# Virginia National Bankshares Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Virginia National Bankshares Corp](/companies/vabk.md) (CIK 1572334)
- Form: 10-Q
- Filed: 2023-08-11
- Accepted by EDGAR: Aug 11, 2023, 08:31 ET
- Period: 2023-06-30
- Accession: 0000950170-23-041617
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1572334/000095017023041617/vabk-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1572334/000095017023041617/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $4.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $7.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $5.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $11.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.14 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 5,375,073 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 5,375,545 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $10.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $501.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Total assets | at 2023-06-30 | $1.58bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $1.44bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-06-30 | $59.7m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-06-30 | $142.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,860 characters.

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, 2022. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 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 judgment 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: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict between Russia and Ukraine) or other major events, the governmental and societal responses thereto, or the prospect of these events; changes, particularly declines, in general economic and market conditions in the local economies in which the Company operates, including the effects of declines in real estate values; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the impact of changes in laws, regulations and guidance related to financial services including, but not limited to, taxes, banking, securities and insurance; changes in accounting principles, policies and guidelines; the financial condition of the Company’s borrowers; the Company's ability to attract, hire, train and retain qualified employees; an increase in unemployment levels; competitive pressures on loan and deposit pricing and demand; fluctuation in asset quality; assumptions that underlie the Company’s ACL; the value of securities held in the Company's investment portfolio; performance of assets under management; cybersecurity threats or attacks and the development and maintenance of reliable electronic systems; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the risks and uncertainties described from time to time in the Company’s press releases and filings with the SEC; and the Company’s performance in managing the risks involved in any of the foregoing. 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, 2022 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.

### 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.

- ROAA for the three months ended June 30, 2023 was 1.46% compared to 1.27% realized in the same period in the prior year, as average assets were lower in the current period as compared to the same period in the prior year. ROAA for the six months ended June 30, 2023 was 1.47% compared to 1.15% realized in the same period in the prior year.
- ROAE for the three months ended June 30, 2023 was 15.98% compared to 16.20% realized in same period in the prior year. ROAE for the six months ended June 30, 2023 was 16.74% compared to 14.26% realized in same period in the prior year.
- Net income per diluted share was $1.05 for the three months ended June 30, 2023, compared to $1.06 for the same period in the prior year. Net income per diluted share was $2.13 for the six months ended June 30, 2023, compared to $1.98 for the same period in the prior year, due to the increase of $833 thousand 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. During the second quarter of 2023, the Board of Directors approved a share repurchase plan of up to 5% of outstanding common stock, subject to consultation with the Federal Reserve.

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.

### APPLICATION OF CRITICAL ACCOUNTING 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 2022 Form 10-K. The significant change in the Company’s application of critical accounting policies since December 31, 2022 relates to the estimate of the allowance for credit losses, described as follows:

**Allowance for credit losses -** The Company establishes the ACL through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL. The ACL represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the ACL is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the ACL on all loans is based in part on forecasts of the national unemployment rate, which we believe to be indicative of risk factors related to the collectability of the loans. In addition, management’s estimate of expected credit losses is based on the remaining life of certain consumer loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the ACL. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the ACL, we consider a range of possible assumptions and outcomes related to the various factors identified above. The level of the allowance is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.

### FINANCIAL CONDITION

#### Total assets

The total assets of the Company as of June 30, 2023 were $1.6 billion. This is a $39.3 million, or 2.4%, decrease from total assets reported at December 31, 2022 and a $160.8 million, or 9.2%, decrease from total assets reported at June 30, 2022. During 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines in deposit balances through the second quarter of 2023, which resulted in decreases within overnight investments and in the securities portfolio in order to provide necessary funding.

#### Interest-bearing deposits in other banks

The Company had $20.2 million of interest-bearing deposits in other banks as of June 30, 2023, compared to $19.1 million as of December 31, 2022 and $145.2 million as of June 30, 2022. During 2022, significant excess liquidity was deployed into short-term investment securities. During the first six months of 2023, customer deposit balances declined $130.3 million, which was largely funded by interest-bearing deposits in other banks.

#### Federal funds sold

The Company had no overnight federal funds sold as of June 30, 2023, $45 thousand as of December 31, 2022 and $52.8 million as of June 30, 2022. Any excess funds are sold on a daily basis in the federal funds market. The Company monitors liquidity on a daily basis to ensure that it maintains sufficient liquidity to meet its funding commitments at all times.

