September 30, 2016,March 31, 2022, the total allowance for loan losses,activity in the allowanceACLL by impairment methodologyportfolio, and information about individually evaluated and collectively evaluated loans by impairment methodology (in thousands): $ 546 $ 1,108 $ 3,609 $ 1,874 $ 309 $ 7,446 (313 ) 1,409 1,705 (391 ) (224 ) 2,186 — — — (851 ) (126 ) (977 ) — 5 2 — 55 62 11 74 (150 ) (15 ) 80 — $ 244 $ 2,596 $ 5,166 $ 617 $ 94 $ 8,717 — — — — — — 244 2,596 5,166 617 94 8,717 $ 48,610 $ 334,302 $ 416,001 $ 110,937 $ 8,117 $ 917,967 1,044 474 73 — — 1,591 47,566 333,828 415,928 110,937 8,117 916,376 $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 — (6 ) — (32 ) (491 ) (529 ) 10 19 15 145 226 415 191 18 364 1,043 234 1,850 $ 546 $ 1,108 $ 3,609 $ 1,874 $ 309 $ 7,446 — — — 888 — 888 546 1,108 3,609 986 309 6,558 $ 51,840 $ 331,421 $ 418,456 $ 111,225 $ 7,581 $ 920,523 1,045 530 13 1,085 — 2,673 50,795 330,891 418,443 110,140 7,581 917,850 19 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 $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 — — — (8 ) (98 ) (106 ) 4 5 2 140 73 224 (1 ) (113 ) 145 (40 ) 9 — $ 348 $ 969 $ 3,377 $ 810 $ 324 $ 5,828 — — — — — — 348 969 3,377 810 324 5,828 $ 49,308 $ 290,408 $ 384,191 $ 103,682 $ 8,834 $ 836,423 — 619 28 1,483 — 2,130 49,308 289,789 384,163 102,199 8,834 834,293 $ 1,044 $ — $ 1,044 $ 1,045 474 — 474 530 73 — 73 13 — — — 1,085 $ 1,591 $ — $ 1,591 $ 2,673 20 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 September 30, 2017, as of and for the periods ended December 31, 20162022 and September 30, 2016,March 31, 2022, 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 $ 2,412 $ 1,045 $ — $ 1,045 $ — $ 30 $ 75 680 530 — 530 — 580 11 26 13 — 13 — 22 — 1,084 — 1,085 1,085 888 650 40 $ 4,202 $ 1,588 $ 1,085 $ 2,673 $ 888 $ 1,282 $ 126 $ 743 $ 618 $ — $ 618 $ — $ 732 $ 1 39 28 — 28 — 29 0 1,680 1,484 — 1,484 — 1,491 — $ 2,462 $ 2,130 $ — $ 2,130 $ — $ 2,252 $ 1 September 30, 2017, December 31, 2022 and March 31, 2022, loans classified as troubled debt restructurings (TDRs) and included in impaired loans in the disclosure above totaled $340 thousand.$101 thousand and $1.6 million, respectively. At September 30, 2017, $287 thousandDecember 31, 2022 and March 31, 2022, 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 in TDRs at December 31, 2016, $300 thousand of which were performing under the restructured terms. Modified terms under TDRs may includeincluded 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. ThereDuring the three months ended March 31, 2022, there were no loans modified under TDRs during the three and nine month periods ended September 30, 2017. There was one loan secured by 1-4 family residential real estate classified as a TDR during the three 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.TDRs. and nine months ended September 30, 2017 March 31, 2023 and 2016,2022, there were no troubled debt restructuringsTDRs 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 inbalanceloans are evaluated for OREOexpected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are as followsdetermined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. • Home equity lines of credit are generally secured by second mortgages on residential real estate property. • Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral. $ 1,044 $ — $ 1,044 474 — 474 73 — 73 $ 1,591 $ — $ 1,591 21 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 applicable 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, 2016.22
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the real estate loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.
The following table shows the amortized cost basis as of March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty: $ — 0.00 % 76 0.02 % — 0.00 % — 0.00 % $ 76 0.02 % $ — 0.00 % 20 0.01 % — 0.00 % — 0.00 % $ 20 0.01 % 6. Other Borrowings1, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Bank had unusedCompany has identified the unfunded portion of certain lines of credit totaling $131.1 million and $125.6 million available with non-affiliated banksas unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment 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 ofany time. No 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 Bankloss estimate is subject to various regulatory capital requirements administeredreported for off-balance-sheet credit exposures that are unconditionally cancellable by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulatorsCompany or for undrawn amounts under such arrangements that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015, with full compliance of all the requirements 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 may 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.23Notes 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.Note 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 significantlydrawn prior to the distributioncancellation of plan assets. Pension plan assets are expected to remainthe arrangement. cash and equivalents through the distribution date.other liabilities was $153 thousand. 