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

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

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

The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of ~~November 4, 2022~~May 2, 2023 was ~~3,490,171~~3,525,875.

NOTE 1. General

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP.

In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the results of operations and the changes in shareholders' equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ and cash flows for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 Form 10-K”).

Eagle Financial Services, Inc. (the "Company") owns 100% of Bank of Clarke ~~County~~ (the “Bank”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.

Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations. None of the reclassifications were of a material nature and they had no effect on prior year net income or shareholders' equity.

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (collectively, "ASC 326").

ASC 326 introduced an approach based on current expected credit losses ("CECL") to estimate credit losses on certain types of financial instruments, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. It modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses ("ACL") is measured for such loans.

The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, recording an increase in the reported balance of the allowance for credit losses on loans, increasing the liability for credit losses on commitments to extend credit, and reducing total equity of both the Company and the Bank of Clarke, which resulted in a reduction of regulatory capital of Bank of Clarke. As a result of adopting ASC 326, the Company recorded a decrease to opening retained earnings of approximately $2.0 million, net of deferred taxes of approximately $521 thousand as of January 1, 2023.

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The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics.

The adoption of ASC 326 did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where other-than-temporary-impairments had previously been recognized or that required an ACL.

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Form 10-K.

Securities: Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently all of the Company’s debt securities are classified as available for sale. Available for sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in
other comprehensive income (loss). Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the interest method over the term of the securities.

Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Company has elected to exclude accrued interest receivable from the amortized cost basis. Accrued interest totaled $408 thousand at March 31, 2023, and is included in the other assets line item in the Consolidated Balance Sheets. For debt securities available for sale, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Loans Held for Investment: The Company makes mortgage, commercial and consumer loans to customers. The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Company has elected to exclude accrued interest receivable from the amortized cost basis. Accrued interest totaled $3.9 million at March 31, 2023, and is included in the other assets line item in the Consolidated Balance Sheet. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method. The Company is amortizing these amounts over the estimated life of the related loans.

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A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual 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. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual 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 our loan portfolio.

In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.

Allowance for Credit Losses on Loans: The allowance for credit losses on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No allowance for credit loss is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a loss-rate, or cohort methodology to estimate its current expected credit losses on loans. The cohort method identifies and captures the balances of pooled loans with similar risk characteristics, as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives. This method encompasses loan balances for as long as the loans are outstanding.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include economic conditions including reasonable and supportable forecasts of economic conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances; lending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell. Additional disclosures related to loans and the allowance for credit losses on loans are reflected in note 5.

Reserve for Unfunded Commitments: The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses. The reserve totaled $426 thousand at March 31, 2023 and $65 thousand at December 31, 2022. The

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initial adjustment for the adoption of ASC 326 was $406 thousand and the Company recorded a provision of $(45) thousand for the three months ended March 31, 2023.

NOTE 2. Stock-Based Compensation Plan

During 2014, the Company’s shareholders approved a stock incentive plan which allows key employees and directors to increase their personal financial interest in the Company. This plan permits the issuance of incentive stock options and non-qualified stock options and the award of stock appreciation rights, common stock, restricted stock, and phantom stock. The plan authorizes the issuance of up to 500,000 shares of common stock.

The Company periodically grants restricted stock to its directors, executive officers and certain non-executive officers. Restricted stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. ~~In general, outside~~Outside directors are periodically granted restricted shares which vest over a period of one year. Prior to 2023, the vesting period for outside directors was typically less than 9nine months. ~~For the last several years, executive~~Executive officers have been granted restricted shares which vest over a 3three year ~~year~~ service period and restricted shares which vest based on meeting annual performance measures over a 1two year ~~year~~ period. ~~In recent years, certain~~Certain non-executive officers also have been granted restricted shares which vest over a 3three year service period. The Company recognizes compensation expense over the restricted period based on the fair value of the Company's stock on the grant date. The Company's policy is to recognize forfeitures as they occur. As of ~~September 30, 2022,~~March 31, 2023, there was $~~645~~1.4 ~~thousand~~million of unrecognized compensation cost related to nonvested restricted stock.

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The following table presents restricted stock activity for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Nine Months Ended										Three Months Ended
	September 30,										March 31,
	2022					2021					2023					2022
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested, beginning of period		31,738		$	30.70		20,928		$	29.98		38,780		$	33.47		31,738		$	30.70
Granted		31,648			34.40		32,496			31.16		36,378			36.80		24,331			35.25
Vested		(12,468	)		30.00		(12,258	)		30.95		(12,749	)		32.33		(12,468	)		30.00
Forfeited		(810	)		29.69		(425	)		31.05		—			—		(810	)		29.69
Nonvested, end of period		50,108		$	33.72		40,741		$	30.62		62,409		$	35.64		42,791		$	33.51

NOTE 3. Earnings Per Common Share

Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per 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 number of potential common shares is determined using the treasury method.

The following table shows the weighted average number of shares used in computing earnings per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022. During 2023 and 2022, ~~and 2021. During 2022 and 2021,~~ there were no potentially dilutive securities outstanding.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

Average number of common shares outstanding used to calculate basic and diluted earnings per share

3,487,555

3,448,352

3,479,876

3,436,271


	Three Months Ended
	March 31,
	2023		2022
Average number of common shares outstanding used to calculate basic and diluted earnings per share		3,522,431		3,472,332

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NOTE 4. Securities

On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost to measure an expected credit loss under the CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. All securities information presented as of March 31, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

Amortized costs and fair values of securities available for sale at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	September 30, 2022									March 31, 2023
	(in thousands)									(in thousands)
Obligations of U.S. government corporations and agencies	$	9,994	$	—	$	(783	)	$	9,211	$	9,495	$	—	$	(638	)	$	8,857
Mortgage-backed securities		156,879		—		(25,337	)		131,542		150,148		—		(20,748	)		129,400
Obligations of states and political subdivisions		7,027		—		(408	)		6,619		6,628		4		(260	)		6,372
Subordinated debt		4,750		—		(369	)		4,381		4,750		—		(489	)		4,261
	$	178,650	$	—	$	(26,897	)	$	151,753	$	171,021	$	4	$	(22,135	)	$	148,890


	December 31, 2021									December 31, 2022
	(in thousands)									(in thousands)
Obligations of U.S. government corporations and agencies	$	14,541	$	417	$	(37	)	$	14,921	$	9,993	$	—	$	(858	)	$	9,135
U.S. treasury notes		2,003		—		—			2,003
Mortgage-backed securities		152,391		753		(2,132	)		151,012		153,289		—		(24,136	)		129,153
Obligations of states and political subdivisions		21,104		773		—			21,877		7,027		2		(422	)		6,607
Subordinated debt		2,500		11		(3	)		2,508		4,750		—		(489	)		4,261
	$	192,539	$	1,954	$	(2,172	)	$	192,321	$	175,059	$	2	$	(25,905	)	$	149,156

The amortized cost and estimated fair value of securities at March 31, 2023, by the earlier of contractual maturity or expected maturity, are shown below. The Company has elected to exclude accrued interest receivable, totaling $408 thousand at March 31, 2023, from the amortized cost basis of securities. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	438	$	435
Due after one year through five years		5,743		5,484
Due after five years through ten years		21,928		20,129
Due after ten years		142,912		122,842
	$	171,021	$	148,890

During the three months ended March 31, 2023 and 2022, the Company sold no available for sale securities.

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~~During the nine months ended September 30, 2022, the Company sold $15.4~~ ~~million of available for sale securities recognizing $~~6 ~~thousand in gross gains and $743~~ ~~thousand in gross losses. During the nine months ended September 30, 2021, the Company sold $15.9~~ ~~million of available for sale securities recognizing $143~~ ~~thousand in gross gains and $119~~ ~~thousand in gross losses.~~

The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:


	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	September 30, 2022												March 31, 2023
	(in thousands)												(in thousands)
Obligations of U.S. government corporations and agencies	$	9,210	$	783	$	—	$	—	$	9,210	$	783	$	1,626	$	58	$	7,231	$	580	$	8,857	$	638
Mortgage-backed securities		33,673		4,519		97,869		20,818		131,542		25,337		1,525		39		127,875		20,709		129,400		20,748
Obligations of states and political subdivisions		6,580		408		—		—		6,580		408		1,351		13		4,477		247		5,828		260
Subordinated debt		3,631		369		—		—		3,631		369		1,153		96		2,607		393		3,760		489
	$	53,094	$	6,079	$	97,869	$	20,818	$	150,963	$	26,897	$	5,655	$	206	$	142,190	$	21,929	$	147,845	$	22,135


	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	December 31, 2021												December 31, 2022
	(in thousands)												(in thousands)
Obligations of U.S. government corporations and agencies	$	2,616	$	37	$	—	$	—	$	2,616	$	37	$	6,140	$	543	$	2,994	$	315	$	9,134	$	858
Mortgage-backed securities		101,080		1,214		29,555		918		130,635		2,132		31,771		4,052		97,382		20,084		129,153		24,136
Obligations of states and political subdivisions														6,065		422		—		—		6,065		422
Subordinated debt		247		3		—		—		247		3		2,431		319		1,080		170		3,511		489
	$	103,943	$	1,254	$	29,555	$	918	$	133,498	$	2,172	$	46,407	$	5,336	$	101,456	$	20,569	$	147,863	$	25,905

8The reference point for determining when securities are in an unrealized loss position is month end. As such, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

There were 104 debt securities with a fair value below the amortized cost basis, totaling $147.8 million of aggregate fair value as of March 31, 2023. The Company concluded that a credit loss does not exist in its securities portfolio at March 31, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

~~Gross unrealized losses on available for sale securities included~~ ~~one hundred five~~ ~~(105) and~~ ~~forty one~~ (41) debt securities at September 30, 2022 and December 31, 2021, respectively. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The fair value of a security reflects its liquidity as compared to similar instruments, current market rates on similar instruments, and the creditworthiness of the issuer. Absent any change in the liquidity of a security or the creditworthiness of the issuer, prices will decline as market rates rise and vice-versa. The primary cause of the unrealized losses at September 30, 2022 and December 31, 2021 was changes in market interest rates and other market conditions and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, the unrealized losses were deemed to be temporary. The Company’s mortgage-backed securities are issued by U.S. government agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.

The Company’s securities are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associated with certain securities and the level of uncertainty related to changes in the value of securities, it is at least reasonably possible that changes in risks in the near term would materially affect the securities balance reported in the financial statements.

Securities having a carrying value of $~~8.5~~14.5 million at ~~September 30, 2022~~March 31, 2023 were pledged as security for trust accounts.

The composition of restricted investments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was as follows:


	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
	(in thousands)				(in thousands)
Federal Reserve Bank Stock	$	944	$	344	$	944	$	944
Federal Home Loan Bank Stock		3,524		565		10,218		8,149
Community Bankers’ Bank Stock		140		140		140		140
	$	4,608	$	1,049	$	11,302	$	9,233

NOTE 5. Loans and Allowance for ~~Loan~~Credit Losses on Loans

The composition of loans at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was as follows:

September 30,

December 31,

2022

2021

(in thousands)

Mortgage loans on real estate:

Construction and land development

$
69,255

$
71,191

Secured by farmland

16,220

13,710

Secured by 1-4 family residential properties

280,880

263,723

Multifamily

38,877

29,093

Commercial

491,364

377,051

Commercial and industrial loans

179,848

143,378

Consumer installment loans

107,877

67,281

All other loans

11,167

16,798

Total loans

$
1,195,488

$
982,225

Net deferred loan costs and premiums

6,353

3,495

Allowance for loan losses

(10,742
)

(8,787
)

$
1,191,099

$
976,933


	March 31,			December 31,
	2023			2022
	(in thousands)
Mortgage real estate loans:
Construction & Secured by Farmland	$	90,660		$	89,651
HELOCs		41,827			43,588
Residential First Lien - Investor		113,483			111,074
Residential First Lien - Owner Occupied		130,383			125,088
Residential Junior Liens		11,142			11,417
Commercial - Owner Occupied		238,577			232,115
Commercial - Non-Owner Occupied & Multifamily		353,330			315,326
Commercial and industrial loans:
SBA PPP loans		69			74
Other commercial and industrial loans		102,128			99,571
Marine loans		253,893			230,874
Consumer loans		43,841			44,841
Overdrafts		150			218
Other loans		13,608			12,503
Total loans	$	1,393,091		$	1,316,340
Net deferred loan costs and premiums		7,609			7,443
Allowance for credit losses		(13,950	)		(11,218	)
	$	1,386,750		$	1,312,565

~~TABLE OF CONTENTS~~

At ~~September 30, 2022,~~March 31, 2023, the Company was servicing $~~178.0~~250.4 million of marine loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $~~466~~728 thousand at ~~September 30, 2022,~~March 31, 2023, which are recorded in other assets in the Consolidated Balance Sheets. When loans are sold with servicing retained, servicing assets are recorded which represent the Company's right to service loans that were sold. Servicing assets are initially recorded by the Company at fair value and are subsequently amortized in proportion to, and over the period of, estimated net servicing income.