The Company participates 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, 2023 totaled $481.3 million, a decrease of $62.0 million compared with the $543.3 million reported at December 31, 2022 and an increase of $14.3 million from the $467.0 million reported at June 30, 2022. The decrease from year-end is due to sales from lower yielding AFS securities to meet funding demands discussed earlier, while the increase during 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, 2023 and December 31, 2022, the investment securities holdings represented 30.4% and 33.5% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $7.4 million as of June 30, 2023, compared to $5.1 million as of December 31, 2022 and $5.1 million as of June 30, 2022. 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, 2023, the unrestricted securities portfolio totaled $473.9 million. The following table summarizes the Company's AFS securities by type as of June 30, 2023, December 31, 2022, and June 30, 2022 (dollars in thousands):

|  | June 30, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total | June 30, 2022 Balance | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. Government treasuries | $175,551 | 37.0% | $242,470 | 45.1% | $161,009 | 34.9% |
| U.S. Government agencies | 38,839 | 8.2% | 28,755 | 5.4% | 30,532 | 6.6% |
| Mortgage-backed securities/CMOs | 157,788 | 33.3% | 167,076 | 31.0% | 175,962 | 38.1% |
| Corporate bonds | 18,702 | 4.0% | 18,729 | 3.5% | 11,154 | 2.4% |
| Municipal bonds | 82,988 | 17.5% | 81,156 | 15.1% | 83,173 | 18.0% |
| Total available for sale securities | $473,868 | 100.0% | $538,186 | 100.0% | $461,830 | 100.0% |

39

The unrestricted 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. Refer to Note 2. Adoption of New Accounting Standards for discussion on the impact of CECL to the evaluation of securities for ACL.

#### 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 well as the counties of Jefferson and Berkeley in West Virginia.

As of June 30, 2023, total loans were $973.3 million, compared to $936.4 million as of December 31, 2022 and $960.2 million at June 30, 2022. Loans as a percentage of total assets at June 30, 2023 were 61.4%, compared to 55.0% as of June 30, 2022. Loans as a percentage of deposits at June 30, 2023 were 72.2%, compared to 60.1% as of June 30, 2022.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2023, December 31, 2022, and June 30, 2022 (dollars in thousands):

|  | June 30, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total | June 30, 2022 Balance | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial loans | $98,312 | 10.1% | $71,139 | 7.6% | $77,599 | 8.1% |
| Real estate mortgage: |  |  |  |  |  |  |
| Construction and land | 29,825 | 3.1% | 37,541 | 4.0% | 55,140 | 5.7% |
| 1-4 family residential mortgages | 317,330 | 32.6% | 323,185 | 34.5% | 329,920 | 34.4% |
| Commercial | 486,643 | 50.0% | 459,125 | 49.0% | 446,282 | 46.5% |
| Total real estate mortgage | 833,798 | 85.7% | 819,851 | 87.6% | 831,342 | 86.6% |
| Consumer | 41,238 | 4.2% | 45,425 | 4.9% | 51,251 | 5.3% |
| Total loans | $973,348 | 100.0% | $936,415 | 100.0% | $960,192 | 100.0% |

Loan balances increased by $36.9 million or 3.9% from December 31, 2022 to June 30, 2023. During the first half of 2023, the Company funded $62.3 million in organic loan production and purchased $27.7 million in government guaranteed loans. Paydowns and normal amortization of $53.1 million significantly impacted gross loan balances during the first half of 2023. As of June 30, 2023, only $196 thousand of PPP loans remain outstanding on the Bank's balance sheet.

The following table details the Company's levels of non-owner occupied commercial real estate as of June 30, 2023, along with the average loan size and % of risk ratings for each category (dollars in thousands):

| Loan Type | Balance | % of Total CRE | Average Loan Size | Special Mention | Sub- standard | Non-accrual |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hotels | $13,005 | 5.37% | $2,601 | 0.00% | 0.00% | 0.00% |
| Office Building | 70,969 | 29.32% | $835 | 0.00% | 0.00% | 0.00% |
| Warehouses/Industrial | 47,409 | 19.58% | $1,823 | 0.00% | 1.42% | 0.99% |
| Retail | 84,631 | 34.96% | $1,387 | 0.06% | 0.00% | 0.00% |
| Day Cares / Schools | 15,735 | 6.50% | $1,574 | 2.26% | 0.00% | 0.00% |
| All Other Commercial Buildings | 10,330 | 4.27% | $795 | 0.00% | 0.00% | 0.00% |
| Total Non-Owner Occupied CRE | $242,079 |  |  |  |  |  |

40

#### Loan quality

The Company continues to experience extremely low levels of NPAs, as a result of strict underwriting standards and practices. However, the economic environment in the Company's lending footprint could be impacted as persistent inflation, higher interest rates, and other signs of recession materialize, which could increase NPAs in future periods.

*Nonaccruals -* Nonaccrual loans, comprised of six loans to five borrowers, totaled $1.2 million at June 30, 2023, compared to balances of $673 thousand and $511 thousand reported at December 31, 2022 and June 30, 2022, respectively. The adoption of CECL altered the manner in which purchased loans that were in nonaccrual status are presented, and as a result, two such loans totaling $534 thousand are now included in this figure.

*Past Due Loans -* The Company had loans in its portfolio totaling $107 thousand, $705 thousand and $626 thousand, as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible.

*Troubled Loan Modifications -* The Company adopted ASU 2022-02, *Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures*, effective January 1, 2023 on a prospective basis. Refer to Note 1. Summary of Significant Accounting Policies in Part I, Item 1, Notes to Consolidated Financial Statements for information on the Company's accounting policy for loan modifications to borrowers experiencing financial difficulty and how the Company defines TLMs. As of June 30, 2023, the Company had TLMs totaling $1.1 million.