2522Components 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 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 Share and nine months ended September 30, 2017 March 31, 2023 and 20162022 (dollars in thousands, except per share data): 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) $ 3,849 $ 3,729 6,273,913 6,238,973 7,203 6,732 6,281,116 6,245,705 $ 0.61 $ 0.60 $ 0.61 $ 0.60 12.6. Fair Value Measurements1)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).23September 30, 2017March 31, 2023 and December 31, 20162022 (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 $ — $ 11,445 $ — $ 11,445 $ — 94,906 — 94,906 — 56,004 — 56,004 — $ 162,355 $ — $ 162,355 $ — 2,396 — 2,396 — $ 164,751 $ — $ 164,751 $ — $ 11,229 $ — $ 11,229 $ — 96,918 — 96,918 — 54,760 — 54,760 — $ 162,907 $ — $ 162,907 $ — 2,679 — 2,679 — $ 165,586 $ — $ 165,586 $ — 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,with an ACLLrecords any fair value adjustmentsmay determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans heldan individual basis and excluded from the collective evaluation. Specific allocations of the allowance for sale during nine months ended September 30, 2017 andcredit losses are determined by analyzing the year ended December 31, 2016.Impaired LoansLoans are designated as impaired when, inborrower’s ability to repay amounts owed, collateral deficiencies, the judgment of management based on current information and events, it is probable that all amounts due according to the contractual termsrelative risk grade of the loan agreements will notand economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collected. The measurement of loss associated with impaired loans cancollateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be based onprovided substantially through the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market priceoperation or sale of the loan, orcollateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. There was no allowance for credit losses on collateral dependent loans at March 31, 2023.estimated costscost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.2824Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2) within the last twelve months. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.Other real estate ownedLoans are transferred to other real estate owned when the collateral securing them is foreclosed on or acquired through a deed in lieu of foreclosure. The measurement of loss associated with other real estate owned is 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 the Consolidated Statements of Income. $ 184 $ — $ — $ 184 1,591 — — 1,591 $ 1,848 $ — $ — $ 184 197 — — 197 $ 184 10.00 % $ 1,591 6.50 % $ 184 10.00 % 197 6.50 % (1) Unobservable inputs were weighted by the relative fair value of the instruments. 25 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 September 30, 2017March 31, 2023 and December 31, 20162022 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 $ 77,801 $ 77,801 $ — $ — $ 77,801 162,355 — 162,355 — 162,355 151,301 — 141,956 — 141,956 1,803 — 1,803 — 1,803 909,250 — — 877,833 877,833 24,424 — 24,424 — 24,424 4,389 — 4,389 — 4,389 2,396 — 2,396 — 2,396 $ 1,241,525 $ — 1,086,894 150,040 $ 1,236,934 4,996 — — 5,318 5,318 9,279 — — 5,936 5,936 354 — 354 — 354 $ 66,914 $ 66,914 $ — $ — $ 66,914 162,907 — 162,907 — 162,907 153,158 — 141,797 — 141,797 1,908 — 1,908 — 1,908 913,077 — — 880,473 880,473 24,531 — 24,531 — 24,531 4,543 — 4,543 — 4,543 2,679 — 2,679 — 2,679 $ 1,241,332 $ — $ 1,104,483 $ 131,304 $ 1,235,787 4,995 — — 5,267 5,267 9,279 — — 6,067 6,067 163 — 163 — 163 26 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$200 thousand and $352 thousand for the ninethree months ended September 30, 2017. The Company did not have compensation expense related to stock awards for the nine months ended September 30, 2016.32Notes to Consolidated Financial Statements (Unaudited)ended March 31, 2023, respectively. oneone share of common stock on a specified issuance date.In2017, 3,9392023, 13,727 restricted stock units were granted to employees, with 1,3174,580 units vesting immediately, and 2,6229,147 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 29,181 $ 20.31 13,727 17.54 (11,401 ) 19.2 — — 31,507 $ 20.31 September 30, 2017,March 31, 2023, 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$411 thousand. This expense is expected to be recognized through 2019.2026. Compensation expense related to restricted stock unit awards recognized for the ninethree months ended September 30, 2017 March 31, 2023 and 20162022 totaled $57$138 thousand and $72$134 thousand, respectively. AsSeptember 30, 2017,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 is equal to the fair value of the award and recognized over the vesting period. Beginning on May 11, 2023, equity awards granted by the Company does not expectwould be from the forfeiture2023 Stock Incentive Plan and would not be granted from the 2014 Stock Incentive Plan. 2714.8. 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) $ (445 ) $ 743 $ 298 (14,243 ) — (14,243 ) — 553 553 (14,243 ) 553 (13,690 ) $ (14,688 ) $ 1,296 $ (13,392 ) $ (24,587 ) $ 2,116 $ (22,471 ) 2,162 — 2,162 316 — 316 — (223 ) (223 ) 2,478 (223 ) 2,255 $ (22,109 ) $ 1,893 $ (20,216 ) tables presenttable presents information related to reclassifications from accumulated other comprehensive lossincome (loss) for the three months ended March 31, 2023 and nine month periods ended September 30, 2017 and 20162022 (in thousands).:$ — $ — — — $ — $ — 28