TABLE OF CONTENTS

Changes in the allowance for ~~loan~~credit losses on loans for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ and the year ended December 31, ~~2021~~2022 were as follows:


	Nine Months Ended			Year Ended			Nine Months Ended			Three Months Ended			Year Ended			Three Months Ended
	September 30,			December 31,			September 30,			March 31,			December 31,			March 31,
	2022			2021			2021			2023			2022			2022
				(in thousands)									(in thousands)
Balance, beginning	$	8,787		$	7,096		$	7,096		$	11,218		$	8,787		$	8,787
Provision for loan losses		900			1,483			1,183
Cumulative effect adjustment for adoption of ASC 326											2,077			—			—
Provision for credit losses											709			1,830			540
Recoveries added to the allowance		1,224			318			238			21			1,260			35
Loan losses charged to the allowance		(169	)		(110	)		(69	)
Credit losses charged to the allowance											(75	)		(659	)		(47	)
Balance, ending	$	10,742		$	8,787		$	8,448		$	13,950		$	11,218		$	9,315

Nonaccrual and past due loans by class at ~~September 30, 2022 and December~~March 31, ~~2021~~2023 were as follows:

September 30, 2022

(in thousands)

30 - 59
Days
Past Due

60 - 89
Days
Past Due

90 or More
Days
Past Due

Total Past
Due

Current

Total Loans

90 or More
Days Past
Due Still
Accruing

Nonaccrual
Loans

Commercial - Non Real Estate:

Commercial & Industrial

$
301

$
32

$
73

$
406

$
179,442

$
179,848

$
—

$
73

Commercial Real Estate:

Owner Occupied

—

—

—

—

219,493

219,493

—

22

Non-owner occupied

—

271

—

271

271,600

271,871

—

1,353

Construction and Farmland:

Residential

—

208

—

208

9,818

10,026

—

—

Commercial

—

—

103

103

75,346

75,449

—

655

Consumer:

Installment

262

—

—

262

107,615

107,877

—

1

Residential:

Equity Lines

137

—

—

137

40,835

40,972

—

19

Single family

—

172

156

328

239,580

239,908

—

304

Multifamily

—

—

—

—

38,877

38,877

—

—

All Other Loans

—

—

—

—

11,167

11,167

—

—

Total

$
700

$
683

$
332

$
1,715

$
1,193,773

$
1,195,488

$
—

$
2,427


	March 31, 2023
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing
Mortgage real estate loans:
Construction & Secured by Farmland	$	—	$	—	$	100	$	100	$	90,560	$	90,660	$	—
HELOCs		—		—		137		137		41,690		41,827		—
Residential First Lien - Investor		—		—		—		—		113,483		113,483		—
Residential First Lien - Owner Occupied		82		—		38		120		130,263		130,383		—
Residential Junior Liens		—		—		—		—		11,142		11,142		—
Commercial - Owner Occupied		19		—		—		19		238,558		238,577		—
Commercial - Non-Owner Occupied & Multifamily		1,321		—		—		1,321		352,009		353,330		—
Commercial and industrial loans:
SBA PPP loans		—		—		—		—		69		69		—
Other commercial and industrial loans		—		—		73		73		102,055		102,128		—
Marine loans		—		—		430		430		253,463		253,893		430
Consumer loans		248		—		146		394		43,447		43,841		146
Overdrafts		—		—		—		—		150		150		—
Other loans		—		—		—		—		13,608		13,608		—
Total	$	1,670	$	—	$	924	$	2,594	$	1,390,497	$	1,393,091	$	576

~~TABLE OF CONTENTS~~

December 31, 2021

(in thousands)

30 - 59
Days
Past Due

60 - 89
Days
Past Due

90 or More
Days Past
Due

Total Past
Due

Current

Total Loans

90 or More
Past Due
Still
Accruing

Nonaccrual
Loans

Commercial - Non Real Estate:

Commercial & Industrial

$
8

$
7

$
—

$
15

$
143,363

$
143,378

$
—

$
—

Commercial Real Estate:

Owner Occupied

—

—

—

—

188,839

188,839

—

124

Non-owner occupied

146

—

130

276

187,936

188,212

—

1,547

Construction and Farmland:

Residential

—

—

—

—

10,077

10,077

—

—

Commercial

—

126

108

234

74,590

74,824

—

234

Consumer:

Installment

6

—

—

6

67,275

67,281

—

3

Residential:

Equity Lines

13

—

—

13

35,849

35,862

—

29

Single family

409

238

434

1,081

226,780

227,861

43

786

Multifamily

—

—

—

—

29,093

29,093

—

—

All Other Loans

—

—

—

—

16,798

16,798

—

—

Total

$
582

$
371

$
672

$
1,625

$
980,600

$
982,225

$
43

$
2,723

~~TABLE OF CONTENTS~~

~~Allowance for loan losses by segment at September 30, 2022 and December 31, 2021 were as follows:~~

As of and For the Nine Months Ended

September 30, 2022

(in thousands)

Construction
and Farmland

Residential
Real Estate

Commercial
Real Estate

Commercial

Consumer

All Other
Loans

Unallocated

Total

Allowance for credit losses:

Beginning Balance

$
2,794

$
1,750

$
1,650

$
1,656

$
646

$
291

$
—

$
8,787

Charge-Offs

—

(2
)

—

—

(67
)

(100
)

—

(169
)
Recoveries

5

883
��

197

107

21

11

—

1,224

Provision

(84
)

(862
)

352

702

397

185

210

900

Ending balance

$
2,715

$
1,769

$
2,199

$
2,465

$
997

$
387

$
210

$
10,742

Ending balance: Individually evaluated for impairment

$
—

$
32

$
—

$
374

$
—

$
—

$
—

$
406

Ending balance: collectively evaluated for impairment

$
2,715

$
1,737

$
2,199

$
2,091

$
997

$
387

$
210

$
10,336

Loans:

Ending balance

$
85,475

$
319,757

$
491,364

$
179,848

$
107,877

$
11,167

$
—

$
1,195,488

Ending balance individually evaluated for impairment

$
1,042

$
3,482

$
1,989

$
453

$
24

$
—

$
—

$
6,990

Ending balance collectively evaluated for impairment

$
84,433

$
316,275

$
489,375

$
179,395

$
107,853

$
11,167

$
—

$
1,188,498

~~TABLE OF CONTENTS~~

December 31, 2021

(in thousands)

Construction
and Farmland

Residential
Real Estate

Commercial
Real Estate

Commercial

Consumer

All Other
Loans

Unallocated

Total

Allowance for credit losses:

Beginning Balance

$
1,604

$
1,929

$
1,645

$
1,374

$
198

$
346

$
—

$
7,096

Charge-Offs

—

(13
)

—

(10
)

(19
)

(68
)

—

(110
)
Recoveries

12

240

7

18

29

12

—

318

Provision

1,178

(406
)

(2
)

274

438

1

—

1,483

Ending balance

$
2,794

$
1,750

$
1,650

$
1,656

$
646

$
291

$
—

$
8,787

Ending balance: Individually evaluated for impairment

$
—

$
39

$
—

$
—

$
—

$
—

$
—

$
39

Ending balance: collectively evaluated for impairment

$
2,794

$
1,711

$
1,650

$
1,656

$
646

$
291

$
—

$
8,748

Loans:

Ending balance

$
84,901

$
292,816

$
377,051

$
143,378

$
67,281

$
16,798

$
—

$
982,225

Ending balance individually evaluated for impairment

$
257

$
2,778

$
2,295

$
108

$
16

$
—

$
—

$
5,454

Ending balance collectively evaluated for impairment

$
84,644

$
290,038

$
374,756

$
143,270

$
67,265

$
16,798

$
—

$
976,771

TABLE OF CONTENTS

~~Impaired~~


	March 31, 2023
	(in thousands)
	Nonaccruals with No Allowance for Credit Losses		Nonaccrual with an Allowance for Credit Losses		Nonaccrual Loans
Mortgage real estate loans:
Construction & Secured by Farmland	$	100	$	—	$	100
HELOCs		154		—		154
Residential First Lien - Investor		167		—		167
Residential First Lien - Owner Occupied		—		—		—
Residential Junior Liens		5		—		5
Commercial - Owner Occupied		19		—		19
Commercial - Non-Owner Occupied & Multifamily		1,321		—		1,321
Commercial and industrial loans:						—
SBA PPP loans		—		—		—
Other commercial and industrial loans		—		73		73
Marine loans		—		—		—
Consumer loans		—		—		—
Overdrafts		—		—		—
Other loans		—		—		—
Total	$	1,766	$	73	$	1,839

Nonaccrual and past due loans by class ~~as of and for the periods ended September 30, 2022 and~~at December 31, ~~2021~~2022 were as follows:

As of

September 30, 2022

(in thousands)

Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

With no related allowance:

Commercial - Non Real Estate:

Commercial & Industrial

$
91

$
79

$
—

$
94

$
4

Commercial Real Estate:

Owner Occupied

208

204

—

209

9

Non-owner occupied

2,029

1,785

—

1,792

15

Construction and Farmland:

Residential

—

—

—

—

—

Commercial
��

1,059

1,045

—

1,056

13

Consumer:

Installment

25

24

—

26

1

Residential

Equity lines

23

19

—

20

—

Single family

2,895

2,798

—

2,836

76

Multifamily

—

—

—

—

—

Other Loans

—

—

—

—

—

$
6,330

$
5,954

$
—

$
6,033

$
118

With an allowance recorded:

Commercial - Non Real Estate:

Commercial & Industrial

$
379

$
374

$
374

$
413

$
17

Commercial Real Estate:

Owner Occupied

—

—

—

—

—

Non-owner occupied

—

—

—

—

—

Construction and Farmland:

Residential

—

—

—

—

—

Commercial

—

—

—

—

—

Consumer:

Installment

—

—

—

—

—

Residential

Equity lines

—

—

—

—

—

Single family

699

678

32

687

20

Multifamily

—

—

—

—

—

Other Loans

—

—

—

—

—

$
1,078

$
1,052

$
406

$
1,100

$
37

Total:

Commercial

$
470

$
453

$
374

$
507

$
21

Commercial Real Estate

2,237

1,989

—

2,001

24

Construction and Farmland

1,059

1,045

—

1,056

13

Consumer

25

24

—

26

1

Residential

3,617

3,495

32

3,543

96

Other

—

—

—

—

—

Total

$
7,408

$
7,006

$
406

$
7,133

$
155


	December 31, 2022
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual Loans
Mortgage real estate loans:
Construction & Secured by Farmland	$	—	$	—	$	101	$	101	$	89,550	$	89,651	$	—	$	397
HELOCs		149		—		—		149		43,439		43,588		—		155
Residential First Lien - Investor		—		—		—		—		111,074		111,074		—		—
Residential First Lien - Owner Occupied		222		—		39		261		124,827		125,088		—		175
Residential Junior Liens		—		—		—		—		11,417		11,417		—		6
Commercial - Owner Occupied		—		—		—		—		232,115		232,115		—		—
Commercial - Non-Owner Occupied & Multifamily		—		—		—		—		315,326		315,326		—		1,356
Commercial and industrial loans:
SBA PPP loans		—		—		—		—		74		74		—		—
Other commercial and industrial loans		15		—		73		88		99,483		99,571		—		73
Marine loans		—		—		—		—		230,874		230,874		—		—
Consumer loans		56		—		318		374		44,467		44,841		318		—
Overdrafts		—		—		—		—		218		218		—		—
Other loans		—		—		—		—		12,503		12,503		—		—
Total	$	442	$	—	$	531	$	973	$	1,315,367	$	1,316,340	$	318	$	2,162

~~(1)~~

Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $16 ~~thousand at September 30, 2022.~~

TABLE OF CONTENTS

As of

December 31, 2021

(in thousands)

Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

With no related allowance:

Commercial - Non Real Estate:

Commercial & Industrial

$
143

$
109

$
—

$
166

$
11

Commercial Real Estate:

Owner Occupied

148

124

—

142

—

Non-owner occupied

2,539

2,177

—

2,186

—

Construction and Farmland:

Residential

—

—

—

—

—

Commercial

271

257

—

267

9

Consumer:

Installment

17

16

—

19

1

Residential:

Equity lines

35

29

—

32

—

Single family

2,088

1,974

—

2,012

62

Multifamily

—

—

—

—

—

Other Loans

—

—

—

—

—

$
5,241

$
4,686

$
—

$
4,824

$
83

With an allowance recorded:

Commercial - Non Real Estate:

Commercial & Industrial

$
—

$
—

$
—

$
—

$
—

Commercial Real Estate:

Owner Occupied

—

—

—

—

—

Non-owner occupied

—

—

—

—

—

Construction and Farmland:

Residential

—

—

—

—

—

Commercial

—

—

—

—

—

Consumer:

Installment

—

—

—

—

—

Residential:

Equity lines

—

—

—

—

—

Single family

811

787

39

802

30

Multifamily

—

—

—

—

—

Other Loans

—

—

—

—

—

$
811

$
787

$
39

$
802

$
30

Total:

Commercial

$
143

$
109

$
—

$
166

$
11

Commercial Real Estate

2,687

2,301

—

2,328

—

Construction and Farmland

271

257

—

267

9

Consumer

17

16

—

19

1

Residential

2,934

2,790

39

2,846

92

Other

—

—

—

—

—

Total

$
6,052

$
5,473

$
39

$
5,626

$
113

~~(1)~~

~~Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs,~~The allowance for credit losses on loans by segment at March 31, 2023 and ~~any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $~~19 ~~thousand at~~ December 31, ~~2021.~~2022 was as follows:


	As of and For the Three Months Ended
	March 31, 2023
	(in thousands)
	Construction and Farmland			Residential Real Estate		Commercial Real Estate & MultiFamily		Commercial			Marine			Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	2,714		$	1,735	$	2,221	$	2,222		$	1,555		$	299		$	472		$	—	$	11,218
Cumulative effect adjustment for adoption of ASC 326	$	(1,840	)	$	1,933	$	3,584	$	(1,102	)	$	(285	)	$	(123	)	$	(90	)	$	—	$	2,077
Charge-Offs		—			—		—		—			—			(6	)		(69	)		—		(75	)
Recoveries		1			5		—		5			—			4			6			—		21
Provision		(3	)		106		468		(59	)		126			12			59			—		709
Ending balance	$	872		$	3,779	$	6,273	$	1,066		$	1,396		$	186		$	378		$	—	$	13,950
Ending balance: Individually evaluated	$	—		$	—	$	—	$	73		$	—		$	—		$	—		$	—	$	73
Ending balance: collectively evaluated	$	872		$	3,779	$	6,273	$	993		$	1,396		$	186		$	378		$	—	$	13,877
Loans:
Ending balance	$	90,660		$	296,835	$	591,907	$	102,197		$	253,893		$	43,841		$	13,758		$	—	$	1,393,091
Ending balance individually evaluated	$	100		$	220	$	1,340	$	73		$	—		$	—		$	—		$	—	$	1,733
Ending balance collectively evaluated	$	90,560		$	296,615	$	590,567	$	102,124		$	253,893		$	43,841		$	13,758		$	—	$	1,391,358