*Troubled Debt Restructurings -* After the adoption of ASU 2022-02, the Company no longer has TDRs. The below information is presented for December 31, 2022, prior to the adoption of ASU 2022-02.

As of December 31, 2022, the Company had a total of $1.3 million of loans classified as TDRs. Of this balance only one loan in the amount of $495 thousand was a nonperforming TDR. The remaining $788 thousand, of which $700 thousand were student loans, were classified as performing. Based on regulatory guidance on student lending, the Company classified 46 of its Purchased Student Loans as TDRs for a total of $700 thousand as of December 31, 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 evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continued 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 Credit Losses

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

|  | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| --- | ---: | ---: | ---: |
| Total loans | $973,348 | $936,415 | $960,192 |
| Nonaccrual loans | $1,185 | $673 | $511 |
| Allowance for credit losses | $7,863 | $5,552 | $5,503 |
| Nonaccrual loans to total loans | 0.12% | 0.07% | 0.05% |
| ACL to total loans | 0.81% | 0.59% | 0.57% |
| ACL to nonaccrual loans | 663.54% | 824.96% | 1076.91% |

The ACL on loans as a percentage of loans was 0.81% as of June 30, 2023, 0.59% as of December 31, 2022, and 0.57% as of June 30, 2022. The total of the ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 1.94% as of June 30, 2023, compared to 2.29% as of December 31, 2022. 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 $11.0 million as of June 30, 2023. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ACL as a percentage of loans.

A recovery of provision for credit losses totaling $19 thousand and a provision for loan losses totaling $148 thousand were recorded in the six months ended June 30, 2023 and 2022, respectively. The following is a summary of the changes in the ACL for the six months ended June 30, 2023 and 2022 (dollars in thousands):

|  | 2023 | 2022 |
| --- | ---: | ---: |
| Allowance for loan losses, December 31 of prior year | $5,552 | $5,984 |
| Impact of adoption of CECL, January 1, 2023 | 2,491 | - |
| Charge-offs | (322) | (664) |
| Recoveries | 161 | 252 |
| Provision for (recovery of) credit losses | (19) | (69) |
| Allowance for credit losses, June 30 | $7,863 | $5,503 |

For additional insight into management’s approach and methodology in estimating the ACL, please refer to the earlier discussion of “Allowance for Credit 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 ACL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ACL was adequately provided for as of June 30, 2023 and acknowledges that the ACL 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, 2023 totaled $17.6 million compared to $17.8 million as of December 31, 2022 and $19.2 million as of June 30, 2022, decreasing from prior year second quarter due to the sale of a branch building in the first quarter of 2023. 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, 2023, the Company occupied fourteen 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 the office of Masonry Capital. Sturman Wealth currently leases space in the 404 People Place office building. 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.

Assets held for sale of $965 thousand as of December 31, 2022 were sold during the three months ended March 31, 2023.

#### Leases

As of June 30, 2023, the Company has recorded $6.6 million of right-of-use assets and $6.3 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2022, $6.5 million of right-of-use assets and $6.2 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, 2023 were $1.3 billion, a decrease of $130.3 million compared to December 31, 2022, and a decrease of $250.8 million compared to June 30, 2022 (dollars in thousands). As stated above, during 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines during 2022 and the first half of 2023 in deposit balances.

| No cost and low cost deposits: | June 30, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total | June 30, 2022 Balance | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Noninterest demand deposits | $412,273 | 30.6% | $495,649 | 33.5% | $512,889 | 32.1% |
| Interest checking accounts | 312,773 | 23.2% | 399,983 | 27.1% | 399,930 | 25.0% |
| Money market and savings deposit accounts | 398,074 | 29.5% | 467,600 | 31.6% | 535,958 | 33.5% |
| Total noninterest and low cost deposit accounts | 1,123,120 | 83.3% | 1,363,232 | 92.2% | 1,448,777 | 90.6% |
| Time deposit accounts: |  |  |  |  |  |  |
| Certificates of deposit | 218,630 | 16.2% | 111,134 | 7.5% | 144,913 | 9.1% |
| CDARS deposits | 6,326 | 0.5% | 3,972 | 0.3% | 5,208 | 0.3% |
| Total certificates of deposit and other time deposits | 224,956 | 16.7% | 115,106 | 7.8% | 150,121 | 9.4% |
| Total deposit account balances | $1,348,076 | 100.0% | $1,478,338 | 100.0% | $1,598,898 | 100.0% |

Noninterest-bearing demand deposits on June 30, 2023 were $412.3 million, representing 30.6% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $710.8 million, and represented 52.7% of total deposits at June 30, 2023. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 83.3% of total deposit accounts at June 30, 2023. 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 $28.4 million and $104.4 million are included in the interest checking accounts and in the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2023. As of December 31, 2022, ICS® deposit balances of $28.8 million and $128.6 million are included in the interest checking accounts and in the money market and savings deposit account balances, respectively. All ICS® accounts consist of reciprocal balances for the Company’s customers. The Company currently holds no brokered or specialty CDs.