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. $ 646 $ 609 800 750 776 803 — 94 196 233 $ 2,418 $ 2,489 360 222 $ 2,778 $ 2,711 29 $ 9,000 $ 2,396 $ — $ — $ 9,000 $ 2,679 $ — $ — (1) Collateral pledged may be comprised of cash or securities. Details 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 Details 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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe Companyloancredit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.strategy. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:conditions in the financial markets and economic conditions may adversely affect the Company’s business;the inability of the Company to successfully manage its growth or implement its growth strategy;difficulties in combining the operations of 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.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; changes in 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 September 30, 2017March 31, 2023 and statements of income of the Company for thethree months ended March 31, 2023 and nine month periods ended September 30, 2017 and 20162022 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, 2016.2022. The statements of income for thethree and nine month periodsmonths ended September 30, 2017March 31, 2023 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 investsowns an interest in entitiesan entity that provideprovides title insurance and investment services. Bank of Fincastle Services, Inc. is no longer an active operating entity. Shen-Valley Land Holdings, 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 2017.2022. 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 periodthree months ended September 30, 2017,March 31, 2023, followed by occupancy and equipment expense, which comprised 13%comprised 12% of noninterest expenses. Historically, theThe provision for loancredit 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 loancredit losses.by $138$120 thousand, or 3%, to $1.8$3.8 million, or $0.37$0.61 per basic and diluted share, for the three months ended September 30, 2017,March 31, 2023, compared to $1.7$3.7 million, or $0.34$0.60 per basic and diluted share, for the same period in 2016.2022. Return on average assets was 1.00%1.15% and return on average equity was 12.78%14.2% for the thirdfirst quarter of 2017,2023, compared to 0.95%1.06% and 13.44%13.4%, respectively, for the same period in 2016.2022. $138 thousand increase in net income for the three month period ended September 30, 2017 resulted primarily from a $573$628 thousand, or 10%6%, increase in net interest income, and a $46$67 thousand, or 1%2%, decreaseincrease in total noninterest expenses,income, which were partially offset by a $556 thousand, or 6%, increase in total noninterest expense. There was no provision for credit losses in the first quarter of 2023 or 2022.2016. These increases were2022, total interest income increased from an increase in the yield on all earning asset classes and a change in the composition of earning assets. Average loans increased $88.7 million, while average interest-bearing deposits in banks decreased $142.7 million. Total interest expense increased from higher interest rates paid on deposits and was partially offset by a $294$73.8 million decrease in average interest-bearing deposits.13%2%, decrease in noninterest income and a $187 thousandprimarily from an 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 3%, and the net interest margin increased 22 basis points to 3.79% for the third quarter of 2017, compared to 3.57% 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 supplies expense, lowerdeposits, ATM and check card fees, lowerand other operating income, which were partially offset by decreases in fee income from other customer services and brokered mortgage fee income.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. data processing expense. provision for loan losses,Company's quarterly performance, see "Net Interest Income,” “Provision for Loan Losses”Credit Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below.33Year-to-Date PerformanceNet income increased by $905 thousand to $5.1 million, or $1.04 per basic and diluted share, for the nine months ended September 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 periodTable 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.ContentsNet 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.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 methodology for determining this measurement may differ among companies. 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). 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 % $ 9,200 $ 8,644 (3 ) (28 ) (5 ) (4 ) — (20 ) $ 9,192 $ 8,592 $ 11,258 $ 10,634 2,778 2,711 $ 14,036 $ 13,345 65.49 % 64.38 % 20172023 and 20162022 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). $ 11,512 $ 9,496 2,016 1,528 (2,216 ) (340 ) (69 ) (69 ) (67 ) (67 ) $ 11,176 $ 10,548 $ — $ 8 82 81 $ 82 $ 89 $ 11,258 $ 10,637 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 34Critical Accounting PoliciesGeneral and related notes are prepared in accordance with GAAP. The financial information contained within theour 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 the Company’s transactions would be the same,may not change, the timing of events that would impact the transactions could change.Presented below is a discussion of thosethat management believes are the most important (“Critical Accounting Policies”) to the portrayal and understanding of the Company’s financial condition andor results of operations. The Critical Accounting Policiesoperations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. In the eventIf conditions occur that differentdiffer from our assumptions, or conditions were to prevail, and depending upon the severity of such changes,differences, the possibility of materially differentCompany’s financial condition or results of operations is a reasonable