John Marshall Bancorp, Inc. - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 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: 001-41315

John Marshall Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Virginia

81-5424879

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1943 Isaac Newton Square

Suite 100

Reston, VA 20190

(Address of Principal Executive Offices)

(703) 584-0840

(Registrant’s telephone number)

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


Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Stock, $0.01 par value per share	JMSB	The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically 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.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

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

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

As of November 7, 2022, there were 14,076,110 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited)	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2022 and September 30, 2021 (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and September 30, 2021 (Unaudited)	5

	Consolidated Statements of Shareholders’ Equity for the three months ended September 30, 2022 and September 30, 2021 (Unaudited)	6

	Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2022 and September 30, 2021 (Unaudited)	7

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and September 30, 2021 (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	56

Part II	Other Information

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

Signatures

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

JOHN MARSHALL BANCORP, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
Assets
Cash and due from banks	$	14,957	$	2,920
Interest-bearing deposits in banks		59,799		102,879
Total cash and cash equivalents		74,756		105,799
Securities available-for-sale, at fair value		366,546		239,300
Securities held-to-maturity, fair value of $81,765 and $103,258 as of September 30, 2022 and December 31, 2021, respectively		100,598		105,509
Restricted securities, at cost		4,421		4,951
Equity securities, at fair value		1,913		1,869
Loans, net of unearned income		1,725,114		1,666,469
Allowance for loan losses		(20,032)		(20,032)
Net loans		1,705,082		1,646,437
Bank premises and equipment, net		1,331		1,620
Accrued interest receivable		4,744		4,943
Bank owned life insurance		21,071		20,998
Right of use assets		3,936		4,913
Other assets		21,142		12,970
Total assets	$	2,305,540	$	2,149,309
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing demand deposits	$	535,186	$	488,838
Interest-bearing demand deposits		705,593		633,901
Savings deposits		102,909		101,376
Time deposits		719,653		657,438
Total deposits		2,063,341		1,881,553
Federal Home Loan Bank advances		—		18,000
Subordinated debt		24,603		24,728
Accrued interest payable		643		843
Lease liabilities		4,186		5,182
Other liabilities		10,555		10,533
Total liabilities	$	2,103,328	$	1,940,839
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued	$	—	$	—
Common stock, nonvoting, par value $0.01 per share; authorized 1,000,000 shares; none issued		—		—
Common stock, voting, par value $0.01 per share; authorized 30,000,000 shares; issued and outstanding, 14,070,080 at September 30, 2022, including 58,046 unvested shares, 13,745,598 shares at December 31, 2021, including 75,826 unvested shares		140		137
Additional paid-in capital		94,560		91,107
Retained earnings		138,428		117,626
Accumulated other comprehensive loss		(30,916)		(400)
Total shareholders’ equity	$	202,212	$	208,470
Total liabilities and shareholders’ equity	$	2,305,540	$	2,149,309

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest and Dividend Income
Interest and fees on loans	$	18,222	$	16,737	$	53,740	$	52,075
Interest on investment securities, taxable		2,323		1,159		5,597		2,921
Interest on investment securities, tax-exempt		30		30		90		90
Dividends		62		65		185		196
Interest on deposits in banks		571		51		897		134
Total interest and dividend income	$	21,208	$	18,042	$	60,509	$	55,416
Interest Expense
Deposits	$	3,068	$	1,473	$	6,090	$	5,268
Federal Home Loan Bank advances		—		31		42		94
Subordinated debt		448		372		1,461		1,115
Total interest expense	$	3,516	$	1,876	$	7,593	$	6,477
Net interest income	$	17,692	$	16,166	$	52,916	$	48,939
Provision for loan losses		—		325		—		2,780
Net interest income after provision for loan losses	$	17,692	$	15,841	$	52,916	$	46,159
Non-interest Income
Service charges on deposit accounts	$	79	$	70	$	240	$	188
Bank owned life insurance		255		102		445		309
Other service charges and fees		175		120		469		339
Gains on securities		—		—		—		10
Insurance commissions		47		28		312		205
Other operating income (loss)		(106)		5		(493)		155
Total non-interest income	$	450	$	325	$	973	$	1,206
Non-interest Expenses
Salaries and employee benefits	$	5,072	$	4,977	$	15,754	$	15,646
Occupancy expense of premises		461		484		1,435		1,505
Furniture and equipment expenses		323		373		989		1,073
Other operating expenses		2,102		1,789		6,247		6,359
Total non-interest expenses	$	7,958	$	7,623	$	24,425	$	24,583
Income before income taxes	$	10,184	$	8,543	$	29,464	$	22,782
Income tax expense		2,139		1,782		5,863		4,868
Net income	$	8,045	$	6,761	$	23,601	$	17,914
Earnings per share, basic	$	0.57	$	0.50	$	1.69	$	1.31
Earnings per share, diluted	$	0.57	$	0.48	$	1.67	$	1.29

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Net Income	$	8,045	$	6,761	$	23,601	$	17,914
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net of tax of $(3,709) and $23 for the three months ended September 30, 2022 and September 30, 2021, respectively, net of tax of $(8,081) and $(624) for the nine months ended September 30, 2022 and September 30, 2021, respectively		(13,952)		87		(30,401)		(2,347)
Reclassification adjustment for gains on available-for-sale securities included in net income, net of tax of $(2) for the nine months ended September 30, 2021		—		—		—		(8)
Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $(10) and $(8) for the three months ended September 30, 2022 and September 30, 2021, respectively, net of tax of $(31) and $(8) for the nine months ended September 30, 2022 and September 30, 2021, respectively		(36)		(31)		(115)		(31)
Total other comprehensive income (loss)	$	(13,988)	$	56	$	(30,516)	$	(2,386)
Total comprehensive income (loss)	$	(5,943)	$	6,817	$	(6,915)	$	15,528

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended September 30, 2022 and 2021

(In thousands, except share and per share data)

(Unaudited)


								Accumulated
								Other		Total
				Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares	Common Stock		Capital		Earnings		Income (Loss)		Equity
Balance, June 30, 2021	13,578,178	$	136	$	90,448	$	103,318	$	1,344	$	195,246
Net income	—		—		—		6,761		—		6,761
Other comprehensive income	—		—		—		—		56		56
Exercise of stock options	5,812		—		40		—		—		40
Restricted stock vesting	420		—		—		—		—		—
Share-based compensation	—		—		119		—		—		119
Balance, September 30, 2021	13,584,410	$	136	$	90,607	$	110,079	$	1,400	$	202,222

Balance, June 30, 2022	13,968,053	$	140	$	93,935	$	130,383	$	(16,928)	$	207,530
Net income	—		—		—		8,045		—		8,045
Other comprehensive loss	—		—		—		—		(13,988)		(13,988)
Exercise of stock options	43,615		—		492		—		—		492
Restricted stock vesting, net of 54 shares surrendered	366		—		—		—		—		—
Share-based compensation	—		—		133		—		—		133
Balance, September 30, 2022	14,012,034	$	140	$	94,560	$	138,428	$	(30,916)	$	202,212

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Nine Months Ended September 30, 2022 and 2021

(In thousands, except share and per share data)

(Unaudited)


								Accumulated
								Other		Total
				Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares	Common Stock		Capital		Earnings		Income (Loss)		Equity
Balance, December 31, 2020	13,532,558	$	135	$	89,995	$	92,165	$	3,786	$	186,081
Net income	—		—		—		17,914		—		17,914
Other comprehensive loss	—		—		—		—		(2,386)		(2,386)
Exercise of stock options	30,499		1		216		—		—		217
Restricted stock vesting, net of 18 shares surrendered	21,353		—		—		—		—		—
Share-based compensation	—		—		396		—		—		396
Balance, September 30, 2021	13,584,410	$	136	$	90,607	$	110,079	$	1,400	$	202,222

Balance, December 31, 2021	13,669,772	$	137	$	91,107	$	117,626	$	(400)	$	208,470
Net income	—		—		—		23,601		—		23,601
Other comprehensive loss	—		—		—		—		(30,516)		(30,516)
Dividend declared on common stock ($0.20 per share)	—		—		—		(2,799)		—		(2,799)
Exercise of stock options	325,649		3		3,051		—		—		3,054
Restricted stock vesting, net of 97 shares surrendered	16,613		—		—		—		—		—
Share-based compensation	—		—		402		—		—		402
Balance, September 30, 2022	14,012,034	$	140	$	94,560	$	138,428	$	(30,916)	$	202,212

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine months ended
	September 30,
	2022		2021
Cash Flows from Operating Activities
Net income	$	23,601	$	17,914
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation		430		647
Right of use asset amortization		1,033		1,068
Provision for loan losses		—		2,780
Share-based compensation expense		402		396
Net amortization of securities		68		338
Fair value adjustment on equity securities		498		(85)
Amortization of debt issuance costs		296		37
Net (gains) losses on premises and equipment		1		(19)
Gains on sales and calls of available-for-sale securities		—		(10)
Deferred tax expense (benefit)		670		(664)
Net increase in cash surrender value of life insurance		(73)		(309)
Changes in assets and liabilities:
Decrease in accrued interest receivable		199		647
Increase in other assets		(732)		(106)
Decrease in accrued interest payable		(200)		(266)
Increase (decrease) in other liabilities		(1,030)		283
Net cash provided by operating activities	$	25,163	$	22,651
Cash Flows from Investing Activities
Net increase in loans	$	(58,645)	$	(39,944)
Purchase of available-for-sale securities		(206,889)		(217,460)
Purchase of held-to-maturity securities		(1,003)		(6,031)
Proceeds from maturities, calls and principal repayments of available-for-sale securities		41,151		28,428
Proceeds from maturities, calls and principal repayments of held-to-maturity securities		5,712		1,492
Net redemption of restricted securities		530		728
Net purchases of equity securities		(542)		(628)
Insurance casualty proceeds		—		22
Purchases of bank premises and equipment		(142)		(286)
Net cash (used in) investing activities	$	(219,828)	$	(233,679)
Cash Flows from Financing Activities
Net increase in deposits	$	181,788	$	197,428
Net repayment of Federal Home Loan Bank advances		(18,000)		(4,000)
Issuance of subordinated debt		24,579		—
Repayment of subordinated debt		(25,000)		—
Cash dividends paid		(2,799)		—
Issuance of common stock for share options exercised		3,054		217
Net cash provided by financing activities	$	163,622	$	193,645
Net decrease in cash and cash equivalents	$	(31,043)	$	(17,383)
Cash and cash equivalents, beginning of period		105,799		121,074
Cash and cash equivalents, end of period	$	74,756	$	103,691
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	7,497	$	6,705
Income taxes		4,387		5,141
Supplemental Disclosures of Noncash Transactions
Unrealized loss on securities available-for-sale	$	(38,480)	$	(3,575)
Right of use asset obtained in exchange for new operating lease liability		56		385

The accompanying notes are an integral part of these consolidated financial statements.

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JOHN MARSHALL BANCORP, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(Unaudited)

Note 1— Nature of Business and Summary of Significant Accounting Policies

Nature of Banking Activities

John Marshall Bancorp, Inc. (the “Company”), headquartered in Reston, Virginia, became the registered bank holding company under the Bank Holding Company Act of 1956 for its wholly-owned subsidiary, John Marshall Bank (the “Bank”), on March 1, 2017. This reorganization was completed through a one-for-one share exchange in which the Bank’s shareholders received one share of voting common stock of the Company in exchange for each share of the Bank’s voting common stock. The Company was formed on April 21, 2016 under the laws of the Commonwealth Virginia. The Bank was formed on April 5, 2005 under the laws of the Commonwealth of Virginia and was chartered as a bank on February 9, 2006, by the Virginia Bureau of Financial Institutions. The Bank is a member of the Federal Reserve System and is subject to the rules and regulations of the Virginia Bureau of Financial Institutions, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank opened for business on April 17, 2006 and provides banking services to its customers primarily in the Washington, D.C. metropolitan area.

Basis of Presentation

The accounting and reporting policies of John Marshall Bancorp, Inc. conform to generally accepted accounting principles in the United States of America (“GAAP”) and reflect practices of the banking industry. The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. As such, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2021, included in the Company’s Registration Statement on Form 10, as amended, filed with the SEC on April 18, 2022.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and 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 allowance for loan losses.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the full year. All amounts and disclosures included in this quarterly report as of December 31, 2021, were derived from the Company’s audited consolidated financial statements. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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

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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 who file with the 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. As part of the Company’s implementation efforts, we have reconciled and validated historical loan, charge-off and recovery data, determined segmentation of the loan portfolio for application of the current expected credit losses (“CECL”) calculation, determined the key assumptions to be utilized in the calculation, selected lifetime loss reserve calculation methods and established a methodology framework, updated our qualitative factor framework, performed parallel runs of the CECL calculation, and completed the third party model validation review. The ultimate impact of CECL on the allowance for credit losses will depend on the size and composition of the loan portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to the CECL model, methodology and key assumptions. At adoption, the Company will record a cumulative effect adjustment to retained earnings for incremental change in the allowance for credit losses.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is 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, where an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have not yet adopted ASU 2016-13 (such as the Company), the effective dates for the provisions of 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; however, the Company does not expect to adopt ASU 2016-13 in advance of the required implementation date. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

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Note 2— Investment Securities

The following table summarizes the amortized cost and fair value of securities held-to-maturity and available-for-sale and the corresponding amounts of gross unrealized gains and losses at September 30, 2022 and December 31, 2021.