	As of and For the Year Ended
	December 31, 2022
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate & MultiFamily		Commercial			Marine		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	2,794		$	1,671		$	1,729	$	1,294		$	789	$	219		$	291		$	—	$	8,787
Charge-Offs		—			(9	)		—		(300	)		—		(79	)		(271	)		—		(659	)
Recoveries		9			888			197		109			—		44			13			—		1,260
Provision		(89	)		(815	)		295		1,119			766		115			439			—		1,830
Ending balance	$	2,714		$	1,735		$	2,221	$	2,222		$	1,555	$	299		$	472		$	—	$	11,218
Ending balance: Individually evaluated for impairment	$	—		$	27		$	—	$	73		$	—	$	—		$	—		$	—	$	100
Ending balance: collectively evaluated for impairment	$	2,714		$	1,708		$	2,221	$	2,149		$	1,555	$	299		$	472		$	—	$	11,118
Loans:
Ending balance	$	89,651		$	291,167		$	547,441	$	99,645		$	230,874	$	44,841		$	12,721		$	—	$	1,316,340
Ending balance individually evaluated for impairment	$	1,044		$	3,719		$	1,695	$	141		$	—	$	22		$	—		$	—	$	6,621
Ending balance collectively evaluated for impairment	$	88,607		$	287,448		$	545,746	$	99,504		$	230,874	$	44,819		$	12,721		$	—	$	1,309,719

TABLE OF CONTENTS

~~When~~The following table presents the ~~ultimate collectability~~amortized cost basis of ~~the total principal of an impaired~~collateral-dependent loans by loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.portfolio segment:


	March 31, 2023
	(in thousands)
(in thousands)	Real Estate Collateral		Other Collateral		Total
Mortgage real estate loans:
Construction & Secured by Farmland	$	100	$	—	$	100
HELOCs		137		—		137
Residential First Lien - Investor		—		—		—
Residential First Lien - Owner Occupied		83		—		83
Residential Junior Liens		—		—		—
Commercial - Owner Occupied		19		—		19
Commercial - Non-Owner Occupied & Multifamily		1,321		—		1,321
Commercial and industrial loans:						—
SBA PPP loans		—		—		—
Other commercial and industrial loans		—		73		73
Marine loans		—		—		—
Consumer loans		—		—		—
Overdrafts		—		—		—
Other loans		—		—		—
	$	1,660	$	73	$	1,733

The Company ~~uses a rating system for evaluating~~did not identify any significant changes in the ~~risks associated with non-consumer loans. Consumer~~extent to which collateral secures its collateral dependent loans, ~~are not evaluated for~~whether in the form of general deterioration or from other factors during the period ended March 31, 2023.

The Company categorizes loans into risk ~~unless the characteristics of the loan fall within classified categories. Consumer loans are evaluated for collection~~categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment ~~performance. Descriptions~~experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. This anallysis is performed on a quarterly basis. The following table presents risk ratings by loan portfolio segment and origination year (for 2023 only). Description of these ratings are as follows:


Pass		Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Special Mention
~~Special Mention~~	Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.
Classified		Classified loans include loans rated Substandard, Doubtful and Loss.
~~Substandard~~		• Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

~~Doubtful~~		• Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

~~Loss~~	• Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at March 31, 2023 and December 31, 2022 was as follows:

TABLE OF CONTENTS


	March 31, 2023
	Term Loan Amortized Cost Basis by Origination Year
(in thousands)	2023		2022		2021		��	2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total		Revolving Loans Converted to Term

Mortgage real estate loans:
Construction & Secured by Farmland
Pass	$	8,682	$	28,303	$	20,996		$	5,535	$	3,567	$	5,150	$	18,122	$	90,355	$	—
Special Mention		—		—		—			151		—		—		—		151		—
Classified		—		—		—			—		—		154		—		154		—
Total	$	8,682	$	28,303	$	20,996		$	5,686	$	3,567	$	5,304	$	18,122	$	90,660	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—
HELOCs
Pass	$	—	$	—	$	—		$	—	$	—	$	—	$	41,549	$	41,549	$	—
Special Mention		—		—		—			—		—		—		124		124		—
Classified		—		—		—			—		—		—		154		154		—
Total	$	—	$	—	$	—		$	—	$	—	$	—	$	41,827	$	41,827	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—
Residential First Lien - Investor
Pass	$	5,740	$	27,287	$	33,544		$	12,061	$	5,382	$	26,932	$	—	$	110,946	$	—
Special Mention		—		396		236			635		—		—		—		1,267		—
Classified		—		—		1,129			141		—		—		—		1,270		—
Total	$	5,740	$	27,683	$	34,909		$	12,837	$	5,382	$	26,932	$	—	$	113,483	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—
Residential First Lien - Owner Occupied
Pass	$	6,521	$	28,777	$	24,614		$	38,100	$	4,835	$	25,840	$	—	$	128,687	$	—
Special Mention		—		—		—			—		—		661		—		661		—
Classified		—		—		—			—		—		1,035		—		1,035		—
Total	$	6,521	$	28,777	$	24,614		$	38,100	$	4,835	$	27,536	$	—	$	130,383	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—
Residential Junior Liens
Pass	$	180	$	3,144	$	3,473		$	1,622	$	681	$	2,042	$	—	$	11,142	$	—
Special Mention		—		—		—			—		—		—		—		—		—
Classified		—		—		—			—		—		—		—		—		—
Total	$	180	$	3,144	$	3,473		$	1,622	$	681	$	2,042	$	—	$	11,142	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—
Commercial - Owner Occupied
Pass	$	11,646	$	72,943	$	42,854		$	28,387	$	16,685	$	56,614	$	3,075	$	232,204	$	—
Special Mention		—		—		1,068			965		1,108		555		250		3,946		—
Classified		—		—		2,408			—		—		19		—		2,427		—
Total	$	11,646	$	72,943	$	46,330		$	29,352	$	17,793	$	57,188	$	3,325	$	238,577	$	—
Current period gross charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—	$	—

~~Credit quality information by class at September 30, 2022 and December 31, 2021 was as follows:~~17

TABLE OF CONTENTS


Commercial - Non-Owner Occupied & Multifamily
Pass	$	32,763	$	101,502	$	62,140	$	66,916	$	18,340	$	47,253	$	1,965	$	330,879	$	—
Special Mention		—		8,686		535		2,430		—		157		—		11,808		—
Classified		—		—		—		8,957		—		1,686		—		10,643		—
Total	$	32,763	$	110,188	$	62,675	$	78,303	$	18,340	$	49,096	$	1,965	$	353,330	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans:
SBA PPP loans
Pass	$	—	$	—	$	69	$	—	$	—	$	—	$	—	$	69	$	—
Special Mention		—		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	69	$	—	$	—	$	—	$	—	$	69	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial and industrial loans
Pass	$	7,704	$	38,228	$	15,935	$	2,648	$	3,349	$	3,480	$	23,732	$	95,076	$	—
Special Mention		—		205		4,157		731		—		45		374		5,512		—
Classified		—		—		—		1,540		—		—		—		1,540		—
Total	$	7,704	$	38,433	$	20,092	$	4,919	$	3,349	$	3,525	$	24,106	$	102,128	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Marine loans
Pass	$	38,397	$	141,991	$	42,233	$	1,251	$	—	$	—	$	30,021	$	253,893	$	—
Special Mention		—		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		—		—		—
Total	$	38,397	$	141,991	$	42,233	$	1,251	$	—	$	—	$	30,021	$	253,893	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer loans
Pass	$	1,744	$	14,728	$	7,104	$	9,603	$	1,996	$	93	$	8,573	$	43,841	$	—
Special Mention		—		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		—		—		—
Total	$	1,744	$	14,728	$	7,104	$	9,603	$	1,996	$	93	$	8,573	$	43,841	$	—
Current period gross charge-offs	$	3	$	3	$	—	$	—	$	—	$	—	$	—	$	6	$	—
Overdrafts
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Special Mention		—		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		150		150		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	150	$	150	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	69	$	69	$	—
Other loans
Pass	$	1,594	$	8,660	$	509	$	13	$	—	$	2,783	$	49	$	13,608	$	—
Special Mention		—		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		—		—		—
Total	$	1,594	$	8,660	$	509	$	13	$	—	$	2,783	$	49	$	13,608	$	—
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total by Risk Category

TABLE OF CONTENTS


Pass	$	114,971	$	465,563	$	253,471	$	166,136	$	54,835	$	170,187	$	127,086	$	1,352,249	$	—
Special Mention		—		9,287		5,996		4,912		1,108		1,418		748		23,469		—
Classified		—		—		3,537		10,638		—		2,894		304		17,373		—
Total	$	114,971	$	474,850	$	263,004	$	181,686	$	55,943	$	174,499	$	128,138	$	1,393,091	$	—
Total current period gross charge-offs	$	3	$	3	$	—	$	—	$	—	$	—	$	69	$	75	$	—


	As of
	December 31, 2022
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	247,061	$	526	$	72	$	—	$	—	$	247,659
Commercial Real Estate:
Owner Occupied		212,074		20,020		21		—		—		232,115
Non-owner occupied		257,625		16,189		1,706		—		—		275,520
Construction and Farm land:
Residential		11,235		—		21		—		—		11,256
Commercial		69,427		153		8,815		—		—		78,395
Residential:
Equity Lines		43,124		310		154		—		—		43,588
Single family		251,247		5,972		951		—		—		258,170
Multifamily		39,806		—		—		—		—		39,806
All other loans		12,721		—		—		—		—		12,721
Total	$	1,144,320	$	43,170	$	11,740	$	—	$	—	$	1,199,230


	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	116,908	$	202

As of

September 30, 2022

(in thousands)

INTERNAL RISK RATING GRADES

Pass

Special
Mention

Substandard

Doubtful

Loss

Total

Commercial - Non Real Estate:

Commercial & Industrial

$
179,618

$
157

$
73

$
—

$
—

$
179,848

Commercial Real Estate:

Owner Occupied

200,192

19,279

22

—

—

219,493

Non-owner occupied

261,315

8,556

2,000

—

—

271,871

Construction and Farmland:

Residential

9,818

208

—

—

—

10,026

Commercial

63,482

3,203

8,764

—

—

75,449

Residential:

Equity Lines

40,952

—

20

—

—

40,972

Single family

235,445

3,041

1,306

116

—

239,908

Multifamily

38,877

—

—

—

—

38,877

All other loans

11,167

—

—

—

—

11,167

Total

$
1,040,866

$
34,444

$
12,185

$
116

$
—

$
1,087,611

Performing

Nonperforming

Consumer Credit Exposure by Payment Activity

$
107,876

$
1

As of

December 31, 2021

(in thousands)

INTERNAL RISK RATING GRADES

Pass

Special
Mention

Substandard

Doubtful

Loss

Total

Commercial - Non Real Estate:

Commercial & Industrial

$
143,197

$
176

$
5

$
—

$
—

$
143,378

Commercial Real Estate:

Owner Occupied

185,978

2,703

158

—

—

188,839

Non-owner occupied

180,830

4,819

2,563

—

—

188,212

Construction and Farm land:

Residential

10,077

—

—

—

—

10,077

Commercial

59,318

15,198

308

—

—

74,824

Residential:

Equity Lines

35,832

—

30

—

—

35,862

Single family

224,510

1,601

1,633

117

—

227,861

Multifamily

26,952

2,141

—

—

—

29,093

All other loans

16,798

—

—

—

—

16,798

Total

$
883,492

$
26,638

$
4,697

$
117

$
—

$
914,944

Performing

Nonperforming

Consumer Credit Exposure by Payment Activity

$
67,275

$
6

NOTE 6. ~~Troubled Debt~~ Restructurings for Borrowers Experiencing Financial Difficulty

~~All loans deemed a troubled debt restructuring (“TDR"), are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when~~The Company adopted the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Company has granted a concession (one or multiple items may be present):

•

~~The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.~~

•

~~The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.~~

•

~~The borrower receives a reduction of the face amount or maturity amount of the debt as stated~~amendments in ~~the instrument or other agreement.~~

•

~~The borrower receives a deferral of required payments (principal and/or interest)~~ASU 2022-02, which ~~causes more than an insignificant change in cash flow.~~

•

~~The borrower receives a reduction of the accrued interest.~~

~~There were~~ 26eliminated accounting guidance on TDR loans ~~totaling $~~for creditors and requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty that we made on or after January 1, 2023.~~4.4~~ ~~million at September 30, 2022. At December 31, 2021, there were~~ 17 ~~TDR loans totaling $2.7~~ ~~million.~~ ~~Two~~ ~~TDR loans, totaling $136~~ ~~thousand, were in nonaccrual status at September 30, 2022.~~ ~~Two~~ ~~TDR loans, totaling $149~~ thousand, were in nonaccrual status at December 31, 2021. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at September 30, 2022 or December 31, 2021.

The following ~~tables set forth information on~~table presents the ~~Company’s troubled debt restructurings by class~~amortized cost of loans ~~occurring~~that were modified during the ~~three and nine months ended September 30, 2022 and 2021. During~~period by loan portfolio segment:


	March 31, 2023
	(in thousands)
	Term Extension		Total		% of Total Class of Loans
Mortgage real estate loans:
Residential First Lien - Owner Occupied	$	355	$	355		0.27	%
Total	$	355	$	355

None of the ~~nine months ended September 30, 2022, nine~~ loans that were modified ~~in TDRs, with six loans being newly classified as TDRs~~defaulted during the three months ended ~~September 30, 2022.~~ March 31, 2023 and the loans remain current with contractual payments as of March 31, 2023. The financial effects of the term extensions during the period added a weighted average of 1.0 years to the life of loans which reduced the payment amounts for the borrowers.

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulting in granting a concession to a borrower experiencing financial dificulties as a TDR.

