VABK 10-Q Quarterly Report June 30, 2022

VABK 10-Q Quarter ended June 30, 2022

Exhibits

Exhibits

VIRGINIA NATIONAL BANKSHARES CORP

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2022


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

For the transition period from ___________ to ___________

Commission File Number: 001-40305

VIRGINIA NATIONAL BANKSHARES CORP ORATION

(Exact Name of Registrant as Specified in its Charter)


Virginia	46-2331578
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
404 People Place
Charlottesville , Virginia	22911
(Address of principal executive offices )	(Zip Code)

Registrant’s telephone number, including area code: ( 434 ) 817-8621

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

       
        Title of each class

       
        Trading
       
        Symbol(s)

       
        Name of each exchange on which registered

       
          Common Stock

       
          VABK

       
        The
       
          Nasdaq
         
        Capital Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

As of August 10, 2022, the registrant had 5,326,271 shares of common stock, $2.50 par value per share, outstanding.

VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS


Part I. Financial Information
Item 1 Financial Statements		Page 4
Consolidated Balance Sheets (unaudited)		Page 4
Consolidated Statements of Income (unaudited)		Page 5
Consolidated Statements of Comprehensive Income (Loss) (unaudited)		Page 6
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 7
Consolidated Statements of Cash Flows (unaudited)		Page 8
Notes to Consolidated Financial Statements (unaudited)		Page 9

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 36
Application of Critical Accounting Policies and Estimates		Page 38
Financial Condition		Page 38
Results of Operations		Page 45

Item 3 Quantitative and Qualitative Disclosures About Market Risk		Page 52

Item 4 Controls and Procedures		Page 52

Part II. Other Information
Item 1 Legal Proceedings		Page 53
Item 1A Risk Factors		Page 53
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 53
Item 3 Defaults Upon Senior Securities		Page 53
Item 4 Mine Safety Disclosures		Page 53
Item 5 Other Information		Page 53
Item 6 Exhibits		Page 53

Signatures		Page 54

Glossary of Acronyms and Defined Terms


2005 Plan	-	2005 Stock Incentive Plan
2014 Plan	-	2014 Stock Incentive Plan
2022 Plan	-	2022 Stock Incentive Plan
ACL	-	Allowance for credit losses
Acquired Loans	-	Loans acquired from Fauquier
AFS	-	Available for sale
ALLL	-	Allowance for loan and lease losses
ASC	-	Accounting Standards Codification
ASU	-	Accounting Standards Update
the Bank	-	Virginia National Bank
bps	-	Basis points
CDARS™	-	Certificates of Deposit Account Registry Service
CECL	-	Current expected credit losses
CMO	-	Collateralized mortgage obligation
the Company	-	Virginia National Bankshares Corporation and its subsidiaries
COVID-19	-	Novel coronavirus disease
EBA	-	Excess Balance Account
Effective Date	-	April 1, 2021
EPS	-	Earnings per share or net income per share
Exchange Act	-	Securities Exchange Act of 1934, as amended
Fauquier	-	Fauquier Bankshares, Inc. and its subsidiaries
FASB	-	Financial Accounting Standards Board
Federal Reserve	-	Board of Governors of the Federal Reserve System
Federal Reserve Bank or FRB	-	Federal Reserve Bank of Richmond
FFS		Federal funds sold, or fed funds sold
FHLB	-	Federal Home Loan Bank of Atlanta
Form 10-K	-	Annual Report on Form 10-K for the year ended December 31, 2021
FTE	-	Fully taxable equivalent
GAAP or U.S. GAAP	-	Accounting principles generally accepted in the United States
ICS ®	-	Insured Cash Sweep ®
LIBOR	-	London Interbank Offering Rate
Masonry Capital	-	Masonry Capital Management, LLC
Merger	-	Mergers of Fauquier Bankshares, Inc. and The Fauquier Bank with and into the Company and the Bank, respectively
Merger Agreement	-	Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger
NPA	-	Nonperforming assets
OCC	-	Office of the Comptroller of the Currency
OREO	-	Other real estate owned
OTTI	-	Other than temporary impairment
PCA	-	Prompt Corrective Action
PCI	-	Purchased credit impaired
PII	-	Personally identifiable information
the Plans	-	2005 Stock Incentive Plan, 2014 Stock Incentive Plan and 2022 Stock Incentive Plan
PPP	-	Paycheck Protection Program
ROAA	-	Return on Average Assets
ROAE	-	Return on Average Equity
SAB	-	Staff Accounting Bulletin
SBA	-	Small Business Administration
SEC	-	U.S. Securities and Exchange Commission
Securities Act	-	Securities Act of 1933, as amended
Sturman Wealth	-	Sturman Wealth Advisors
TDR	-	Troubled debt restructuring
TFB	-	The Fauquier Bank
VNBTrust	-	VNBTrust, National Association

PART I. FINANCI AL INFORMATION

ITEM 1. FINAN CIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED B ALANCE SHEETS

(Dollars in thousands, except per share data)


	June 30, 2022			December 31, 2021 *
ASSETS	Unaudited
Cash and due from banks	$	17,631		$	20,345
Interest-bearing deposits in other banks		145,217			336,032
Federal funds sold		52,819			152,463
Securities:
Available for sale, at fair value		461,830			303,817
Restricted securities, at cost		5,138			4,950
Total securities		466,968			308,767
Loans, net of deferred fees and costs		960,192			1,061,211
Allowance for loan losses		( 5,503	)		( 5,984	)
Loans, net		954,689			1,055,227
Premises and equipment, net		19,193			25,093
Bank owned life insurance		38,046			31,234
Goodwill		8,140			8,140
Core deposit intangible, net		7,405			8,271
Other intangible assets, net		240			274
Other real estate owned, net		-			611
Right of use asset, net		7,343			7,583
Accrued interest receivable and other assets		27,249			18,144
Total assets	$	1,744,940		$	1,972,184
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	512,889		$	522,281
Interest-bearing		399,930			446,314
Money market and savings deposit accounts		535,958			665,530
Certificates of deposit and other time deposits		150,121			162,045
Total deposits		1,598,898			1,796,170
Junior subordinated debt, net		3,390			3,367
Lease liability		6,925			7,108
Accrued interest payable and other liabilities		1,511			3,552
Total liabilities		1,610,724			1,810,197
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $ 2.50 par value		-			-
Common stock, $ 2.50 par value		13,201			13,178
Capital surplus		104,858			104,584
Retained earnings		53,852			46,436
Accumulated other comprehensive loss		( 37,695	)		( 2,211	)
Total shareholders' equity		134,216			161,987
Total liabilities and shareholders' equity	$	1,744,940		$	1,972,184
Common shares outstanding		5,326,271			5,308,335
Common shares authorized		10,000,000			10,000,000
Preferred shares outstanding		-			-
Preferred shares authorized		2,000,000			2,000,000

* Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STAT EMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	For the three months ended						For the six months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Interest and dividend income:
Loans, including fees	$	10,610		$	13,009		$	21,379		$	18,947
Federal funds sold		302			21			363			33
Other interest-bearing deposits		219			39			355			39
Investment securities:
Taxable		1,662			757			2,674			1,264
Tax exempt		308			273			612			449
Dividends		64			32			126			66
Total interest and dividend income		13,165			14,131			25,509			20,798

Interest expense:
Demand and savings deposits		498			548			1,174			925
Certificates and other time deposits		157			324			352			604
Borrowings		49			108			97			144
Total interest expense		704			980			1,623			1,673
Net interest income		12,461			13,151			23,886			19,125
Provision for (recovery of) loan losses		( 217	)		( 141	)		( 69	)		210
Net interest income after provision for (recovery of) loan losses		12,678			13,292			23,955			18,915

Noninterest income:
Wealth management fees		572			980			1,129			1,309
Advisory and brokerage income		210			359			426			550
Deposit account fees		458			426			923			586
Debit/credit card and ATM fees		779			599			1,486			753
Bank owned life insurance income		246			199			457			306
Resolution of commercial dispute		-			-			2,400			-
Gains on sale of assets		1,113			-			1,113			27
Other		268			357			499			428
Total noninterest income		3,646			2,920			8,433			3,959

Noninterest expense:
Salaries and employee benefits		4,086			4,741			8,817			7,143
Net occupancy		1,282			1,109			2,479			1,604
Equipment		254			340			537			456
Bank franchise tax		304			429			608			602
Computer software		357			216			620			383
Data processing		699			994			1,437			1,283
FDIC deposit insurance assessment		125			182			351			245
Marketing, advertising and promotion		259			232			526			369
Merger and merger-related expenses		-			5,874			-			6,152
Plastics expense		92			73			231			115
Professional fees		404			510			741			687
Core deposit intangible amortization		427			428			866			428
Other		1,153			865			2,324			1,307
Total noninterest expense		9,442			15,993			19,537			20,774

Income before income taxes		6,882			219			12,851			2,100
Provision for income taxes		1,197			72			2,242			448
Net income	$	5,685		$	147		$	10,609		$	1,652
Net income per common share, basic	$	1.07		$	0.03		$	1.99		$	0.41
Net income per common share, diluted	$	1.06		$	0.03		$	1.98		$	0.41
Weighted average common shares outstanding, basic		5,326,271			5,305,277			5,319,166			4,019,700
Weighted average common shares outstanding, diluted		5,347,008			5,320,290			5,345,242			4,031,301

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)


	For the three months ended						For the six months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net income	$	5,685		$	147		$	10,609		$	1,652
Other comprehensive income (loss):
Unrealized gains (losses) on securities, net of tax of ($ 4,308 ) and ($ 9,536 ) for the three and six months ended June 30, 2022; and net of tax of $ 506 and ($ 394 ) for the three and six months ended June 30, 2021, respectively		( 16,214	)		1,903			( 35,879	)		( 1,484	)
Unrealized gains (losses) on interest rate swaps, net of tax of $ 42 and $ 104 for the three and six months ended June 30, 2022; and net of tax of ($ 30 ) and ($ 30 ) for the three and six months ended June 30, 2021, respectively		160			( 111	)		395			( 111	)
Total other comprehensive income (loss)		( 16,054	)		1,792			( 35,484	)		( 1,595	)
Total comprehensive income (loss)	$	( 10,369	)	$	1,939		$	( 24,875	)	$	57

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CH ANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Dollars in thousands, except per share data)

(Unaudited)


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2020	$	6,722	$	32,457		$	41,959		$	1,460		$	82,598
Exercise of stock options		1		14			-			-			15
Stock option expense		-		34			-			-			34
Restricted stock grant expense		-		61			-			-			61
Vested stock grants		7		( 7	)		-			-			-
Cash dividends declared ($ 0.30 per share)		-		-			( 814	)		-			( 814	)
Net income		-		-			1,505			-			1,505
Other comprehensive loss		-		-			-			( 3,387	)		( 3,387	)
Balance, March 31, 2021	$	6,730	$	32,559		$	42,650		$	( 1,927	)	$	80,012
Common stock issued in acquisition of Fauquier Bankshares, Inc.		6,428		71,608									78,036
Exercise of stock options		2		13			-			-			15
Stock option expense		-		31			-			-			31
Restricted stock grant expense		-		165			-			-			165
Vested stock grants		16		( 16	)		-			-			-
Cash dividends declared ($ 0.30 per share)		-		-			( 1,596	)		-			( 1,596	)
Net income		-		-			147			-			147
Other comprehensive income		-		-			-			1,792			1,792
Balance, June 30, 2021	$	13,176	$	104,360		$	41,201		$	( 135	)	$	158,602