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
U.S Treasuries	$	6,000	$	—	$	(895)	$	5,105
U.S. government and federal agencies		35,588		—		(6,318)		29,270
Collateralized mortgage obligations		21,924		—		(4,155)		17,769
Taxable municipal		6,076		—		(1,340)		4,736
Mortgage-backed		31,010		—		(6,125)		24,885
Total Held-to-maturity Securities	$	100,598	$	—	$	(18,833)	$	81,765
Available-for-sale
U.S Treasuries	$	63,404	$	—	$	(4,585)	$	58,819
U.S. government and federal agencies		38,717		—		(4,261)		34,456
Corporate bonds		3,000		—		(308)		2,692
Collateralized mortgage obligations		46,188		—		(5,977)		40,211
Tax-exempt municipal		4,996		—		(623)		4,373
Taxable municipal		608		—		(30)		578
Mortgage-backed		249,113		—		(23,696)		225,417
Total Available-for-sale Securities	$	406,026	$	—	$	(39,480)	$	366,546


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
U.S Treasuries	$	6,000	$	—	$	(150)	$	5,850
U.S. government and federal agencies		35,720		—		(726)		34,994
Collateralized mortgage obligations		25,606		—		(534)		25,072
Taxable municipal		6,089		—		(194)		5,895
Mortgage-backed		32,094		—		(647)		31,447
Total Held-to-maturity Securities	$	105,509	$	—	$	(2,251)	$	103,258
Available-for-sale
U.S Treasuries	$	30,954	$	—	$	(411)	$	30,543
U.S. government and federal agencies		34,803		258		(524)		34,537
Corporate bonds		1,000		31		—		1,031
Collateralized mortgage obligations		39,596		179		(726)		39,049
Tax-exempt municipal		5,007		255		—		5,262
Taxable municipal		1,653		37		(5)		1,685
Mortgage-backed		127,287		1,232		(1,326)		127,193
Total Available-for-sale Securities	$	240,300	$	1,992	$	(2,992)	$	239,300

During 2021, the Company transferred investment securities with a carrying value of $99.0 million, including an unrealized gain of $593 thousand from available-for-sale to held-to-maturity and began classifying certain newly purchased debt securities as held-to-maturity, as it has the intent and ability to hold these securities to maturity. The unrealized gain at the time of transfer is being amortized over the remaining lives of the securities.

The Company did not sell nor recognize any gain or loss for any debt securities for the three or nine months ended September 30, 2022. The Company did not sell any debt securities for the three or nine months ended September 30, 2021. A gross gain of $10 thousand was recognized on the call of a security during the nine months ended September 30, 2021.

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Securities having a market value of $91.4 million and $78.6 million at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes required by law. These securities had an amortized cost of $105.8 million and $78.8 million at September 30, 2022 and December 31, 2021, respectively.

The following tables summarize the fair value of securities held-to-maturity and securities available-for-sale at September 30, 2022 and December 31, 2021 and the corresponding amounts of gross unrealized losses. Management uses the valuations as of month-end in determining when securities are in an unrealized loss position. Therefore, a security’s market value could have exceeded its amortized cost on other days during the prior twelve-month period.


	September 30, 2022
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
Held-to-maturity
U.S Treasuries	$	—	$	—	$	5,105	$	(895)	$	5,105	$	(895)
U.S. government and federal agencies		834		(166)		28,436		(6,152)		29,270		(6,318)
Collateralized mortgage obligations		5,679		(1,126)		12,090		(3,029)		17,769		(4,155)
Taxable municipal		—		—		4,736		(1,340)		4,736		(1,340)
Mortgage-backed		1,643		(328)		23,242		(5,797)		24,885		(6,125)
Total Held-to-maturity Securities	$	8,156	$	(1,620)	$	73,609	$	(17,213)	$	81,765	$	(18,833)
Available-for-sale
U.S Treasuries	$	39,019	$	(2,025)	$	19,800	$	(2,560)	$	58,819	$	(4,585)
U.S. government and federal agencies		20,293		(1,831)		14,163		(2,430)		34,456		(4,261)
Corporate bonds		2,692		(308)		—		—		2,692		(308)
Collateralized mortgage obligations		20,001		(1,507)		20,210		(4,470)		40,211		(5,977)
Tax-exempt municipal		4,373		(623)		—		—		4,373		(623)
Taxable municipal		336		(2)		242		(28)		578		(30)
Mortgage-backed		165,485		(13,529)		59,932		(10,167)		225,417		(23,696)
Total Available-for-sale Securities	$	252,199	$	(19,825)	$	114,347	$	(19,655)	$	366,546	$	(39,480)


	December 31, 2021
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
Held-to-maturity
U.S Treasuries	$	5,851	$	(150)	$	—	$	—	$	5,851	$	(150)
U.S. government and federal agencies		31,617		(645)		3,376		(81)		34,993		(726)
Collateralized mortgage obligations		25,072		(534)		—		—		25,072		(534)
Taxable municipal		3,971		(133)		1,923		(61)		5,894		(194)
Mortgage-backed		27,995		(573)		3,452		(74)		31,447		(647)
Total Held-to-maturity Securities	$	94,506	$	(2,035)	$	8,751	$	(216)	$	103,257	$	(2,251)
Available-for-sale
U.S Treasuries	$	30,543	$	(411)	$	—	$	—	$	30,543	$	(411)
U.S. government and federal agencies		14,154		(301)		6,877		(223)		21,031		(524)
Collateralized mortgage obligations		30,352		(726)		—		—		30,352		(726)
Taxable municipal		265		(5)		—		—		265		(5)
Mortgage-backed		93,129		(1,280)		918		(46)		94,047		(1,326)
Total Available-for-sale Securities	$	168,443	$	(2,723)	$	7,795	$	(269)	$	176,238	$	(2,992)

U.S. Treasuries - The unrealized losses in 31 and 15 U.S. Treasury debt securities at September 30, 2022 and December 31, 2021, respectively, were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases,

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which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

U.S. Government and Federal Agencies - The unrealized losses in 50 and 40 investments in direct obligations of U.S. government agencies at September 30, 2022 and December 31, 2021, respectively, were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Collateralized Mortgage Obligation Securities - The unrealized losses in 53 and 35 investments in collateralized mortgage obligation investments at September 30, 2022 and December 31, 2021, respectively, were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by various agencies of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to change in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider the investment to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Municipal Securities - The unrealized losses in 14 and eight investments in municipal securities at September 30, 2022 and December 31, 2021, respectively, were caused by interest rate changes. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Corporate Securities - The unrealized losses in three corporate securities at September 30, 2022 were caused by interest rate changes. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2022.

Mortgage-Backed Securities - The unrealized losses in 218 and 75 investments in federal agency mortgage-backed securities at September 30, 2022 and December 31, 2021, respectively, were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by various agencies of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to change in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

The Company reviews each debt security for other-than-temporary impairment on at least a quarterly basis based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the security’s ratings, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regards to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery. The Company did not consider those investments to be other-than-temporary impaired at September 30, 2022 or December 31, 2021. Additionally, the Company has not recognized any other-than-temporary impairment on any of the investments owned as of September 30, 2022.

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The table below summarizes, by major security type, the contractual maturities of our investment securities as of September 30, 2022. Borrowers may have the right to call or prepay certain obligations and as such, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below.


	September 30, 2022
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Held-to-maturity
Due in one year or less	$	—	$	—
Due after one year through five years		993		840
Due after five years through ten years		42,260		35,082
Due after ten years		57,345		45,843
Total Held-to-maturity Securities	$	100,598	$	81,765
Available-for-sale
Due in one year or less	$	38	$	38
Due after one year through five years		99,559		92,262
Due after five years through ten years		167,122		153,112
Due after ten years		139,307		121,134
Total Available-for-sale Securities	$	406,026	$	366,546

In the prevailing rate environments as of September 30, 2022 and December 31, 2021, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.6 years and 4.5 years, respectively.

The table below summarizes the carrying amount of restricted securities as of September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Federal Reserve Bank Stock	$	3,288	$	3,275
Federal Home Loan Bank Stock		1,073		1,616
Community Bankers’ Bank Stock		60		60
Total Restricted Securities	$	4,421	$	4,951

The Company held equity securities with readily determinable fair values totaling $1.9 million at September 30, 2022 and December 31, 2021. Changes in the fair value of these securities are reflected in earnings. Losses of $(107) thousand and $(14) thousand were recorded in other non-interest income in the Consolidated Statements of Income for the three months ended September 30, 2022 and September 30, 2021, respectively. A loss of $(498) thousand and a gain of $85 thousand was recorded in other non-interest income in the Consolidated Statements of Income for the nine months ended September 30, 2022 and September 30, 2021, respectively. These securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the Company’s nonqualified deferred compensation liability.

Note 3— Loans

The following table presents the composition of the Company’s loan portfolio as of September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Real Estate Loans:
Commercial	$	1,091,221	$	968,442
Construction and land development		199,324		231,090
Residential		385,696		342,491
Commercial - Non-Real Estate:
Commercial loans		45,105		122,945
Consumer - Non-Real Estate:
Consumer loans		585		586
Total Gross Loans	$	1,721,931	$	1,665,554
Allowance for loan losses		(20,032)		(20,032)
Net deferred loan costs		3,183		915
Total net loans	$	1,705,082	$	1,646,437

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Note 4— Allowance for Loan Losses

The following tables present the activity in the allowance for loan losses for the nine months ended September 30, 2022 and September 30, 2021.


	September 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance, December 31, 2021	$	13,091	$	2,824	$	2,769	$	711	$	5	$	632	$	20,032
Charge-offs		(1)		—		—		—		—		—		(1)
Recoveries		—		—		—		1		—		—		1
Provision		345		97		(186)		(208)		1		(49)		—
Ending Balance, September 30, 2022	$	13,435	$	2,921	$	2,583	$	504	$	6	$	583	$	20,032


	September 30, 2021
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance, December 31, 2020	$	10,602	$	2,617	$	2,430	$	1,007	$	11	$	350	$	17,017
Charge-offs		(90)		—		—		(1)		—		—		(91)
Recoveries		—		—		—		—		—		—		—
Provision		2,001		(782)		88		(291)		(6)		1,770		2,780
Ending Balance, September 30, 2021	$	12,513	$	1,835	$	2,518	$	715	$	5	$	2,120	$	19,706

The following tables present the balance of the allowance for loan losses, the allowance by impairment methodology, total loans, and loans by impairment methodology as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,435		2,921		2,583		504		6		583		20,032
Total allowance	$	13,435	$	2,921	$	2,583	$	504	$	6	$	583	$	20,032

Loans:
Individually evaluated for impairment	$	—	$	—	$	530	$	—	$	—	$	—	$	530
Collectively evaluated for impairment		1,091,221		199,324		385,166		45,105		585		—		1,721,401
Total loans	$	1,091,221	$	199,324	$	385,696	$	45,105	$	585	$	—	$	1,721,931

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	December 31, 2021
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,091		2,824		2,769		711		5		632		20,032
Total allowance	$	13,091	$	2,824	$	2,769	$	711	$	5	$	632	$	20,032

Loans:
Individually evaluated for impairment	$	—	$	—	$	549	$	—	$	—	$	—	$	549
Collectively evaluated for impairment		968,442		231,090		341,942		122,945		586		—		1,665,005
Total loans	$	968,442	$	231,090	$	342,491	$	122,945	$	586	$	—	$	1,665,554

Gross commercial loans included $138 thousand and $69.6 million of Paycheck Protection Program (“PPP”) loans as of September 30, 2022 and December 31, 2021, respectively. The Company does not maintain an allowance on these loan balances, as they are 100% guaranteed by the U.S. Small Business Administration (“SBA”). Management believes the ending allowances at each of the dates indicated were sufficient to absorb the probable losses inherent in the loan portfolio at those dates.

The following tables present a summary of impaired loans and the related allowance as of September 30, 2022 and December 31, 2021.


	September 30, 2022
			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		with		with		Recorded		Related		Recorded		Income
(Dollars in thousands)	Balance		No Allowance		Allowance		Investment		Allowance		Investment		Recognized
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land development		—		—		—		—		—		—		—
Residential		530		530		—		530		—		540		15
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total Impaired Loans	$	530	$	530	$	—	$	530	$	—	$	540	$	15


	December 31, 2021
			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		with		with		Recorded		Related		Recorded		Income
(Dollars in thousands)	Balance		No Allowance		Allowance		Investment		Allowance		Investment⁽¹⁾		Recognized⁽¹⁾
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land development		—		—		—		—		—		—		—
Residential		549		549		—		549		—		569		24
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total Impaired Loans	$	549	$	549	$	—	$	549	$	—	$	569	$	24

(1)	Amounts shown for the twelve month period ended December 31, 2021.

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The following tables present a summary of past due and non-accrual loans by class as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	1,091,221	$	1,091,221	$	—	$	—
Construction and land development		—		—		—		—		199,324		199,324		—		—
Residential		—		—		—		—		385,696		385,696		—		—
Commercial		—		—		—		—		45,105		45,105		—		—
Consumer		—		—		—		—		585		585		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,721,931	$	1,721,931	$	—	$	—


	December 31, 2021
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	968,442	$	968,442	$	—	$	—
Construction and land development		—		—		—		—		231,090		231,090		—		—
Residential		—		—		—		—		342,491		342,491		—		—
Commercial		—		—		—		—		122,945		122,945		—		—
Consumer		—		—		—		—		586		586		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,665,554	$	1,665,554	$	—	$	—

The following tables present a summary of credit quality information for loans by class as of September 30, 2022 and December 31, 2021.