During the three months ended ~~September 30, 2021, three loans were modified in TDRs.~~

~~TABLE OF CONTENTS~~

Three Months Ended

September 30, 2022

(in thousands)

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Consumer:

Installment

1

$
20

$
21

Residential:

Single family

4

894

894

Total

5

$
914

$
915

Three Months Ended

September 30, 2021

(in thousands)

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Consumer:

Installment

Total

—

$
—

—

Nine Months Ended

September 30, 2022

(in thousands)

Number of
Contracts

Pre-Modification Outstanding
Recorded Investment

Post-Modification Outstanding
Recorded Investment

Commercial - Non Real Estate:

Commercial & Industrial

Commercial Real Estate:

Owner Occupied

1

$
185

$
185

Non-Owner Occupied

1

$
161

$
161

Construction and Farmland:

Commercial

1

639

639

Consumer:

Installment

1

$
20

$
21

Residential:

Equity

Single family

7

1,433

1,451

Total

11

$
2,438

$
2,457

Nine Months Ended

September 30, 2021

(in thousands)

Number of
Contracts

Pre-Modification Outstanding
Recorded Investment

Post-Modification Outstanding
Recorded Investment

Consumer:

Installment

2

$
15

$
15

Residential:

Single family

1

98

98

Total

3

$
113

$
113

~~During the three and nine months ended September 30,~~March 31, 2022, the Company ~~restructured~~classified ~~eleven~~no additional loans ~~by granting concessions to the borrowers experiencing financial difficulty.~~ ~~Eight~~ ~~loans were restructured renewing or extending the loan beyond the original maturity date. One loan was restructured by refinancing and providing cash out to the borrower.~~ ~~Two~~ ~~loans were restructured by refinancing the loans to extend the term.~~

~~During the nine months ended September 30, 2021, the Company restructured~~ ~~three~~ loans by granting a concession to
borrowers experiencing financial difficulty. These loans were restructured by reducing the loan payments and extending the
term.as troubled debt restructurings.

There were no payment defaults during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 for TDRs that were restructured within the preceding twelve-month period. ~~There were~~ no ~~payment defaults during the three and nine months ended September 30, 2021.~~

Management defines default as over 30 days contractually past due under the modified terms, the foreclosure and/or repossession of the collateral, or the charge-off of the loan during the twelve-month period subsequent to the modification.

NOTE 7. Deposits

The composition of deposits at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was as follows:


	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
	(in thousands)				(in thousands)
Noninterest bearing demand deposits	$	491,184	$	470,355	$	464,123	$	478,750
Savings and interest bearing demand deposits:
NOW accounts	$	168,543	$	162,690	$	234,372	$	167,197
Money market accounts		281,839		251,862		257,082		220,498
Regular savings accounts		181,699		168,744		161,348		239,736
	$	632,081	$	583,296	$	652,802	$	627,431
Time deposits:
Balances of less than $250,000	$	71,059	$	58,427	$	170,994	$	87,531
Balances of $250,000 and more		59,790		65,157		102,032		70,363
	$	130,849	$	123,584	$	273,026	$	157,894
	$	1,254,114	$	1,177,235	$	1,389,951	$	1,264,075

NOTE 8. Leases

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s four long-term lease agreements are classified as operating leases. These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for a residual value guarantee and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases:


(dollars in thousands)
					September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Lease liabilities					$	5,057		$	5,289		$	4,898		$	4,978
Right-of-use assets					$	4,860		$	5,139		$	4,672		$	4,766
Weighted average remaining lease term					14 years			15 years			14 years			14 years
Weighted average discount rate						3.02	%		2.99	%		3.05	%		3.04	%

	Three Months Ended				Nine Months Ended						Three Months Ended
Lease Cost	September 30, 2022		September 30, 2021		September 30, 2022			September 30, 2021			March 31, 2023			March 31, 2022
Operating lease cost	$	132	$	106	$	396		$	257		$	132		$	132
Short-term lease cost		3		7		11			15			4			4
Total lease cost	$	135	$	113	$	407		$	272		$	136		$	136

Cash paid for amounts included in the measurement of lease liabilities	$	116	$	83	$	348		$	209		$	117		$	115

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:


	As of
(dollars in thousands)				As of
Lease payments due	September 30, 2022			March 31, 2023
Twelve months ending September 30, 2023	$	471
Twelve months ending September 30, 2024		478
Twelve months ending September 30, 2025		497
Twelve months ending September 30, 2026		428
Twelve months ending September 30, 2027		390
Twelve months ending March 31, 2024				$	475
Twelve months ending March 31, 2025					482
Twelve months ending March 31, 2026					484
Twelve months ending March 31, 2027					393
Twelve months ending March 31, 2028					392
Thereafter		4,247			4,050
Total undiscounted cash flows	$	6,511		$	6,276
Discount		(1,454	)		(1,378	)
Lease liabilities	$	5,057		$	4,898

NOTE 9. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following section provides a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

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The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


			Fair Value Measurements at								Fair Value Measurements at
			September 30, 2022								March 31, 2023
			Using								Using
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	September 30, 2022		(Level 1)		(Level 2)		(Level 3)		March 31, 2023		(Level 1)		(Level 2)		(Level 3)
	(in thousands)								(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	9,211	$	—	$	9,211	$	—	$	8,857	$	—	$	8,857	$	—
Mortgage-backed securities		131,542		—		131,542		—		129,400		—		129,400		—
Obligations of states and political subdivisions		6,619		—		6,619		—		6,372		—		6,372		—
Subordinated debt		4,381		—		4,381		—		4,261		—		4,261		—
Derivative:
Interest rate swaps		1,120		—		1,120		—		608		—		608		—
Total assets at fair value	$	152,873	$	—	$	152,873	$	—	$	149,498	$	—	$	149,498	$	—
Liabilities:
Interest rate swaps	$	1,120	$	—	$	1,120	$	—	$	608	$	—	$	608	$	—
Total liabilities at fair value	$	1,120	$	—	$	1,120	$	—	$	608	$	—	$	608	$	—

			Fair Value Measurements at								Fair Value Measurements at
			December 31, 2021								December 31, 2022

	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		December 31, 2022		(Level 1)		(Level 2)		(Level 3)
	(in thousands)								(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	14,921	$	—	$	14,921	$	—	$	9,135	$	—	$	9,135	$	—
U.S. treasury notes		2,003		—		2,003		—		—		—		—		—
Mortgage-backed securities		151,012		—		151,012		—		129,153		—		129,153		—
Obligations of states and political subdivisions		21,877		—		21,877		—		6,607		—		6,607		—
Subordinated debt		2,508		—		2,508		—		4,261		—		4,261		—
Derivative:
Interest rate swap		58		—		58		—		1,017		—		1,017		—
Total assets at fair value	$	192,379	$	—	$	192,379	$	—	$	150,173	$	—	$	150,173	$	—
Liabilities:
Interest rate swap	$	58	$	—	$	58	$	—	$	1,017	$	—	$	1,017	$	—
Total liabilities at fair value	$	58	$	—	$	58	$	—	$	1,017	$	—	$	1,017	$	—

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

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

Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of 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). The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and the year ended December 31, ~~2021.~~2022.

~~Impaired~~Individually Evaluated Collateral-Dependent Loans: ~~Loans are designated as impaired when, in the judgment~~The estimated fair value of ~~management based on current information and events, it~~individually evaluated collateral-dependent loans is ~~probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be~~ based on the ~~present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair~~ value of the underlying collateral ~~securing~~or the ~~loans, if they are~~value of the underlying collateral, ~~dependent.~~less estimated cost to sell, as appropriate. Collateral is generally real estate; however, collateral may ~~be in the form of real estate or business assets including~~include vehicles, equipment, inventory, ~~and~~ accounts ~~receivable. The vast majority of the collateral is real estate.~~receivable, and/or other business assets. The value of real estate collateral is determined ~~utilizing~~using a market valuation approach based on an appraisal conducted by an independent, licensed ~~appraiser using observable market data within the last twelve months (Level 2). However, if the collateral is a house or building in the process~~appraiser. The value of ~~construction or if~~other assets may also be based on an appraisal, ~~of the property is more than one year old and not solely based on observable~~ market ~~comparables~~quotations, aging schedules or ~~management determines~~other sources. Collateral-dependent individually evaluated loans are classified within Level 3 of 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.hierarchy. Any fair value adjustments are recorded in the period incurred as a provision for ~~loan~~credit losses on the Consolidated Statements of Income. There were no individually evaluated collateral dependent loans recorded at fair value at March 31, 2023 or December 31, 2022.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at ~~September 30, 2022~~March 31, 2023 and had a balance of $108 thousand in other real etate owned at December 31, ~~2021.~~2022.

~~TABLE OF CONTENTS~~

The following table displays quantitative information about Level 3 Fair Value Measurements for certain ~~financial~~ assets measured at fair value on a nonrecurring basis at ~~September 30, 2022 and~~ December 31, ~~2021:~~2022:

Quantitative information about Level 3 Fair Value Measurements

September 30, 2022

Valuation Technique(s)

Unobservable Input

Range

Weighted Average (1)
Assets:

Impaired loans

Present value of cash flows

Discount rate

4% - 6%

5 %

Quantitative information about Level 3 Fair Value Measurements

December 31, 2021

Valuation Technique(s)

Unobservable Input

Range

Weighted Average (1)
Assets:

Impaired loans

Discounted appraised value

Selling cost

12 %

12 %
Impaired loans

Present value of cash flows

Discount rate

4% - 6%

5 %


	Quantitative information about Level 3 Fair Value Measurements
	December 31, 2022
	Valuation Technique(s)	Unobservable Input	Range	Weighted Average (1)
Assets:
Other real estate owned	Discounted contract price	Discount for selling costs	6%	6 %

(1) Unobservable inputs were weighted by the relative fair values of the instruments.

TABLE OF CONTENTS

The following table summarizes the Company’s ~~financial and nonfinancial~~ assets that were measured at fair value on a nonrecurring basis at ~~September 30, 2022 and~~ December 31, ~~2021:~~2022:

Carrying value at

September 30, 2022

Balance as of

Identical
Assets

Observable
Inputs

Unobservable
Inputs

September 30, 2022

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Financial Assets:

Impaired loans

$
643

$
—

$
—

$
643

Carrying value at

December 31, 2021

Balance as of

Quoted Prices
in Active
Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Financial Assets:

Impaired loans

$
746

$
—

$
—

$
746

Carrying value at

December 31, 2022

Balance as of

Quoted Prices
in Active
Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

December 31, 2022

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Nonfinancial Assets:

Other real estate owned

108

—

108

—

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The carrying value and fair value of the Company’s financial instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:


	Fair Value Measurements at										Fair Value Measurements at
	September 30, 2022										March 31, 2023
	Using										Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of		Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	September 30, 2022		(Level 1)		(Level 2)		(Level 3)		September 30, 2022		March 31, 2023		(Level 1)		(Level 2)		(Level 3)		March 31, 2023
	(in thousands)										(in thousands)
Financial assets:
Cash and short-term investments	$	35,935	$	35,935	$	—	$	—	$	35,935	$	128,715	$	128,715	$	—	$	—	$	128,715
Securities		151,753		—		151,753		—		151,753		148,890		—		148,890		—		148,890
Restricted Investments		4,608		—		4,608		—		4,608		11,302		—		11,302		—		11,302
Loans held for sale		90				90		—		90
Loans, net		1,191,099		—		—		1,182,235		1,182,235		1,386,750		—		—		1,319,238		1,319,238
Bank owned life insurance		23,731		—		23,731		—		23,731		24,041		—		24,041		—		24,041
Accrued interest receivable		3,079		—		3,079		—		3,079		4,290		—		4,290		—		4,290
Interest rate swaps		1,120		—		1,120		—		1,120		608		—		608		—		608
Financial liabilities:
Deposits	$	1,254,114	$	—	$	1,254,480	$	—	$	1,254,480	$	1,389,951	$	—	$	1,387,848	$	—	$	1,387,848
Federal Home Loan Bank advances		75,000		—		74,978		—		74,978
Federal Home Loan Bank advances, short-term												125,000		—		125,020		—		125,020
Federal Home Loan Bank advances, long-term												95,000		—		95,929		—		95,929
Subordinated debt, net of unamortized issuance costs		29,360		—		29,352		—		29,352		29,394		—		25,573		—		25,573
Accrued interest payable		1,196		—		1,196		—		1,196		2,028		—		2,028		—		2,028
Interest rate swaps		1,120		—		1,120		—		1,120		608		—		608		—		608


	Fair Value Measurements at										Fair Value Measurements at
	December 31, 2021										December 31, 2022
	Using										Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of		Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		December 31, 2021		December 31, 2022		(Level 1)		(Level 2)		(Level 3)		December 31, 2022
	(in thousands)										(in thousands)
Financial assets:
Cash and short-term investments	$	64,068	$	64,068	$	—	$	—	$	64,068	$	66,894	$	66,894	$	—	$	—	$	66,894
Securities		192,321		—		192,321		—		192,321		149,156		—		149,156		—		149,156
Restricted Investments		1,049		—		1,049		—		1,049		9,233		—		9,233		—		9,233
Loans held for sale		876				876		—		876		153				153		—		153
Loans, net		976,933		—		—		969,612		969,612		1,312,565		—		—		1,260,149		1,260,149
Bank owned life insurance		23,236		—		23,236		—		23,236		23,862		—		23,862		—		23,862
Accrued interest receivable		2,634		—		2,634		—		2,634		3,902		—		3,902		—		3,902
Interest rate swap		58		—		58		—		58		1,017		—		1,017		—		1,017
Financial liabilities:
Deposits	$	1,177,235	$	—	$	1,177,582	$	—	$	1,177,582	$	1,264,075	$	—	$	1,262,859	$	—	$	1,262,859
Federal funds purchased												32,980		—		32,980		—		32,980
Federal Home Loan Bank advances, short-term												175,000		—		174,705		—		174,705
Subordinated debt, net of unamortized issuance costs												29,377		—		26,101		—		26,101
Accrued interest payable		67		—		67		—		67		926		—		926		—		926
Interest rate swap		58		—		58		—		58		1,017		—		1,017		—		1,017

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NOTE 10. Change in Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes unrealized gains and losses on available for sale securities and changes in benefit obligations and plan assets for the post retirement benefit plan. Changes to accumulated other comprehensive income (loss) are presented net of their tax effect as a component of equity. Reclassifications out of accumulated other comprehensive income (loss) are recorded in the Consolidated Statements of Income either as a gain or loss.