Balance, December 31, 2021	$	13,178	$	104,584		$	46,436		$	( 2,211	)	$	161,987
Stock option expense		-		41			-			-			41
Restricted stock grant expense		-		93			-			-			93
Vested stock grants		12		( 12	)		-			-			-
Cash dividends declared ($ 0.30 per share)		-		-			( 1,596	)		-			( 1,596	)
Net income		-		-			4,924			-			4,924
Other comprehensive loss		-		-			-			( 19,430	)		( 19,430	)
Balance, March 31, 2022	$	13,190	$	104,706		$	49,764		$	( 21,641	)	$	146,019
Stock option expense		-		42			-			-			42
Restricted stock grant expense		-		121			-			-			121
Vested stock grants		11		( 11	)		-			-			-
Cash dividends declared ($ 0.30 per share)		-		-			( 1,597	)		-			( 1,597	)
Net income		-		-			5,685			-			5,685
Other comprehensive loss		-		-			-			( 16,054	)		( 16,054	)
Balance, June 30, 2022	$	13,201	$	104,858		$	53,852		$	( 37,695	)	$	134,216

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEM ENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	For the six months ended
	June 30, 2022			June 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,609		$	1,652
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		( 69	)		210
Net accretion of certain acquisition-related adjustments		( 1,023	)		( 804	)
Amortization of intangible assets		900			462
Net amortization and accretion of securities		539			661
Net gains on sale of other assets		( 1,113	)		—
Earnings on bank owned life insurance		( 457	)		( 306	)
Depreciation and other amortization		1,921			1,406
Stock option expense		83			65
Stock grant expense, restricted		214			226
Net change in:
Accrued interest receivable and other assets		94			( 1,914	)
Accrued interest payable and other liabilities		( 2,032	)		2,808
Net cash provided by operating activities		9,666			4,466

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fauquier Bankshares		—			153,278
Net (increase) decrease in restricted investments		( 188	)		358
Purchases of available for sale securities		( 216,525	)		( 15,217	)
Proceeds from maturities, calls and principal payments of available for sale securities		12,558			12,923
Net decrease in loans		101,621			46,452
Purchase of bank owned life insurance		( 6,355	)		—
Proceeds from sale of premises and equipment		6,207			—
Proceeds from sale of other real estate owned		610			—
Purchase of bank premises and equipment		( 334	)		( 818	)
Net cash (used in) provided by investing activities		( 102,406	)		196,976

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, interest checking accounts, and money market accounts		( 185,348	)		78,892
Net (decrease) increase in certificates of deposit and other time deposits		( 11,892	)		2,167
Net decrease in other borrowings		-			( 23	)
Proceeds from stock options exercised		-			30
Cash dividends paid		( 3,193	)		( 3,224	)
Net cash (used in) provided by financing activities		( 200,433	)		77,842
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$	( 293,173	)	$	279,284

CASH AND CASH EQUIVALENTS:
Beginning of period	$	508,840		$	34,695
End of period	$	215,667		$	313,979

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	1,664		$	1,611
Taxes	$	1,500		$	1,042

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized losses on available for sale securities	$	( 45,415	)	$	( 1,878	)
Unrealized gains (losses) on interest rate swaps	$	499		$	( 141	)
Initial right-of-use assets obtained in exchange for new operating lease liabilities	$	540		$	—
Assets acquired in business combination	$	—		$	910,494
Liabilities assumed in business combination	$	—		$	840,226
Change in goodwill	$	—		$	7,768

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2022

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021.

Business Combination: On April 1, 2021 , Virginia National Bankshares Corporation completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $ 78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations.

Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries Virginia National Bank and Masonry Capital Management, LLC, a registered investment advisor. The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services and, in 2021, of TFB Trust and Investment Management. The Bank also offers, through its networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors and, in 2021, TFB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation: The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 .

Reclassifications: If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses 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 expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.

Smaller reporting companies, like the Company, who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The amendments of Topic 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption.

The Company established a cross-functional steering committee in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard. The Company has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under Topic 326. The Company has also engaged a vendor to assist in modeling expected lifetime losses under Topic 326, and is continuing to

develop and refine an approach to estimating the Allowance for Credit Losses (ACL). The adoption of Topic 326 may result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the ACL that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the ACL and expanded disclosures about the ACL. The Company has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to the ACL.

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

LIBOR and Other Reference Rates In March 2020, the FASB issued ASU 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 the 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 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 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified all loans that are directly or indirectly impacted 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.

TDRs and Vintage Disclosures 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 TDRs 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 adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

Note 2. Business Combinations

On April 1, 2021 , the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company, with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier.

Pursuant to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Effective Date of the Merger, plus cash in lieu of fractional shares. In connection with the transaction, the Company issued 2,571,213 shares of its common stock to the shareholders of Fauquier and paid $ 4 thousand in cash in lieu of fractional shares. Each share of the Company’s common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger. Shortly after the Effective Date of the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving.

The Company accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the Merger and the common stock of the Company issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period may not exceed one year from the acquisition date.

The following table presents as of April 1, 2021 the total consideration paid by the Company in connection with the Merger, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill (dollars in thousands):


	As Recorded					As Recorded
	by Fauquier		Fair Value			by Virginia National
	Bankshares, Inc.		Adjustment			Bankshares
Assets:
Cash and cash equivalents	$	153,282	$	-		$	153,282
Securities available for sale		93,133		-			93,133
Restricted securities		1,619		-			1,619
Loans, net		615,766		( 13,123	)		602,643
Premises and equipment		16,276		3,872			20,148
Other real estate owned		1,356		( 745	)		611
Bank-owned life insurance		13,677		-			13,677
Right-of-use assets		4,355		1,077			5,432
Core deposit intangible		-		9,660			9,660
Other assets		11,298		( 1,009	)		10,289
Total assets acquired	$	910,762	$	( 268	)	$	910,494

Liabilities:
Deposits		817,499		191			817,690
Short-term borrowings		12,582		473			13,055
Junior subordinated debt		4,124		( 790	)		3,334
Lease liability		4,440		352			4,792
Other liabilities		1,355		-			1,355
Total liabilities assumed	$	840,000	$	226		$	840,226
Net assets acquired						$	70,268
Total consideration paid							78,036
Goodwill						$	7,768

In connection with the Merger, the Company recorded approximately $ 7.8 million of goodwill and $ 9.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset will be amortized over a period of seven years using the sum of years digits method.

The Acquired Loans had aggregate outstanding principal of $ 622.9 million and an estimated fair value of $ 602.6 million. The discount between the outstanding principal balance and fair value of $ 20.3 million represents expected credit losses and adjustments for market interest rates of $ 21.3 million, offset by elimination of net deferred fees/costs of $ 979 thousand. Under the acquisition method (ASC 805), the ALLL recorded in the books of Fauquier in the amount of $ 7.2 million was not carried over into the books of the Company.

As of the Effective Date, the fair value of the performing loans was $ 513.8 million, which was 1.7 % less than the book value of the loans. The total fair value discount on performing loans of $ 9.0 million consisted of a credit discount of $ 8.4 million and an other fair value discount of $ 647 thousand. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired. As of the Effective Date, the fair value of PCI loans was $ 87.3 million, which was 12.3 % below the book value of the loans. The total fair value mark on PCI loans of $ 12.3 million consisted of a credit discount of $ 11.2 million and an other fair value discount of $ 1.1 million.

Information about PCI acquired loans as of April 1, 2021 is as follows (dollars in thousands):


	April 1, 2021
Contractual principal and interest at acquisition	$	136,476
Nonaccretable difference		( 33,712	)
Expected cash flows at acquisition		102,764
Accretable yield		( 15,499	)
Basis in PCI loans at acquisition, estimated fair value	$	87,265

Fair values of the major categories of assets acquired and liabilities assumed as part of the Merger were determined as follows:

Cash and due from banks: The carrying amount of cash and due from banks was used as a reasonable estimate of fair value.

Securities available for sale: The estimated fair value of investment securities AFS was based on quoted pricing from a third party portfolio accounting service vendor for the valuation of those securities.

Loans: The Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's ALLL. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the Acquired Loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the Acquired Loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Premises and equipment: The land and buildings acquired were recorded at fair value as determined by current appraisals by independent third parties and tax assessments at Effective Date.

Other real estate owned : Other real estate owned was recorded at fair value based on an existing purchase contract, less estimated selling costs. (Note that the OREO was sold during the second quarter of 2022.)

Bank owned life insurance: The carrying amount of bank owned life insurance was used as a reasonable estimate of fair value.

Right of use assets and lease liabilities: Lease liabilities were measured at the present value of the remaining lease payments, as if each acquired lease was a new lease of the Company at the Effective Date. Right-of-use assets were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms.

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $ 9.7 million or 1.3 % of non-maturity deposits.

Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $ 191 thousand premium and is being amortized into income over a period of thirty-six months .

Short-term borrowings: The fair value of borrowings was determined by comparison to current interest rates for similar borrowings. The resulting fair value adjustment to short-term borrowings is a $ 473 thousand premium, which will be amortized into interest expense over the remaining life of the debt on a straight-line basis. (Note that such borrowings were repaid in the third quarter of 2021, and therefore, the premium was fully amortized during the quarter in which they were repaid.)

Junior subordinated debt : The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate. The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $ 790 thousand discount and is being accreted over the remaining life of the debt on a straight-line basis.

The revenue and earnings amounts specific to Fauquier since the Effective Date that are included in the consolidated results for 2021 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the Effective Date.

There were no merger and merger-related expenses incurred during the three and six months ended June 30, 2022 and $ 5.9 million and $ 6.2 million incurred during the three and six months ended June 30, 2021 , respectively, primarily consisting of personnel and legal expenses.