	September 30, 2022
			Special								Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Loans
Real Estate Loans
Commercial	$	1,091,221	$	—	$	—	$	—	$	—	$	1,091,221
Construction and land development		197,174		2,150		—		—		—		199,324
Residential		385,588		—		108		—		—		385,696
Commercial		45,105		—		—		—		—		45,105
Consumer		585		—		—		—		—		585
Total Loans	$	1,719,673	$	2,150	$	108	$	—	$	—	$	1,721,931


	December 31, 2021
			Special								Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Loans
Real Estate Loans
Commercial	$	961,177	$	7,029	$	236	$	—	$	—	$	968,442
Construction and land development		230,704		—		386		—		—		231,090
Residential		342,377		—		114		—		—		342,491
Commercial		122,945		—		—		—		—		122,945
Consumer		586		—		—		—		—		586
Total Loans	$	1,657,789	$	7,029	$	736	$	—	$	—	$	1,665,554

The Company assesses credit quality based on internal risk rating of loans. Internal risk rating definitions are:

Pass: These include satisfactory loans that have acceptable levels of risk.

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Special Mention: Loans classified as special mention have a potential weakness that requires close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. These credits do not expose the Company to sufficient risk to warrant further adverse classification.

Substandard: A substandard asset is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future.

As part of the Company’s loan modification program to borrowers experiencing financial difficulty, the Company may provide concessions to minimize the economic loss and improve long-term loan performance and collectability.

The Company had a recorded investment in TDRs of $530 thousand and $549 thousand as of September 30, 2022 and December 31, 2021, respectively. The Company did not have any loans that were determined to be new TDRs during the three or nine months ended September 30, 2022 and September 30, 2021.

As of September 30, 2022 and September 30, 2021, all loans in TDR status were in compliance with their modified terms. There were no loans modified in TDRs that subsequently defaulted within 12 months of their modification date during the three or nine months ended September 30, 2022 and September 30, 2021.

All TDRs are considered impaired and impairment is determined on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. As of September 30, 2022 and December 31, 2021, none of the Bank’s TDRs required the recordation of a specific reserve. As of September 30, 2022 and December 31, 2021, there were no additional commitments to disburse funds on loans classified as TDRs.

Note 5— Deposits and Borrowings

The following tables show the components of the Company’s funding sources.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Deposits:
Non-interest bearing demand deposits⁽¹⁾	$	535,186	$	488,838
Interest-bearing demand deposits⁽¹⁾		705,593		633,901
Savings deposits		102,909		101,376
Time deposits⁽²⁾		719,653		657,438
Total Deposits	$	2,063,341	$	1,881,553


						September 30, 2022		December 31, 2021
(Dollars in thousands)	Stated Interest Rates		Weighted-Average Interest Rate			Carrying Value		Carrying Value
Long-term Debt:
Subordinated debt	5.25	%		5.25	%	$	24,603	$	24,728
FHLB advances⁽³⁾							—		18,000
Total Long-term Debt:						$	24,603	$	42,728

(1) Overdraft demand deposits reclassified to loans totaled $1 thousand and $2 thousand at September 30, 2022 and December 31, 2021, respectively.

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(2)	The aggregate amount of certificates of deposit with a minimum denomination of $250,000 was $283.3 million and $255.0 million at September 30, 2022 and December 31, 2021, respectively.

(3)	The Company’s Federal Home Loan Bank (“FHLB”) advances were called by the FHLB during the second quarter of 2022.

The Company obtains certain deposits through the efforts of third-party brokers. Brokered deposits totaled $284.7 million and $217.7 million at September 30, 2022 and December 31, 2021, respectively, and were included primarily in time deposits on the Company’s Consolidated Balance Sheets. Reciprocal IntraFi certificates of deposit totaled $46.3 million and $61.3 million at September 30, 2022 and December 31, 2021, respectively. Reciprocal IntraFi demand and money market deposits totaled $216.1 million and $209.6 million at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, there were no depositors that represented 5% or more of the Company’s total deposits.

The Company completed a private placement of a $25.0 million fixed-to-floating subordinated note on June 15, 2022 (“2022 note”). Subject to limited exceptions permitting earlier redemption, the note is callable, in whole or in part, commencing July 1, 2027. Unless redeemed earlier, the note will mature on July 1, 2032. The note bears interest at a fixed rate of 5.25% to but excluding July 1, 2027, and will bear interest at a floating rate equal to the three-month Secured Overnight Financing Rate plus 245 basis points thereafter. The note qualifies as Tier 2 capital for regulatory purposes. The note is carried at its principal amount, less unamortized issuance costs. On July 15, 2022, the earliest available call date, the Company utilized the proceeds from the 2022 note issuance to redeem its $25.0 million fixed-to-floating 5.75% subordinated notes that were issued on July 6, 2017 (“2017 notes”).

The Company from time to time uses FHLB advances as a source of funding. FHLB advances are secured by a blanket floating lien on all real estate mortgage loans secured by 1-to-4 family residential, multi-family and commercial real estate properties. At September 30, 2022, the Company did not have any outstanding FHLB advances. Available borrowing capacity based on collateral value amounted to approximately $374.6 million as of September 30, 2022.

The Company also has federal funds lines of credit with correspondent banks available for overnight borrowing of $105.0 million of which $0 had been drawn upon at September 30, 2022.

The Company also has the capacity to borrow up to $27.3 million at the Federal Reserve discount window of which $0 had been drawn upon at September 30, 2022. The Bank had loans pledged at the Federal Reserve discount window totaling $34.0 million as of September 30, 2022.

The following table shows the carrying amount of the Company’s time deposits by contractual maturity as of September 30, 2022.


(Dollars in thousands)	September 30, 2022
2022	$	131,774
2023		499,483
2024		82,693
2025		2,972
2026		2,346
Thereafter		385
Total	$	719,653

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Note 6— Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Virginia, the District of Columbia, the State of Maryland, the State of North Carolina and the State of West Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2019.

The following table summarizes the Company’s provision for income taxes charged to operations for the nine months ended September 30, 2022 and September 30, 2021, respectively.


(Dollars in thousands)	September 30, 2022		September 30, 2021
Current tax expense	$	5,193	$	5,532
Deferred tax expense (benefit)		670		(664)
Total Income Tax Expense	$	5,863	$	4,868

The following table presents the factors driving the difference between the amount of income tax determined by applying the statutory federal income tax rate to income before income taxes and the amount of income tax expense reflected in the Consolidated Statements of Income for the nine months ended September 30, 2022 and September 30, 2021, respectively.


(Dollars in thousands)	September 30, 2022		September 30, 2021
Computed “expected” tax expense	$	6,187	$	4,784
Increase (decrease) in income taxes resulting from:
Bank-owned life insurance		(93)		(65)
Tax-exempt interest income		(118)		(119)
State income taxes, net of federal benefit		347		163
Excess tax benefit on share-based compensation		(370)		(17)
Other, net		(90)		122
Total	$	5,863	$	4,868

Note 7— Commitments and Contingencies

The Company is party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Company does not anticipate any material losses as a result of these transactions.

The following table summarizes the contract or notional amount of the Company’s exposure to off-balance sheet risk as of September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Commitments to extend credit	$	258,795	$	272,701
Standby letters of credit	$	14,850	$	14,485

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held

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varies but may include accounts receivable, inventory, property and equipment, income-producing commercial properties, and other real estate properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Note 8— Fair Value Measurements

Determination of Fair Value

The Company determines the fair values of its financial instruments based on the fair value hierarchy established by Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurement, which defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market and in an orderly transaction between market participants on the measurement date.

The fair value measurements and disclosures topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its assets and liabilities 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 that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets Measured at Fair Value on a Recurring Basis

In accordance with ASC Topic 820, the following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a recurring basis in the financial statements.

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Securities Available-for-sale and Equity Securities

Securities available-for-sale and equity securities with readily determinable fair values 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 (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its portfolio of debt securities. The vendor’s primary source for security valuation is ICE Data Services, which evaluates securities based on market data. ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance and rating to incorporate additional spreads to the industry benchmark curves.

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The following tables summarize the fair value of assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.


			Fair Value Measurements at September 30, 2022 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	September 30, 2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	58,819	$	—	$	58,819	$	—
U.S. government and federal agencies		34,456		—		34,456		—
Corporate bonds		2,692		—		2,692		—
Collateralized mortgage obligations		40,211		—		40,211		—
Tax-exempt municipal		4,373		—		4,373		—
Taxable municipal		578		—		578		—
Mortgage-backed		225,417		—		225,417		—
Equity securities, at fair value		1,913		1,913		—		—
Total assets at fair value	$	368,459	$	1,913	$	366,546	$	—


			Fair Value Measurements at December 31, 2021 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	30,543	$	—	$	30,543	$	—
U.S. government and federal agencies		34,537		—		34,537		—
Corporate bonds		1,031		—		1,031		—
Collateralized mortgage obligations		39,049		—		39,049		—
Tax-exempt municipal		5,262		—		5,262		—
Taxable municipal		1,685		—		1,685		—
Mortgage-backed		127,193		—		127,193		—
Equity securities, at fair value		1,869		1,869		—		—
Total assets at fair value	$	241,169	$	1,869	$	239,300	$	—

Assets Measured at Fair Value on a Nonrecurring Basis

Under certain circumstances, the Company makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one-year-old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an

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outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had no impaired loans with a recorded reserve as of September 30, 2022 or December 31, 2021.

Other Real Estate Owned

OREO is carried at the lower of cost or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value using observable market data, the Company records the property as Level 2. When an appraised value using observable market data is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the property as Level 3 valuation. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The Company had no OREO as of September 30, 2022 or December 31, 2021.

The following tables present the carrying value and estimated fair value, including the level within the fair value hierarchy, of the Company’s financial instruments as of September 30, 2022 and December 31, 2021.


			Fair Value Measurements at September 30, 2022 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	as of September 30, 2022		(Level 1)		(Level 2)		(Level 3)		September 30, 2022
Assets:
Cash and cash equivalents	$	74,756	$	74,756	$	—	$	—	$	74,756
Securities:
Available-for-sale		366,546		—		366,546		—		366,546
Held-to-maturity		100,598		—		81,765		—		81,765
Equity securities, at fair value		1,913		1,913		—		—		1,913
Restricted securities, at cost		4,421		—		4,421		—		4,421
Loans, net of unearned income		1,705,082		—		—		1,631,043		1,631,043
Bank owned life insurance		21,071		—		21,071		—		21,071
Accrued interest receivable		4,744		—		4,744		—		4,744
Liabilities:
Deposits	$	2,063,341	$	—	$	2,057,563	$	—	$	2,057,563
Subordinated debt		24,603		—		—		22,517		22,517
Accrued interest payable		643		—		643		—		643

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			Fair Value Measurements at December 31, 2021 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	as of December 31, 2021		(Level 1)		(Level 2)		(Level 3)		December 31, 2021
Assets:
Cash and cash equivalents	$	105,799	$	105,799	$	—	$	—	$	105,799
Securities:
Available-for-sale		239,300		—		239,300		—		239,300
Held-to-maturity		105,509		—		103,258		—		103,258
Equity securities, at fair value		1,869		1,869		—		—		1,869
Restricted securities, at cost		4,951		—		4,951		—		4,951
Loans, net of unearned income		1,646,437		—		—		1,659,396		1,659,396
Bank owned life insurance		20,998		—		20,998		—		20,998
Accrued interest receivable		4,943		—		4,943		—		4,943
Liabilities:
Deposits	$	1,881,553	$	—	$	1,882,132	$	—	$	1,882,132
FHLB advances		18,000		—		17,837		—		17,837
Subordinated debt		24,728		—		—		25,325		25,325
Accrued interest payable		843		—		843		—		843

Note 9— Earnings per Common Share

Earnings per common share is calculated in accordance with ASC 260 - Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.

Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of voting common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

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The following table summarizes the computation of earnings per share for the three and nine months ended September 30, 2022 and September 30, 2021.


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Earnings per common share - basic:
Income available to common shareholders (in thousands):
Net income	$	8,045	$	6,761	$	23,601	$	17,914
Less: Income attributable to unvested restricted stock awards		(33)		(30)		(103)		(85)
Net income available to common shareholders	$	8,012	$	6,731	$	23,498	$	17,829

Weighted average shares outstanding:
Common shares outstanding, including unvested restricted stock		14,047,746		13,641,330		13,963,307		13,635,404
Less: Unvested restricted stock		(58,332)		(60,792)		(60,983)		(64,955)
Weighted-average common shares outstanding - basic		13,989,414		13,580,538		13,902,324		13,570,449

Earnings per common share - basic	$	0.57	$	0.50	$	1.69	$	1.31

Earnings per common share - diluted:
Income available to common shareholders (in thousands):
Net income	$	8,045	$	6,761	$	23,601	$	17,914
Less: Income attributable to unvested restricted stock awards		(33)		(30)		(103)		(85)
Net income available to common shareholders	$	8,012	$	6,731	$	23,498	$	17,829

Weighted average shares outstanding:
Common shares outstanding, including unvested restricted stock		14,047,746		13,641,330		13,963,307		13,635,405
Less: Unvested restricted stock		(58,332)		(60,792)		(60,983)		(64,955)
Plus: Effect of dilutive options		118,872		302,566		163,563		294,776
Weighted-average common shares outstanding - diluted		14,108,286		13,883,104		14,065,887		13,865,226

Earnings per common share - diluted	$	0.57	$	0.48	$	1.67	$	1.29

Outstanding options to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. All stock options outstanding as of September 30, 2022 were included in computing diluted earnings per share for the three and nine month periods ended September 30, 2022, as none had anti-dilutive effects. All stock options outstanding as of September 30, 2021 were included in computing diluted earnings per share for the three month period ended September 30, 2021, as none had anti-dilutive effects. Stock options representing 15,000 weighted average shares were not included in computing diluted earnings per share for the nine months September 30, 2021 because their effects were anti-dilutive.