Changes to accumulated other comprehensive income (loss) by component are shown in the following table for the periods indicated:

Three Months Ended

September 30,

2022

2021

Unrealized
Gains and
Losses on
Available
for Sale
Securities

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

Total

Unrealized
Gains and
Losses on
Available
for Sale
Securities

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

Total

(dollars in thousands)

(dollars in thousands)

July 1

$
(16,775
)

$
19

$
(16,756
)

$
1,103

$
19

$
1,122

Other comprehensive (loss) before reclassifications

(6,401
)

—

(6,401
)

(47
)

—

(47
)
Reclassifications

737

—

737

—

—

—

Tax effect of current period changes

1,189

—

1,189

10

—

10

Current period changes net of taxes

(4,475
)

—

(4,475
)

(37
)

—

(37
)
September 30

$
(21,250
)

$
19

$
(21,231
)

$
1,066

$
19

$
1,085


	Nine Months Ended																Three Months Ended
	September 30,																March 31,
	2022								2021								2023									2022
	Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan		Total			Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan		Total			Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan			Total			Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan		Total
	(dollars in thousands)								(dollars in thousands)								(dollars in thousands)									(dollars in thousands)
January 1	$	(174	)	$	19	$	(155	)	$	3,260		$	19	$	3,279		$	(20,465	)	$	19		$	(20,446	)	$	(174	)	$	19	$	(155	)
Other comprehensive (loss) before reclassifications		(27,416	)		—		(27,416	)		(2,753	)		—		(2,753	)
Other comprehensive income (loss) before reclassifications																		3,772			(8	)		3,764			(13,454	)		—		(13,454	)
Reclassifications		737			—		737			(24	)		—		(24	)		—			—			—			—			—		—
Tax effect of current period changes		5,603			—		5,603			583			—		583			(792	)		3			(789	)		2,826			—		2,826
Current period changes net of taxes		(21,076	)		—		(21,076	)		(2,194	)		—		(2,194	)		2,980			(5	)		2,975			(10,628	)		—		(10,628	)
September 30	$	(21,250	)	$	19	$	(21,231	)	$	1,066		$	19	$	1,085
March 31																	$	(17,485	)	$	14		$	(17,471	)	$	(10,802	)	$	19	$	(10,783	)

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, $(there were ~~737~~no~~) thousand was reclassified~~ reclassifications out of accumulated other comprehensive income (loss) ~~and appeared as loss on sale of securities in the Consolidated Statements of Income. For the three and nine months ended September 30, 2021,~~ ~~zero~~ ~~and $~~24 thousand, respectively, were reclassified out of accumulated other comprehensive income (loss) and appeared as gain on sale of securities in the Consolidated Statements of Income. For the three and nine months ended September 30, 2022, the tax related to these reclassifications was $~~155~~ ~~thousand, which is included in income tax expense in the Consolidated Statements of Income. For the three and nine months ended September 30, 2021, the tax related to these reclassifications was~~ ~~zero~~ ~~and $~~5 ~~thousand, respectively, which is included in income tax expense in the Consolidated Statements of Income.~~.

NOTE 11. Other Real Estate Owned

The following table is a summary of other real estate owned (“OREO”) activity for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ and the year ended December 31, ~~2021:~~2022:


	Nine Months Ended		Year Ended			Nine Months Ended			Three Months Ended			Year Ended		Three Months Ended
	September 30,		December 31,			September 30,			March 31,			December 31,		March 31,
	2022		2021			2021			2023			2022		2022
	(in thousands)								(in thousands)
Balance, beginning	$	—	$	607		$	607		$	108		$	—	$	—
Transfer from loans		—		266			266			—			108		—
Gain on foreclosures		—		—			—			—			—		—
Sales		—		(781	)		(588	)		(108	)		—		—
Valuation adjustments		—		(92	)		(92	)		—			—		—
Balance, ending	$	—	$	—		$	193		$	—		$	108	$	—

TABLE OF CONTENTS

The major classifications of other real estate owned in the consolidated balance sheets at March 31, 2023 and December 31, 2022 were as follows:


	March 31, 2023		December 31, 2022
	(in thousands)
Construction and Farmland	$	—	$	—
Residential Real Estate		—		108
Commercial Real Estate		—		—
Subtotal	$	—	$	108
Less valuation allowance		—		—
Total	$	—	$	108

There ~~was~~ ~~one~~were no consumer mortgage ~~loan totaling $116~~ ~~thousand~~ collateralized by residential real estate in the process of foreclosure at ~~September 30, 2022~~March 31, 2023 andno ~~consumer mortgage loans collateralized by residential real estate in the process of foreclosure at~~ December 31, ~~2021.~~2022.

NOTE 12. Qualified Affordable Housing Project Investments

The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the balance of the investment for qualified affordable housing projects was $~~2.4~~2.2 million and $~~2.6~~2.3 million, respectively. These balances are reflected in Other assets on the Consolidated Balance Sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $11zero ~~thousand~~ at both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. These balances are reflected in Other liabilities on the Consolidated Balance Sheets. The Company expects to fulfill these commitments by December 31, 2023, in accordance with the terms of the individual agreements.

During each of the three months ended ~~September 30,~~March 31, 2023 and March 31, 2022, ~~and September 30, 2021,~~ the Company recognized amortization expense of $82104 thousand and $57 ~~thousand, respectively. The Company recognized amortization expense for the nine months ended September 30, 2022 and 2021 of $196~~ ~~thousand and $172~~ thousand, respectively. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.

Total estimated credits to be received during ~~2022~~2023 are $~~353~~358 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ were $~~269~~90 ~~thousand and $272~~ ~~thousand, respectively.~~thousand.

NOTE 13. Recent Accounting Pronouncements and Other Authoritative Guidance

In ~~June 2016,~~March 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting ~~Standards Update (“ASU”~~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 the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.

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

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified impacted loans and is currently working with individual borrowers to modify loans that are directly or indirectly influnced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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Recently Adopted Accounting Developments

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments -– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ~~amendments in this~~ ASU, ~~among other things, require the measurement of all~~as amended, requires an entity to measure expected credit losses for financial assets ~~held~~carried at ~~the reporting date~~amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. ~~Financial institutions and~~Among 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,things, the ASU ~~amends~~also amended the ~~accounting~~impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on ~~available-for-sale debt securities and purchased financial assets with credit deterioration. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”), such~~loans, as ~~the Company, and all other entities who do not file with the SEC are required~~well as an adjustment to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.The Company formed a CECL committee during 2016 which continues to meet to address the compliance requirements. Historic loan data has been gathered and reviewed for completeness and accuracy. In addition, the committee is actively engaged in formalizing the Company’s ~~calculation process including its approach~~reserve for ~~the development~~unfunded loan commitments, was $2.5 million. The adjustment net of loss rates and related qualitative adjustments with the assistance of a third-party vendor. Since June 30, 2022, the committee has been running parallel allowance models under the current and new standard.

~~Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance~~tax recorded to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.shareholders’ equity totaled $2.0 million.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ~~For entities that have not yet adopted ASU 2016-13, the effective date for~~ ASU 2022-02 iswas effective for the same as the effective date in ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures, provided they have adopted ASU 2016-13. The Company ~~is currently assessing the impact that ASU 2022-02 will have~~ on ~~its consolidated financial statements.~~January 1, 2023.

NOTE 14. Borrowings

On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $30.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due April 1, 2032 (the “Notes”).

The Company plans ~~to use~~on using the net proceeds of the Notes offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes at the holding company and bear an initial interest rate of 4.50% until April 1, 2027, with interest during this period payable semi-annually in arrears. From and including April 1, 2027, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 2.35%, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after April 1, 2027. Initial debt issuance costs were $673 thousand. The debt balance of $30.0 million is presented net of unamortized issuance costs of $~~640~~606 thousand at ~~September 30, 2022.~~March 31, 2023.

~~During~~The Company had $220.0 million in total borrowings with the ~~third quarter of 2022,~~FHLB at March 31, 2023 with $125.0 million being short-term borrowings and $95.0 million being long-term borrowings. The interest rates on the ~~Company entered into~~short-term borrowings with the FHLB ranged from 4.76% to 5.07%, with a ~~fixed rate credit Federal Home Loan Bank advance in the amount of $75.0~~ ~~million. This advance was has an interest~~weighted average rate of ~~2.18~~4.88%. The interest rates on the long-term borrowings with the FHLB ranged from 4.72% to 4.83%, with a ~~maturity date of~~ ~~October 6, 2022. On October 6, 2022 the original advance matured and was paid off with a new advance for $75.0~~ ~~million with an interest~~weighted average rate of ~~3.79~~4.77%. Of the long-term FHLB borrowings, $55.0 million is due in 2025 and ~~a maturity date of~~$40.0 million is due in ~~January 6, 2023~~2026. The Company had $175.0 million in outstanding borrowings with the FHLB at December 31, 2022. The Company had a $60.0 million irrevocable letter of credit at March 31, 2023 with the FHLB to secure public deposits.

NOTE 15. Derivatives

The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. Derivative contracts that are not designated in a qualifying hedging relationships include customer accommodation loan swaps. The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of the swaps with borrowers and the swaps with dealer counterparties.

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The following table summarize key elements of the Company's derivative instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


	September 30, 2022						March 31, 2023
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
	(in thousands)						(in thousands)
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower	$	23,285	$	1,120	$	—	$	25,263	$	608	$	—
Matched interest rate swaps with counterparty		23,285		—		1,120		25,263		—		608

	December 31, 2021						December 31, 2022
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
	(in thousands)						(in thousands)
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower	$	2,391	$	58	$	—	$	23,141	$	1,017	$	—
Matched interest rate swaps with counterparty		2,391		—		58		23,141		—		1,017

NOTE 16. Business Segments

The Company has two reportable operating segments: community banking and marine lending. Revenue from community banking operations consist primarily of net interest income related to investments in loan and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity. Revenue from marine lending operations consist primarily of net interest income related to commercial and consumer marine loans and gains on sales of loans.

Financial information of the parent company and the Bank of Clarke Wealth Management Division is included in the "All Other" category. The parent company's revenue and expenses are comprised primarily of interest expense associated with subordinated debt. The wealth management division's net recenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers.

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The following table provides income and asset information as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and March 31, 2022, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income. The results by business segment are based on management’s accounting process, which assigns income statement items and assets to each operating segment. Given the Company's reportable segments are contained within the Bank, management must make certain allocations of expenses, which may not be representative of the costs expected to be incurred if the specific business segments operated as stand-alone entities.


	Three Months Ended
	March 31, 2023
	Community Banking			Marine Lending		All Other			Eliminations		Consolidated
	(in thousands)
Interest Income	$	15,241		$	3,317	$	—		$	—	$	18,558
Interest Expense		4,367			1,193		354			—		5,914
Net Interest Income		10,874			2,124		(354	)		—		12,644
Gain on sales of loans		214			242		—			—		456
Other noninterest income		1,862			50		1,158			—		3,070
Net Revenue		12,950			2,416		804			—		16,170
Provision for credit losses		506			158		—			—		664
Noninterest expense		10,360			1,282		744			—		12,386
Income (loss) before taxes		2,084			976		60			—		3,120
Income tax expense (benefit)		317			205		13			—		535
Net Income (loss)	$	1,767		$	771	$	47		$	—	$	2,585

Other data:
Capital expenditures	$	(10	)	$	17	$	—		$	—	$	7
Depreciation and amortization		345			95		123			—		563

	Three Months Ended
	March 31, 2022
	Community Banking			Marine Lending		All Other			Eliminations		Consolidated
	(in thousands)
Interest Income	$	10,406		$	1,103	$	—		$	—	$	11,509
Interest Expense		316			54		—			—		370
Net Interest Income		10,090			1,049		—			—		11,139
Gain on sales of loans		131			347		—			—		478
Other noninterest income		1,830			14		921			—		2,765
Net Revenue		12,051			1,410		921			—		14,382
Provision for credit losses		416			124		—			—		540
Noninterest expense		8,549			625		749			—		9,923
Income (loss) before taxes		3,086			661		172			—		3,919
Income tax expense (benefit)		494			139		36			—		669
Net Income (loss)	$	2,592		$	522	$	136		$	—	$	3,250

Other data:
Capital expenditures	$	307		$	8	$	16		$	—	$	331
Depreciation and amortization		354			42		51			—		447

	Community Banking			Marine Lending		All Other			Eliminations		Consolidated
Total assets at March 31, 2023	$	1,492,308		$	263,240	$	1,174		$	—	$	1,756,722
Total assets at December 31, 2022	$	1,377,461		$	237,595	$	1,661		$	—	$	1,616,717

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

The purpose of this discussion is to focus on the important factors affecting the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q and Item 8, Financial Statements and Supplementary Data, of the ~~2021~~2022 Form 10-K.

Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke ~~County~~ (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law. At ~~September 30, 2022,~~March 31, 2023, the Company had total assets of ~~$1.47~~$1.76 billion, net loans of ~~$1.19~~$1.39 billion, total deposits of ~~$1.25~~$1.39 billion, and shareholders’ equity of ~~$98.5~~$104.5 million. The Company’s net income was ~~$11.3~~$2.6 million for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to its local, independent status.

The Bank is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, sales of investments through Eagle Investment Services, secondary market mortgage activities, and deposit operations. The Bank also incurs noninterest expenses such as compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers visit with existing and potential customers to discuss the products and services offered. The Bank also utilizes traditional advertising such as television commercials, radio ads, newspaper ads, and billboards.

Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.