Note 3. Securities

The amortized cost and fair values of securities available for sale as of June 30, 2022 and December 31, 2021 were as follows (dollars in thousands):


June 30, 2022			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government treasuries	$	162,019	$	-	$	( 1,010	)	$	161,009
U.S. Government agencies		35,313		-		( 4,781	)		30,532
Mortgage-backed securities/CMOs		197,121		19		( 21,177	)		175,962
Corporate bonds		11,483		4		( 334	)		11,154
Municipal bonds		104,027		7		( 20,861	)		83,173
Total Securities Available for Sale	$	509,963	$	30	$	( 48,163	)	$	461,830


December 31, 2021			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	32,424	$	24	$	( 867	)	$	31,581
Mortgage-backed securities/CMOs		172,975		248		( 2,259	)		170,964
Municipal bonds		101,136		1,162		( 1,026	)		101,272
Total Securities Available for Sale	$	306,535	$	1,434	$	( 4,152	)	$	303,817

As of June 30, 2022 , there were $ 455.5 million, or 278 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $ 48.2 million and consist of 117 mortgage-backed/collateralized mortgage obligations, 124 municipal bonds, 20 agency bonds, 11 treasury bonds and 6 corporate bonds.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position at June 30, 2022, and December 31, 2021 (dollars in thousands):



	Less than 12 Months					12 Months or More					Total
June 30, 2022	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government treasuries	$	161,009	$	( 1,010	)	$	—	$	—		$	161,009	$	( 1,010	)
U.S. Government agencies		11,960		( 1,207	)		18,572		( 3,574	)		30,532		( 4,781	)
Mortgage-backed/CMOs		133,182		( 15,276	)		39,881		( 5,901	)		173,063		( 21,177	)
Corporate bonds		9,152		( 334	)		—		—			9,152		( 334	)
Municipal bonds		67,453		( 16,097	)		14,277		( 4,764	)		81,730		( 20,861	)
	$	382,756	$	( 33,924	)	$	72,730	$	( 14,239	)	$	455,486	$	( 48,163	)



	Less than 12 Months					12 Months or More					Total
December 31, 2021	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	14,443	$	( 340	)	$	15,220	$	( 527	)	$	29,663	$	( 867	)
Mortgage-backed/CMOs		131,876		( 1,735	)		15,192		( 524	)		147,068		( 2,259	)
Municipal bonds		40,352		( 722	)		10,409		( 304	)		50,761		( 1,026	)
	$	186,671	$	( 2,797	)	$	40,821	$	( 1,355	)	$	227,492	$	( 4,152	)

The Company’s securities portfolio is primarily made up of fixed rate instruments, the prices of which move inversely with interest rates. Any unrealized losses are considered by management to be driven by increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the instruments approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of June 30, 2022, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of June 30, 2022, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $ 5.4 million at June 30, 2022 were pledged as collateral to secure deposits and facilitate borrowing from the Federal Reserve Bank of Richmond. At December 31, 2021 , securities having carrying values of $ 12.7 million were similarly pledged.

For the three and six months ended June 30, 2022 and June 30, 2021 , there were no sales of securities.

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta, CBB Financial Corporation (the holding company for Community Bankers Bank) and an investment in an SBA loan fund. These restricted securities, totaling $ 5.1 million and $ 5.0 million as of June 30, 2022 and December 31, 2021, are carried at cost.

The amortized cost and fair value of AFS debt securities at June 30, 2022 are presented below based upon contractual maturities, by major investment categories (dollars in thousands). Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.


	Amortized Cost		Fair Value
U.S. Government treasuries
One year or less	$	69,543	$	69,071
After one year to five years		92,476		91,938
	$	162,019	$	161,009
U.S. Government agencies
After one year to five years	$	649	$	584
After five years to ten years		28,664		25,088
Ten years or more		6,000		4,860
	$	35,313	$	30,532
Mortgage-backed securities/CMOs
After one year to five years	$	11,389	$	10,897
After five years to ten years		3,211		2,971
Ten years or more		182,521		162,094
	$	197,121	$	175,962
Corporate bonds
After one year to five years	$	5,848	$	5,798
After five years to ten years		5,635		5,356
	$	11,483	$	11,154
Municipal bonds
One year or less	$	502	$	502
After one year to five years		610		601
After five years to ten years		17,259		16,039
Ten years or more		85,656		66,031
	$	104,027	$	83,173

Total Debt Securities Available for Sale	$	509,963	$	461,830

Note 4. Loans

The composition of the loan portfolio by major loan classifications at June 30, 2022 and December 31, 2021 appears below (dollars in thousands).


	June 30,			December 31,
	2022			2021
Commercial	$	77,599		$	96,696
Real estate construction and land		55,140			79,331
1-4 family residential mortgages		329,920			358,148
Commercial mortgages		446,282			473,632
Consumer		51,251			53,404
Total loans		960,192			1,061,211
Less: Allowance for loan losses		( 5,503	)		( 5,984	)
Net loans	$	954,689		$	1,055,227

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company and Fauquier, prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $ 207.5 million of SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of June 30, 2022 , the Company had PPP loans of $ 1.9 million outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of June 30, 2022 and December 31, 2021 , unamortized premiums on loans purchased prior to the Merger were $ 811 thousand and $ 1.1 million, respectively. Net deferred loan fees totaled $ 504 thousand and $ 865 thousand as of June 30, 2022 and December 31, 2021 , respectively. The deferred fees include $ 46 thousand in remaining fees collected from the SBA for the PPP loans that are being amortized over the contractual life of the underlying loans, most which are over a 60-month period. As loans are forgiven by the SBA, accounting principles allow for the accelerated recognition of unamortized fees at that time.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The table above includes a net fair value mark of $ 12.3 million on the purchased impaired loans and $ 5.3 million on the purchased performing loans as of June 30, 2022 on the Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

The outstanding principal balance and the carrying amount at June 30, 2022 on these Acquired Loans were as follows (dollars in thousands):


	June 30, 2022						December 31, 2021
	Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total		Acquired Loans - Purchased Credit Impaired		Acquired Loans - Purchased Performing		Acquired Loans - Total
Outstanding principal balance	$	56,178	$	315,349	$	371,527	$	76,608	$	372,172	$	448,780
Carrying amount:
Commercial	$	702	$	16,273	$	16,975	$	994	$	28,065	$	29,059
Real estate construction and land		6,539		9,133		15,672		18,576		14,297		32,873
1-4 family residential mortgages		11,900		173,134		185,034		16,020		194,708		210,728
Commercial mortgages		24,694		109,880		134,574		28,675		126,638		155,313
Consumer		91		1,678		1,769		118		2,224		2,342
Total acquired loans	$	43,926	$	310,098	$	354,024	$	64,383	$	365,932	$	430,315

The following table presents a summary of the changes in the accretable yield of loans classified as purchased credit impaired (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Accretable yield, beginning of period	$	12,428		$	—		$	13,742		$	—
Additions		—			15,499			—			15,499
Accretion		( 761	)		( 858	)		( 1,500	)		( 858	)
Reclassification from (to) nonaccretable difference		—			—			2,193			—
Other changes, net		—			—			( 2,768	)		—
Accretable yield, end of period	$	11,667		$	14,641		$	11,667		$	14,641

Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding Acquired Loans, as of June 30, 2022 and December 31, 2021. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the six months ended June 30, 2022 or the twelve months ended December 31, 2021. Interest income recognized is for the six months ended June 30, 2022 or the twelve months ended December 31, 2021 (dollars in thousands).


June 30, 2022	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
1-4 family residential mortgages	$	604	$	626	$	-	$	613	$	2
Total impaired loans without a valuation allowance		604		626		-		613		2

Impaired loans with a valuation allowance
Consumer		835		835		9		840		26
Total impaired loans with a valuation allowance		835		835		9		840		26
Total impaired loans	$	1,439	$	1,461	$	9	$	1,453	$	28


December 31, 2021	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Real estate construction and land	$	-	$	37	$	-	$	2	$	-
1-4 family residential mortgages		594		600		-		269		24
Total impaired loans without a valuation allowance		594		637		-		271		24

Impaired loans with a valuation allowance
Consumer		935		935		6		974		54
Total impaired loans with a valuation allowance		935		935		6		974		54
Total impaired loans	$	1,529	$	1,572	$	6	$	1,245	$	78

Included in the impaired loans are non-accrual loans. Generally, a loan is placed on non-accrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. The recorded investment in non-accrual loans is shown below by class (dollars in thousands):


	June 30, 2022		December 31, 2021
1-4 family residential mortgages	$	511	$	495
Total non-accrual loans	$	511	$	495

Additionally, TDRs are considered impaired loans. TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

In accordance with regulatory guidance, the Company approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. COVID-19 related loan deferrals declined to zero as of June 30, 2022 , from $ 1.2 million as of December 31, 2021 and $ 2.0 million as of June 30, 2021.

Based on regulatory guidance on student lending, the Company has classified 56 of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $ 835 thousand as of June 30, 2022 . These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months ( 36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Management evaluates these loans individually for impairment and includes any expected loss in the ALLL; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed in non-accrual status, which are considered to be nonperforming (dollars in thousands).


Troubled debt restructurings	June 30, 2022				December 31, 2021
	No. of		Recorded		No. of		Recorded
	Loans		Investment		Loans		Investment
Performing TDRs
1-4 family residential mortgages		1	$	93		1	$	99
Consumer		56		835		58		935
Total performing TDRs		57	$	928		59	$	1,034

Nonperforming TDRs
1-4 family residential mortgages		2		511		1		495
Total nonperforming TDRs		2	$	511		1	$	495
Total TDRs		59	$	1,439		60	$	1,529

No loans were modified under the terms of a TDR during the three months ended June 30, 2022 or 2021 . A summary of loans shown above that were modified under the terms of a TDR during the six months ended June 30, 2022 and 2021 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.


	For the six months ended						For the six months ended
	June 30, 2022						June 30, 2021
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance

Consumer	--		$	—	$	—		6	$	63	$	63
1-4 family residential mortgages		1		54		54	--			—		—
Total loans modified during the period		1	$	54	$	54		6	$	63	$	63

During the three and six months ended June 30, 2022 , there were no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $ 56 thousand prior to being charged off.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at June 30, 2022 or December 31, 2021 .

Note 5. Allowance for Loan Losses

The ALLL is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total ALLL, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

For purposes of determining the ALLL on the outstanding loans that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. Note that under the acquisition method of accounting (ASC 805), the ALLL recorded in the books of Fauquier was not carried over into the books of the Company; however the Acquired Loans were subject to net fair value marks.

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan pools except for the following:

•

All pools with a risk classification of excellent or good, as noted in the Risk Ratings and Historical Loss Factor Assigned section as follows.

•

Student loans purchased - The loss rate methodology for student loans is based on the average historical loss rate for each tranche of loans, using a twelve-quarter lookback period. Due to the declining balances in these pools, a balance weighted loss rate weight is used. In addition, qualitative factors are applied.

•

Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.

•

Minute Lender Loans – Commercial and Consumer - Minute Lender loans were acquired in the Merger and were historically assigned a loss rate of 4%, which was a recommendation of the vendor that administers the program. A 4 % loss rate will be utilized until such time that a historical loss rate is available.

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted annually.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.

Risk Ratings and Historical Loss Factor Assigned

Excellent

A 0% historical loss factor is applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk. The Company has never experienced a loss within this category.

Good

These loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve of 0.15 % is applied to these loans. The Company has never experienced a loss within this category.

Pass

A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory – modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average – average risk loans where the borrower has reasonable debt service capacity

Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

Special Mention

These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of June 30, 2022 and December 31, 2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.