Note 10— Stock Based Compensation Plan

The Company’s share-based compensation plan, approved by stockholders and effective April 28, 2015 (the “2015 Plan”), provides for the grant of share-based awards in the form of incentive stock options, non-incentive stock options, restricted stock and restricted stock units to directors and employees. The Company has reserved 976,211 shares of voting common stock for issuance under the 2015 Plan, which will remain in effect until April 28, 2025. The Company’s Compensation Committee administers the 2015 Plan and has the authority to determine the terms and conditions of each award thereunder. As of September 30, 2022, 323,630 shares are available to grant in future periods under the 2015 Plan.

The Company’s previous share-based compensation plan, the 2006 Stock Option Plan (the “2006 Plan”), provided for the grant of share-based awards in the form of incentive stock options and non-incentive stock options to directors and employees. As amended, the 2006 Plan provided for awards of up to 1,490,700 shares. In April 2015, the 2006 Plan was terminated and replaced with the 2015 Plan. Options outstanding prior to April 28, 2015 were granted under the 2006 Plan and shall be subject to the provisions of the 2006 Plan.

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To date, options granted under the 2015 Plan typically vest over five years and expire 10 years from the grant date. Under the 2015 Plan, the exercise price of options may not be less than 100% of fair market value at the grant date with a maximum term for an option award of 10 years from the date of grant.

The table below provides a summary of the stock options activity for the nine months ended September 30, 2022.


	September 30, 2022
		Weighted Average		Aggregate Intrinsic
	Shares	Exercise Price		Value
Outstanding at January 1, 2022	534,236	$	10.45
Granted	—		—
Exercised	(325,649)		9.39
Forfeited or expired	(3,653)		8.79
Outstanding at September 30, 2022	204,934		12.17	$	2,538,641
Exercisable at September 30, 2022	204,934	$	12.17	$	2,538,641

The aggregate intrinsic value of stock options in the table above represents the total amount by which the current market value of the underlying stock exceeds the exercise price of the option that would have been received by the Company had all option holders exercised their options on September 30, 2022. The intrinsic value of options exercised was $693 thousand and $4.4 million for the three and nine months ended September 30, 2022, respectively, and $66 thousand and $268 thousand for the three and nine months ended September 30, 2021. These amounts and the intrinsic values noted in the table above change based on changes in the market value of the Company’s voting common stock.

The table below provides a summary of the stock options outstanding and exercisable as of September 30, 2022.


	September 30, 2022
	Options Outstanding		Options Exercisable
		Weighted Average		Weighted Average
		Remaining		Remaining
	Number	Contractual Life	Number	Contractual Life
Exercise Prices	Outstanding	in Years	Exercisable	in Years
$0.00 - $11.00	187	0.29	187	0.29
$11.01 - $12.00	188,685	2.56	188,685	2.56
$12.01 - $16.00	1,062	2.23	1,062	2.23
$16.01 - $18.16	15,000	5.58	15,000	5.58
Total	204,934	2.77	204,934	2.77

There were no options granted during the three or nine month periods ended September 30, 2022 or 2021.

Share-based compensation expense applicable to the Company’s share-based compensation plans for stock options was $10 thousand for the nine months ended September 30, 2021. The Company did not record any share-based compensation expense applicable to the Company’s share-based compensation plans for stock options during the three months ended September 30, 2021 or for the three or nine months ended September 30, 2022.

The Company does not have any unrecognized share-based compensation expense related to nonvested options as of September 30, 2022.

The table below provides a summary of the restricted stock awards granted under the 2015 plan for the nine months ended September 30, 2022.


	September 30, 2022
		Weighted Average
	Shares	Grant Date Fair Value
Nonvested at January 1, 2022	75,826	$	17.25
Granted	500		22.10
Vested	(16,710)		17.03
Forfeited	(1,570)		16.55
Nonvested at September 30, 2022	58,046		17.37

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Compensation expense for restricted stock grants is recognized over the vesting period of the awards based on the fair value of the Company’s voting common stock at issue date. The fair value of the stock was determined using the closing stock price on the day of grant. The restricted stock grants vest over two to five years. The Company awarded 7,946 restricted stock grants during the nine months ended September 30, 2021.

Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $133 thousand and $119 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The total fair value of the shares, which vested during the three months ended September 30, 2022 and September 30, 2021, was $10 thousand and $8 thousand, respectively.

Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $402 thousand and $386 thousand for the nine months ended September 30, 2022 and September 30, 2021, respectively. The total fair value of the shares, which vested during the nine months ended September 30, 2022 and September 30, 2021, was $381 thousand and $361 thousand, respectively.

Unrecognized share-based compensation expense related to nonvested restricted stock grants amounted to $628 thousand as of September 30, 2022. This amount is expected to be recognized over a weighted-average period of 1.5 years.

Note 11— Regulatory Capital

The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Securities Exchange Act of 1934, as amended. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.

The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision. Failure to meet minimum capital requirements can initiate certain mandatory – possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes that the Bank met all capital adequacy requirements to which it was subject as of September 30, 2022 and December 31, 2021.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 to risk-weighted assets, and Tier 1 capital to average assets.

In addition to the minimum regulatory capital required for capital adequacy purposes, the Bank is required to maintain a minimum capital conservation buffer above those minimums in the form of common equity. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. The capital conservation buffer was 2.5% at September 30, 2022, and is applicable for the common equity Tier 1, Tier 1, and total capital ratios. The Bank’s institution specific capital conservation buffer above the required minimums was 7.4% at September 30, 2022.

As of September 30, 2022, the most recent notification from the Federal Reserve Bank of Richmond (the “Reserve Bank”) categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the institution must maintain minimum total risk-based, common equity Tier 1, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.

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The table below provides a summary of the Bank’s capital ratios as of September 30, 2022 and December 31, 2021.


									Minimum To Be Well Capitalized
	Actual				Minimum Capital Requirement⁽¹⁾				Under Prompt Corrective Action
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2022
Total capital (to risk weighted assets)	$	274,611	15.4	%	$	187,251	10.5	%	$	178,334	10.0	%
Tier 1 capital (to risk weighted assets)		254,226	14.3	%		151,584	8.5	%		142,668	8.0	%
Common equity tier 1 capital (to risk weighted assets)		254,226	14.3	%		124,834	7.0	%		115,917	6.5	%
Tier 1 capital (to average assets)		254,226	11.0	%		92,494	4.0	%		115,618	5.0	%

As of December 31, 2021
Total capital (to risk weighted assets)	$	252,843	15.3	%	$	173,923	10.5	%	$	165,641	10.0	%
Tier 1 capital (to risk weighted assets)		232,458	14.0	%		140,795	8.5	%		132,513	8.0	%
Common equity tier 1 capital (to risk weighted assets)		232,458	14.0	%		115,948	7.0	%		107,666	6.5	%
Tier 1 capital (to average assets)		232,458	11.0	%		84,799	4.0	%		105,999	5.0	%

(1)Including Capital Conservation Buffer

Note 12— Revenue

Certain of the Company’s non-interest revenue streams are derived from short-term contacts associated with services provided to deposit account holders as well as other ancillary services, which are accounted for in accordance with ASC 606 – Revenue Recognition. For most of these revenue streams, the duration of the contract does not extend beyond the services performed. Due to the short duration of most customer contracts that generate non-interest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.

The following table shows the components of non-interest income for the three and nine months ended September 30, 2022 and September 30, 2021.


	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2022		2021		2022		2021
Service charges on deposit accounts ⁽¹⁾
Overdrawn account fees	$	19	$	22	$	60	$	53
Account service fees		60		48		180		135
Other service charges and fees ⁽¹⁾
Interchange income		108		96		306		273
Other charges and fees		67		24		163		66
Bank owned life insurance		255		102		445		309
Gains on securities		—		—		—		10
Net gains (losses) on premises and equipment ⁽¹⁾		—		19		(1)		19
Insurance commissions ⁽¹⁾		47		28		312		205
Other operating income (loss) ⁽²⁾		(106)		(14)		(492)		136
Total non-interest income	$	450	$	325	$	973	$	1,206

(1)	Income within the scope of ASC 606 – Revenue Recognition.

(2)

Includes other operating income (loss) within the scope of ASC 606 – Revenue Recognition amounting to $1 thousand and $6 thousand and a loss of $(107) thousand and $(498) thousand related to the fair value adjustment on equity securities carried at fair value for the three and nine months ended September 30, 2022, respectively, which is outside the scope of ASC 606. These securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the Company’s

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nonqualified deferred compensation liability. Includes other operating income (loss) within the scope of ASC 606 – Revenue Recognition amounting to less than $1 thousand and $51 thousand and a fair value adjustment loss of $(14) thousand and gain of $85 thousand outside the scope of ASC 606 for the three and nine months ended September 30, 2021, respectively.

A description of the Company’s revenue streams accounted for under ASC 606 follows:

Service charges on deposit accounts

Service charges on deposit accounts consist of overdrawn account fees and account service fees. Overdrawn account fees are recognized at the point in time that the overdraft occurs. Account service fees consist primarily of account analysis and other maintenance fees and are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Payment for service charges on deposit accounts is received immediately or in the following month through a direct charge to customers’ accounts.

Other service charges and fees

Other service charges and fees are primarily comprised of interchange income and other charges and fees. Interchange income is earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. Other charges and fees include revenue from processing wire transfers, cashier’s checks, and other transaction based services. The Company’s performance obligation for these charges and fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Net gains (losses) on premises and equipment

The Company records a gain or loss on the disposition of premises and equipment when control of the property transfers or is involuntarily converted to a monetary asset (e.g., insurance proceeds). This income is reflected in other operating income on the Company’s Consolidated Statements of Income.

Insurance commissions

The Company performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated in the form of a commission for placement of an insurance policy based on a percentage of premiums issued and maintained during the period. Revenue is recognized when received.

Note 13— Other Operating Expenses

The following table shows the components of other operating expenses for the three and nine months ended September 30, 2022 and September 30, 2021.


	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2022		2021		2022		2021
Advertising expense	$	47	$	99	$	147	$	309
Data processing		484		297		1,412		1,048
FDIC insurance		140		185		410		672
Professional fees		281		218		852		1,116
State franchise tax		523		461		1,570		1,387
Director costs		200		201		615		591
Other operating expenses		427		328		1,241		1,236
Total other operating expenses	$	2,102	$	1,789	$	6,247	$	6,359

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Note 14— Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax for the nine months ended September 30, 2022 and September 30, 2021.


	September 30, 2022
			Unrealized Gains on
			Securities Transferred from
	Unrealized Gain (Loss) on		Available-for-sale to		Accumulated Other
(Dollars in thousands)	Available-for-sale Securities		Held-to-maturity		Comprehensive Income (Loss)
Beginning balance, January 1, 2022	$	(789)	$	389	$	(400)
Net change during the period		(30,401)		(115)		(30,516)
Ending balance, September 30, 2022	$	(31,190)	$	274	$	(30,916)


	September 30, 2021
			Unrealized Gains on
			Securities Transferred from
	Unrealized Gain (Loss) on		Available-for-sale to		Accumulated Other
(Dollars in thousands)	Available-for-sale Securities		Held-to-maturity		Comprehensive Income (Loss)
Beginning balance, January 1, 2021	$	3,786	$	—	$	3,786
Net change during the period		(2,824)		438		(2,386)
Ending balance, September 30, 2021	$	962	$	438	$	1,400

The Company did not have any items reclassified out of accumulated other comprehensive income (loss) to net income during the three or nine months ended September 30, 2022 or the three months ended September 30, 2021. Items reclassified out of accumulated other comprehensive income (loss) to net income during the nine months ended September 30, 2021 consisted of a net gain on the call of a security classified as available-for-sale. The gain on this transaction totaled $10 thousand and its related tax was $2 thousand. Gains are included in the “Gains on securities” line item and the related tax is presented in the “Income tax expense” line item in the Consolidated Statements of Income.

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

The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 1, Financial Statements, of this Form 10-Q. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations or trends in operations for any future periods.