The remaining 16.7% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $225.0 million at June 30, 2023, increasing over the balances as of December 31, 2022 as a result of several interest rate promotions put into place in the second quarter of 2023. Included in these deposit totals are CDARSTM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled $6.3 million as of June 30, 2023 and $4.0 million as of December 31, 2022, all of which were reciprocal balances for the Company’s customers.

As of June 30, 2023 and December 31, 2022, the estimated amounts of uninsured deposits were $311.6 million, or 23.1% and $459.4 million, or 31.1% of total deposits, respectively.

#### Federal funds purchased

The Company purchased $20.5 million in federal funds as of June 30, 2023, (comprised of $10.5 million in overnight federal funds purchased and $10 million in an unsecured federal funds line of credit), compared to no such purchases as of December 31, 2022 or June 30, 2022. As noted in the Federal funds sold section previously, any excess funds are sold on a daily basis in the federal funds market and Federal funds are purchased as needed to meet liquidity needs.

#### 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.

As of June 30, 2023, based on the FHLB’s evaluation, the Company has an available credit position of $393 million, for which access can be negotiated based on multiple factors. The Company currently has a collateral dependent line of credit with the FHLB for $67.7 million, secured by commercial mortgages, with borrowings of $59.7 million as of June 30, 2023. As of December 31, 2022, there were no outstanding borrowings with the FHLB and the Company had an off-balance sheet letter of credit in the amount of $30.0 million, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. The letter of credit was secured under the collateral dependent line of credit described above and was retired in the second quarter of 2023.

Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with six major regional correspondent banks for a total of $114.0 million and a secured line with the Federal Reserve discount window in the amount of $4.0 million, based on the market value of the collateral. The Company had $10.0 million in outstanding balances on these lines or facilities, as noted in the federal funds purchased section above, as of June 30, 2023, but no outstanding balance as of December 31, 2022 or June 30, 2022.

#### 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, 2023 and December 31, 2022, 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, 2022 to June 30, 2023 (dollars in thousands):

|  |  |
| --- | ---: |
| Equity, December 31, 2022 | $133,416 |
| Net income | 11,442 |
| Other comprehensive income | 2,644 |
| Impact of adoption of CECL | (1,890) |
| Cash dividends declared | (3,532) |
| Exercise of stock options | 18 |
| Equity increase due to expensing of stock options | 110 |
| Equity increase due to expensing of restricted stock | 231 |
| Equity, June 30, 2023 | $142,439 |

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 17.97%, 17.97%, 18.80% and 11.20%, respectively, as of June 30, 2023, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 17.73%, 17.73%, 18.56% and 11.05%, respectively, as of June 30, 2023, also exceeding the minimum requirements.

As of June 30, 2023, 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 ACL to total loans, tangible book value per share, tangible equity 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 ACL 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, except for the per share data):

| Fully tax-equivalent measures | As of or for the Three Months Ended June 30, 2023 | June 30, 2022 | For the Six Months Ended June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $13,703 | $12,461 | $27,116 | $23,886 |
| Fully tax-equivalent adjustment | 86 | 82 | 175 | 164 |
| Net interest income (FTE) | $13,789 | $12,543 | $27,291 | $24,050 |
| Efficiency ratio | 54.4% | 58.6% | 55.4% | 60.5% |
| Fully tax-equivalent adjustment | -0.3% | -0.3% | -0.3% | -0.4% |
| Efficiency ratio (FTE) | 54.1% | 58.3% | 55.1% | 60.1% |
| Net interest margin | 3.81% | 3.00% | 3.75% | 2.76% |
| Fully tax-equivalent adjustment | 0.02% | 0.02% | 0.02% | 0.02% |
| Net interest margin (FTE) | 3.83% | 3.02% | 3.77% | 2.78% |
| Other financial measures |  |  |  |  |
| ACL to total loans | 0.81% | 0.57% |  |  |
| Fair value mark to total loans | 1.13% | 1.82% |  |  |
| ACL + fair value mark to total loans (non-GAAP) | 1.94% | 2.39% |  |  |
| Book value per share | $26.54 | $25.20 |  |  |
| Impact of intangible assets | (2.53) | (2.96) |  |  |
| Tangible book value per share (non-GAAP) | $24.01 | $22.24 |  |  |
| Total equity | $142,439 | $134,216 |  |  |
| Impact of intangible assets | (13,583) | (15,785) |  |  |
| Tangible equity | $128,856 | $118,431 |  |  |

#### Net income

Net income for the three months ended June 30, 2023 was $5.7 million, a $34 thousand decrease compared to $5.7 million reported for the three months ended June 30, 2022. Net income per diluted share was $1.05 for the three months ended June 30, 2023 compared to $1.06 per diluted share for the same period in the prior year.

Net income for the six months ended June 30, 2023 was $11.4 million, compared to $10.6 million for the six months ended June 30, 2022. Net income per diluted share was $2.13 for the six months ended June 30, 2023,compared to $1.98 per diluted share for the same period in the prior year.

#### Net interest income

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).