likelihood.Allowance for Loan LossesThe 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 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.be materially impacted. The Company performs regular credit reviews of the loan portfolio to review credit qualityevaluates its critical accounting estimates and adherence to underwriting standards. The credit reviews consist of reviews by its internal credit administration departmentassumptions on an ongoing basis 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 our primary credit quality indicator. updates them as needed. The Company has various committees that reviewprovides additional information on its critical accounting policies and ensure that the allowance for loans losses methodology isestimates under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in accordance with GAAPits 2022 Form 10-K and loss factors used appropriately reflect the risk characteristicsin Note 1 “Significant Accounting Policies and Estimates” in Part I, Item 1 of the loan portfolio.The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs,this Quarterly Report.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 changesCompany’s lending policies disclosed in the value of the collateral.Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area.The allowance for loan losses consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows, fair value of collateral less estimated costs to sell or 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 notAnnual Report on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions among other considerations.The general component covers loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is calculated by loan type and uses an average loss rate during the preceding twelve quarters. The qualitative factors are assigned by management based on delinquencies and asset quality, national and local economic trends, effects of the changes in the value of underlying collateral, trends in volume and nature of loans, effects of changes in the lending policy, the experience and depth of management, concentrations of credit, quality of the loan review system and the effect of external factors such as competition and regulatory requirements. The factors assigned differ by loan type. The general allowance estimates losses whose impact on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor. For further information regarding the allowance for loan losses see Note 4 to the Consolidated Financial Statements.Other Real Estate Owned (OREO)Other real estate owned (OREO) consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans and properties originally acquired for branch operations or expansion but no longer intended to be used for that purpose. OREO is initially recorded at fair value less estimated costs to sell to establish a new cost basis. OREO is subsequently reported at the lower of cost or fair value less costs to sell, determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors or recent developments, such as changes in absorption rates or marketconditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustments to the collateral value estimates indicated in the appraisals. Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its distressed asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned. Management reviews the value of other real estate owned each quarter 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 from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. 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 prospectsForm 10-K for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.Core Deposit IntangiblesAcquired intangible assets (such as core deposit intangibles) are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life. The Company amortizes intangible assets arising from branch transactions over their useful life. Core deposit intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.Lending PoliciesGeneralIn 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 who have been pre-approved by the Board Loan Committee.As part of 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 throughout the year in order to ensure standards of quality are met. The Company also obtains an independent review of loans within the portfolio on an annual basis to analyze loan risk ratings and validate specific reserves on impaired loans.In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are disclosed but not reflected in its financial statements, including commitments to extend credit. At 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, 2022.loancredit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consistsconsist 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.expense.Net Interest IncomeFor3%, to $3.8 million, or $0.61 per diluted share, for the three months ended September 30, 2017, net interest income increased $573 thousand, or 10%, to $6.4 million for the quarter ended September 30, 2017,March 31, 2023, compared to $5.8$3.7 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 $0.60 per diluted share, for the same period in 2016.2022. Return on average assets was 1.15% and return on average equity was 14.20% for the first quarter of 2023, compared to 1.06% and 13.40%, respectively, for the same period in 2022.28 basis102-basis point increase in the yield on total earning assets whichand was partially offset by a 6 basis61-basis point increase in interest expense as a percentpercentage of average earning assets.