Cautionary Note on Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. These forward-looking statements are based on our beliefs and assumptions and on the information available to us at the time that these disclosures were prepared, and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations. Factors that could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, the following:

●

the potential resurgence of the COVID-19 pandemic and the associated efforts to limit the spread of the virus;

●

deteriorating economic conditions, either nationally or in our market area, including higher unemployment and lower real estate values;

●

the concentration of our business in the Washington, D.C. metropolitan area and the effect of changes in the economic, political and environmental conditions on this market;

●

inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments;

●

adverse changes in the securities markets;

●

changes in the financial condition or future prospects of issuers of securities that we own;

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;

●

changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

●

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

●

results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take similar actions;

●

changes in accounting policies and practices;

●

our ability to successfully capitalize on growth opportunities;

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●

additional risks related to new lines of business, products, product enhancements or services;

●

increased competition with other financial institutions and fintech companies;

●

changes in consumer spending, borrowing and savings habits;

●

our ability to retain key employees;

●

changes in our financial condition or results of operations that reduce capital;

●

adequacy of our allowance for loan losses;

●

deterioration of our asset quality;

●

future performance of our loan portfolio with respect to recently originated loans;

●

the level of prepayments on loans and mortgage-backed securities;

●

the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;

●

liquidity, interest rate and operational risks associated with our business;

●

implications of our status as a smaller reporting company and as an emerging growth company; and

●

other factors discussed in Item 1A. Risk Factors in the Company’s Registration Statement on Form 10, as amended, filed with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary note.

Overview

We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.

As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by recording a provision for loan losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, income from bank owned life insurance, and merchant services fee income. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

As of September 30, 2022, the Company had total consolidated assets of $2.31 billion, total loans net of unearned income of $1.73 billion, total deposits of $2.06 billion and total shareholders’ equity of $202.2 million.

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Critical Accounting Policies and Estimates

The Company’s accounting and reporting policies conform to GAAP, as well as general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

The following is a discussion of the critical accounting policy and significant estimate that require us to make complex and subjective judgments. Additional information about this policy can be found in Note 1 of our consolidated financial statements included in Item 13 of our Registration Statement on Form 10.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged off when management believes the collectability of a loan balance is unlikely, which reduces the allowance. Loans are generally written down to the estimated net realizable value of the underlying collateral when the loan is 180 days past due. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans by segment in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors used for each segment include an analysis of the levels of and trends in delinquencies, nonaccrual loans, and watch list loans; trends in concentrations, volume and term of loans; effects of any changes in lending policies and practices; experience, ability, and depth of management; national and local economic trends and conditions; and any other factor, as deemed appropriate. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, construction, and commercial mortgage loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures unless the loan has been modified in a troubled debt restructuring.

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Selected Financial Data

The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of September 30, 2022 and September 30, 2021 and the selected income statement data for the three and nine months ended September 30, 2022 and September 30, 2021 have been derived from our consolidated financial statements.


		As of or for the Three Months Ended						As of or for the Nine Months Ended
(Dollars in thousands, except per share data)	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Balance Sheet Data:
Loans, net of unearned income	$	1,725,114		$	1,602,377		$	1,725,114		$	1,602,377
Allowance for loan losses		(20,032)			(19,706)			(20,032)			(19,706)
Total assets		2,305,540			2,095,504			2,305,540			2,095,504
Deposits		2,063,341			1,837,548			2,063,341			1,837,548
Shareholders’ equity		202,212			202,222			202,212			202,222
Asset Quality Data:
Net (charge-offs) recoveries to average total loans, net of unearned income (annualized)		0.00	%		0.00	%		0.00	%		(0.01)	%
Allowance for loan losses to nonperforming loans		NM			NM			NM			NM
Allowance for loan losses to total gross loans net of unearned income⁽¹⁾		1.16	%		1.23	%		1.16	%		1.23	%
Non-performing assets to total assets		0.00	%		0.00	%		0.00	%		0.00	%
Non-performing loans to total loans		0.00	%		0.00	%		0.00	%		0.00	%
Capital Ratios (Bank level):
Total risk-based capital ratio		15.4	%		15.2	%		15.4	%		15.2	%
Tier 1 risk-based capital ratio		14.3	%		14.0	%		14.3	%		14.0	%
Leverage ratio		11.0	%		10.8	%		11.0	%		10.8	%
Common equity tier 1 ratio		14.3	%		14.0	%		14.3	%		14.0	%
Equity-to-total assets ratio		9.7	%		10.8	%		9.7	%		10.8	%
Income Statement Data:
Interest and dividend income	$	21,208		$	18,042		$	60,509		$	55,416
Interest expense		3,516			1,876			7,593			6,477
Net interest income	$	17,692		$	16,166		$	52,916		$	48,939
Provision for loan losses		—			325			—			2,780
Non-interest income		450			325			973			1,206
Non-interest expense		7,958			7,623			24,425			24,583
Income before taxes	$	10,184		$	8,543		$	29,464		$	22,782
Income tax expense		2,139			1,782			5,863			4,868
Net income	$	8,045		$	6,761		$	23,601		$	17,914
Per Share Data and Shares Outstanding:
Weighted average common shares (basic)		13,989,414			13,580,538			13,902,324			13,570,449
Weighted average common shares (diluted)		14,108,286			13,883,104			14,065,887			13,865,226
Common shares outstanding		14,070,080			13,644,985			14,070,080			13,644,985
Earnings per share, basic	$	0.57		$	0.50		$	1.69		$	1.31
Earnings per share, diluted	$	0.57		$	0.48		$	1.67		$	1.29
Book value	$	14.37		$	14.82		$	14.37		$	14.82
Performance Ratios:
Return on average assets ("ROAA")⁽²⁾		1.38	%		1.30	%		1.40	%		1.19	%
Return on average equity ("ROAE")⁽³⁾		15.07	%		13.35	%		15.03	%		12.32	%
Net interest margin⁽⁴⁾		3.10	%		3.15	%		3.19	%		3.30	%
Efficiency ratio		43.9	%		46.2	%		45.3	%		49.0	%

NM – Not meaningful

(1)	Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.16% and 1.29% at September 30, 2022 and September 30, 2021, respectively.

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(2)	ROAA is calculated by dividing year-to-date net income annualized by year-to-date average assets.

(3)	ROAE is calculated by dividing year-to-date net income annualized by year-to-date average equity.

(4)	Net interest margin for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

Results of Operations – Nine Months Ended September 30, 2022 and September 30, 2021

Overview

Net income for the nine months ended September 30, 2022 increased $5.7 million or 31.7% to $23.6 million compared to $17.9 million for the nine months ended September 30, 2021. Diluted earnings per share increased $0.38 or 29.5% to $1.67 for the nine months ended September 30, 2022, compared to diluted earnings per share of $1.29 for the nine months ended September 30, 2021.

Net interest income for the nine months ended September 30, 2022 increased $4.0 million or 8.1% compared to the nine months ended September 30, 2021 and was driven primarily by growth in the Company’s loan and investment portfolios.

The Company did not record a provision for loan losses for the nine months ended September 30, 2022, compared to a $2.8 million provision for the nine months ended September 30, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy. Additional discussion of the provision for loan losses is included below under the heading Provision Expense and Allowance for Loan Losses.

Non-interest income decreased $233 thousand or 19.3% during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of $(583) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a $153 thousand non-recurring bank owned life insurance related benefit claim realized and increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. During the nine months ended September 30, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the mark-to-market adjustments, gain on the called security, and bank owned life insurance related benefit claim, non-interest income increased $203 thousand or 18.3%.

Non-interest expense decreased $158 thousand or 0.6% during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease in non-interest expense was primarily due to non-recurring legal and professional fees incurred in 2021, as well as decreases in marketing expense and FDIC insurance fees. The decrease in marketing expense was primarily due to lower marketing vendor related expenses. The decrease in FDIC insurance fees was primarily due to lower insurance premiums. These decreases were partially offset by increases in state franchise taxes and data processing fees. The increase in state franchise taxes was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in data processing fees was due to new investments in technology solutions to support our operations.

The ROAA for the nine months ended September 30, 2022 and September 30, 2021 was 1.40% and 1.19%, respectively. The ROAE for the nine months ended September 30, 2022 and September 30, 2021 was 15.03% and 12.32%, respectively.

Net Interest Income and Net Interest Margin

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and borrowings. Net interest margin represents the difference between interest received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net

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interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.

The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the nine months ended September 30, 2022 and September 30, 2021.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities


	September 30, 2022						September 30, 2021
			Interest Income /		Average				Interest Income /		Average
(Dollars in thousands)	Average Balance		Expense		Rate		Average Balance		Expense		Rate
Assets:
Securities:
Taxable	$	433,128	$	5,782	1.78	%	$	249,451	$	3,117	1.67	%
Tax-exempt⁽¹⁾		5,002		114	3.05	%		5,039		114	3.02	%
Total securities	$	438,130	$	5,896	1.80	%	$	254,490	$	3,231	1.70	%
Loans, net of unearned income⁽²⁾:
Taxable		1,626,661		53,192	4.37	%		1,565,883		51,533	4.40	%
Tax-exempt⁽¹⁾		22,656		694	4.10	%		20,357		686	4.51	%
Total loans, net of unearned income	$	1,649,317	$	53,886	4.37	%	$	1,586,240	$	52,219	4.40	%
Interest-bearing deposits in other banks	$	134,874	$	897	0.89	%	$	145,618	$	134	0.12	%
Total interest-earning assets	$	2,222,321	$	60,679	3.65	%	$	1,986,348	$	55,584	3.74	%
Total non-interest earning assets		35,066						30,863
Total assets	$	2,257,387					$	2,017,211
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
NOW accounts	$	325,647	$	829	0.34	%	$	255,791	$	594	0.31	%
Money market accounts		389,535		1,516	0.52	%		333,366		927	0.37	%
Savings accounts		109,740		284	0.35	%		76,910		210	0.37	%
Time deposits		658,897		3,461	0.70	%		663,257		3,537	0.71	%
Total interest-bearing deposits	$	1,483,819	$	6,090	0.55	%	$	1,329,324	$	5,268	0.53	%
Subordinated debt		27,476		1,461	7.11	%		24,696		1,115	6.04	%
Other borrowed funds		8,257		42	0.68	%		18,502		94	0.68	%
Total interest-bearing liabilities	$	1,519,552	$	7,593	0.67	%	$	1,372,522	$	6,477	0.63	%
Demand deposits		511,504						437,905
Other liabilities		16,321						12,439
Total liabilities	$	2,047,377					$	1,822,866
Shareholders’ equity	$	210,010					$	194,345
Total liabilities and shareholders’ equity	$	2,257,387					$	2,017,211
Net interest spread					2.98	%					3.11	%
Net interest income and margin			$	53,086	3.19	%			$	49,107	3.30	%

(1)	Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)	The Company did not have any loans on non-accrual as of September 30, 2022 or September 30, 2021.

Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.

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Tax-Equivalent Net Interest Income


	Nine months ended
	September 30,
(Dollars in thousands)	2022		2021
GAAP Financial Measurements:
Interest Income - Loans	$	53,740	$	52,075
Interest Income - Securities and Other Interest-Earning Assets		6,769		3,341
Interest Expense - Deposits		6,090		5,268
Interest Expense - Borrowings		1,503		1,209
Total Net Interest Income	$	52,916	$	48,939

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		146		144
Add: Tax Benefit on Tax-Exempt Interest Income - Securities		24		24
Total Tax Benefit on Tax-Exempt Interest Income ⁽¹⁾	$	170	$	168
Tax-Equivalent Net Interest Income	$	53,086	$	49,107

(1)	Tax benefit was calculated using the federal statutory tax rate of 21%.

Net interest income increased $4.0 million or 8.1% on a fully tax-equivalent basis for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase in net interest income was driven by an increase in the average balance of interest-earning assets coupled with an increase in yields on the Company’s investment portfolio and interest-bearing deposits in other banks as a result of rising interest rates during 2022.

On a fully tax-equivalent basis, the net interest margin was 3.19% for the nine months ended September 30, 2022, compared to 3.30% for the nine months ended September 30, 2021. The decrease in net interest margin was primarily due to increases in the cost of interest-bearing deposits and subordinated debt coupled with a decrease in yield on the Company’s loan portfolio. The cost of interest-bearing liabilities increased 0.04% from 0.63% for the nine months ended September 30, 2021 to 0.67% for the nine months ended September 30, 2022. The increase in the cost of interest-bearing liabilities was primarily due to higher interest expense on deposits and our subordinated debt. The increase in interest expense on subordinated debt was primarily the result of carrying the 2017 notes and the 2022 note from June 15, 2022 until July 15, 2022, when the 2017 notes were redeemed, coupled with the accelerated amortization of $272 thousand in deferred issuance costs associated with our 2017 notes. Increases in rates offered on NOW and money market deposit accounts during the first nine months of 2022 also contributed to the increase in the cost of interest-bearing deposits.

The loan portfolio’s yield for the nine months ended September 30, 2022 was 4.37% compared to 4.40% for the nine months ended September 30, 2021. The decrease in yield on the Company’s loan portfolio was primarily due to a modest decrease in the weighted average yield of commercial real estate loans originated subsequent to September 30, 2021.

The investment securities portfolio’s yield for the nine months ended September 30, 2022 was 1.80% compared to 1.70% for the nine months ended September 30, 2021. The increase of 0.10% was primarily due to higher yields on investment securities purchased subsequent to September 30, 2021.

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.