*Quarterly overview -* Net interest income (FTE) for the three months ended June 30, 2023 was $13.8 million, a $1.2 million increase compared to net interest income (FTE) of $12.5 million for the three months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.32% to 6.35%, positively impacting interest income by $4.8 million. This metric was also positively impacted by the volume of securities, increasing from an average of $391.2 million in the three months ended June 30, 2022 to $488.1 million in the three months ended June 30, 2023, positively impacting interest income by $594 thousand. The increase in yield earned on such securities over the same period positively impacted interest income by $685 thousand, increasing from 2.16% for the three months ended June 30, 2022 to 2.78% for the three months ended June 30, 2023. The decline in average loan balances, from $984.9 million for the three months ended June 30, 2022 to $940.3 million for the three months ended June 30, 2023, negatively impacted interest income by $527 thousand. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 88 bps during the three months ended June 30, 2023. Interest expense increased $3.9 million for the three months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of 3.83% for the three months ended June 30, 2023 was 81 bps higher than the 3.02% for the three months ended June 30, 2022. Overall, the cost of interest-bearing deposits increased period over period, from a cost of 24 bps to 174 bps, increasing interest expense by $3.5 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) by $439 thousand as compared to the prior year.

*Year-to-date overview -* Net interest income (FTE) for the six months ended June 30, 2023 was $27.3 million, a $3.2 million increase compared to net interest income (FTE) of $24.1 million for the six months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.28% to 5.96%, positively impacting interest income by $7.9 million. The decrease in volume of loans, from an average balance of $1.0 billion for the six months ended June 30, 2022 to $936.6 million for the six months ended June 30, 2023, negatively impacted interest income (FTE) by $1.7 million. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 32 bps during the six months ended June 30, 2023. The increase in volume of securities held, from an average balance of $352.5 million for the six months ended June 30, 2022 to $501.2 million for the six months ended June 30, 2023, positively impacted net interest income (FTE) by $1.8 million, and the increase in yield earned on such securities increased from 2.03% to 2.72% for the periods noted, positively impacting net interest income (FTE) by $1.5 million. Interest expense increased $6.0 million for the six months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of 3.77% for the six months ended June 30, 2023 was 99 bps higher than the 2.78% for the six months ended June 30, 2022.Overall, the cost of interest-bearing deposits increased period over period, from a cost of 26 bps to 141 bps, increasing interest expense by $5.1 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) by $766 thousand as compared to the prior year.

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.

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, 2023 and 2022. These tables also include rate/volume analyses for these same periods (dollars in thousands).

### Consolidated Average Balance Sheet and Analysis of Net Interest Income

| ASSETS Interest Earning Assets: Securities: | For the Three Months Ended June 30, 2023 Average Balance | Interest Income/ Expense | Average Yield/Cost | June 30, 2022 Average Balance | Interest Income/ Expense | Average Yield/Cost | Change in Interest Income/ Expense Change Due to : 4 Volume | Rate | Total Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable Securities | $421,156 | $2,980 | 2.83% | $325,833 | $1,726 | 2.12% | $584 | $670 | $1,254 |
| Tax Exempt Securities 1 | 66,956 | 415 | 2.48% | 65,352 | 390 | 2.39% | 10 | 15 | 25 |
| Total Securities 1 | 488,112 | 3,395 | 2.78% | 391,185 | 2,116 | 2.16% | 594 | 685 | 1,279 |
| Loans: |  |  |  |  |  |  |  |  |  |
| Real Estate | 823,289 | 13,167 | 6.41% | 847,661 | 8,988 | 4.25% | (265) | 4,444 | 4,179 |
| Commercial | 74,665 | 969 | 5.21% | 86,394 | 995 | 4.62% | (144) | 118 | (26) |
| Consumer | 42,310 | 758 | 7.19% | 50,828 | 627 | 4.95% | (118) | 249 | 131 |
| Total Loans | 940,264 | 14,894 | 6.35% | 984,883 | 10,610 | 4.32% | (527) | 4,811 | 4,284 |
| Fed Funds Sold | 895 | 10 | 4.48% | 150,393 | 302 | 0.81% | (545) | 253 | (292) |
| Other interest-bearing deposits | 13,777 | 119 | 3.46% | 142,010 | 219 | 0.62% | (347) | 247 | (100) |
| Total Earning Assets | 1,443,048 | 18,418 | 5.12% | 1,668,471 | 13,247 | 3.18% | (825) | 5,996 | 5,171 |
| Less: Allowance for Credit Losses | (7,805) |  |  | (5,866) |  |  |  |  |  |
| Total Non-Earning Assets | 113,883 |  |  | 133,526 |  |  |  |  |  |
| Total Assets | $1,549,126 |  |  | $1,796,131 |  |  |  |  |  |
| LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |
| Interest Bearing Liabilities: |  |  |  |  |  |  |  |  |  |
| Interest Bearing Deposits: |  |  |  |  |  |  |  |  |  |
| Interest Checking | $331,523 | $106 | 0.13% | $411,374 | $58 | 0.06% | $(13) | $61 | $48 |
| Money Market and Savings Deposits | 415,015 | 2,197 | 2.12% | 550,883 | 440 | 0.32% | (134) | 1,891 | 1,757 |
| Time Deposits | 194,736 | 1,776 | 3.66% | 152,695 | 157 | 0.41% | 55 | 1,564 | 1,619 |
| Total Interest-Bearing Deposits | 941,274 | 4,079 | 1.74% | 1,114,952 | 655 | 0.24% | (92) | 3,516 | 3,424 |
| Federal funds purchased | 2,392 | 32 | 5.37% | — | — | — | 32 | — | 32 |
| Short-term borrowings | 34,265 | 439 | 5.14% | — | — | — | 439 | — | 439 |
| Junior subordinated debt | 3,430 | 79 | 9.24% | 3,383 | 49 | 5.81% | 1 | 29 | 30 |
| Total Interest-Bearing Liabilities | 981,361 | 4,629 | 1.89% | 1,118,335 | 704 | 0.25% | 380 | 3,545 | 3,925 |
| Non-Interest-Bearing Liabilities: |  |  |  |  |  |  |  |  |  |
| Demand deposits | 416,039 |  |  | 527,008 |  |  |  |  |  |
| Other liabilities | 9,853 |  |  | 10,067 |  |  |  |  |  |
| Total Liabilities | 1,407,253 |  |  | 1,655,410 |  |  |  |  |  |
| Shareholders' Equity | 141,873 |  |  | 140,721 |  |  |  |  |  |
| Total Liabilities & Shareholders' Equity | $1,549,126 |  |  | $1,796,131 |  |  |  |  |  |
| Net Interest Income (FTE) |  | $13,789 |  |  | $12,543 |  | $(1,205) | $2,451 | $1,246 |
| Interest Rate Spread 2 |  |  | 3.23% |  |  | 2.93% |  |  |  |
| Cost of Funds |  |  | 1.33% |  |  | 0.17% |  |  |  |
| Interest Expense as a Percentage of Average Earning Assets |  |  | 1.29% |  |  | 0.17% |  |  |  |
| Net Interest Margin (FTE) 3 |  |  | 3.83% |  |  | 3.02% |  |  |  |