June 30, 2022	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	30,684	$	14,136	$	30,445	$	1,291	$	110	$	933	$	77,599
Real estate construction and land		-		-		47,821		342		1,446		5,531		55,140
1-4 family residential mortgages		-		-		314,514		6,953		839		7,614		329,920
Commercial mortgages		-		-		383,299		45,396		7,416		10,171		446,282
Consumer		470		20,417		29,237		960		101		66		51,251
Total Loans	$	31,154	$	34,553	$	805,316	$	54,942	$	9,912	$	24,315	$	960,192


December 31, 2021	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial	$	45,862	$	13,920	$	32,460	$	732	$	1,645	$	2,077	$	96,696
Real estate construction and land		-		-		51,098		7,360		2,849		18,024		79,331
1-4 family residential mortgages		-		2,030		334,300		5,013		1,520		15,285		358,148
Commercial mortgages		-		-		382,108		61,563		8,530		21,431		473,632
Consumer		524		18,535		32,821		1,225		179		120		53,404
Total Loans	$	46,386	$	34,485	$	832,787	$	75,893	$	14,723	$	56,937	$	1,061,211

In addition, the adequacy of the Company’s ALLL is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

Changes in national and local economic conditions, including the condition of various market segments;

Changes in the value of underlying collateral;

Changes in volume of classified assets, measured as a percentage of capital;

Changes in volume of delinquent loans;

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

Changes in lending policies and procedures, including underwriting standards;

Changes in the experience, ability and depth of lending management and staff; and

Changes in the level of policy exceptions.

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s markets and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $ 1.4 million at June 30, 2022 , a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $ 9 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of June 30, 2022.

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the six months ended June 30, 2022 and the year ended December 31, 2021 appears below (dollars in thousands):


As of and for the period ended June 30, 2022
	Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages			Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	252		$	399		$	4,478		$	855		$	5,984
Charge-offs		( 243	)		-			-			( 421	)		( 664	)
Recoveries		136			8			4			104			252
Provision for (recovery of) loan losses		110			( 51	)		( 300	)		172			( 69	)
Ending Balance	$	255		$	356		$	4,182		$	710		$	5,503

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	9		$	9
Collectively evaluated for impairment		255			356			4,182			701			5,494
Acquired loans - purchased credit impaired		-			-			-			-			-

Loans:
Individually evaluated for impairment	$	-		$	-		$	604		$	835		$	1,439
Collectively evaluated for impairment		76,897			48,601			739,004			50,325			914,827
Acquired loans - purchased credit impaired		702			6,539			36,594			91			43,926
Ending Balance	$	77,599		$	55,140		$	776,202		$	51,251		$	960,192


As of and for the period ended December 31, 2021
	Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	209		$	160	$	3,897	$	1,189		$	5,455
Charge-offs		( 147	)		-		-		( 688	)		( 835	)
Recoveries		191			12		6		141			350
Provision for (recovery of) loan losses		( 1	)		227		575		213			1,014
Ending Balance	$	252		$	399	$	4,478	$	855		$	5,984

Ending Balance:
Individually evaluated for impairment	$	-		$	-	$	-	$	6		$	6
Collectively evaluated for impairment		252			399		4,478		849			5,978
Acquired loans - purchased credit impaired		-			-		-		-			-

Loans:
Individually evaluated for impairment	$	-		$	-	$	594	$	935		$	1,529
Collectively evaluated for impairment		95,702			60,755		786,491		52,351			995,299
Acquired loans - purchased credit impaired		994			18,576		44,695		118			64,383
Ending Balance	$	96,696		$	79,331	$	831,780	$	53,404		$	1,061,211

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ALLL is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of June 30, 2022 and December 31, 2021 (dollars in thousands).


Past Due Aging as of June 30, 2022	30-59 Days		60-89 Days		90 Days or More		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	762	$	235	$	596	$	1,593	$	702	$	75,304	$	77,599	$	596
Real estate construction and land		-		206		-		206		6,539		48,395		55,140		-
1-4 family residential mortgages		1,350		-		-		1,350		11,900		316,670		329,920		-
Commercial mortgages		-		154		-		154		24,694		421,434		446,282		-
Consumer loans		207		102		30		339		91		50,821		51,251		30
Total Loans	$	2,319	$	697	$	626	$	3,642	$	43,926	$	912,624	$	960,192	$	626


Past Due Aging as of December 31, 2021	30-59 Days		60-89 Days		90 Days or More		Total Past Due		PCI		Current		Total Loans		90 Days Past Due and Still Accruing

Commercial	$	385	$	355	$	718	$	1,458	$	994	$	94,244	$	96,696	$	718
Real estate construction and land		873		1,283		-		2,156		18,576		58,599		79,331		-
1-4 family residential mortgages		1,508		100		495		2,103		16,020		340,025		358,148		-
Commercial mortgages		-		-		-		-		28,675		444,957		473,632		-
Consumer loans		345		196		83		624		118		52,662		53,404		83
Total Loans	$	3,111	$	1,934	$	1,296	$	6,341	$	64,383	$	990,487	$	1,061,211	$	801

Note 6. Goodwill and Other Intangible Assets

The carrying amount of goodwill was $ 8.1 million at June 30, 2022 and December 31, 2021.

The Company had $ 7.6 million, $ 8.5 million and $ 8.6 million of other intangible assets as of June 30, 2022, December 31, 2021 and June 30, 2021 , respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to as Sturman Wealth Advisors, and (ii) the core deposits acquired from Fauquier in 2021. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets (dollars in thousands):


	June 30, 2022					December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	9,660	$	( 2,255	)	$	9,660	$	( 1,389	)
Customer relationships intangible		773		( 533	)		773		( 499	)
Total	$	10,433	$	( 2,788	)	$	10,433	$	( 1,888	)

Amortization expense was $ 444 thousand and $ 445 thousand for the three months ended June 30, 2022 and 2021 , respectively and $ 900 thousand and $ 462 thousand for the six months ended June 30, 2022 and 2021, respectively.

Estimated future amortization expense as of June 30, 2022 is as follows (dollars in thousands):


	Core		Customer
	Deposit		Relationships
	Intangible		Intangible
For the six months ending December 31, 2022	$	819	$	33
For the year ending December 31, 2023		1,493		67
For the year ending December 31, 2024		1,301		67
For the year ending December 31, 2025		1,110		67
For the year ending December 31, 2026		918		6
Thereafter		1,764		-
Total	$	7,405	$	240

Note 7. 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 for a term similar to the length of the lease, including any probable renewal options available. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term. Payments for leases with terms longer than twelve months are included in the determination of the lease liability. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Each of the Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees 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):


	June 30, 2022			June 30, 2021
Lease liability	$	6,925		$	7,833
Right -of-use asset	$	7,343		$	8,371
Weighted average remaining lease term	5.84 years			6.37 years
Weighted average discount rate		1.97	%		1.98	%


	Three Months Ended June 30,				Six Months Ended June 30,
Lease Expense:	2022		2021		2022		2021
Operating lease expense	$	449	$	427	$	894	$	649
Short-term lease expense		139		32		191		61
Total lease expense	$	588	$	459	$	1,085	$	710
Cash paid for amounts included in lease liabilities	$	418	$	389	$	832	$	608

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):


Undiscounted Cash Flow	June 30, 2022
Six months ending December 31, 2022	$	817
Twelve months ending December 31, 2023		1,567
Twelve months ending December 31, 2024		1,296
Twelve months ending December 31, 2025		1,091
Twelve months ending December 31, 2026		748
Twelve months ending December 31, 2027		650
Thereafter		1,141
Total undiscounted cash flows	$	7,310
Less: Discount		( 385	)
Lease liability	$	6,925

Note 8. Net Income Per Share

The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three and six months ended June 30, 2022 and 2021. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive. The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as of June 30, 2022 and June 30, 2021 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).


Three Months Ended	June 30, 2022							June 30, 2021
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	5,685		5,326,271	$	1.07		$	147		5,305,277	$	0.03
Effect of dilutive stock options		-		20,737		( 0.01	)		-		15,013		-
Diluted net income per share	$	5,685		5,347,008	$	1.06		$	147		5,320,290	$	0.03

Six Months Ended	June 30, 2022							June 30, 2021
	Net Income		Weighted Average Shares		Per Share Amount			Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	10,609		5,319,166	$	1.99		$	1,652		4,019,700	$	0.41
Effect of dilutive stock options		-		26,076		( 0.01	)		-		11,601		-
Diluted net income per share	$	10,609	$	5,345,242	$	1.98		$	1,652		4,031,301	$	0.41

For the three and six months ended June 30, 2022 , there were 101,901 option shares considered anti-dilutive and excluded from this calculation. For the three and six months ended June 30, 2021 , there were 78,301 option shares considered anti-dilutive and excluded from this calculation.

Note 9. Stock Incentive Plans

At the Annual Shareholders Meeting on June 23, 2022, shareholders approved the Virginia National Bankshares Corporation 2022 Stock Incentive Plan. The 2022 Plan made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan made available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2022 Plan and the 2014 Plan provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. No new grants can be issued under the 2005 Stock Incentive Plan as this plan has expired.

For the 2022 Plan, the option price for any stock options cannot be less that the fair value of the Company’s stock on the grant date. In addition, 95 % of the common stock authorized for issuance must have a vesting or exercise schedule of at least one year. For the 2014 Plan and the 2005 Plan, the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted and nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of June 30, 2022 . Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends. Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below. No grants have been issued under the 2022 Plan.


	2022 Plan		2014 Plan			2005 Plan
Aggregate shares issuable		150,000		275,625			253,575
Options issued, net of forfeited and expired options		—		( 170,106	)		( 59,870	)
Unrestricted stock issued		—		( 11,635	)		—
Restricted stock grants issued, net of forfeited		—		( 65,853	)		—
Cancelled due to Plan expiration		—		—			( 193,705	)
Remaining available for grant		150,000		28,031			-

Stock grants issued and outstanding:
Total vested and unvested shares		—		77,488			—
Fully vested shares		—		31,764			—

Option grants issued and outstanding:
Total vested and unvested shares		—		167,901			1,379
Fully vested shares		—		76,148			1,379

Exercise price range	$	—	$ 23.75 to $ 42.62			$ 13.69

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.

Stock Options

Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):


	June 30, 2022
	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2022		169,280	$	33.89	$	962
Issued		—		—
Exercised		—		—
Expired		—		—
Outstanding at June 30, 2022		169,280	$	33.89	$	477

Options exercisable at June 30, 2022		77,527	$	37.31	$	144

For the three months ended June 30, 2022 and 2021 , the Company recognized $ 42 thousand and $ 31 thousand, respectively, in compensation expense for stock options. For the six months ended June 30, 2022 and 2021 , the Company recognized $ 83 thousand and $ 65 thousand, respectively, in compensation expense for stock options. As of June 30, 2022 , there was $ 304 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2026 . The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were no stock option grants issued during the three and six months ended June 30, 2022 and 2021.

Summary information pertaining to options outstanding at June 30, 2022 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.


	Options Outstanding					Options Exercisable
Exercise Price	Number of Options Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$ 13.69 to $ 20.00		1,379	0.6 Years	$	13.69		1,379	$	13.69
$ 20.01 to $ 30.00		66,000	8.0 Years		24.64		18,400		25.02
$ 30.01 to $ 40.00		44,420	8.1 Years		36.97		11,772		38.52
$ 40.01 to $ 42.62		57,481	5.9 Years		42.62		45,976		42.62
Total		169,280	7.3 Years	$	33.89		77,527	$	37.31

Stock Grants

Unrestricted stock grant - During the six months ended June 30, 2022 , 100 shares of unrestricted stock were granted to an employee for a total expense of $ 3 thousand. No unrestricted stock grants were awarded during the three months ended June 30, 2022 or during the year ended December 31, 2021.