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Rate/Volume Analysis


	For the Nine Months Ended September 30,
	2022 and 2021
	Increase
	(Decrease) Due to
(Dollars in thousands)	Volume		Rate		Total Increase (Decrease)
Interest-earning Assets:
Securities:
Taxable	$	2,423	$	242	$	2,665
Tax-exempt⁽¹⁾		—		—		—
Total securities	$	2,423	$	242	$	2,665
Loans, net of unearned income:
Taxable		1,987		(328)		1,659
Tax-exempt⁽¹⁾		70		(62)		8
Total loans, net of unearned income⁽²⁾	$	2,057	$	(390)	$	1,667
Interest-bearing deposits in other banks	$	(65)	$	828	$	763
Total interest-earning assets	$	4,415	$	680	$	5,095
Interest-bearing Liabilities:
Interest-bearing deposits:
NOW accounts	$	182	$	53	$	235
Money market accounts		127		462		589
Savings accounts		85		(11)		74
Time deposits		(58)		(18)		(76)
Total interest-bearing deposits	$	336	$	486	$	822
Subordinated debt		148		198		346
Other borrowed funds		(52)		—		(52)
Total interest-bearing liabilities	$	432	$	684	$	1,116
Change in net interest income	$	3,983	$	(4)	$	3,979

(1)	Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)The Company did not have any loans on non-accrual as of September 30, 2022 or September 30, 2021.

Interest Income

Interest income increased by $5.1 million or 9.2% to $60.7 million on a fully tax-equivalent basis for the nine months ended September 30, 2022 compared to $55.6 million for the nine months ended September 30, 2021 primarily due to an increase in volume in interest-earning assets as a result of loan growth and investment security purchases. The increase in interest income was partially offset by a decrease in rate on the loan portfolio.

Fully tax-equivalent interest income on loans increased by approximately $1.7 million as a result of volume. Average loans for the comparative nine month period increased approximately $63.1 million between September 30, 2022 and September 30, 2021, which was primarily attributable to origination volume in the commercial real estate and residential real estate portfolios subsequent to September 30, 2021. The increase in interest income on the loan portfolio as a result of volume was partially offset by a reduction in rate primarily due to a modest decrease in the weighted average yield of commercial real estate loans originated subsequent to September 30, 2021.

Fully tax-equivalent interest income on investment securities increased by approximately $2.7 million primarily as a result of volume. Average investment securities increased approximately $183.6 million between the nine months ended September 30, 2022 and September 30, 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.

Interest Expense

Interest expense increased by $1.1 million or 17.2% to $7.6 million for the nine months ended September 30, 2022 compared to $6.5 million for the nine months ended September 30, 2021 primarily due to an increase in rate and volume on interest-bearing deposits. Our

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overall cost of interest-bearing deposits was 0.55% for the nine months ended September 30, 2022 compared to 0.53% for the nine months ended September 30, 2021. The increase in rate on interest-bearing deposits was primarily due to higher cost of funds on money market accounts due to an increase in interest rates during the first nine months of 2022. The increase in volume on interest-bearing deposits was primarily attributable to growth in NOW and money market accounts. The increase in volume and rate on subordinated debt was primarily the result of carrying the 2017 notes and the 2022 note from June 15, 2022 until July 15, 2022, when the 2017 notes were redeemed, coupled with the accelerated amortization of $272 thousand in deferred issuance costs associated with our 2017 notes.

Our overall cost of funds benefited from an increase in average non-interest bearing deposits to total average deposits, which increased from 24.8% for the nine months ended September 30, 2021 to 25.6% for the nine months ended September 30, 2022.

Provision Expense and Allowance for Loan Losses

The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses inherent in the loan portfolio as of each balance sheet date. Both the amount of the provision, which is charged to earnings, and the level of the allowance for loan losses are impacted by many factors, including general, industry-specific, and geographic-specific economic conditions, current and historical credit losses, conditions specific to individual borrowers, the value of collateral underlying secured loans, among other factors. The Company is not required to implement the new CECL standard until January 1, 2023, and until adoption, the Company has and will continue to account for its allowance for losses using an incurred loss model.

The Company did not record a provision for loan losses for the nine months ended September 30, 2022, compared to a $2.8 million provision for the nine months ended September 30, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy. The allowance for loan losses was $20.0 million as of September 30, 2022 and December 31, 2021. The allowance for loan losses as a percent of total gross loans net of unearned income as of September 30, 2022 and December 31, 2021 was 1.16% and 1.20%, respectively. The Company does not maintain an allowance on PPP loan balances, as they are 100% guaranteed by the SBA. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.16% and 1.25% at September 30, 2022 and December 31, 2021, respectively.

See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.

Non-interest Income

The Company’s recurring sources of non-interest income consist primarily of bank owned life insurance income, service charges on deposit accounts and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.

The following table summarizes non-interest income for the nine months ended September 30, 2022 and September 30, 2021.

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	Nine months ended
	September 30,
(Dollars in thousands)	2022		2021
Service charges on deposit accounts
Overdrawn account fees	$	60	$	53
Account service fees		180		135
Other service charges and fees
Interchange income		306		273
Other charges and fees		163		66
Bank owned life insurance		445		309
Gains on securities		—		10
Net gains (losses) on premises and equipment		(1)		19
Insurance commissions		312		205
Other operating income (loss)		(492)		136
Total non-interest income	$	973	$	1,206

Non-interest income decreased $233 thousand or 19.3% during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of $(583) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a $153 thousand non-recurring bank owned life insurance related benefit claim realized and increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. The increase insurance commissions was primarily due to higher production during the first nine months of 2022 when compared to the same period of 2021. The increase in interchange income was primarily due to higher transaction volume during the first nine months of 2022 when compared to the same period of 2021. During the nine months ended September 30, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the mark-to-market adjustments, gain on the called security, and bank owned life insurance related benefit claim, non-interest income increased $203 thousand or 18.3%.

Non-interest Expense

Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.

The following table summarizes non-interest expense for the the nine months ended September 30, 2022 and September 30, 2021.


	Nine months ended
	September 30,
(Dollars in thousands)	2022		2021
Salaries and employee benefits expense	$	15,754	$	15,646
Occupancy expense of premises		1,435		1,505
Furniture and equipment expenses		989		1,073
Advertising expense		147		309
Data processing		1,412		1,048
FDIC insurance		410		672
Professional fees		852		1,116
State franchise tax		1,570		1,387
Bank insurance		147		130
Vendor services		452		426
Supplies, printing, and postage		97		136
Director costs		615		591
Other operating expenses		545		544
Total non-interest expense	$	24,425	$	24,583

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Income Taxes

Income tax expense increased $995 thousand or 20.4% to $5.9 million for the nine months ended September 30, 2022 compared to $4.9 million for the nine months ended September 30, 2021. Our effective tax rate for the nine months ended September 30, 2022 was 19.9%, compared to 21.4% for the same period of 2021. The decrease in our effective tax rate was primarily due to tax benefits realized in connection with the exercise of certain nonqualified stock options during the nine months ended September 30, 2022.

Results of Operations – Three Months Ended September 30, 2022 and September 30, 2021

Overview

Net income increased $1.2 million or 19.0% to $8.0 million for the three months ended September 30, 2022, compared to net income of $6.8 million for the three months ended September 30, 2021. Diluted earnings per share increased $0.09 or 18.8% to $0.57 for the three months ended September 30, 2022, compared to diluted earnings per share of $0.48 for the three months ended September 30, 2021.

Net interest income increased $1.5 million to $17.7 million for the three months ended September 30, 2022, compared to $16.2 million for the three months ended September 30, 2021. Balance sheet growth, particularly in the loan and investment portfolios, resulted in an increase in net interest income of 9.4% for the three months ended September 30, 2022 when compared to the three months ended September 30, 2021.

The Company did not record a provision for loan losses for the three months ended September 30, 2022, compared to $325 thousand for the same period of 2021. Additional discussion of the provision for loan losses is included below under the heading Provision Expense.

Non-interest income increased $125 thousand or 38.5% during the third quarter of 2022 compared to the third quarter of 2021. The increase in non-interest income was primarily due to a $153 thousand increase in bank owned life insurance income as a result of a benefit claim realized. In addition, we realized increases in insurance commissions, service charges and fees on deposit accounts, and interchange and other fee income. The increase was partially offset by mark-to-market adjustments of $(93) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan.

Non-interest expense increased $335 thousand or 4.4% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in non-interest expense was primarily due to increases in data processing fees, salaries and employee benefits, and franchise tax expense. The increase in data processing fees was primarily due to investments in technology solutions supporting our operations. The increase in salaries and employee benefits were driven by an increase in accrued incentive compensation tied to the Company’s performance that was offset in part by lower employee insurance costs as well as lower accruals related to deferred compensation. The increase in state franchise taxes was due to an increase in the Bank’s equity. The increase in non-interest expense was partially offset by decreases in furniture and equipment expense and occupancy expense of premises. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases.

The ROAA for the three months ended September 30, 2022 and September 30, 2021 was 1.38% and 1.30%, respectively. The ROAE for the three months ended September 30, 2022 and September 30, 2021 was 15.07% and 13.35%, respectively.

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Net Interest Income and Net Interest Margin

The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the three months ended September 30, 2022 and September 30, 2021.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities


	September 30, 2022						September 30, 2021
			Interest Income /		Average				Interest Income /		Average
(Dollars in thousands)	Average Balance		Expense		Rate		Average Balance		Expense		Rate
Assets:
Securities:
Taxable	$	483,861	$	2,385	1.96	%	$	320,014	$	1,224	1.52	%
Tax-exempt⁽¹⁾		4,999		38	3.02	%		5,013		38	3.01	%
Total securities	$	488,860	$	2,423	1.97	%	$	325,027	$	1,262	1.54	%
Loans, net of unearned income⁽²⁾:
Taxable		1,655,670		17,983	4.31	%		1,555,877		16,533	4.22	%
Tax-exempt⁽¹⁾		29,126		302	4.11	%		24,818		259	4.14	%
Total loans, net of unearned income	$	1,684,796	$	18,285	4.31	%	$	1,580,695	$	16,792	4.21	%
Interest-bearing deposits in other banks	$	103,669	$	571	2.19	%	$	132,662	$	51	0.15	%
Total interest-earning assets	$	2,277,325	$	21,279	3.71	%	$	2,038,384	$	18,105	3.52	%
Total non-interest earning assets		37,500						30,759
Total assets	$	2,314,825					$	2,069,143
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
NOW accounts	$	329,780	$	404	0.49	%	$	277,117	$	203	0.29	%
Money market accounts		377,736		727	0.76	%		327,144		296	0.36	%
Savings accounts		106,647		107	0.40	%		87,935		75	0.34	%
Time deposits		705,206		1,830	1.03	%		649,963		899	0.55	%
Total interest-bearing deposits	$	1,519,369	$	3,068	0.80	%	$	1,342,159	$	1,473	0.44	%
Subordinated debt		28,397		448	6.26	%		24,708		372	5.97	%
Other borrowed funds		—		—	0.00	%		18,000		31	0.68	%
Total interest-bearing liabilities	$	1,547,766	$	3,516	0.90	%	$	1,384,867	$	1,876	0.54	%
Demand deposits		538,271						470,476
Other liabilities		16,641						12,810
Total liabilities	$	2,102,678					$	1,868,153
Shareholders’ equity	$	212,147					$	200,990
Total liabilities and shareholders’ equity	$	2,314,825					$	2,069,143
Net interest spread					2.81	%					2.98	%
Net interest income and margin			$	17,763	3.10	%			$	16,229	3.15	%

(1)	Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)	The Company did not have any loans on non-accrual as of September 30, 2022 or September 30, 2021.

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Tax-Equivalent Net Interest Income


	Three months ended
	September 30,
(Dollars in thousands)	2022		2021
GAAP Financial Measurements:
Interest Income - Loans	$	18,222	$	16,737
Interest Income - Securities and Other Interest-Earning Assets		2,986		1,305
Interest Expense - Deposits		3,068		1,473
Interest Expense - Borrowings		448		403
Total Net Interest Income	$	17,692	$	16,166

Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		63		55
Add: Tax Benefit on Tax-Exempt Interest Income - Securities		8		8
Total Tax Benefit on Tax-Exempt Interest Income ⁽¹⁾	$	71	$	63
Tax-Equivalent Net Interest Income	$	17,763	$	16,229

(1)	Tax benefit was calculated using the federal statutory tax rate of 21%.

Net interest income increased $1.5 million or 9.5% on a fully tax-equivalent basis for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase in net interest income was driven by an increase in the average balance of interest-earning assets, particularly in the loan and investment portfolios.

On a fully tax-equivalent basis, the net interest margin was 3.10% for the three months ended September 30, 2022, compared to 3.15% for the three months ended September 30, 2021. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing liabilities, which more than offset the increase in yields on loans, investments, and interest-bearing deposits in other banks. The cost of interest-bearing liabilities was 0.90% for the third quarter of 2022 compared to 0.54% for the same quarter of the prior year. The increase in the cost of interest-bearing liabilities was primarily due to a 0.36% increase in the cost of interest-bearing deposits as a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on NOW and money market deposit accounts during the first nine months of 2022.

The loan portfolio’s yield for the three months ended September 30, 2022 was 4.31% compared to 4.21% for the three months ended September 30, 2021. The increase of 0.10% was primarily attributable to an increase in yield on the Company’s variable rate loans as a result of an increase in interest rates during 2022 coupled with a higher weighted average yield on loans originated during the third quarter of 2022.