The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Category I officers, and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Category I) is assigned to the Bank’s President / Chief Executive Officer, Chief Revenue Officer and Chief Credit Officer (approval authority only). Two officers in Category I may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured; and the three Category I Officers can combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Officers in Category II, III, IV, V, VI and VII have lesser authorities and with approval of a Category I officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories I through VII can also utilize the co-approval of the Regional and Small Business Credit Officers to extend loans with exposures up to $2.5 million and $1.5 million respectively on a secured basis, and up to $1 million and $750 thousand respectively on an unsecured basis. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Director Loan Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

The following sections discuss the major loan categories within the total loan portfolio:

Residential lending activity may be generated by the Bank’s loan officer solicitations, 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. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. 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.

Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as 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 repayment of 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 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, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.

The Bank makes local construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished construction project. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.

Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, 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, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. Refer to the Marine Lending section below for discussion of additional commercial and industrial lending.

The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank originates its consumer loans within its geographic market area and these loans are generally made to customers with whom the Bank has an existing relationship. Consumer loans generally 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 on 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 the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.

Refer to the Marine Lending section below for discussion of additional consumer lending.

The Bank’s marine lending unit includes originated retail loans, which are classified as commercial and industrial loans or consumer loans, depending on the borrower, and dealer floorplan loans, which are classified as commercial and industrial loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company primarily has secured agreements with premium manufacturers to support dealer floor plan loans which may reduce the Company’s credit exposure to the dealer, despite its underwriting of each respective dealer. The Company has developed incentive retail pricing programs with the dealers to drive retail dealer flow. Retail loans are generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow.

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.

The ~~allowance for loan losses is an estimate of the probable losses inherent in the Company’s loan portfolio. As required by GAAP,~~Company establishes the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, ~~is accrued when~~current conditions and reasonable and supportable forecasts relevant to the ~~occurrence~~collectability of loans. The measurement of the allowance for credit losses is ~~probable~~based in part on forecasts of unemployment, inflation, as well as the consumer price index, and ~~they can~~may also consider other factors, which we believe to be ~~estimated. Impairment~~indicative of risk factors related to collectability. Management also assesses the risk of credit losses ~~are accrued based on~~arising from changes in economic conditions; the ~~differences between~~nature and volume of the loan ~~balance~~portfolio; the volume and severity of delinquencies and adversely classified loan balances; lending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of ~~its~~underlying collateral in determining the ~~present value~~recorded balance of ~~future cash flows, or~~ the ~~price established in the secondary market. The Company’s~~ allowance for loan losses has three basic components: the general allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The general allowance uses historical experience and other qualitative factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history of the Company. The specific allowance is based upon thecredit losses. This evaluation of specific impaired loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then evaluated to determine how much loss is estimated to be realized on its disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective ~~and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance is due to imprecision in the model and for losses~~because it requires estimates that are ~~not directly allocable~~susceptible to ~~a specific loan type within~~significant revision as more information becomes available. In evaluating the portfolio. As the loans, which are affected by these events, are identified or losses are experienced on the loans which are affected by these events, they will be reflected within the specific or general allowances. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data,level of the ~~2021 Form 10-K, provides additional information~~allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Refer to Note 1 of the interim consolidated financial information contained in Item 1 of this quarterly report on Form 10-Q for additional detail concerning the determination of the allowance for ~~loan losses.~~credit losses on loans.

The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our expectations, intentions or objectives concerning our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” "could," “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

Net income for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was ~~$11.3~~$2.6 million, an ~~increase~~decrease of ~~29.59%~~20.46% or ~~$2.6 million~~$665 thousand when compared to the same period in ~~2021. Net income for the three months ended September 30, 2022 was $4.1 million, an increase of 42.08% or $1.2 million when compared to the same period in 2021.~~2022. Earnings per share, basic and diluted were ~~$3.25~~$0.73 and ~~$2.54 for the nine months ended September 30, 2022 and 2021, respectively. Earnings per share, basic and diluted were $1.17 and $0.83~~$0.94 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was 0.63% and ~~2021 was 1.09% and 0.98%~~0.99%, respectively.

Return on average equity ("ROE") measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders. The ROE of the Company, on an annualized basis, for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was 10.14% and ~~2021 was 14.63% and 11.05%~~12.15%, respectively.

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was ~~$36.0~~$12.6 million and ~~$29.9~~$11.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, which represents an increase of ~~$6.1~~$1.5 million or ~~20.23%. Net interest income was $12.9 million and $10.4 million for the three months ended September 30, 2022 and 2021, respectively, which represents an increase of $2.5 million or 24.04%~~13.51%. Net interest income increased ~~primarily~~ due to the increase in the average balance of the loan portfolio along with the rising interest rate environment. Average interest earning assets increased ~~$187.4~~$317 million or 25.25% when comparing the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 while the average yield on earning assets increased by 20106 basis points over that same period.

Total interest income was ~~$38.5~~$18.6 million and ~~$31.2~~$11.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, which represents an increase of ~~$7.3~~$7.0 million or ~~23.42%~~61.25%. Total interest ~~income~~expense was ~~$14.4~~$5.9 million and ~~$10.8 million~~$370 thousand for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, which represents an increase of ~~$3.6~~$5.5 million or ~~33.24%~~1,498.38%. Total interest expense was $2.6 million and $1.3 million for the nine months ended September 30, 2022 and 2021, respectively, which represents an increase of $1.3 million or 96.70%. Total interest expense was $1.5 million and $383 thousand three months ended September 30, 2022 and 2021. The increase in interest income was driven by an increase in the average balance of the loan portfolio along with the rising interest rate environment. The current rising interest rate environment, along with the growth of higher-paying deposit accounts, have been the main drivers for the increase interest expense. The increase in interest expense ~~was primarily due~~can also be attributed to the 2022 subordinated debt issuance, currently paying a 4.50% fixed rate, on March 31, 2022 along with afour Federal Home Loan Bank ~~advance~~advances of ~~$75.0~~$220.0 million ~~entered into in July 2022 at a~~maturing from December 2023 through March 2026 with varying fixed ~~rate~~rates ranging from of ~~2.18%~~4.71% to 5.07%.

The net interest margin was ~~3.68%~~3.27% and ~~3.58% for the nine months ended September 30, 2022 and 2021, respectively. The net interest margin was 3.72% and 3.56%~~3.61% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for ~~2022~~2023 and ~~2021.~~

Given the expectation of rising interest rates, net interest income and net interest margin could continue to experience some improvement as interest earning assets generally are expected to reprice at a faster rate than liabilities for the remainder of 2022.

38Net interest margin may experience some decline due to additional deposit pricing pressure as interest rates continue to increase and increased competition for new deposits is experienced. These combined also could result in the Company having to borrow wholesale funding to fund asset growth which is more expensive than deposits.

The following table shows 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 three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (dollars in thousands):

The following table shows 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 nine months ended September 30, 2022 and 2021(dollars in thousands):

The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income.

The tax-equivalent yield on earning assets increased from ~~3.74%~~3.73% to ~~3.94%~~4.79% for the ~~nine~~three months ended ~~September 30, 2021 and~~March 31, 2022 ~~respectively.~~compared to the same three month period in 2023. For those same time periods, the tax-equivalent yield on securities increased 3946 basis points. The tax equivalent yield on loans ~~decreased seven~~increased 85 basis points from ~~4.45%~~4.25% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~4.38%~~5.10% for the same time period in ~~2022.~~2023. The increase in the tax-equivalent yield on earning assets for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 resulted mostly from the increase in the tax-equivalent yield on ~~securities. In the current rising interest rate environment, as securities are maturing and being called or sold, they are being replaced with securities at higher rates.~~loans. The ~~decrease~~increase in the yield on loans as compared to the corresponding period in ~~2021~~2022 was primarily due to the ~~composition of the~~ current ~~loan portfolio and lower PPP fee accretion in 2022.~~rising interest rate environment.

The average rate on interest bearing liabilities increased from ~~0.27%~~0.21% to ~~0.44%~~2.23% for the ~~nine~~three months ended ~~September 30, 2021 and~~March 31, 2022 compared to the same three month period in 2023, respectively. The average rate on interest bearing deposits ~~decreased one~~increased 141 basis ~~point~~points during the period. The ~~majority~~current rising interest rate environment, along with the growth of ~~deposit growth has been in non-maturity~~higher-cost deposit accounts, ~~which~~ have ~~traditionally paid a lower interest~~been the main drivers for the increased in the average rate than maturity deposit accounts. The growth in lower interest rate deposit accounts and the reduction in higher interest rate accounts as well as the repricing of those accounts, has resulted in a stable rate paid on interest bearing ~~deposits, despite the current rise in rates paid on deposit accounts.~~deposits. The cost of interest bearing liabilities was also higher in the ~~third~~first quarter of ~~2022 as well as the nine month period,~~2023, due to the subordinated ~~notes that the Company issued~~debt issuance in 2022, currently paying a 4.50% fixed rate, on March 31, 2022 ~~which are currently paying a 4.5% fixed rate, and a~~along with four Federal Home Loan Bank ~~advance~~advances of ~~$75~~$220.0 million ~~entered into in July 2022 at a~~maturing from December 2023 through March 2026 with varying fixed ~~rate~~rates ranging from of ~~2.18%~~4.71% to 5.07%.

The provision for ~~loan~~credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for ~~loan~~credit losses as discussed within the Critical Accounting Policies section ~~above.~~above and in Note 1 of our interim financial information. The Company's provision for credit losses in 2023 consisted of changes in the allowance for credit losses on loans and the reserve for unfunded loan commitments. The allowance for credit losses on loans represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, ~~will~~reduces the recorded investment in loans to the net amount expected to be ~~adequate to absorb probable losses inherent in the loan portfolio.~~collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses.loans. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. The amount of provision for ~~loan~~credit losses on loans is affected by several factors including the growth rate of loans, net charge-offs (recoveries), and the estimated amount of ~~inherent~~expected losses within the loan portfolio. The provision for ~~loan losses for the nine months ended September 30, 2022 and 2021 was $900 thousand and $1.2 million, respectively. The provision for loan~~credit losses for the three months ended ~~September 30,~~March 31, 2023 and 2022 was $664 thousand and ~~2021 was zero and $300~~$540 thousand, respectively. The provision for credit losses for the three months ended ~~September 30, 2021~~March 31, 2023 and ~~the nine months ended September 30,~~ 2022 ~~and 2021~~ resulted mostly from loan growth during the quarters. ~~There was no provision in the third quarter of 2022 due to the large amount of recoveries recognized during the period, mainly from two loan relationships.~~

Total noninterest income for the ~~nine months ended September 30, 2022 and 2021 was $10.3 million and $8.0 million, respectively and for the~~ three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ was ~~$3.2~~$3.5 million and ~~$2.9~~$3.2 million, respectively. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

Wealth management fee income increased from ~~2021~~2023 to 2022. Wealth management fee income is comprised of income from fiduciary activities as well as commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. ~~With the addition of several new employees during 2022, total~~Total assets under management have seen an increase during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 when compared to the three months ended March 31, 2022.

Services charges on deposit accounts increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 when compared to the same periods in ~~2021.~~2022. This increase is mainly due to increases in overdraft charges. Overdraft charges can fluctuate based on changes in customer activity.

The amount of other services charges and fees is comprised primarily of loan servicing fee income, fees received from the Bank’s credit card program and fees generated from the Bank’s ATM/debit card programs. Other service charges and fees increased during the three months ended ~~September 30, 2022 and remained comparable~~March 31, 2023. This increase can be attributed to increased ATM fee income. ATM fee income can fluctuate based on ATM usage by non-customers.

Other operating income decreased for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 when compared to the same period in ~~2021. This increase can be attributed to fees received from the Bank’s credit card program as the Bank’s in-house credit card portfolio continues to grow.~~

During the second quarter of 2021, the Bank began to sell mortgage and marine loans. During the first three quarters of 2022, the Company sold $11.5 million in mortgage loans on the secondary market and $97.8 million of marine loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $568 thousand and $1.5 million during the three and nine months ended September 30, 2022. During the third quarter of 2022, the Company sold $3.0 million in Small Business Association (SBA) loans, resulting in a gain of $175 thousand. Beginning in the second quarter of 2021, the Company sold $11.3 million in mortgage loans on the secondary market and $41.1 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $486 thousand and $845 during the three and nine months ended September 30, 2021.

Bank owned life insurance (“BOLI”) income increased for the nine months ended September 30, 2022. The Company made an investment of $10.0 million during the second quarter of 2021, which has resulted in increased BOLI income for the nine months ended September 30, 2022 in comparison to the same period in the prior year.

~~Other operating income increased for the three and nine months ended September 30, 2022 when compared to the same periods in 2021.~~ This increase can be mainly attributed to cash distributions received during the first quarter of 2022 from investments in Small Business Investment Companies, ~~(SBICs).~~
that were not received during the first quarter of 2023.

Total noninterest expenses increased ~~$5.3~~$2.4 million or ~~20.42%~~24.82% for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period in ~~2021. Total noninterest expenses increased $1.5 million or 16.12% for the three months ended September 30, 2022 compared to the same period in 2021.~~2022. The following table presents the components of noninterest expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

The Company’s growth has had an impact on noninterest expenses. Total assets have grown by ~~$170.1~~$382.4 million or ~~13.05%~~27.83% from ~~December~~March 31, ~~2021~~2022 to ~~September 30, 2022.~~March 31, 2023. This growth has required investments to be made in the Company’s infrastructure, causing increases in salaries and employee benefits, ~~occupancy expenses and~~ equipment expenses, ~~and~~ advertising and marketing ~~expenses.~~expenses and computer software expense. In addition, increases in asset size and capital levels have impacted the FDIC assessment and bank franchise tax amounts.

Salaries and employee benefits increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 over ~~2021.~~2022. Annual pay increases, newly hired employees, increasing insurance costs and enhanced employee incentive plans have attributed to these increases. The number of full-time equivalent employees ~~(FTEs)~~ has increased from ~~215~~221 at ~~September 30, 2021~~March 31, 2022 to ~~235~~253 at ~~September 30, 2022.~~March 31, 2023.

ATM network fees increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 over ~~2021.~~2022. This is due mainly to fluctuations in customer usage.