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 balances increased to 75% of average earning assets for the quarter ended September 30, 2017, compared to 71% of average earning assets for the same period in 2016.The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits, with the largest impact coming from the cost of interest-bearing checking accounts, which increased by 17 basis points comparing the periods.For the nine months ended September 30, 2017, net interest income increased $1.3 million, or 8%, to $18.7 million, compared to $17.3 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% for the nine months ended September 30, 2017, compared to 3.61% for the same period in 2016. The 13 basis point increase in the net interest margin resulted from a 17 basis102-basis point increase in the yield on total earning assets which was partially offset byattributable to higher yields in all earning asset categories and a 4 basischange in the earning asset composition. Average loans as a percentage of earning assets increased to 72% in the first quarter of 2023 from 61% in the first quarter of 2022, while average interest-bearing deposits in banks decreased to 3% from 13%, and average securities decreased to 25% from 26% of average earning assets.percentpercentage of average earning assets.The higher yield on earning assets was 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 3 basis points, 14 basis points, and 35 basis points, respectively. A change in the asset composition also favorably impacted the earning asset yield, as average loan balances increased to 74% of average earning assets for the nine months ended September 30, 2017, compared to 70% of average earning assets for the same period in 2016.The 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,deposits, which increased by 16 basis points comparingto 1.11% for the periods.first quarter of 2023 from 0.16% for the first quarter of 2022. 35 Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate $ 260,034 $ 1,339 2.09 % $ 284,016 $ 1,132 1.62 % 54,733 388 2.87 % 61,308 386 2.55 % 1,905 27 5.85 % 1,825 21 4.72 % $ 316,672 $ 1,754 2.25 % $ 347,149 $ 1,539 1.80 % $ 915,863 $ 11,512 5.10 % $ 824,988 $ 9,477 4.66 % — — — 2,223 27 4.49 % $ 915,863 $ 11,512 5.10 % $ 827,211 $ 9,504 4.66 % 1 — 0 — — — 35,293 344 3.95 % 177,951 70 0.16 % $ 1,267,829 $ 13,610 4.35 % $ 1,352,311 $ 11,113 3.33 % (9,534 ) (5,766 ) 93,334 83,979 $ 1,351,629 $ 1,430,524 $ 276,611 $ 942 1.38 % $ 289,475 $ 100 0.14 % 194,751 61 0.13 % 206,798 25 0.05 % 198,177 746 1.53 % 246,958 52 0.08 % 143,070 467 1.32 % 143,201 163 0.46 % $ 812,609 $ 2,216 1.11 % $ 886,432 $ 340 0.16 % 6 — 0.05 — — 0.00 % 4,995 69 5.62 % 6,244 69 4.50 % 9,279 67 2.91 % 9,279 67 2.91 % 222 — — % — — — % $ 827,111 $ 2,352 1.15 % $ 901,955 $ 476 0.21 % 409,777 411,576 4,817 4,171 $ 1,241,705 $ 1,317,702 109,924 112,822 $ 1,351,629 $ 1,430,524 $ 11,258 $ 10,637 3.20 % 3.12 % 0.77 % 0.15 % 0.75 % 0.14 % 3.60 % 3.19 % 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$89 thousand for the three months ended September 30, 2017ended March 31, 2023 and 2016,2022, respectively.(2)placed on a non-accrual status are reflected in the balances.Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) 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 % 36(1)Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34%. The tax-equivalent adjustment was $279 thousand and $295 thousand for the nine months ended September 30, 2017 and 2016, respectively.(2)Loans placed on a non-accrual status are reflected in the balances.LoanCredit Lossesdidestablished a $132 thousand allowance for credit losses on securities held to maturity along with the adoption of CECL on January 1, 2023. The allowance for credit losses on securities held to maturity was unchanged at $133 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for loancredit losses duringfor securities held to maturity in the thirdfirst quarter of 2017 or 2016, which resulted in a total allowance for loan losses of $5.3 million, or 1.03% of total loans, at September 30, 2017. This compared to2023. The Bank also recorded an allowance for loancredit losses on off-balance sheet credit exposures of $5.3 million, or 1.09%$153 thousand upon adoption 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.CECL on January 1, 2023. The allowance for loancredit losses allocatedon off-balance sheet credit exposures was unchanged at $153 thousand at March 31, 2023, and as a result, it was not necessary 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 loancredit losses duringon off-balance sheet credit exposures in 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 thirdfirst quarter of 2017,2023.$124 thousandthe same period one year ago. The effective tax rate for the first quarter of net charge-offs2023 was 19.0% compared to 19.2% for the same period in 2016.For2022. The reduced effective tax rate for 2023 was primarily the nine months ended September 30, 2017 or 2016, the Bank did not record a provision for loan losses. During 2017, an increaseresult of higher non-taxable income relative to taxable income in the general reserve component of the allowance for loan losses was offset by a decrease in the specific reserve component. Net charge-offs totaled $20 thousand for the first nine months of 20172023 compared to $86 thousand of net recoveries for the same period of 2016. The increase in the general reserve resulted primarily from the impact of $28.6 million of loan growth during the first nine 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, compared to $2.3 million for the same period in 2016. The decrease