Restricted stock grants – During the six months ended June 30, 2022 , 5,580 and 12,856 restricted shares, were granted to employees and non-employee directors, respectively, vesting over a four-year or five-year period. (Note that all such shares were granted during the first quarter of 2022 with no shares granted during the second quarter of 2022.) During the three and six months ended June 30, 2021 , 5,730 and 19,233 restricted shares, respectively, were granted. For the three and six months ended June 30, 2022 , $ 121 thousand and $ 214 thousand, respectively, was expensed as a result of restricted stock grants. As of June 30, 2022 , there was $ 1.3 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2026 .

Changes in the restricted stock grants outstanding during the six months ended June 30, 2022 are summarized below (dollars in thousands except per share data):


	June 30, 2022
	Number of Shares			Weighted Average Grant Date Fair Value Per Share			Aggregate Intrinsic Value
Nonvested as of January 1, 2022		37,011		$	28.98		$	1,165
Issued		18,536			35.62		584
Vested		( 9,223	)		( 27.38	)		( 290	)
Forfeited		( 600	)		( 33.74	)		( 19	)
Nonvested at June 30, 2022		45,724		$	31.94		$	1,440

Note 10. Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value:


	Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.

	Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

	Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

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

Securities available for sale

Securities AFS are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2.

The following tables present the balances measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (dollars in thousands):


			Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government treasuries	$	161,009	$	-	$	161,009	$	-
U.S. Government agencies		30,532		-		30,532		-
Mortgage-backed securities/CMOs		175,962		-		175,962		-
Corporate bonds		11,154		-		11,154		-
Municipal bonds		83,173		-		83,173		-
Total securities available for sale	$	461,830	$	-	$	461,830	$	-

Interest rate swap asset		310		-		310		-
Total assets at fair value	$	462,140	$	-	$	462,140	$	-


			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	31,581	$	-	$	31,581	$	-
Mortgage-backed securities/CMOs		170,964		-		170,964		-
Municipal bonds		101,272		-		101,272		-
Total securities available for sale	$	303,817	$	-	$	303,817	$	-

Liabilities:
Interest rate swap liabilities	$	197	$	-	$	197	$	-
Total liabilities at fair value	$	197	$	-	$	197	$	-

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of December 31, 2021 , the Company had one OREO property acquired through the Merger which was carried at a fair value of $ 611 thousand. The Company sold this OREO property during the current quarter and therefore had a zero balance in OREO as of June 30, 2022.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans, excluding PCI loans, of $ 1.4 million as of June 30, 2022 and $ 1.5 million as of December 31, 2021. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above .

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2021 . There were no such assets to report as of June 30, 2022.


			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
Other Real Estate Owned	$	611	$	-	$	-		61100.0	%

For the assets measured at fair value on a nonrecurring basis as of December 31, 2021 , the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands). There were no such assets to report as of June 30, 2022.

             
              Description

             
              Fair Value

             
              Valuation Technique

             
              Unobservable Inputs

             
              Weighted Average

             
              Assets:

             
              Other Real Estate Owned

611

             
              Market comparables

             
                Discount applied to bonafide offer

6.0

             
              *
             
              A discount percentage is applied based on estimated cost to sell.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2022 and December 31, 2021 are as follows (dollars in thousands):


			Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	215,667	$	215,667	$	-	$	-	$	215,667
Available for sale securities		461,830		-		461,830		-		461,830
Loans, net		954,689		-		-		929,045		929,045
Bank owned life insurance		38,046		-		38,046		-		38,046
Accrued interest receivable		4,229		-		2,055		2,174		4,229
Interest rate swap asset		310		-		310		-		310

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,448,777	$	-	$	1,448,777	$	-	$	1,448,777
Certificates of deposit		150,121		-		144,556		-		144,556
Junior subordinated debt, net		3,390		-		3,459		-		3,459
Accrued interest payable		134		-		134		-		134


			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	508,840	$	508,840	$	-	$	-	$	508,840
Available for sale securities		303,817		-		303,817		-		303,817
Loans, net		1,055,227		-		-		1,059,650		1,059,650
Bank owned life insurance		31,234		-		31,234		-		31,234
Other real estate owned, net		611		-		-		611		611
Accrued interest receivable		3,778		-		1,252		2,526		3,778

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125
Certificates of deposit		162,045		-		161,850		-		161,850
Junior subordinated debt		3,367		-		3,367		-		3,367
Accrued interest payable		174		-		174		-		174
Interest rate swap liabilities		197		-		197		-		197

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 11. Other Comprehensive Income (Loss)

A component of the Company’s other comprehensive income (loss), in addition to net income from operations, is the recognition of the unrealized gains and losses on AFS securities, net of income taxes. Reclassifications of realized gains and losses on AFS securities are reported in the income statement as “Gains on sales of securities” with the corresponding

income tax effect reflected as a component of income tax expense. There were no sales of securities in the three and six months ended June 30, 2022 and 2021.

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of ($ 7.9 ) million and ($ 464 ) thousand, as of June 30, 2022 and December 31, 2021, respectively (dollars in thousands).


	June 30, 2022			December 31, 2021
Accumulated other comprehensive loss on securities	$	( 38,026	)	$	( 2,164	)
Accumulated other comprehensive income (loss) on interest rate swap		331			( 47	)
Total accumulated other comprehensive loss	$	( 37,695	)	$	( 2,211	)

Note 12. Derivative Instruments and Hedging Activities

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. The Company designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Customer accommodation loan swaps are derivative contracts that are not designated in a qualifying hedging relationship.

Cash flow hedges . The Company designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company’s junior subordinated debt. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Company’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of June 30, 2022 and December 31, 2021, the Company had designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings through 2036.

Unrealized gains or losses recorded in other comprehensive income (loss) related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Cash collateral held at other banks for swaps was $ 570 thousand as of June 30, 2022 and December 31, 2021. Collateral is dependent on the market valuation of the underlying hedges.

The follow table summarizes the Company’s derivative instruments as of June 30, 2022 and December 31, 2021 (dollars in thousands):


	June 30, 2022
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	310		Other Liabilities	6/15/2031

	December 31, 2021
Derivatives designated as hedging instruments	Notional/ Contract Amount		Fair Value			Fair Value Balance Sheet Location	Expiration Date
Interest rate forward swap - cash flow	$	4,000	$	( 197	)	Other Liabilities	6/15/2031
Interest rate swap - fair value	$	3,940	$	( 8	)	Other Liabilities	2/12/2022

Note 13. Segment Reporting

The Company has four reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

The four reportable segments are:

•

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

•

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.

•

VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management. Investment management services currently are offered through in-house and third-party managers.

•

Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business. For both the three months ended June 30, 2022 and 2021 , management fees totaling $ 25 thousand were charged by the Bank and eliminated in consolidated totals. For both the six months ended June 30, 2022 and 2021 , management fees totaling $ 50 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three and six months ended June 30, 2022 and 2021 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.


Three months ended June 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	12,461		$	-	$	-		$	-	$	12,461
Provision for (recovery of) loan losses		( 217	)		-		-			-	$	( 217	)
Noninterest income		2,851			210		365			220	$	3,646
Noninterest expense		8,717			161		376			188	$	9,442
Income (loss) before income taxes		6,812			49		( 11	)		32		6,882
Provision for (benefit from) income taxes		1,181			11		( 2	)		7		1,197
Net income (loss)	$	5,631		$	38	$	( 9	)	$	25	$	5,685


Six months ended June 30, 2022	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital		Consolidated
Net interest income	$	23,886		$	-	$	-		$	-	$	23,886
Provision for (recovery of) loan losses		( 69	)		-		-			-		( 69	)
Noninterest income		4,385			426		3,196			426		8,433
Noninterest expense		17,538			327		1,298			374		19,537
Income before income taxes		10,802			99		1,898			52		12,851
Provision for income taxes		1,811			21		399			11		2,242
Net income	$	8,991		$	78	$	1,499		$	41	$	10,609


Three months ended June 30, 2021	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	13,151		$	-	$	-		$	-		$	13,151
Provision for (recovery of) loan losses		( 141	)		-		-			-			( 141	)
Noninterest income		2,356			202		203			159			2,920
Noninterest expense		15,416			167		215			195			15,993
Income (loss) before income taxes		232			35		( 12	)		( 36	)		219
Provision for (benefit from) income taxes		75			7		( 3	)		( 7	)		72
Net income (loss)	$	157		$	28	$	( 9	)	$	( 29	)	$	147

Six months ended June 30, 2021	Bank			Sturman Wealth Advisors		VNB Trust & Estate Services			Masonry Capital			Consolidated
Net interest income	$	19,125		$	-	$	-		$	-		$	19,125
Provision for loan losses		210			-		-			-			210
Noninterest income		2,870			393		404			292			3,959
Noninterest expense		19,671			327		421			355			20,774
Income (loss) before income taxes		2,114			66		( 17	)		( 63	)		2,100
Provision for (benefit from) income taxes		451			14		( 4	)		( 13	)		448
Net income (loss)	$	1,663		$	52	$	( 13	)	$	( 50	)	$	1,652

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, 2021. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s ALLL; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management; expected revenue synergies and cost savings from the recently completed merger with Fauquier may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and other reports filed from time to time by the Company with the Securities and Exchange Commission. These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.

MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK

On April 1, 2021, the Company completed its Merger with Fauquier. The Merger of Fauquier with and into the Company was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary.

Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, and 3) net income per share. (Refer to Reconcilement of Non-GAAP Measures within the Non-GAAP presentations section for further detail and calculation of amounts labeled as "Non-GAAP.")

•

ROAA for the three months ended June 30, 2022 was 1.27% compared to 0.03% (1.02% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year, as the increase in net income was significantly higher in the current period and no merger or merger-related expenses were incurred in the current period. ROAA for the six months ended June 30, 2022 was 1.15% compared to 0.24% (0.93% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year.

•

ROAE for the three months ended June 30, 2022 was 16.20% compared to 0.37% (11.88% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year. ROAE for the six months ended June 30, 2022 was 14.26% compared to 2.76% (10.66% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year.

•

Net income per diluted share was $1.06 for the three months ended June 30, 2022, compared to $0.03 ($0.89 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $5.5 million in net income. Net income per diluted share was $1.98 for the six months ended June 30, 2022, compared to $0.41 ($1.33 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $9.0 million in net income.

We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management’s Discussion and Analysis for more discussion on these financial performance measures.

IMPACT OF COVID-19

The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

Management will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.

Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure. There were no COVID-19 related loan deferrals as of June 30, 2022.

As of June 30, 2022, capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity. Management also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate that the Company can react effectively to an economic downturn.

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app . The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a temporary schedule whereby most staff members worked remotely, allowing the remaining essential staff to create more distance between each other within the offices. We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking. The client service center was also moved on a short-term basis to a larger location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to normal.

The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19. Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.