**(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, 2023 Average Interest Balance Income/ Expense ASSETS Interest Earning Assets: Securities: | Average Yield/Cost | June 30, 2022 Average Balance | Interest Income/ Expense | Average Yield/Cost | Change in Interest Income/ Expense Change Due to : 4 Volume | Rate | Total Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable Securities $434,219 $5,997 | 2.76% | $287,241 | $2,800 | 1.95% | $1,762 | $1,435 | $3,197 |
| Tax Exempt Securities 1 67,019 831 | 2.48% | 65,249 | 775 | 2.38% | 21 | 35 | 56 |
| Total Securities 1 501,238 6,828 | 2.72% | 352,490 | 3,575 | 2.03% | 1,783 | 1,470 | 3,253 |
| Loans: |  |  |  |  |  |  |  |
| Real Estate 820,033 24,032 | 5.91% | 866,863 | 18,082 | 4.21% | (1,023) | 6,973 | 5,950 |
| Commercial 73,357 2,098 | 5.77% | 89,944 | 2,084 | 4.67% | (424) | 438 | 14 |
| Consumer 43,179 1,531 | 7.15% | 51,302 | 1,213 | 4.77% | (215) | 533 | 318 |
| Total Loans 936,569 27,661 | 5.96% | 1,008,109 | 21,379 | 4.28% | (1,662) | 7,944 | 6,282 |
| Fed Funds Sold 455 10 | 4.43% | 151,429 | 363 | 0.48% | (683) | 330 | (353) |
| Other interest-bearing deposits 20,789 378 | 3.67% | 235,418 | 356 | 0.30% | (598) | 620 | 22 |
| Total Earning Assets 1,459,051 34,877 | 4.82% | 1,747,446 | 25,673 | 2.96% | (1,160) | 10,364 | 9,204 |
| Less: Allowance for Credit Losses (7,947) |  | (5,946) |  |  |  |  |  |
| Total Non-Earning Assets 114,372 |  | 124,851 |  |  |  |  |  |
| Total Assets $1,565,476 |  | $1,866,351 |  |  |  |  |  |
| LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |
| Interest Bearing Liabilities: |  |  |  |  |  |  |  |
| Interest Bearing Deposits: |  |  |  |  |  |  |  |
| Interest Checking $346,625 $195 | 0.11% | $416,393 | $119 | 0.06% | $(23) | $99 | $76 |
| Money Market and Savings Deposits 431,849 3,970 | 1.85% | 603,259 | 1,055 | 0.35% | (380) | 3,295 | 2,915 |
| Time Deposits 161,247 2,424 | 3.03% | 155,544 | 352 | 0.46% | 13 | 2,059 | 2,072 |
| Total Interest-Bearing Deposits 939,721 6,589 | 1.41% | 1,175,196 | 1,526 | 0.26% | (390) | 5,453 | 5,063 |
| Federal funds purchased 3,754 91 | 4.89% | — | — | — | 91 | — | 91 |
| Short-term borrowings 31,074 766 | 4.97% | — | — | — | 766 | — | 766 |
| Junior subordinated debt 3,423 140 | 8.25% | 3,377 | 97 | 0.00% | 1 | 42 | 43 |
| Total Interest-Bearing Liabilities 977,972 7,586 | 1.56% | 1,178,573 | 1,623 | 0.28% | 468 | 5,495 | 5,963 |
| Non-Interest-Bearing Liabilities: |  |  |  |  |  |  |  |
| Demand deposits 440,285 |  | 527,049 |  |  |  |  |  |
| Other liabilities 9,423 |  | 10,704 |  |  |  |  |  |
| Total Liabilities 1,427,680 |  | 1,716,326 |  |  |  |  |  |
| Shareholders' Equity 137,796 |  | 150,025 |  |  |  |  |  |
| Total Liabilities & Shareholders' Equity $1,565,476 |  | $1,866,351 |  |  |  |  |  |
| Net Interest Income (FTE) $27,291 |  |  | $24,050 |  | $(1,628) | $4,869 | $3,241 |
| Interest Rate Spread 2 | 3.26% |  |  | 2.68% |  |  |  |
| Cost of Funds | 1.08% |  |  | 0.19% |  |  |  |
| Interest Expense as a Percentage of Average Earning Assets | 1.05% |  |  | 0.19% |  |  |  |
| Net Interest Margin (FTE) 3 | 3.77% |  |  | 2.78% |  |  |  |