in noninterest income was primarily attributable to a $181 thousand, or 19%, decrease in service charges on deposit accounts and a $113 thousand, or 62%, 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 the third quarter of 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 $20 thousand increase in wealth management fees.For the nine months ended September 30, 2017, noninterest income decreased $430 thousand, or 7%, to $5.9 million, compared to $6.4 million for the same period in 2016. The decrease in noninterest income was primarily attributable to a $385 thousand, or 15%, decrease in service charges on 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 in 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 decreases were partially offset by a $38 thousand increase in salaries 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 assessment resulted from lower FDIC deposit insurance assessment rates as a result of changes put into effect by the FDIC combined with the Bank's financial condition. Amortization expense decreased due to accelerated amortization of core deposit intangibles in prior quarters.The increase in salaries and employee benefits resulted primarily from higher health insurance expense and from the addition of employees during the quarter 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 expenses 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 expense 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 decreased 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 by an increase in the amount of employer contributions to the Company’s 401(k) defined contribution plan. The decrease in FDIC assessment resulted from lower FDIC deposit insurance assessment rates as a result of the 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 years.Income Taxes2022. 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 March 31, 2023, and nine month periods ended September 30, 2017 and 2016.2022. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income.income, and 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, 2016.2022.Totalincreased by $15.5totaled $1.4 billion, which was an increase of $2.9 million to $731.5 million at September 30, 2017 compared to $716.0 million atfrom December 31, 2016.2022. The increase from the prior period was primarily attributabledue to a $28.7$13.7 million increase in net loans, when comparing the periods. The increase in net loans was partially offset by a $6.5 million decrease in interest-bearing deposits in banks and a $5.7 million decreasewas partially offset by decreases in cash and due from banks, securities, since December 31, 2016.loans, and other assets.$10.7 million to $656.3 million at September 30, 2017 compared to $645.6 million at December 31, 2016. Noninterest-bearing demand$193 thousand, which was offset by accrued interest payable and other liabilities that decreased by $742 thousand during the quarter. Although total deposits increased slightly, the composition of deposits changed as noninterest-bearing deposits and savings and interest-bearing deposits increased $11.3decreased $17.3 million and $1.8 million,$264 thousand, respectively, when comparing the periods. These increases were partially offset by a $2.4 million decrease inwhile time deposits since December 31, 2016.LoansLoans, net of the allowance for loan losses, increased $28.7 million, or 6% to $509.4 million at September 30, 2017, compared to $480.7 million at December 31, 2016. Growth of the loan portfolio was led$17.8 million.other real estate loans with balances that increased $10.9$3.5 million during the first nine monthsquarter from a $955 thousand increase in retained earnings and a $2.3 million decrease in accumulated other comprehensive loss. The decrease in accumulated other comprehensive loss was attributable to an improvement in unrealized losses in the available-for-sale securities portfolio, primarily from changes in market rates. During the first quarter, retained earnings increased after absorbing cash dividend payments to common shareholders of 2017, followed by consumer$0.15 per share and othera $1.9 million decrease to retained earnings on January 1, 2023 from the adoption of CECL. The Company's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.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 industrial loans, and consumer and other loans. Real estate loans are further divided into the following classes: Construction and Land Development; 1-4 Family Residential; and Other Real Estate Loans. Descriptions of the Company’s loan classes are as follows:Real Estate Loans – Construction and Land Development: The Company originates construction loanstotaled $915.9 million for the acquisition and developmentfirst quarter of land and construction2023, which was an increase of commercial buildings, condominiums, townhomes, and one-to-four family residences.Real Estate Loans – 1-4 Family: This class$1.0 million from the fourth quarter 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 of commercial real estate typically2022. There were no significant changes 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 commercial loans secured by real estate throughoutcomposition during the Bank's market area. The abilityfirst quarter.38loancredit losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of purchase premiums and discounts, recognized evenly over the life of the loans.$89$47 thousand at September 30, 2017, compared to $116 thousandMarch 31, 2023. There were no loans greater than 90 days past due and still accruing at December 31, 2016.2022. 