The investment securities portfolio’s yield for the three months ended September 30, 2022 was 1.97% compared to 1.54% for the three months ended September 30, 2021. The increase of 0.43% was primarily due to higher yields on investment securities purchased subsequent to September 30, 2021.

The yield on interest-bearing deposits due from banks for the three months ended September 30, 2022 was 2.19% compared to 0.15% for the three months ended September 30, 2021. The increase of 2.04% was primarily due to a higher federal funds rate during the three months ended September 30, 2022 when compared to the same period of 2021.

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Rate/Volume Analysis


	For the Three Months Ended September 30,
	2022 and 2021
	Increase
	(Decrease) Due to
(Dollars in thousands)	Volume		Rate		Total Increase (Decrease)
Interest-earning Assets:
Securities:
Taxable	$	809	$	352	$	1,161
Tax-exempt⁽¹⁾		—		—		—
Total securities	$	809	$	352	$	1,161
Loans, net of unearned income:
Taxable		1,083		367		1,450
Tax-exempt⁽¹⁾		44		(1)		43
Total loans, net of unearned income⁽²⁾	$	1,127	$	366	$	1,493
Interest-bearing deposits in other banks	$	(149)	$	669	$	520
Total interest-earning assets	$	1,787	$	1,387	$	3,174
Interest-bearing Liabilities:
Interest-bearing deposits:
NOW accounts	$	65	$	136	$	201
Money market accounts		58		373		431
Savings accounts		19		13		32
Time deposits		145		786		931
Total interest-bearing deposits	$	287	$	1,308	$	1,595
Subordinated debt		58		18		76
Other borrowed funds		1		(32)		(31)
Total interest-bearing liabilities	$	346	$	1,294	$	1,640
Change in net interest income	$	1,441	$	93	$	1,534

(1)	Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)The Company did not have any loans on non-accrual as of September 30, 2022 or September 30, 2021.

Interest Income

Interest income increased by $3.2 million or 17.5% to $21.3 million on a fully tax-equivalent basis for the three months ended September 30, 2022 compared to $18.1 million for the three months ended September 30, 2021, driven by both an increase in volume and rates on interest-earning assets. The increase in volume of average interest-earning assets was primarily attributable to the Company’s loan and investment portfolio. The increase in rate on interest-earning assets was primarily attributable to interest-bearing deposits due from banks, as well as the Company’s loan and investment portfolios.

Fully tax-equivalent interest income on loans increased by approximately $1.5 million as a result of volume growth and an increase in rate. Average loans increased approximately $104.1 million between the three months ended September 30, 2022 and September 30, 2021, which was primarily attributable to growth in the investor real estate, residential mortgage, commercial owner-occupied real estate, and multi-family loan portfolios.

Fully tax-equivalent interest income on investment securities increased by approximately $1.2 million as a result of volume growth and rate increases. Average investment securities increased approximately $163.8 million between the three months ended September 30, 2022 and September 30, 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.

The increase in rates on loans, investment securities, and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates market throughout the first nine months of 2022.

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Interest Expense

Interest expense increased by $1.6 million to $3.5 million for the three months ended September 30, 2022 compared to $1.9 million for the three months ended September 30, 2021, primarily due to an increase in rates and, to a lesser extent, volume of deposits. The increase in rates was primarily a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on NOW and money market deposit accounts during the first nine months of 2022. Our overall cost of funds benefited from an increase in average non-interest bearing deposits to total average deposits, which increased from 26.0% for the three months ended September 30, 2021 to 26.2% for the three months ended September 30, 2022.

Provision Expense

The Company did not record a provision for loan losses for the three months ended September 30, 2022, compared to $325 thousand for the same period of 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy.

See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.

Non-interest Income

The following table summarizes non-interest income for the three months ended September 30, 2022 and September 30, 2021.


	Three months ended
	September 30,
(Dollars in thousands)	2022		2021
Service charges on deposit accounts
Overdrawn account fees	$	19	$	22
Account service fees		60		48
Other service charges and fees
Interchange income		108		96
Other charges and fees		67		24
Bank owned life insurance		255		102
Net gains on premises and equipment		—		19
Insurance commissions		47		28
Other operating income (loss)		(106)		(14)
Total non-interest income	$	450	$	325

Non-interest income increased $125 thousand or 38.5% during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in non-interest income was primarily due to a $153 thousand increase in BOLI income as a result of a benefit claim realized. In addition, we realized increases in insurance commissions, service charges and fees on deposit accounts, and interchange and other fee income. The increase in insurance commissions was primarily due to higher production in the third quarter of 2022 when compared to the same quarter of 2021. The increase in service charges and fees on deposit accounts was due to deposit growth subsequent to September 30, 2021. The increase in interchange income was primarily due to higher transaction volume during the third quarter of 2022 when compared to the same quarter of 2021. The increase in non-interest income was partially offset by mark-to-market adjustments of $(93) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. Excluding the impacts of the mark-to-market adjustments and bank owned life insurance related benefit claim, non-interest income increased $65 thousand or 19.1%.

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Non-interest Expense

The following table summarizes non-interest expense for the three months ended September 30, 2022 and September 30, 2021.


	Three months ended
	September 30,
(Dollars in thousands)	2022		2021
Salaries and employee benefits expense	$	5,072	$	4,977
Occupancy expense of premises		461		484
Furniture and equipment expenses		323		373
Advertising expense		47		99
Data processing		484		297
FDIC insurance		140		185
Professional fees		281		218
State franchise tax		523		461
Bank insurance		57		45
Vendor services		151		133
Supplies, printing, and postage		36		42
Director costs		200		201
Other operating expenses		183		108
Total non-interest expense	$	7,958	$	7,623

Non-interest expense increased $335 thousand or 4.4% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in non-interest expense was primarily due to increases in data processing fees, salaries and employee benefits, and franchise tax expense. The increase in data processing fees was primarily due to investments in technology solutions supporting our operations. The increase in salaries and employee benefits were driven by an increase in accrued incentive compensation tied to the Company’s performance that was offset in part by lower employee insurance costs as well as lower accruals related to deferred compensation. The increase in state franchise taxes was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in non-interest expense was partially offset by decreases in furniture and equipment expense, occupancy expense of premises, and marketing expense. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in marketing expense was primarily due to lower marketing vendor related expenses.

Income Taxes

Income tax expense increased $357 thousand or 20.0% to $2.1 million for the three months ended September 30, 2022 compared to $1.8 million for the three months ended September 30, 2021. Our effective tax rate for the three months ended September 30, 2022 was 21.0%, compared to 20.9% for the same period ended September 30, 2021.

Discussion and Analysis of Financial Condition

Assets, Liabilities, and Shareholders’ Equity

Total assets were $2.31 billion at September 30, 2022, $2.32 billion at June 30, 2022 and $2.15 billion at December 31, 2021. Total assets during the most recent quarter were impacted by the $25.0 million redemption of our 2017 fixed-to-floating 5.75% subordinated notes on July 15, 2022 that was completed utilizing proceeds from our private placement of a $25.0 million fixed-to-floating 5.25% subordinated note on June 15, 2022. Asset growth from December 31, 2021 to September 30, 2022 was $156.2 million or 7.3% primarily due to increases in the investment and loan portfolios of $122.3 million and $58.6 million, respectively. The increase in total assets was partially offset by a decrease in interest-bearing deposits in banks of $43.1 million.

The Company’s total liabilities increased $162.5 million or 8.4% to $2.10 billion at September 30, 2022 compared to $1.94 billion at December 31, 2021. The increase in total liabilities was primarily attributable to an increase in total deposits of $181.8 million as a result

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of growth in interest-bearing and non-interest bearing deposits. The increase in total liabilities was partially offset by an $18.0 million decrease in FHLB advances as a result of the FHLB calling outstanding advances during the nine months ended September 30, 2022.

The Company’s total shareholders’ equity decreased $6.3 million or 3.0% to $202.2 million at September 30, 2022 compared to $208.5 million at December 31, 2021. The decrease in total shareholders’ equity was primarily due to an increase in the net unrealized loss on the Company’s available-for-sale investment portfolio and the one-time special dividend declared during the first quarter of 2022. The decrease was partially offset by an increase in retained earnings attributable to net income during the year and an increase in additional paid-in capital due to stock option exercises. Total common shares outstanding increased from 13,745,598, including 75,826 shares relating to unvested stock awards, at December 31, 2021, to 14,070,080, including 58,046 shares relating to unvested stock awards, at September 30, 2022. Excluding accumulated other comprehensive income, which primarily includes the impact of unrealized losses on the Company’s available-for-sale investment portfolio, total shareholders’ equity increased $24.3 million or 11.6% from December 31, 2021 to September 30, 2022.

Investment Securities

The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $467.1 million at September 30, 2022 and $344.8 million at December 31, 2021. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $4.4 million and $1.9 million, respectively, as of September 30, 2022 and $5.0 million and $1.9 million, respectively, as of December 31, 2021.

The Company purchased $207.9 million of investment securities during the nine months ended September 30, 2022, which were comprised of $151.1 million of mortgage-backed securities, $32.3 million of U.S. Treasuries, $12.9 million of collateralized mortgage obligation securities, $9.6 million of U.S. government and federal agency securities, and $2.0 million of corporate bonds. The Company had $46.9 million in maturities, calls and principal repayments on securities during the nine months ended September 30, 2022, which was comprised of $30.2 million of mortgage-backed securities, $9.9 million of collateralized mortgage obligation securities, $5.8 million of U.S. government and federal agency securities, and $1.0 million of municipal bonds.

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The following table summarizes the amortized cost and fair value of the Company’s fixed income investment portfolio as of September 30, 2022 and December 31, 2021, respectively.


	September 30, 2022				December 31, 2021
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Held-to-maturity
U.S Treasuries	$	6,000	$	5,105	$	6,000	$	5,850
U.S. government and federal agencies		35,588		29,270		35,720		34,994
Collateralized mortgage obligations		21,924		17,769		25,606		25,072
Taxable municipal		6,076		4,736		6,089		5,895
Mortgage-backed		31,010		24,885		32,094		31,447
Total Held-to-maturity Securities	$	100,598	$	81,765	$	105,509	$	103,258
Available-for-sale
U.S Treasuries	$	63,404	$	58,819	$	30,954	$	30,543
U.S. government and federal agencies		38,717		34,456		34,803		34,537
Corporate bonds		3,000		2,692		1,000		1,031
Collateralized mortgage obligations		46,188		40,211		39,596		39,049
Tax-exempt municipal		4,996		4,373		5,007		5,262
Taxable municipal		608		578		1,653		1,685
Mortgage-backed		249,113		225,417		127,287		127,193
Total Available-for-sale Securities	$	406,026	$	366,546	$	240,300	$	239,300

The following table summarizes the maturity composition of our fixed income investment securities as of September 30, 2022, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.


	September 30, 2022
	Amortized		Fair		Weighted-Average
(Dollars in thousands)	Cost		Value		Yield
Held-to-maturity
Due in one year or less	$	—	$	—	—
Due after one year through five years		993		840	0.90	%
Due after five years through ten years		42,260		35,082	1.12	%
Due after ten years		57,345		45,843	1.40	%
Total Held-to-maturity Securities	$	100,598	$	81,765	1.27	%
Available-for-sale
Due in one year or less	$	38	$	38	2.00	%
Due after one year through five years		99,559		92,262	1.79	%
Due after five years through ten years		167,122		153,112	2.28	%
Due after ten years		139,307		121,134	1.83	%
Total Available-for-sale Securities	$	406,026	$	366,546	2.01	%

Loan Portfolio

Gross loans, net of unearned income, increased $58.6 million or 3.5% to $1.73 billion as of September 30, 2022 compared to $1.67 billion as of December 31, 2021. Excluding PPP loans, gross loans held for investment net of unearned income increased $129.0 million or 8.1% from December 31, 2021 to September 30, 2022. PPP loans held for investment net of unearned income totaled $133 thousand at September 30, 2022, a decrease from $67.7 million at December 31, 2021.

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The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of September 30, 2022 and December 31, 2021.


	September 30, 2022				December 31, 2021
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real Estate Loans:
Commercial	$	1,091,221	63.37	%	$	968,442	58.15	%
Construction and land development		199,324	11.58	%		231,090	13.87	%
Residential		385,696	22.40	%		342,491	20.56	%
Commercial - Non Real Estate:
Commercial loans⁽¹⁾		45,105	2.62	%		122,945	7.38	%
Consumer - Non-Real Estate:
Consumer loans		585	0.03	%		586	0.04	%
Total Gross Loans	$	1,721,931	100.00	%	$	1,665,554	100.00	%
Allowance for loan losses		(20,032)				(20,032)
Net deferred loan costs		3,183				915
Total net loans	$	1,705,082			$	1,646,437

(1)	Includes gross PPP loans of $138 thousand and $69.6 million as of September 30, 2022 and December 31, 2021, respectively.

The following table summarizes the contractual maturities of the loans as of September 30, 2022 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.