~~Professional~~An increase in professional fees ~~increased during the nine months ended September 30, 2022 over 2021 mostly~~was also noted between both periods. This increase is mainly due to increased ~~consulting services being used~~audit expenses related to new FDICIA requirement after reaching $1 billion in asset size, as well as, fees associated with SEC filings during the ~~Company continues to grow and expand.~~first quarter of 2023.

Data processing fees ~~expenses increased in 2022~~decreased during the three months ended March 31, 2023 over 2022. This was mainly due to credits with our core provider that the ~~fees associated~~Company was able to apply to an invoice during the ~~new general ledger system implemented~~
first quarter of 2023 in ~~late 2021,~~order to reduce the ~~implementation of a new budgeting system and a new loan end-to-end platform system.~~bill amount.

For the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 other operating expenses increased over ~~2021.~~2022. This increase is due to increased loan related expenses due to a higher volume, increased wealth management expenses due to growth in assets under management, and employee travel expense for training, marketing and sales meetings.

The efficiency ratio of the Company was ~~66.99%~~76.52% and ~~68.56% for the nine months ended September 30, 2022 and 2021, respectively. The efficiency ratio of the Company was 65.73% and 71.31%~~68.87% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021.~~respectively. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.

The calculation of the efficiency ratio for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ was as follows:

Income tax expense was ~~$2.5 million and $1.8 million during the nine months ended September 30, 2022 and 2021, respectively. Income tax expense was $923~~$535 thousand and ~~$584~~$669 thousand during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The effective tax rate was ~~17.97%~~17.15% and ~~16.91% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was 18.44% and 16.89%~~17.07% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The effective tax rate is below the statutory rate of 21% due to tax-exempt income on investment securities and loans. The effective tax rate is also impacted by BOLI as well as income tax credits on qualified affordable housing project investments as discussed in Note 12 to the Consolidated Financial Statements as well as qualified rehabilitation credits.

The ~~slight increases~~Company has two reportable operating segments: community banking and marine lending. Revenue from community banking operations consist primarily of net interest income related to investments in loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity. Revenue from marine lending operations consist primarily of net interest income related to commercial and consumer marine loans and gains on sales of loans.

Financial information for the parent company and the Bank of Clarke Wealth Management Division is included in the ~~2022 periods as compared~~"All Other" category. The parent company's operating results are comprised primarily of interest expense associated with subordinated debt. The wealth management division's net recenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers. Refer to ~~the 2021 periods was primarily due to a lower proportion of tax exempt income to pre-tax earnings year over year.~~Note 16 for additional information.

The following table provides income and asset information as of and for the three months ended March 31, 2023 and 2022 and as of March 31, 2023 and December 31, 2022, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income. Variances that the Company believes require explanation are discussed below the table.

Total securities available for sale were ~~$151.8~~$148.9 million at ~~September 30, 2022,~~March 31, 2023, compared to ~~$192.3~~$149.2 million at December 31, ~~2021.~~2022. This represents a decrease of ~~$40.5 million~~$266 thousand or ~~21.09%~~0.18%. The Company purchased ~~$26.8 million of~~no securities during the ~~nine~~three months ended September 30, 2022. During the nine months ended September 30, 2022, the Company sold $15.4 million of available for sale securities recognizing $6 thousand in gross gains and $743 thousand in gross losses.March 31, 2023. The Company had total maturities, calls, and principal repayments of ~~$24.1~~$3.9 million during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The Company had a net unrealized loss on available for sale securities of ~~$26.7~~$22.1 million at ~~September 30, 2022~~March 31, 2023 as compared to a net unrealized loss of ~~$218 thousand~~$25.9 million at December 31, ~~2021.~~2022. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss). The primary cause of the unrealized losses at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was changes in market interest rates and other market conditions and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the unrealized losses were deemed to be temporary.

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans were ~~$1.20~~$1.40 billion and ~~$985.7 million~~$1.32 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. This represents an increase of ~~$216.1~~$76.9 million or ~~21.93%~~5.81% during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. The ratio of gross loans to deposits increased during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~83.73%~~104.72% at December 31, ~~2021~~2022 to ~~95.83%~~100.77% at September 30, 2022. Loan growth excluding changes in SBA PPP loans during the nine months ended September 30, 2022 was $231.9 million or 23.91%. SBA PPP loans were originated during 2020 and 2021 and as of September 30, 2022 $112 thousand remained outstanding, down $15.8 million or 99.29% from DecemberMarch 31, ~~2021 due to forgiveness of the PPP loan balances.~~2023.

The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. Note 5 to the Consolidated Financial Statements provides the composition of the loan portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. During the quarter ended March 31, 2023, $27.8 million in loans were sold. The Company sold 2.1 million in mortgage loans on the secondary market and 25.7 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in net gains of $456 thousand. The growth in loans was largely due to organic loan portfolios growth as the Company expands lending types and markets.

~~Residential~~Commercial real estate loans (including multifamily loans) were ~~$319.8~~$591.9 million or ~~26.61%~~42.49% and ~~$292.8~~$547.4 million or ~~29.71%~~41.59% of total loans at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively. Commercial real estate loans were $491.4 million or 40.88% and $377.1 million or 38.25% of total loans at September 30,~~ 2022, ~~and December 31, 2021,~~ respectively, representing an increase of ~~$114.3~~$44.5 million or ~~30.32%~~8.12% during the ~~nine~~three months ended ~~September 30, 2022. Construction, land development, and farmland~~March 31, 2023. Marine loans were ~~$85.5~~$253.9 million or ~~7.11%~~18.23% and ~~$84.9~~$230.9 million or ~~8.61%~~17.54% of total loans at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively. Consumer installment loans were $107.9 million or 8.98% and $67.3 million or 6.83% of total loans at September 30,~~ 2022, ~~and December 31, 2021,~~ respectively, representing an increase of ~~$40.6~~$23.0 million or 60.34% during the nine months ended September 30, 2022. Commercial and industrial loans were $179.8 million or 14.96% and $143.4 million or 14.55% of total loans at September 30, 2022 and December 31, 2021, respectively.9.97%. Loan growth was mainly concentrated in commercial real estate loans, which experienced an increase during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 due largely to the continued growth and expansion of the Bank’s current market area. In addition to the commercial real state lending growth, growth of our marine lending portfolio was ~~$71.4 million or 64.64%, which falls into both~~strong due to continued growth in the ~~consumer installment loan~~marine lending team and ~~commercial and industrial loan portfolios.~~market area.

The purpose of, and the methods for, measuring the allowance for ~~loan~~credit losses on loans are discussed in the Critical Accounting Policies section ~~above.~~above and in note 1 of the interim consolidated financial information.. Note 5 to the Consolidated Financial Statements shows the activity within the allowance for ~~loan~~credit losses on loans during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ and the year ended December 31, ~~2021.~~2022. Charged-off loans were ~~$169~~$75 thousand and ~~$69~~$47 thousand for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Recoveries were ~~$1.2 million~~$21 thousand and ~~$238~~$35 thousand for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. This resulted in net ~~recoveries~~charge-offs of ~~$1.1 million~~$54 thousand and ~~$169~~$12 thousand for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The ratio of net charge-offs ~~(recoveries)~~ to average loans was ~~(0.10%) and (0.02%)~~0.00% for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021, respectively.~~2022. The allowance for ~~loan~~credit losses as a percentage of loans was ~~0.89%~~1.00% at ~~September 30, 2022~~March 31, 2023 and ~~0.89%~~0.85% at December 31, ~~2021. Excluding outstanding PPP loans, the allowance for loan losses as a percentage of total loans was 0.89%~~2022 and ~~0.91%~~1.00% as of ~~September 30, 2022 and December 31, 2021, respectively.~~January 1, 2023, the date of adoption for ASC 326. The ~~percentage of the allowance for loan losses to total loans excluding PPP loans declined slightly~~increase as compared to ~~the prior year end. The slight decline during the year-to-date period in~~December 31, 2022 was attributable ~~in part~~ to the ~~concentration~~adoption of loan growth during the period in segments which carry lower reserves. Despite a significant increase in classified loans, allowance for loan losses as a percentage of loans excluding PPP loans declined slightly. The majority of the increase in classified loans was due to the downgrade of loans where current financial information has not been provided, per loan policy. These loans have not been identified as impaired or nonperforming loans. Refer to the Nonperforming Assets and Other Assets section for discussion on nonperforming loans.ASC 326.

All nonaccrual and other impaired loans were evaluated for impairment and any specific allocations were provided for as necessary. Based on management's evaluation and update of the Company's historical loss experience adjusted for qualitative factors assessed, the general reserve as a percentage of non-impaired loans decreased from 0.90% at December 31, 2021 to 0.87% at September 30, 2022. Management believes that the allowance for ~~loan~~credit losses on loans is currently adequate to absorb ~~probable and estimable~~the current expected losses ~~inherent~~ in the loan portfolio. ~~Management will continue to evaluate the adequacy of the allowance for loan losses as more economic data becomes available and as changes within the Company’s portfolio are known.~~

Nonperforming assets consist of nonaccrual loans, repossessed assets, OREO (foreclosed properties), and loans past due 90 days or more and still accruing as detailed in the table below.

Nonperforming assets decreased by ~~$339~~$173 thousand during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. Nonaccrual loans were ~~$2.4~~$1.8 million and ~~$2.7~~$2.2 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. There was no OREO at ~~September 30, 2022~~March 31, 2023 and ~~December 31, 2021. The percentage of nonperforming assets to loans and OREO was 0.20% at September 30, 2022 and 0.28%~~$108 thousand at December 31, ~~2021, respectively.~~2022. There were no$576 thousand in loans past due 90 days or more and still accruing at ~~September 30, 2022~~March 31, 2023 and ~~$43~~$318 thousand in loans past due 90 days or more and still accruing at December 31, ~~2021.~~2022. The percentage of nonperforming assets to loans and OREO was 0.17% at March 31, 2023 and 0.20% at December 31, 2022, respectively.

Total past due loans, as disclosed in note 5 to the Consolidated Financial Statements, increased to ~~$1.7~~$2.6 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$1.6 million~~$973 thousand at December 31, ~~2021.~~2022. The majority of the increase in past due loans was due to one large relationship totaling $1.3 million that was past due 32 days at March 31, 2023. This relationship was not past due at December 31, 2022.

During the ~~nine~~three months ended ~~September 30, 2022, the Bank~~March 31, 2023, no loans were placed ~~four loans totaling $665 thousand~~ on nonaccrual status. Management evaluates the financial condition of borrowers and the value of any collateral on nonaccrual loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans and are reflected in the allowance for ~~loan losses.~~credit losses on loans.

Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses to principal that require additional provisions for ~~loan~~credit losses to be charged against earnings.

For real estate loans, upon foreclosure, the balance of the loan is transferred to OREO and carried at the fair value of the property based on current appraisals and other current market trends, less estimated selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off to the allowance for ~~loan~~credit losses. A review of the recorded property value is performed in conjunction with normal ~~loan~~quarterly reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations.

In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Formal, standardized loan restructuring programs are not utilized by the Company. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provisions. Such restructured loans are included in impaired loans. However, restructured loans are not necessarily considered nonperforming assets. At September 30, 2022, the Company had $4.4 million in restructured loans with specific allowances totaling $31 thousand. At December 31, 2021, the Company had $2.7 million in restructured loans with specific allowances totaling $39 thousand. At September 30, 2022 and December 31, 2021, total restructured loans performing under the restructured terms and accruing interest were $4.2 million and $2.5 million, respectively. Two loans, totaling $136 thousand, were in nonaccrual status at September 30, 2022. Two loans, totaling $149 thousand, were in nonaccrual status at December 31, 2021.

Total deposits were ~~$1.25~~$1.39 billion and ~~$1.18~~$1.26 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. This represents an increase of ~~$76.9~~$125.9 million or ~~6.53%~~9.96% during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. Note 7 to the Consolidated Financial Statements provides the composition of total deposits at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021. The growth~~2022. Growth in deposits has been divided between core and non-core accounts. During the first quarter of 2023, approximately $52.5 million or 41.7% of total deposit growth was organic growth as wethe Company continued to expand and grow into newer market areas.

~~Noninterest-bearing demand~~ The remaining growth was attributable to brokered deposits. As interest rates have risen, the Company has noticed a shift in the mix of deposits ~~which are comprised of checking accounts, increased $20.7 million or 4.43%~~away from ~~$470.4 million at December 31, 2021~~non-interest bearing deposits and towards time deposits and, to $491.2 million at September 30, 2022. Savings and interest-bearing demand deposits, which include NOW accounts, money market accounts and regular savings accounts increased $48.8 million or 8.36% from $583.3 million at December 31, 2021 to $632.1 million at September 30, 2022.a lesser degree, other interest bearing deposits. Time deposits increased ~~$7.2~~by $115.1 million or ~~5.88% from $123.6 million at~~72.9% between December 31, ~~2021~~2022 and March 31, 2023, while non-interest bearing deposits have decreased $14.6 million or 3.1% and savings and interest bearing demand deposits have increased by $25.4 million or 4.0% for the same time period. Time deposits as a percentage of total deposits have increased from 10.0% and 12.5% at March 31, 2022 and December 31, 2022, respectively, to ~~$130.8~~19.6% at March 31, 2023. The increase in time deposits is partially due to $30.0 million ~~at September 30, 2022.~~in brokered accounts that the Company entered into during the first quarter of 2023. At March 31, 2023, over 73% of deposits were fully FDIC insured.

The Bank continues to be a well capitalized financial institution. Total shareholders’ equity at ~~September 30, 2022~~March 31, 2023 was ~~$98.5~~$104.5 million, reflecting a percentage of total assets of ~~6.69%~~5.95%, as compared to ~~$110.3~~$101.7 million and ~~8.46%~~6.29% at December 31, ~~2021.~~2022. The reason for the ~~decrease~~increase in shareholders’ equity ~~during the first nine months of 2022~~ was due to an improvement in unrealized losses on the securities available for sale ~~portfolio.~~ portfolio of $3.8 million as well as net income of $2.6 million earned during the three months ended March 31, 2023.During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company declared dividends of ~~$0.85~~$0.30 and ~~$0.82~~$0.28 per share, respectively. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.