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.Impaired LoansA 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 $5.0 million and $4.9 million at September 30, 2017 and December 31, 2016, respectively.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 being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. There were $340 thousand and $460 thousand in loans classified as TDRs as of September 30, 2017 and December 31, 2016, respectively.other real estate owned (OREO).OREO. Non-performing assets totaled $1.8 million and $2.9 million at March 31, 2023 and December 31, 2022, representing approximately 0.13% and 0.21% of total assets, respectively. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in branch operations, or expansion but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank’sBank had $184 thousand in unimproved real estate classified as OREO totaled $250 thousand at September 30, 2017March 31, 2023 and December 31, 2016. There was2022. The Bank did not a valuation allowance for otherhave any consumer mortgage loans secured by real estate owned at September 30, 2017 or Decemberproperties for which formal foreclosure proceedings were in process as of March 31, 2016.2023.39Non-performing assets totaled $2.4 million at September 30, 2017 and $1.8 million at December2016, representing 0.32% and 0.25% of total assets, respectively. Non-performing assets included $2.1 million in non-accrual loans and $250 thousand in OREO at September 30, 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%2023, 27% of non-performing assets related to construction and land development loans, 26% related towere comprised of residential real estate loans, 18% related to commercial real estate loans, and 11% related to properties originally used for branch operations which are no longer used for that purpose.loans. Additionally, 10% was comprised of OREO. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $9.2$1.7 million and $8.1$2.3 million at September 30, 2017March 31, 2023 and December 31, 2016,2022, 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.Loans greater than 90 days past due and still accruing totaled $89 thousand at September 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. There were $116 thousand of loans greater than 90 days past due and still accruing at December 31, 2016.The allowance for loan losses represents management’s analysis of the existing loan portfolio and related credit risks. The provision for loan losses is based upon management’s current estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses totaled $5.3 million at September 30, 2017 and December 31, 2016, representing 1.03% and 1.09% of total loans, respectively. For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above.Recoveries of loan losses of $17 thousand, $422 thousand, $232 thousand, and $1 thousand were recorded in the construction and land development, 1-4 family residential, other real estate, and commercial and industrial loan classes, respectively, during the nine month period ended September 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. The 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 were offset by provision for loan losses experienced in the consumer and other loan class. The provision for loan losses in 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.Impaired loans totaled $5.0 million and $4.9 million at September 30, 2017 and December 31, 2016, respectively. There was not a 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 thousand at December 31, 2016. The average recorded investment in impaired loans during the nine months ended September 30, 2017 and the year ended December 31, 2016 was $4.8 million and $7.0 million, respectively. Included in the impaired loans total are loans classified as TDRs totaling $340 thousand and $460 thousand at September 30, 2017 and December 31, 2016, respectively. Loans classified as TDRs represent situations in which a modification to the contractual interest rate or repayment structure has been granted to address a financial hardship. As of September 30, 2017, $287 thousand of these TDRs were performing under the restructured terms and were not considered non-performing assets.loancredit 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 loancredit 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 loancredit losses, see “Critical Accounting Policies” above.securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.Securities at September 30, 2017$144.0$315.5 million, a decrease of $5.7$2.5 million, or 4%0.8%, from $149.7$318.0 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.2022. 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 September 30, 2017,March 31, 2023, 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$102 thousand and $333$99 thousand at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Gross unrealized losses in the available for sale portfolio totaled $835 thousand$21.3 million and $1.6$24.0 million at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Gross unrealized gains in the held to maturity portfolio totaled $287$37 thousand and $19 thousand$0 at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Gross unrealized losses in the held to maturity portfolio totaled $247 thousand$9.5 million and $708 thousand$11.4 million at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Investments in an unrealized loss position were considered temporarily impaired at September 30, 2017 and December 31, 2016. The change in the unrealized gains and losses of investment securities from December 31, 20162022 to September 30, 2017March 31, 2023 was related to changes in market interest rates and was not related to credit concerns of the issuers.DepositsAt30, 2017, deposits1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $656.3 million,$400 thousand, or $316 thousand net of tax, for the first quarter of 2023. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.$10.7 million,$193 thousand from $645.6 million at December 31, 2016. There was not a significant change in the deposit mix when comparing the periods. At September 30, 2017, noninterest-bearing2022. Noninterest-bearing demand deposits decreased $17.3 million and savings and interest-bearing demand deposits anddecreased $264 thousand, while time deposits composed 27%, 54%, and 19%increased $17.8 million. Average deposits totaled $1.2 billion for the first quarter of total deposits, respectively,2023, a decrease of $42.7 million, or 3%, compared to 26%the fourth quarter of 2022. The decrease in the average balance of deposits was primarily a result of typical fluctuations in customer deposit balances.54%,totaled $91.2 million at March 31, 2023.20%provides any U.S. federally insured depository institution, including the Bank, with a line of credit facility equal to the par value of securities pledged to the Federal Reserve Bank under the Program. Advances from the BTFP may be requested by the Bank for a term up to one year and until March 11, 2024. The Bank did not pledge securities to, or borrow from, the BTFP facility during the first quarter of 2023.2016.LiquidityLiquidity represents2022, and $235.3 million at March 31, 2022. Excluding municipal deposits, the abilityestimated amount of uninsured customer deposits totaled $135.2 million at March 31, 2023, $185.3 million at December 31, 2022, and $169.5 million at March 31, 2022. $ 59,851 $ 46,130 $ 129,801 162,355 162,907 284,893 (80,221 ) (79,590 ) (120,093 ) 82,134 83,317 164,800 $ 141,985 $ 129,447 $ 294,601 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 generateoff-balance sheet liquidity through liability funding, management believes thatits available lines of credit from other institutions, which totaled $329.1 million at March 31, 2023, $287.3 million at December 31, 2022, and $241.1 million at March 31, 2022. The available lines of credit were comprised of secured and unsecured lines of credit. The Bank had no borrowings on the lines of credit at March 31, 2023, December 31, 2022, or March 31, 2022.maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ borrowing needs.At September 30, 2017, cash, interest-bearing and noninterest-bearing deposits with banks, securities and loans maturing within one year totaled $106.3 million. At September 30, 2017, 14% or $70.7 million of the loan portfolio matures within one year. Non-deposit sources of available funds totaled $131.1 million at September 30, 2017, which included $80.2 million available from Federal Home Loan Bank of Atlanta (FHLB), $42.0 million of unsecured federal fundsthrough lines of credit with other correspondent banksinstitutions at the periods ended (dollars in thousands): $ 51,000 $ 51,000 $ 51,000 219,026 182,839 141,697 59,068 53,923 48,420 278,094 236,762 190,117 $ 329,094 $ 287,762 $ 241,117 $8.9 million available throughprovides any U.S. federally insured depository institution, including the Bank, with a line of credit facility equal to the par value of securities pledged to the Federal Reserve Discount Window.Bank under the Program. Advances from the BTFP may be requested by the Bank for up to one year until March 11, 2024. The Bank did not pledge securities to, or borrow from, the BTFP facility during the first quarter of 2023.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 September 30, 2017March 31, 2023 and December 31, 2016,2022, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.September 30, 2017:March 31, 2023: 13.9114.88 % 12.8713.94 % 12.8713.94 % 9.069.70 % 5.91%6.88 % (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 March 31, 2023 and December 31, 2022.2016.2022.amountedamounted to $75.5$170.2 million at March 31, 2023, and $158.3 million at September 30, 2017, and $71.4 million at December 31, 2016,2022, 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.September 30, 2017March 31, 2023 and December 31, 2016,2022, the Bank had $10.9$17.6 million and $9.0$18.0 million in outstanding standby letters of credit, respectively.September 30, 2017,March 31, 2023, the Bankcash flow hedges had $7.0a fair value of $2.4 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 10 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 ProceduresSeptember 30, 2017March 31, 2023 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.adequateadequate 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, except for the following.PART II – OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk Factors2016.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsNone 1,557 $ 16.06 1,557 $ 4,974,995 Item 3. Defaults upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other Information31.1CertificationCertification.CertificationCertification.13501350.13501350.September 30, 2017March 31, 2023 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss) (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 March 31, 2023, formatted in Inline XBRL (included with Exhibit 101). 45November 13, 2017November 13, 2017May 15, 2023EXHIBIT INDEX46NumberDocumentCertification 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