APPLICATION OF CRITICAL ACCO UNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s 2021 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2021.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of June 30, 2022 were $1.7 billion. This is a $227 million, or 11.5%, decrease from total assets reported at December 31, 2021 and a $102 million, or 5.5%, decrease from total assets reported at June 30, 2021. The decreases were substantially within gross loans, as SBA PPP loans were forgiven, legacy organic loan balances declined due to business sales, property sales and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, and other curtailments (see more detail in the Loan portfolio section following).

Interest-bearing deposits in other banks

The Company had $145.2 million of interest-bearing deposits in other banks as of June 30, 2022, compared to $336.0 million as of December 31, 2021 and $177.8 million as of June 30, 2021. Significant excess liquidity has been deployed into short-term investment securities in the six months ended June 30, 2022 to earn a higher yield.

Federal funds sold

The Company had overnight federal funds sold of $52.8 million as of June 30, 2022, $152.5 million as of December 31, 2021 and $106.6 million as of June 30, 2021. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Excess Balance Account of the Federal Reserve Bank of Richmond. The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

Securities

The Company’s investment securities portfolio as of June 30, 2022 totaled $467.0 million, an increase of $158.2 million compared with the $308.8 million reported at December 31, 2021 and an increase of $195.7 million from the $271.2 million reported at June 30, 2021. The increase from year-end and the same period in the prior year is the result of deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At June 30, 2022 and December 31, 2021, the investment securities holdings represented 26.8% and 15.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $5.1 million as of June 30, 2022, compared to $5.0 million as of December 31, 2021 and $4.3 million as of June 30, 2021. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation (the holding company for Community Bankers Bank), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At June 30, 2022, the unrestricted securities portfolio totaled $461.8 million. The following table summarizes the Company's AFS securities by type as of June 30, 2022, December 31, 2021, and June 30, 2021 (dollars in thousands):


	June 30, 2022					December 31, 2021					June 30, 2021
			% of					% of					% of
	Balance		Total			Balance		Total			Balance		Total
U.S. Government treasuries	$	161,009		34.9	%	$	—		—		$	—		—
U.S. Government agencies		30,532		6.6	%		31,581		10.4	%		35,228		13.2	%
Mortgage-backed securities/CMOs		175,962		38.1	%		170,964		56.3	%		136,418		51.1	%
Corporate bonds		11,154		2.4	%		—		—			—		—
Municipal bonds		83,173		18.0	%		101,272		33.3	%		95,327		35.7	%
Total available for sale securities	$	461,830		100.0	%	$	303,817		100.0	%	$	266,973		100.0	%

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The Company's geographical trade area includes localities in Virginia, Maryland and the District of Columbia that are within a 100-mile radius of any office of the Company.

As of June 30, 2022, total loans were $960.2 million, compared to $1.1 billion as of December 31, 2021 and $1.2 billion at June 30, 2021. Loans as a percentage of total assets at June 30, 2022 were 55.0%, compared to 63.1% as of June 30, 2021. Loans as a percentage of deposits at June 30, 2022 were 60.1%, compared to 71.6% as of June 30, 2021.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2022, December 31, 2021, and June 30, 2021 (dollars in thousands):


	June 30, 2022					December 31, 2021					June 30, 2021
	Balance		% of Total			Balance		% of Total			Balance		% of Total
Commercial loans	$	77,599		8.1	%	$	96,696		9.1	%	$	160,473		13.8	%
Real estate mortgage:
Construction and land		55,140		5.7	%		79,331		7.5	%		96,421		8.3	%
1-4 family residential mortgages		329,920		34.4	%		358,148		33.8	%		381,801		32.7	%
Commercial		446,282		46.5	%		473,632		44.6	%		455,795		39.1	%
Total real estate mortgage		831,342		86.6	%		911,111		85.9	%		934,017		80.1	%
Consumer		51,251		5.3	%		53,404		5.0	%		71,671		6.1	%
Total loans	$	960,192		100.0	%	$	1,061,211		100.0	%	$	1,166,161		100.0	%

The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loan balances from June 30, 2021 and December 31, 2021 to June 30, 2022. The decrease from June 30, 2021 is due predominantly to: 1) the forgiveness of SBA PPP loans in the amount of $71.9 million, 2) paydowns of legacy organic loans due mainly to business sales, property sales and participation fluctuations of $53.8 million, and 3) workouts and paydowns of Acquired Loans of $50.4 million. As of June 30, 2022, less than $1.9 million of PPP loans remain outstanding on the Bank's balance sheet.

Loan quality

Non-accrual loans, comprised of only two loans to one borrower, totaled $511 thousand at June 30, 2022, compared to balances of $495 thousand and $17 thousand reported at December 31, 2021 and June 30, 2021, respectively. Acquired Loans which otherwise would be in non-accrual status are not included in the balances, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling $626 thousand, $801 thousand and $2.8 million, as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The balance as of June 30, 2022 includes a government-guaranteed loan in the amount of $548 thousand. The portfolio includes four non-insured student loans that are 90 days or more past due and still accruing interest, amounting to $30 thousand.

The Company had loans classified as impaired loans in the amount of $1.4 million as of June 30, 2022, $1.5 million as of December 31, 2021, and $1.1 million at June 30, 2021. Based on regulatory guidance on student lending, the Company has classified 56 of its Purchased Student Loans as TDRs for a total of $835 thousand as of June 30, 2022. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

Allowance for loan losses

In general, the Company determines the adequacy of its ALLL by considering the risk classification and delinquency status of loans and other factors. Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification. The purpose of the allowance is to provide for losses inherent in the loan portfolio. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. The Company is committed to determining, on an ongoing basis, the adequacy of its ALLL. The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

Changes in national and local economic conditions, including the condition of various market segments;

Changes in the value of underlying collateral;

Changes in volume of classified assets, measured as a percentage of capital;

Changes in volume of delinquent loans;

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

Changes in lending policies and procedures, including underwriting standards;

Changes in the experience, ability and depth of lending management and staff; and

Changes in the level of policy exceptions.

The Company utilizes a loss migration model, which uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio. If economic conditions improve or worsen, the Company could experience changes in the required ALLL. It is possible that asset quality metrics could decline in the future if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.

The relationship of the ALLL to total loans and nonaccrual loans appears below (dollars in thousands):


	June 30, 2022			December 31, 2021			June 30, 2021
Total loans	$	960,192		$	1,061,211		$	1,166,161
Nonaccrual loans	$	511		$	495		$	17
Allowance for loan losses	$	5,503		$	5,984		$	5,522
Nonaccrual loans to total loans		0.05	%		0.05	%		0.00	%
ALLL to total loans		0.57	%		0.56	%		0.47	%
ALLL to nonaccrual loans		1076.91	%		1208.89	%		32482.35	%

The ALLL as a percentage of loans was 0.57% as of June 30, 2022, 0.56% as of December 31, 2021, and 0.47% as of June 30, 2021. The ALLL as a percentage of gross loans, excluding the impact of the acquired loans and fair value mark (a non-GAAP financial measure), would have been 0.91% as of June 30, 2022, compared to 0.88% as of June 30, 2021. The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.39% as of June 30, 2022, compared to 2.23% as of June 30, 2021. The fair value mark that was allocated to the acquired loans was $21.3 million as of the Effective Date, with a remaining balance of $17.5 million as of June 30, 2022. Refer to

the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.

A recovery of provision for loan losses totaling $69 thousand and a provision for loan losses totaling $210 thousand was recorded in the six months ended June 30, 2022 and 2021, respectively. The following is a summary of the changes in the ALLL for the six months ended June 30, 2022 and 2021 (dollars in thousands):


	2022			2021
Allowance for loan losses, January 1	$	5,984		$	5,455
Charge-offs		(664	)		(397	)
Recoveries		252			254
Provision for (recovery of) loan losses		(69	)		210
Allowance for loan losses, June 30	$	5,503		$	5,522

For additional insight into management’s approach and methodology in estimating the ALLL, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 5 of the Notes to Consolidated Financial Statements. In addition, Note 5 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of June 30, 2022 and acknowledges that the ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of June 30, 2022 totaled $19.2 million compared to $25.1 million as of December 31, 2021 and $25.4 million as of June 30, 2021, decreasing due to the sale of two buildings during the current quarter. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of June 30, 2022, the Company occupied sixteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters, operations center, and offices of both Masonry Capital and Sturman Wealth Advisors. VNB Trust & Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia.

Both the Arlington Boulevard facility in Charlottesville and the People Place facility in Albemarle County also contain office space that is currently under lease to tenants.

Leases

As of June 30, 2022, the Company has recorded $7.3 million of right-of-use assets and $6.9 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2021, $7.6 million of right-of-use assets and $7.1 million of lease liabilities were included on the balance sheet. Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.

Deposits

Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Commonwealth of Virginia.

Total deposits as of June 30, 2022 were $1.6 billion, a decrease of $197 million compared to December 31, 2021, and a decrease of $30.6 million compared to June 30, 2021 (dollars in thousands).


	June 30, 2022					December 31, 2021					June 30, 2021
			% of					% of					% of
	Balance		Total			Balance		Total			Balance		Total
No cost and low cost deposits:
Noninterest demand deposits	$	512,889		32.1	%	$	522,281		29.1	%	$	449,483		27.6	%
Interest checking accounts		399,930		25.0	%		446,314		24.8	%		431,556		26.5	%
Money market and savings deposit accounts		535,958		33.5	%		665,530		37.1	%		577,414		35.4	%

Total noninterest and low cost deposit accounts		1,448,777		90.6	%		1,634,125		91.0	%		1,458,453		89.5	%

Time deposit accounts:
Certificates of deposit		144,913		9.1	%		155,901		8.7	%		162,217		10.0	%
CDARS deposits		5,208		0.3	%		6,144		0.3	%		8,778		0.5	%
Total certificates of deposit and other time deposits		150,121		9.4	%		162,045		9.0	%		170,995		10.5	%

Total deposit account balances	$	1,598,898		100.0	%	$	1,796,170		100.0	%	$	1,629,448		100.0	%

Noninterest-bearing demand deposits on June 30, 2022 were $512.9 million, representing 32.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $935.9 million, and represented 58.5% of total deposits at June 30, 2022. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 90.6% of total deposit accounts at June 30, 2022. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep deposit products. ICS ® deposit balances of $28.8 million and $128.6 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2022. As of December 31, 2021, ICS ® deposit balances of $39.2 million and $225.9 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively. All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining 9.4% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $150.1 million at June 30, 2022. Included in these deposit totals are CDARS TM , whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARS TM deposits totaled $5.2 million as of June 30, 2022 and $6.1 million as of December 31, 2021, all of which were reciprocal balances for the Company’s customers.

Borrowings

Borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained.

The Company has a collateral dependent line of credit with the FHLB, with no outstanding borrowings as of June 30, 2022 or December 31, 2021. The Company has an off-balance sheet letter of credit in the amount of $60 million as of June 30, 2022 and December 31, 2021, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. This letter of credit is secured by commercial mortgages.

Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of June 30, 2022, December 31, 2021 or June 30, 2021.