At ~~September 30, 2022,~~March 31, 2023, the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions. The Bank monitors these ratios on a quarterly basis and has several strategies, including without limitation the issuance of common stock, to ensure that these ratios remain above regulatory minimums.

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio or “CBLR” framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. Under the final rule, an eligible banking organization may opt out and revert to the risk-weighting framework without restriction. As a qualifying community banking organization, the Bank elected to measure its capital adequacy under the CBLR framework as of ~~September 30, 2022,~~March 31, 2023, and its leverage ratio was ~~9.44%~~9.02%. At December 31, ~~2021,~~2022, the ~~Bank utilized the risk-based capital rules to assess its capital adequacy and its~~Bank's leverage ~~tier 1, common equity tier 1, and total capital ratios were 8.84%, 10.44%, 10.44%, and 11.30%, respectively.~~ratio was 9.19% Management believes, that as of ~~September 30, 2022,~~March 31, 2023, that the Bank met all capital adequacy requirements to which it is ~~subject..~~subject. We are closely monitoring our capital position and are taking appropriate steps to ensure our level of capital remains strong. Our capital, while significant, may fluctuate in future periods and limit our ability to pay dividends.

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At ~~September 30, 2022,~~March 31, 2023, liquid assets totaled ~~$291.2~~$319.1 million as compared to ~~$365.1~~$317.1 million at December 31, ~~2021.~~2022. These amounts represented ~~21.18%~~19.31% and ~~30.61%~~20.93% of total liabilities at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The Company ~~minimizes~~generally attempts to minimize liquidity demand by primarily utilizing core deposits to fund asset growth. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently.

There have been no material changes in off-balance sheet arrangements and contractual obligations as reported in the ~~2021~~2022 Form 10-K.

There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the ~~2021~~2022 Form 10-K.

The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2022~~March 31, 2023 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). The Company is currently using the 2013 COSO Framework.

The Company adopted ASC 326, as described further in Note 1 to the consolidatd interim financial statements, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfnded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company’s internal control over financial reporting during the Company’s three months ended ~~September 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There are no material pending legal proceedings to which the Company is a party or of 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, ~~2021.~~2022.

The following table details the Company's purchases of its common stock during the ~~third~~first quarter of ~~2022~~2023 pursuant to the Stock Repurchase Program. The Company authorized 150,000 shares for repurchase under the Stock Repurchase program which was renewed on June 15, 2022. The Program has start date of July 1, 2022 and an expiration date of June 30, 2023.

The following exhibits are filed with this Form 10-Q and this list includes the exhibit index:

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, this ~~10th~~15th day of ~~November, 2022.~~May, 2023.


Virginia		54-1601306
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 East Main Street	P.O. Box 391
Berryville, VA		22611
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None


PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Balance Sheets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	1
	Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	3
	Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3234
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5152
Item 4.	Controls and Procedures	5152

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	5253
Item 1A.	Risk Factors	5253
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5253
Item 3.	Defaults Upon Senior Securities	5253
Item 4.	Mine Safety Disclosures	5253
Item 5.	Other Information	5253
Item 6.	Exhibits	5354


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2022			2021			2023			2022
Cash Flows from Operating Activities
Net income	$	11,324		$	8,738		$	2,585		$	3,250
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		734			750			244			247
Amortization of other assets		525			405			319			200
Amortization of debt issuance costs		33			—
Origination of loans held for sale		(13,244	)		(12,424	)		(4,078	)		(4,129	)
Proceeds from sale of loans held for sale		14,515			11,673			4,445			4,298
Net (gains) on sales of loans		(1,544	)		(845	)		(456	)		(478	)
Provision for loan losses		900			1,183
Loss on other real estate owned		—			128
Loss on the sale and disposal of premises and equipment		3			—
Loss (gain) on the sale of securities		737			(24	)
Provision for credit losses								664			540
(Gain) on other real estate owned								(7	)		—
Amortization of subordinated debt issuance costs								17			—
Stock-based compensation expense		746			617			317			195
Premium amortization on securities, net		460			988			93			185
(Increase) in cash surrender value		(495	)		(368	)
Bank owned life insurance income								(179	)		(179	)
Changes in assets and liabilities:
(Increase) in other assets		(10,691	)		(1,251	)
Increase in other liabilities		623			227
(Increase) decrease in other assets								(3,017	)		29
(Decrease) in other liabilities								(733	)		(3,981	)
Net cash provided by operating activities	$	4,626		$	9,797		$	214		$	177
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	24,135		$	41,711		$	3,945		$	11,140
Proceeds from the sale of securities available for sale		10,813			15,885
Purchases of securities available for sale		(26,813	)		(97,821	)		—			(25,813	)
Proceeds from the sale of restricted investments		—			222
Purchases of restricted investments		(3,559	)		(4	)		(2,069	)		(150	)
Purchases of bank-owned life insurance		—			(10,000	)
Purchases of bank premises and equipment		(493	)		(597	)		(7	)		(331	)
Proceeds from the sale of bank premises and equipment		33			—
Changes in collateral posted with other financial institutions, net		(700	)		—
Proceeds from the sale of other real estate owned								115			—
Proceeds from sales of loans		97,814			41,516			23,762			32,502
Origination of loans net of principal collected		(312,421	)		(127,907	)		(100,575	)		(68,104	)
Funding of capital commitments related to other investments								(275	)		—
Net cash (used in) investing activities	$	(211,191	)	$	(136,443	)	$	(75,104	)	$	(50,756	)
Cash Flows from Financing Activities
Net increase in noninterest bearing demand deposits, savings, and interest bearing demand deposits	$	69,614		$	121,581		$	10,744		$	54,999
Net increase (decrease) in time deposits		7,265			(4,014	)		115,132			(911	)
Net (decrease) increase in federal funds purchased								(32,980	)		—
Net increase in Federal Home Loan Bank advances		75,000			—			45,000			—
Issuance of subordinated debt, net of issuance costs		29,327			—			—			29,327
Issuance of common stock, employee benefit plan		142			133
Repurchase and retirement of common stock		(154	)		(148	)		(128	)		(117	)
Cash dividends paid		(2,762	)		(2,418	)		(1,057	)		(877	)
Net cash provided by financing activities	$	178,432		$	115,134		$	136,711		$	82,421
(Decrease) in cash and cash equivalents	$	(28,133	)	$	(11,512	)
Increase in cash and cash equivalents							$	61,821		$	31,842
Cash and Cash Equivalents
Beginning		64,068			79,920			66,894			64,068
Ending	$	35,935		$	68,408		$	128,715		$	95,910
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,436		$	1,347		$	4,795		$	371
Income taxes	$	2,541		$	1,943		$	311		$	—
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized (loss) on securities available for sale	$	(26,679	)	$	(2,777	)
Other real estate and repossessed assets acquired in settlement of loans	$	—		$	266
Unrealized gain (loss) on securities available for sale							$	3,772		$	(13,454	)
Minimum postretirement liability adjustment							$	(8	)	$	—
Issuance of common stock, dividend investment plan	$	198		$	398		$	—		$	97
Lease liabilities arising from right-of-use assets	$	—		$	79
Sales of securities available for sale settled subsequent to quarter end	$	4,557		$	—


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


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


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.		☐


	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
December 31, 2020	$	8,460		$	10,811		$	82,524		$	3,279		$	105,074
Net income		—			—			2,862			—			2,862
Other comprehensive (loss)		—			—			—			(2,193	)		(2,193	)
Vesting of restricted stock awards, stock incentive plan (10,258 shares)		26			(26	)		—			—			—
Stock-based compensation expense		—			147			—			—			147
Issuance of common stock, dividend investment plan (6,260 shares)		16			165			—			—			181
Repurchase and retirement of common stock (2,814 shares)		(7	)		(76	)		—			—			(83	)
Dividends declared ($0.27 per share)		—			—			(924	)		—			(924	)
March 31, 2021	$	8,495		$	11,021		$	84,462		$	1,086		$	105,064
Net income		—			—			3,003			—			3,003
Other comprehensive income		—			—			—			36			36
Stock-based compensation expense		—			159			—			—			159
Issuance of common stock, dividend investment plan (4,702 shares)		12			146			—			—			158
Issuance of common stock, employee benefit plan (4,154 shares)		10			123			—			—			133
Repurchase and retirement of common stock (760 shares)		(2	)		(23	)		—			—			(25	)
Dividends declared ($0.27 per share)		—			—			(926	)		—			(926	)
June 30, 2021	$	8,515		$	11,426		$	86,539		$	1,122		$	107,602
Net income		—			—			2,873			—			2,873
Other comprehensive (loss)		—			—			—			(37	)		(37	)
Vesting of restricted stock awards, stock incentive plan (2,000 shares)		5			(5	)		—			—			—
Stock-based compensation expense		—			311			—			—			311
Issuance of common stock, dividend investment plan (1,731 shares)		4			55			—			—			59
Repurchase and retirement of common stock (1,175 shares)		(3	)		(37	)		—			—			(40	)
Dividends declared ($0.28 per share)		—			—			(966	)		—			(966	)
September 30, 2021	$	8,521		$	11,750		$	88,446		$	1,085		$	109,802
																Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
December 31, 2021	$	8,556		$	12,115		$	89,764		$	(155	)	$	110,280		$	8,556		$	12,115		$	89,764		$	(155	)	$	110,280
Net income		—			—			3,250			—			3,250			—			—			3,250			—			3,250
Other comprehensive (loss)		—			—			—			(10,628	)		(10,628	)		—			—			—			(10,628	)		(10,628	)
Vesting of restricted stock awards, stock incentive plan (12,468 shares)		31			(31	)		—			—			—			31			(31	)		—			—			—
Stock-based compensation expense		—			195			—			—			195			—			195			—			—			195
Issuance of common stock, dividend investment plan (2,782 shares)		7			90			—			—			97			7			90			—			—			97
Repurchase and retirement of common stock (3,411 shares)		(8	)		(109	)		—			—			(117	)		(8	)		(109	)		—			—			(117	)
Dividends declared ($0.28 per share)		—			—			(974	)		—			(974	)		—			—			(974	)		—			(974	)
March 31, 2022	$	8,586		$	12,260		$	92,040		$	(10,783	)	$	102,103		$	8,586		$	12,260		$	92,040		$	(10,783	)	$	102,103

December 31, 2022																$	8,629		$	13,268		$	100,278		$	(20,446	)	$	101,729
Cumulative effect adjustment for CECL																	—			—			(1,961	)		—			(1,961	)
Net income		—			—			3,992						3,992			—			—			2,585			—			2,585
Other comprehensive (loss)		—			—			—			(5,973	)		(5,973	)
Other comprehensive income																	—			—			—			2,975			2,975
Vesting of restricted stock awards, stock incentive plan (12,749 shares)																	31			(31	)		—			—			—
Stock-based compensation expense		—			222			—			—			222			—			317			—			—			317
Issuance of common stock, employee benefit plan (3,451 shares)		8			112			—			—			120
Dividends declared ($0.28 per share)		—			—			(974	)		—			(974	)
June 30, 2022	$	8,594		$	12,594		$	95,058		$	(16,756	)	$	99,490
Net income		—			—			4,082						4,082
Other comprehensive (loss)		—			—			—			(4,475	)		(4,475	)
Stock-based compensation expense		—			329			—			—			329
Issuance of common stock, dividend investment plan (2,800 shares)		7			94			—			—			101
Issuance of common stock, employee benefit plan (614 shares)		2			20			—			—			22
Repurchase and retirement of common stock (1,031 shares)		(3	)		(34	)		—			—			(37	)
Dividends declared ($0.29 per share)		—			—			(1,012	)		—			(1,012	)
September 30, 2022	$	8,600		$	13,003		$	98,128		$	(21,231	)	$	98,500
Repurchase and retirement of common stock (3,590 shares)																	(9	)		(119	)		—			—			(128	)
Dividends declared ($0.30 per share)																	—			—			(1,057	)		—			(1,057	)
March 31, 2023																$	8,651		$	13,435		$	99,845		$	(17,471	)	$	104,460


	As of and For the Nine Months Ended
	September 30, 2022
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate		Commercial		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	2,794		$	1,750		$	1,650	$	1,656	$	646		$	291		$	—	$	8,787
Charge-Offs		—			(2	)		—		—		(67	)		(100	)		—		(169	)
Recoveries		5			883	��		197		107		21			11			—		1,224
Provision		(84	)		(862	)		352		702		397			185			210		900
Ending balance	$	2,715		$	1,769		$	2,199	$	2,465	$	997		$	387		$	210	$	10,742
Ending balance: Individually evaluated for impairment	$	—		$	32		$	—	$	374	$	—		$	—		$	—	$	406
Ending balance: collectively evaluated for impairment	$	2,715		$	1,737		$	2,199	$	2,091	$	997		$	387		$	210	$	10,336
Loans:
Ending balance	$	85,475		$	319,757		$	491,364	$	179,848	$	107,877		$	11,167		$	—	$	1,195,488
Ending balance individually evaluated for impairment	$	1,042		$	3,482		$	1,989	$	453	$	24		$	—		$	—	$	6,990
Ending balance collectively evaluated for impairment	$	84,433		$	316,275		$	489,375	$	179,395	$	107,853		$	11,167		$	—	$	1,188,498


	Issuer Purchases of Equity Securities
	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that may Yet Be Purchased Under the Plan
								250,000
July 1 - July 31, 2022		—	$	—		—		250,000
August 1 - August 31, 2022		1,031		35.42		1,031		248,969
September 1 - September 30, 2022		—		—		1,031		248,969
		1,031	$	35.42		1,031		248,969


Exhibit No.		Description

31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022~~March 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 Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.

104		The cover page from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022~~March 31, 2023 formatted in Inline XBRL (included with Exhibit 101).


By:			/S/ BRANDON C. LOREY
			Brandon C. Lorey President and Chief Executive Officer

By:			/S/ KATHLEEN J. CHAPPELL
			Kathleen J. Chappell Executive Vice President, Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company