**(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.

The Company believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases/reinvestment of AFS securities. The Company also expects the cost of deposits to continue to rise as competition for deposits increases and as time deposits reprice at maturity. A portion of the Company’s funding may continue to be drawn from borrowings in the near term, also resulting in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin (FTE) will depend on a number of factors, including the Company’s ability to continue to increase the loan portfolio, compete for deposits and manage its borrowings. The Company can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Company's net interest margin (FTE). Alternatively, if market interest rates begin to decline, the Company’s net interest margin (FTE) may be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.

#### Provision for credit losses

A provision for credit losses of $261 thousand was recognized during the three months ended June 30, 2023 compared to a recovery of provision for loan losses of $217 thousand recognized during the three months ended June 30, 2022. A provision for credit losses of $13 thousand was recognized during the six months ended June 30, 2023 compared to a recovery of provision for loan losses recognized of $69 thousand during the six months ended June 30, 2022. The second quarter 2023 provision for credit losses was comprised of $216 thousand of provision for loan losses and $45 thousand of provision for losses on unfunded commitments. The period-end ACL as a percentage of total loans was 0.81% as of June 30, 2023, 0.59% as of December 31, 2022 and 0.57% as of June 30, 2022. The total of the ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 1.94% as of June 30, 2023, compared to 2.29% as of December 31, 2022 and 2.39% as of June 30, 2022.

Loan growth in the second quarter of 2023 was the primary driver of the provision for credit losses taken during the period; however, the majority of the increase in loan balances was attributable to the purchase of government-guaranteed loans which do not require an ACL. No changes have been made to the qualitative factor methodology since January 1, 2023.

Further discussion of management’s assessment of the ACL is provided earlier in the report and in Note 5 – Allowance for Credit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the ACL was adequately provided for at June 30, 2023. The ACL calculation, provision for credit losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. Should economic conditions worsen, we could experience further increases in our required ACL and record additional provision for credit loss exposure.

#### Noninterest income

The components of noninterest income for the three months ended June 30, 2023 and 2022 are shown below (dollars in thousands):

| Noninterest income: | For the Three Months Ended June 30, 2023 | June 30, 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Wealth management fees | $397 | $572 | $(175) | -30.6% |
| Advisory and brokerage income | - | 210 | (210) | -100.0% |
| Deposit account fees | 399 | 458 | (59) | -12.9% |
| Debit/credit card and ATM fees | 636 | 779 | (143) | -18.4% |
| Bank owned life insurance income | 261 | 246 | 15 | 6.1% |
| Gains on sale of assets | - | 1,113 | (1,113) | 100.0% |
| Other | 352 | 268 | 84 | 31.3% |
| Total noninterest income | $2,045 | $3,646 | $(1,601) | -43.9% |

Noninterest income for the three months ended June 30, 2023 of $2.0 million was $1.6 million or 43.9% lower than the amount recorded for the three months ended June 30, 2022, primarily due to gains on the sale of two properties of $1.1 million in the second quarter of the prior year. In addition, $210 thousand of income was recognized in the second quarter of the prior year related to advisory and brokerage income; this business line was sold in the fourth quarter of 2022, eliminating future income or expense related thereto. In the second quarter of 2023, the Company received an additional $267 thousand recovery of unearned premiums related to the loss of insurance on the student loan portfolio, bringing the total recovered from liquidation of the insurance company to over $1.3 million.