Junior Subordinated Debt

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of June 30, 2022 and December 31, 2021, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR.

The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2021 to June 30, 2022 (dollars in thousands):


Equity, December 31, 2021	$	161,987
Net income		10,609
Other comprehensive loss		(35,484	)
Cash dividends declared		(3,193	)
Equity increase due to expensing of stock options		83
Equity increase due to expensing of restricted stock		214
Equity, June 30, 2022	$	134,216

The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 15.95%, 15.95%, 16.50% and 8.79%, respectively, as of June 30, 2022, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 15.69%, 15.69%, 16.24% and 8.65%, respectively, as of June 30, 2022, also exceeding the minimum requirements.

As of June 30, 2022, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the PCA regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

RESULTS OF OPERATIONS

Non-GAAP presentations

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the ALLL to total loans, such as the impact of fair value adjustment, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands):


	As of or for the Three Months Ended						For the Six Months Ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Performance measures
Return on average assets ("ROAA")		1.27	%		0.03	%		1.15	%		0.24	%
Impact of merger and merger related expenses, net of tax		0.00	%		0.99	%		0.00	%		0.69	%
ROAA, excluding merger and merger related expenses (non-GAAP)		1.27	%		1.02	%		1.15	%		0.93	%

Return on average equity ("ROAE")		16.20	%		0.37	%		14.26	%		2.76	%
Impact of merger and merger related expenses, net of tax		0.00	%		11.51	%		0.00	%		7.90	%
ROAE, excluding merger and merger related expenses (non-GAAP)		16.20	%		11.88	%		14.26	%		10.66	%

Net income	$	5,685		$	147		$	10,609		$	1,652
Impact of merger and merger related expenses, net of tax		-			4,553			-			4,722
Net income, excluding merger and merger related expenses (non-GAAP)	$	5,685		$	4,700		$	10,609		$	6,374

Net income per share, diluted	$	1.06		$	0.03		$	1.98		$	0.41
Impact of merger and merger related expenses, net of tax		-			0.86			-			0.92
Net income per share, excluding merger and merger related expenses (non-GAAP), diluted	$	1.06		$	0.89		$	1.98		$	1.33

Fully tax-equivalent measures
Net interest income	$	12,461		$	13,151		$	23,886		$	19,125
Fully tax-equivalent adjustment		82			73			163			120
Net interest income (FTE)	$	12,543		$	13,224		$	24,049		$	19,245

Efficiency ratio		58.6	%		99.5	%		60.0	%		90.0	%
Fully tax-equivalent adjustment		-0.3	%		-0.4	%		0.1	%		-0.5	%
Efficiency ratio (FTE)		58.3	%		99.1	%		60.1	%		89.5	%

Net interest margin		3.00	%		3.03	%		2.76	%		2.98	%
Fully tax-equivalent adjustment		0.02	%		0.02	%		0.02	%		0.02	%
Net interest margin (FTE)		3.02	%		3.05	%		2.78	%		3.00	%

Other financial measures
ALLL to total loans		0.57	%		0.47	%
Impact of acquired loans and fair value mark		0.34	%		0.41	%
ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)		0.91	%		0.88	%

ALLL to total loans		0.57	%		0.47	%
Fair value mark to total loans		1.82	%		1.76	%
ALLL + fair value mark to total loans (non-GAAP)		2.39	%		2.23	%

Book value per share	$	25.20		$	29.89
Impact of intangible assets		(2.96	)		(3.29	)
Tangible book value per share (non-GAAP)	$	22.24		$	26.60

Total equity	$	134,216		$	158,602
Impact of intangible assets		(15,785	)		(17,477	)
Tangible equity	$	118,431		$	141,125

Net income

Net income for the three months ended June 30, 2022 was $5.7 million, a $5.5 million increase compared to net income reported for the three months ended June 30, 2021. Net income per diluted share was $1.06 for the quarter ended June 30, 2022 compared to $0.03 per diluted share for the same quarter in the prior year.

Net income for the six months ended June 30, 2022 was $10.6 million, compared to $1.6 million for the six months ended June 30, 2021. Net income per diluted share was $1.98 for the six months ended June 30, 2022,compared to $0.41 per diluted share for the same period in the prior year.

Net interest income

Net interest income (FTE) for the three months ended June 30, 2022 was $12.5 million, a $681 thousand decrease compared to net interest income (FTE) of $13.2 million for the three months ended June 30, 2021. Net interest income (FTE) decreased primarily due to the decreased volume of loans, declining from an average of $1.2 billion in the three months ended June 30, 2021 to $984.9 million in the three months ended June 30, 2022, negatively impacting interest income by $2.5 million. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the three months ended June 30, 2022. The increase in volume of securities held, from an average balance of $270.2 million for the three months ended June 30, 2021 to $391.2 million for the three months ended June 30, 2022, positively impacted net interest income by $567 thousand, and the increase in yield earned on such securities increased from 1.68% to 2.16% for the periods noted, positively impacted net interest income by $411 thousand. FFS and interest bearing deposits in other banks contributed an additional $281 thousand and $183 thousand, respectively, to net interest income (FTE) for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Net interest income (FTE) was positively impacted by the $276 thousand decrease in interest expense, as described below.

Net interest income (FTE) for the six months ended June 30, 2022 was $24.0 million, a $4.8 million increase compared to net interest income (FTE) of $19.2 million for the six months ended June 30, 2021. Net interest income (FTE) increased primarily due to the increased volume of loans as a result of the Merger, increasing from an average of $910.0 million in the six months ended June 30, 2021 to $1.0 billion in the six months ended June 30, 2022. This increase in volume of loans positively impacted interest income by $1.9 million. The increase in yield on loans, increasing from 4.20% for the six months ended June 30, 2021 to 4.28% for the six months ended June 30, 2022 positively impacted net interest income by $489 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by 24 bps during the six months ended June 30, 2022. The increase in volume of securities held, from an average balance of $222.0 million for the six months ended June 30, 2021 to $352.5 million for the six months ended June 30, 2022, positively impacted net interest income by $1.2 million, and the increase in yield earned on such securities increased from 1.65% to 2.03% for the periods noted, positively impacting net interest income by $531 thousand. FFS and interest bearing deposits in other banks contributed and additional $291 thousand and $290 thousand, respectively, to net interest income (FTE) for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Net interest income (FTE) was positively impacted by the $49 thousand decrease in interest expense, as described below.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.02% for the three months ended June 30, 2022 was 3 bps lower than the 3.05% for the three months ended June 30, 2021. The net interest margin (FTE) of 2.78% for the six months ended June 30, 2022 was 22 bps lower than the 3.00% for the six months ended June 30, 2021. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Interest expense decreased $276 thousand for the three months ended June 30, 2022 compared to the same period in the prior year, due to decreased volume of deposits, as average interest-bearing deposits decreased $54.2 million for the period noted, positively impacting interest expense by $44 thousand, coupled with lower rates paid on deposits, positively impacting interest expense by $173 thousand. The rate paid on interest-bearing deposits averaged 24 bps in the three months ended June 30, 2022, compared to 30 bps for the three months ended June 30, 2021. Also during the three months ended June 30, 2021, the Bank had average outstanding borrowing with the FHLB of $43.0 million, with an interest expense of $59 thousand. No such borrowings were outstanding during the three month period ending June 30, 2022.

Interest expense decreased $49 thousand for the six months ended June 30, 2022 compared to the same period in the prior year, primarily due to the elimination of borrowings from the FHLB, which caused a decline in interest expense period over period of $95 thousand. The impact to interest expense from the increase in the volume of interest-bearing deposits, increasing interest expense by $448 thousand, was completely offset by the decline in rates paid on deposits, decreasing interest expense by $451 thousand when comparing the six months ended June 30, 2021 to the six months ended June 30, 2022.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and six months ended June 30, 2022 and 2021. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income


	For the Three Months Ended
	June 30, 2022			June 30, 2021			Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/
		Expense			Expense				(Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities	$325,833	$1,726	2.12%	$211,827	$792	1.50%	$526	$408	$934
Tax Exempt Securities 1	65,352	390	2.39%	58,398	346	2.37%	41	3	44
Total Securities 1	391,185	2,116	2.16%	270,225	1,138	1.68%	567	411	978
Loans:
Real Estate	847,661	8,988	4.25%	997,446	10,175	4.09%	(1,576)	389	(1,187)
Commercial	86,394	995	4.62%	144,209	1,967	5.47%	(700)	(272)	(972)
Consumer	50,828	627	4.95%	72,468	867	4.80%	(266)	26	(240)
Total Loans	984,883	10,610	4.32%	1,214,123	13,009	4.30%	(2,542)	143	(2,399)
Fed Funds Sold	150,393	302	0.81%	106,934	21	0.08%	12	269	281
Other interest-bearing deposits	142,010	219	0.62%	149,056	36	0.10%	(2)	185	183
Total Earning Assets	1,668,471	13,247	3.18%	1,740,338	14,204	3.27%	(1,965)	1,008	(957)
Less: Allowance for Loan Losses	(5,866)			(5,732)
Total Non-Earning Assets	133,526			124,287
Total Assets	$1,796,131			$1,858,893

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$411,374	$58	0.06%	$437,611	$93	0.09%	$(5)	$(30)	$(35)
Money Market and Savings Deposits	550,883	440	0.32%	561,940	455	0.32%	(9)	(6)	(15)
Time Deposits	152,695	157	0.41%	169,556	324	0.77%	(30)	(137)	(167)
Total Interest-Bearing Deposits	1,114,952	655	0.24%	1,169,107	872	0.30%	(44)	(173)	(217)
Borrowings	—	—	—	43,030	59	0.55%	(59)	—	(59)
Junior subordinated debt	3,383	49	5.81%	3,334	49	—	—	—	—
Total Interest-Bearing Liabilities	1,118,335	704	0.25%	1,215,471	980	0.32%	(103)	(173)	(276)
Non-Interest-Bearing Liabilities:
Demand deposits	527,008			471,078
Other liabilities	10,067			14,109
Total Liabilities	1,655,410			1,700,658
Shareholders' Equity	140,721			158,235
Total Liabilities & Shareholders' Equity	$1,796,131			$1,858,893
Net Interest Income (FTE)		$12,543			$13,224		$(1,862)	$1,181	$(681)
Interest Rate Spread 2			2.93%			2.95%
Cost of Funds			0.17%			0.23%
Interest Expense as a Percentage of Average Earning Assets			0.17%			0.23%
Net Interest Margin (FTE) 3			3.02%			3.05%

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Consolidated Average Balance Sheet and Analysis of Net Interest Income


	For the Six Months Ended
	June 30, 2022			June 30, 2021			Change in Interest Income/ Expense
	Average	Interest	Average	Average	Interest	Average	Change Due to : 4		Total
	Balance	Income/	Yield/Cost	Balance	Income/	Yield/Cost	Volume	Rate	Increase/
		Expense			Expense				(Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities	$287,241	$2,800	1.95%	$176,151	$1,264	1.44%	$979	$557	$1,536
Tax Exempt Securities 1	65,249	775	2.38%	45,818	569	2.48%	232	(26)	206
Total Securities 1	352,490	3,575	2.03%	221,969	1,833	1.65%	1,211	531	1,742
Loans:
Real Estate	866,863	18,082	4.21%	679,951	14,282	4.24%	3,899	(99)	3,800
Commercial	89,944	2,084	4.67%	166,941	3,156	3.81%	(1,676)	604	(1,072)
Consumer	51,302	1,213	4.77%	63,148	1,509	4.82%	(280)	(16)	(296)
Total Loans	1,008,109	21,379	4.28%	910,040	18,947	4.20%	1,943	489	2,432
Fed Funds Sold	151,429	363	0.48%	87,276	72	0.17%	81	210	291
Other interest-bearing deposits	235,418	356	0.30%	74,475	66	0.18%	219	71	290
Total Earning Assets	1,747,446	25,673	2.96%	1,293,760	20,918	3.26%	3,454	1,301	4,755
Less: Allowance for Loan Losses	(5,946)			(5,624)
Total Non-Earning Assets	124,851			84,069
Total Assets	$1,866,351			$1,372,205

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$416,393	$119	0.06%	$291,025	$119	0.08%	$42	$(42)	$0
Money Market and Savings Deposits	603,259	1,055	0.35%	422,048	806	0.39%	322	(73)	249
Time Deposits	155,544	352	0.46%	134,355	604	0.91%	84	(336)	(252)
Total Interest-Bearing Deposits	1,175,196	1,526	0.26%	847,428	1,529	0.36%	448	(451)	(3)
Borrowings	—	—	—	36,551	95	0.52%	(95)	—	(95)
Junior subordinated debt	3,377	98	5.85%	1,255	49	—	64	(15)	49
Total Interest-Bearing Liabilities	1,178,573	1,624	0.28%	885,234	1,673	0.38%	417	(466)	(49)
Non-Interest-Bearing Liabilities:
Demand deposits	527,049			363,709
Other liabilities	10,704			2,877
Total Liabilities	1,716,326			1,251,820
Shareholders' Equity	150,025			120,385
Total Liabilities & Shareholders' Equity	$1,866,351			$1,372,205
Net Interest Income (FTE)		$24,049			$19,245		$3,037	$1,767	$4,804
Interest Rate Spread 2			2.68%			2.88%
Cost of Funds			0.19%			0.27%
Interest Expense as a Percentage of Average Earning Assets			0.38%			0.26%
Net Interest Margin (FTE) 3			2.78%			3.00%

(1)

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

Provision for loan losses

A recovery of provision for loan losses of $217 thousand was recognized during the three months ended June 30, 2022 compared to $141 thousand recognized during the three months ended June 30, 2021. A recovery of provision for loan losses of $69 thousand was recognized during the six months ended June 30, 2022 compared to a provision for loan losses recognized of $210 thousand during the six months ended June 30, 2021. The period-end ALLL as a percentage of total loans was 0.57% as of June 30, 2022, 0.56% as of December 31, 2021 and 0.47% as of June 30, 2021.

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 5 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at June 30, 2022. The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

Noninterest income

The components of noninterest income for the three months ended June 30, 2022 and 2021 are shown below (dollars in thousands):


	For the Three Months Ended				Variance
	June 30, 2022		June 30, 2021		$			%
Noninterest income:
Wealth management fees	$	572	$	980	$	(408	)		-41.6	%
Advisory and brokerage income		210		359		(149	)		-41.5	%
Deposit account fees		458		426		32			7.5	%
Debit/credit card and ATM fees		779		599		180			30.1	%
Bank owned life insurance income		246		199		47			23.6	%
Gains on sale of assets		1,113	-			1,113			100.0	%
Other		268		357		(89	)		-24.9	%
Total noninterest income	$	3,646	$	2,920	$	726			24.9	%

Noninterest income for the three months ended June 30, 2022 of $3.6 million was $726 thousand or 24.9% higher than the amount recorded for the three months ended June 30, 2021. Noninterest income increased predominantly due to the gain on the sale of two buildings in the amount of $1.1 million, offset by a decrease in wealth management fees of $408 thousand due to a reduction in accounts.

The components of noninterest income for the six months ended June 30, 2022 and 2021 are shown below (dollars in thousands):


	For the Six Months Ended				Variance
	June 30, 2022		June 30, 2021		$			%
Noninterest income:
Wealth management fees	$	1,129	$	1,309	$	(180	)		-13.8	%
Advisory and brokerage income		426		550		(124	)		-22.5	%
Deposit account fees		923		586		337			57.5	%
Debit/credit card and ATM fees		1,486		753		733			97.3	%
Bank owned life insurance income		457		306		151			49.3	%
Resolution of commercial dispute		2,400		-		2,400		N/A
Gain on sale of assets		1,113		27		1,086			4022.2	%
Other		499		428		71			16.6	%
Total noninterest income	$	8,433	$	3,959	$	4,474			113.0	%

Noninterest income for the six months ended June 30, 2022 of $8.4 million was $4.5 million or 113.0% higher than the amount recorded for the six months ended June 30, 2021. Noninterest income increased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial dispute, the $1.1 million gain on the sale of two buildings and an increase of $733 thousand of plastics income due to increased number of retail accounts as a result of the Merger.

Noninterest expense

The components of noninterest expense for the three months ended June 30, 2022 and 2021 are shown below (dollars in thousands):


	For the Three Months Ended				Variance
	June 30, 2022		June 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	4,086	$	4,741	$	(655	)		-13.8	%
Net occupancy		1,282		1,109		173			15.6	%
Equipment		254		340		(86	)		-25.3	%
Bank franchise tax		304		429		(125	)		-29.1	%
Computer software		357		216		141			65.3	%
Data processing		699		994		(295	)		-29.7	%
FDIC deposit insurance assessment		125		182		(57	)		-31.3	%
Marketing, advertising and promotion		259		232		27			11.6	%
Merger and merger-related expenses		-		5,874		(5,874	)		-100.0	%
Plastics expense		92		73		19			26.0	%
Professional fees		404		510		(106	)		-20.8	%
Core deposit intangible amortization		427		428		(1	)		-0.2	%
Other		1,153		865		288			33.3	%
Total noninterest expense	$	9,442	$	15,993	$	(6,551	)		-41.0	%

Noninterest expense for the quarter ended June 30, 2022 of $9.4 million was $6.6 million or 41.0% lower than the quarter ended June 30, 2021. This decrease is due to merger and merger-related expenses incurred during the six months ended June 30, 2021 of $5.9 million, a reduction in salaries and employee benefits of $655 thousand as a result of reduced headcount and a $295 thousand reduction in data processing costs as a result of efficiencies gained in connection with the Merger.

The components of noninterest expense for the six months ended June 30, 2022 and 2021 are shown below (dollars in thousands):


	For the Six Months Ended				Variance
	June 30, 2022		June 30, 2021		$			%
Noninterest expense:
Salaries and employee benefits	$	8,817	$	7,143	$	1,674			23.4	%
Net occupancy		2,479		1,604		875			54.6	%
Equipment		537		456		81			17.8	%
Bank franchise tax		608		602		6			1.0	%
Computer software		620		383		237			61.9	%
Data processing		1,437		1,283		154			12.0	%
FDIC deposit insurance assessment		351		245		106			43.3	%
Marketing, advertising and promotion		526		369		157			42.5	%
Merger and merger-related expenses		-		6,152		(6,152	)		-100.0	%
Plastics expense		231		115		116			100.9	%
Professional fees		741		687		54			7.9	%
Core deposit intangible amortization		866		428		438			102.3	%
Other		2,324		1,307		1,017			77.8	%
Total noninterest expense	$	19,537	$	20,774	$	(1,237	)		-6.0	%

Noninterest expense for the six months ended June 30, 2022 of $19.5 million was $1.2 million or 6.0% lower than the six months ended June 30, 2021. This decrease is due to merger and merger-related expenses incurred during the six months ended June 30, 2021 of $6.2 million, offset by increases the following areas due to the Merger being effective April 1, 2021: 1) salaries and employee benefits increased $1.7 million, 2) net occupancy increased $875 thousand, and 3) core deposit intangible amortization increased $438 thousand. In addition, the Company incurred $685 thousand in expenses in the first quarter of 2022, included in noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier.

The efficiency ratio (FTE) of 58.3% for the three months ended June 30, 2022 compared favorably to the 99.1% for the same quarter of 2021, due to the increase in noninterest income and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 60.1 for the six months ended June 30, 2022 also compared favorably to the 89.5% for the six months ended June 30, 2021 for the same reasons. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended June 30, 2022 and 2021, the Company provided $1.2 million and $72 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 17.4% and 32.9%, respectively. The effective income tax rate for the three months ended June 30, 2022 was lower than the prior year, due to the recognition of low-income housing tax credits in the current period and the inflated effective rate in 2021 due to the non-deductibility of certain merger and merger-related expenses. For the six months ended June 30, 2022 and 2021, the Company provided $2.2 million and $448 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 17.4% and 21.9%, respectively. For all periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds.

OTHER SIGNIFICANT EVENTS

None

ITEM 3. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II. OTHE R INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 1A. RI SK FACTORS.

During the quarter ended June 30, 2022, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2021. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUI TY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPO N SENIOR SECURITIES.

None

ITEM 4. MINE SAF ETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.

(a)

Required 8-K disclosures.

None

(b)

Changes in procedures for director nominations by security holders.

None

ITEM 6. E XHIBITS.


Exhibit Number		Description of Exhibit


31.1		302 Certification of Principal Executive Officer

31.2		302 Certification of Principal Financial Officer

32.1		906 Certification

101		The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Shareholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

SIGNAT URES

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.


VIRGINIA NATIONAL BANKSHARES CORPORATION
(Registrant)

By:		/s/ Glenn W. Rust
		Glenn W. Rust
		President and Chief Executive Officer (principal executive officer)

Date:		August 12, 2022

By:		/s/ Tara Y. Harrison
		Tara Y. Harrison
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Date:		August 12, 2022

TABLE OF CONTENTS

Part I. Financi Item 1. Financial Statements Item 1. Finan Note 1. Summary Of Significant Accounting Policies Note 2. Business Combinations Note 3. Securities Note 4. Loans Note 5. Allowance For Loan Losses Note 6. Goodwill and Other Intangible Assets Note 7. Leases Note 8. Net Income Per Share Note 9. Stock Incentive Plans Note 10. Fair Value Measurements Note 11. Other Comprehensive Income (loss)Note 12. Derivative Instruments and Hedging Activities Note 13. Segment Reporting Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management's Discussion and Analysis Of Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 3. Quantitative and Qualitat Item 4. Controls and Procedures Item 4. Controls Part II. Other Information Part II. Othe Item 1. Legal Proceedings Item 1. Legal Item 1A. Risk Factors Item 1A. Ri Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 2. Unregistered Sales Of Equi Item 3. Defaults Upon Senior Securities Item 3. Defaults Upo Item 4. Mine Safety Disclosures Item 4. Mine Saf Item 5. Other Information Item 5. Other Item 6. Exhibits

31.1 302 Certification of Principal Executive Officer 31.2 302 Certification of Principal Financial Officer 32.1 906 Certification

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