The components of noninterest income for the six months ended June 30, 2023 and 2022 are shown below (dollars in thousands):

| Noninterest income: | For the Six Months Ended June 30, 2023 | June 30, 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Wealth management fees | $801 | $1,129 | $(328) | -29.1% |
| Advisory and brokerage income | - | 426 | (426) | -100.0% |
| Deposit account fees | 800 | 923 | (123) | -13.3% |
| Debit/credit card and ATM fees | 1,207 | 1,486 | (279) | -18.8% |
| Bank owned life insurance income | 513 | 457 | 56 | 12.3% |
| Resolution of commercial dispute | - | 2,400 | (2,400) | -100.0% |
| Gain on sale of assets | - | 1,113 | (1,113) | -100.0% |
| Gain on sale of securities, net | 254 | - | 254 | N/A |
| Other | 746 | 499 | 247 | 49.5% |
| Total noninterest income | $4,321 | $8,433 | $(4,112) | -48.8% |

Noninterest income for the six months ended June 30, 2023 of $4.3 million was $4.1 million or 48.8% lower than the amount recorded for the six months ended June 30, 2022. Noninterest income decreased 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 properties and $426 thousand of advisory and brokerage income recognized in the first half of 2022.

#### Noninterest expense

The components of noninterest expense for the three months ended June 30, 2023 and 2022 are shown below (dollars in thousands):

| Noninterest expense: | For the Three Months Ended June 30, 2023 | June 30, 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $4,062 | $4,086 | $(24) | -0.6% |
| Net occupancy | 929 | 1,282 | (353) | -27.5% |
| Equipment | 176 | 254 | (78) | -30.7% |
| Bank franchise tax | 313 | 304 | 9 | 3.0% |
| Computer software | 203 | 357 | (154) | -43.1% |
| Data processing | 806 | 699 | 107 | 15.3% |
| FDIC deposit insurance assessment | 220 | 125 | 95 | 76.0% |
| Marketing, advertising and promotion | 275 | 259 | 16 | 6.2% |
| Plastics expense | 30 | 92 | (62) | -67.4% |
| Professional fees | 198 | 404 | (206) | -51.0% |
| Core deposit intangible amortization | 379 | 427 | (48) | -11.2% |
| Other | 973 | 1,153 | (180) | -15.6% |
| Total noninterest expense | $8,564 | $9,442 | $(878) | -9.3% |

Noninterest expense for the quarter ended June 30, 2023 of $8.6 million was $878 thousand or 9.3% lower than the quarter ended June 30, 2022. This decrease is primarily due to lower occupancy expenses of $353 thousand from the elimination of four branch facilities, as well as reduced professional and consulting fees of $206 thousand and reduced computer software expenses of $154 thousand as a result of efficiencies gained from the Merger.

The components of noninterest expense for the six months ended June 30, 2023 and 2022 are shown below (dollars in thousands):

| Noninterest expense: | For the Six Months Ended June 30, 2023 | June 30, 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $8,113 | $8,817 | $(704) | -8.0% |
| Net occupancy | 2,108 | 2,479 | (371) | -15.0% |
| Equipment | 394 | 537 | (143) | -26.6% |
| Bank franchise tax | 637 | 608 | 29 | 4.8% |
| Computer software | 405 | 620 | (215) | -34.7% |
| Data processing | 1,548 | 1,437 | 111 | 7.7% |
| FDIC deposit insurance assessment | 320 | 351 | (31) | -8.8% |
| Marketing, advertising and promotion | 650 | 526 | 124 | 23.6% |
| Plastics expense | 78 | 231 | (153) | -66.2% |
| Professional fees | 390 | 741 | (351) | -47.4% |
| Core deposit intangible amortization | 770 | 866 | (96) | -11.1% |
| Other | 2,012 | 2,324 | (312) | -13.4% |
| Total noninterest expense | $17,425 | $19,537 | $(2,112) | -10.8% |

Noninterest expense for the six months ended June 30, 2023 of $17.4 million was $2.1 million or 10.8% lower than the six months ended June 30, 2022. This decrease is the result of efficiencies gained from the Merger, namely : 1) salaries and employee benefits decreased $704 thousand, 2) net occupancy decreased $371 thousand, 3) professional fees decreased $351 thousand, and 4) computer software expense decreased $215 thousand.

The efficiency ratio (FTE) of 54.1% for the three months ended June 30, 2023 compared favorably to 58.3% for the same quarter of 2022, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 55.1% for the six months ended June 30, 2023 also compared favorably to 60.1% for the six months ended June 30, 2022 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, 2023 and 2022, the Company provided $1.3 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 18.4% and 17.4%, respectively. For the six months ended June 30, 2023 and 2022, the Company provided $2.6 million and $2.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 18.3% and 17.4%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the recognition of low-income housing tax credits and the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.

### OTHER SIGNIFICANT EVENTS

None

## Controls and procedures

As filed, 1,898 characters.

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 were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 439 characters.

During the quarter ended June 30, 2023, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2022. 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 not to be material also may materially adversely affect our business, financial condition and/or operating results.

Filed Aug 11, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-041617. Last ingested by Listed: Oct 30, 2026, 16:28 ET. No prices; not investment advice.