	September 30, 2022
			After 1		After 5
			Year		years		Maturing
	Within 1		Within 5		Within 15		After 15
(Dollars in thousands)	Year		Years		Years		Years		Total
Real Estate Loans:
Residential	$	8,366	$	37,252	$	37,021	$	303,057	$	385,696
Commercial		49,462		220,010		808,952		12,797		1,091,221
Construction and land development		119,058		54,843		23,999		1,424		199,324
Commercial - Non-Real Estate:
Commercial loans		8,860		24,214		9,900		2,131		45,105
Consumer - Non-Real Estate:
Consumer loans		401		153		—		31		585
Total Gross Loans	$	186,147	$	336,472	$	879,872	$	319,440	$	1,721,931

For Maturities Over One Year:
Floating rate loans			$	142,652	$	286,778	$	306,791	$	736,221
Fixed rate loans				193,820		593,094		12,649		799,563
			$	336,472	$	879,872	$	319,440	$	1,535,784

Asset Quality

The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Banking Officer in conjunction with the Chief Credit Officer are responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.

The Company’s asset quality remained strong through the third quarter of 2022. The Company did not have any nonperforming assets, which includes nonperforming loans and OREO, as of September 30, 2022 or December 31, 2021. As a result, the Company did not

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have any nonperforming loans, which consists of loans that are 90 days or more past due or loans placed on nonaccrual as of September 30, 2022 or December 31, 2021.

The Company did not have any nonaccrual loans as of September 30, 2022 or December 31, 2021 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the three and nine months ended September 30, 2022 or the three and nine months ended September 30, 2021.

The Company may, for economic or legal reasons related to a borrower’s financial condition, grant a concession to the borrower that it would not otherwise consider, which results in the related loan being classified as a TDR. All modifications are evaluated by management on a loan-by-loan basis to determine whether the loan modification constitutes a TDR. Total TDRs were $530 thousand and $549 thousand as of September 30, 2022 and December 31, 2021, respectively, and were performing in accordance with their modified terms as of those dates.

The following table summarizes the Company’s asset quality as of September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022			December 31, 2021
Nonaccrual loans	$	—		$	—
Loans past due 90 days and accruing interest		—			—
Other real estate owned and repossessed assets		—			—
Total nonperforming assets	$	—		$	—

Allowance for loan losses to nonperforming assets		NM			NM
Nonaccrual loans to gross loans		0.00	%		0.00	%
Nonperforming assets to period end loans and OREO		0.00	%		0.00	%

NM – Not meaningful

Allowance for Loan Losses

Refer to the discussion in the “Critical Accounting Policies and Estimates” section above for management’s approach to estimating the allowance for loan losses.

The Company recorded no net charge-offs during the nine months ended September 30, 2022 compared to $91 thousand for the nine months ended September 30, 2021. The Company recorded no net charge-offs during the three months ended September 30, 2022 or September 30, 2021. The allowance for loan losses was $20.0 million as of September 30, 2022 and December 31, 2021. The allowance for loan losses as a percentage of total gross loans net of unearned income as of September 30, 2022 and December 31, 2021 was 1.16% and 1.20%, respectively. The Company does not maintain an allowance on PPP loan balances, as they are 100% guaranteed by the SBA. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.16% and 1.25% at September 30, 2022 and December 31, 2021, respectively. The decrease in the allowance to outstanding loans, net of unearned income, was primarily due to improvement in risk ratings, net changes in historical loss data used in estimating the allowance for loan losses, and reduced pandemic related reserves, which was partially offset by net changes in qualitative adjustments as a result of economic uncertainty stemming from near-record levels of inflation and geopolitical instability.

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The following table summarizes the Company’s loan loss experience by loan portfolio for the three months ended September 30, 2022 and September 30, 2021.


	September 30, 2022					September 30, 2021
	Net		Net			Net		Net
	(charge-offs)		(charge-off)			(charge-offs)		(charge-off)
(Dollars in thousands)	recoveries		recovery rate ⁽¹⁾			recoveries		recovery rate ⁽¹⁾
Real estate loans:
Commercial	$	—		—		$	—	—
Construction and land development		—		—			—	—
Residential		—		—			—	—
Commercial loans		1		0.01	%		—	—
Consumer loans		—		—			—	—
Total	$	1				$	—

Average loans outstanding during the period	$	1,684,796				$	1,580,695
Allowance coverage ratio ⁽²⁾				1.16	%			1.23	%
Total net (charge-off) recovery rate ⁽¹⁾				0.00	%			—
Allowance to nonaccrual loans ratio⁽³⁾				NM				NM

NM – Not meaningful

(1)	The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period.

(2)	The allowance coverage ratio is calculated by dividing the allowance for loan losses at the end of the period by gross loans, net of unearned income at the end of the period.

(3)	The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan losses at the end of the period by nonaccrual loans at the end of the period.

The following table summarizes the Company’s loan loss experience by loan portfolio for the nine months ended September 30, 2022 and September 30, 2021.


	September 30, 2022					September 30, 2021
	Net		Net			Net		Net
	(charge-offs)		(charge-off)			(charge-offs)		(charge-off)
(Dollars in thousands)	recoveries		recovery rate ⁽¹⁾			recoveries		recovery rate ⁽¹⁾
Real estate loans:
Commercial	$	(1)		(0.00)	%	$	(90)	(0.01)	%
Construction and land development		—		—			—	—
Residential		—		—			—	—
Commercial loans		1		0.00	%		(1)	(0.00)	%
Consumer loans		—		—			—	—
Total	$	—				$	(91)

Average loans outstanding during the period	$	1,649,317				$	1,586,240
Allowance coverage ratio ⁽²⁾				1.16	%			1.23	%
Total net (charge-off) recovery rate ⁽¹⁾				(0.00)	%			(0.01)	%
Allowance to nonaccrual loans ratio⁽³⁾				NM				NM

NM – Not meaningful

(1)	The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period.

(2)	The allowance coverage ratio is calculated by dividing the allowance for loan losses at the end of the period by gross loans, net of unearned income at the end of the period.

(3)	The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan losses at the end of the period by nonaccrual loans at the end of the period.

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The following table summarizes the allowance for loan losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan losses and total loans as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Allowance		Percent of Allowance		Percent of Loans in
	for Loan		in Each Category to		Each Category to Total
(Dollars in thousands)	Losses		Total Allocated Allowance		Loans
Real Estate Loans:
Commercial	$	13,435	69.08	%	63.37	%
Construction and land development		2,921	15.02	%	11.58	%
Residential		2,583	13.28	%	22.40	%
Commercial - Non-Real Estate:
Commercial loans		504	2.59	%	2.62	%
Consumer - Non-Real Estate:
Consumer loans		6	0.03	%	0.03	%
Unallocated		583	—		—
Total	$	20,032	100.00	%	100.00	%


	December 31, 2021
	Allowance		Percent of Allowance		Percent of Loans in
	for Loan		in Each Category to		Each Category to Total
(Dollars in thousands)	Losses		Total Allocated Allowance		Loans
Real Estate Loans:
Commercial	$	13,091	67.48	%	58.15	%
Construction and land development		2,824	14.56	%	13.87	%
Residential		2,769	14.27	%	20.56	%
Commercial - Non-Real Estate:
Commercial loans		711	3.66	%	7.38	%
Consumer - Non-Real Estate:
Consumer loans		5	0.03	%	0.04	%
Unallocated		632	—		—
Total	$	20,032	100.00	%	100.00	%

Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the portfolio as of September 30, 2022. There can be no assurance, however, that adjustments to the provision for loan losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for loan losses necessary.

Deposits

Total deposits increased $181.8 million or 9.7% to $2.06 billion as of September 30, 2022 compared to $1.88 billion as of December 31, 2021.

Non-interest bearing demand deposits increased $46.4 million or 9.5% to $535.2 million as of September 30, 2022 compared to $488.8 million at December 31, 2021. Non-interest bearing demand deposits represented 25.9% and 26.0% of total deposits at September 30, 2022 and December 31, 2021, respectively.

Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, increased $135.4 million or 9.7% to $1.53 billion as of September 30, 2022 compared to $1.39 billion as of December 31, 2021. Interest-bearing deposits represented 74.1% and 74.0% of total deposits at September 30, 2022 and December 31, 2021, respectively.

The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand^® deposits, IntraFi Money Market^® deposits and IntraFi CD^® deposits. Core deposits totaled $1.76

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billion or 85.2% of total deposits and $1.64 billion or 86.3% of total deposits at September 30, 2022 and December 31, 2021, respectively.

The following table sets forth the average balances of deposits and the average interest rates paid for the three months ended September 30, 2022 and September 30, 2021.


	September 30, 2022				September 30, 2021
	Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	538,271			$	470,476
Interest bearing:
NOW accounts		329,780	0.49	%		277,117	0.29	%
Money market accounts		377,736	0.76	%		327,144	0.36	%
Savings accounts		106,647	0.40	%		87,935	0.34	%
Time deposits		705,206	1.03	%		649,963	0.55	%
Total interest-bearing		1,519,369	0.80	%		1,342,159	0.44	%
Total	$	2,057,640			$	1,812,635

The following table sets forth the average balances of deposits and the average interest rates paid for the nine months ended September 30, 2022 and September 30, 2021.


	September 30, 2022				September 30, 2021
	Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	511,504			$	437,905
Interest bearing:
NOW accounts		325,647	0.34	%		255,791	0.31	%
Money market accounts		389,535	0.52	%		333,366	0.37	%
Savings accounts		109,740	0.35	%		76,910	0.37	%
Time deposits		658,897	0.70	%		663,257	0.71	%
Total interest-bearing		1,483,819	0.55	%		1,329,324	0.53	%
Total	$	1,995,323			$	1,767,229

The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of September 30, 2022.


	September 30, 2022
(Dollars in thousands)	Total		Uninsured
Three months or less	$	31,680	$	19,180
Over three through 6 months		126,788		96,038
Over 6 through 12 months		79,777		63,527
Over 12 months		45,033		35,783
Total	$	283,278	$	214,528

The Company had estimated total uninsured deposits of $1.15 billion and $1.01 billion as of September 30, 2022, and December 31, 2021, respectively.

Capital Resources

The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.

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The rules adopted by the Federal Reserve require the Bank to maintain the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer, resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of 7.0%, (ii) a ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Tier 1 capital ratio of 8.5%, (iii) a ratio of total risk-based capital to risk-weighted assets of 8.0%, plus the 2.5% capital conservation buffer, resulting in a minimum total risk-based capital ratio of 10.5%, and (iv) a leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. As of September 30, 2022 and December 31, 2021, ratios of the Bank were in excess of the fully phased-in requirements.

The Basel III capital reforms also integrated the new capital requirements into the prompt corrective action provisions under Section 38 of the Federal Deposit Insurance Act. The Federal Reserve’s final rules (i) introduced a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well capitalized status, (ii) increased the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well capitalized status being 8.0%, and (iii) eliminated the provision that provided that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well capitalized. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum leverage ratio (5.0%) for well capitalized status were unchanged by the final rules. As of September 30, 2022 and December 31, 2021, the most recent notification from the Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The federal banking agencies adopted rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period ending January 1, 2026 the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model (“CECL Transition Election”). The Company is required to implement the CECL model as of January 1, 2023 and we intend to make the CECL Transition Election effective in the first quarter of 2023. We currently expect our adoption of this guidance will result in an increase to our allowance for credit losses on financial instruments due to the requirement to record expected losses over the remaining contractual lives of our financial instruments; however, the actual impact will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts at the adoption date. As a result, the adoption of CECL may have an adverse effect on our regulatory capital.

Note 11 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.

Shareholders’ equity decreased $6.3 million or 3.0% to $202.2 million at September 30, 2022 compared to $208.5 million at December 31, 2021. The decrease in shareholders’ equity was primarily attributable to a $(30.5) million other comprehensive loss during the period as a result of changes in fair value in the Company’s available-for-sale investment portfolio caused by rising interest rates and dividends declared of $2.8 million. The decrease was partially offset by net income of $23.6 million and an increase in common stock and additional paid-in capital of $3.4 million due to option exercises. Excluding accumulated other comprehensive income, total shareholders’ equity increased $24.3 million or 11.6% from December 31, 2021 to September 30, 2022.

In August of 2022, the Company’s Board of Directors authorized the extension of the Company’s stock repurchase program that was originally adopted in August of 2021. Under the stock repurchase program, the Company may repurchase up to 700,000 shares of its outstanding common stock, or 5.0% of outstanding shares as of September 30, 2022. The stock repurchase program will expire on August 31, 2023 or earlier if all the authorized shares have been repurchased. The Company has not repurchased any of its outstanding common stock under the program as of September 30, 2022.

Liquidity

Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and

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managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.

The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Liquidity needs are also met with cash and cash equivalents and unencumbered securities classified as available-for-sale. Liquid assets totaled $380.7 million as of September 30, 2022 compared to $299.3 million at December 31, 2021. These amounts represented 16.5% and 16.8% of total assets as of September 30, 2022 and December 31, 2021, respectively.

In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as credit lines with the FHLB, the Reserve Bank and other correspondent banks. Specifically, the Company has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and the Reserve Bank. Based on collateral pledged as of September 30, 2022, the total FHLB available borrowing capacity was $374.6 million. Additional borrowing capacity with the Reserve Bank was approximately $27.3 million as of September 30, 2022. Undrawn lines of credit with other correspondent banks totaled $105.0 million at September 30, 2022.

Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management maintains that the Company has a strong liquidity position, any of the factors referenced above could materially impact that in the future.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 7 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2022. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company 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 rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the third fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our operations, the Company and its subsidiary are parties to various claims and lawsuits. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us. Although the ultimate outcome of legal proceedings cannot be ascertained at this time, it is the opinion of management that the liabilities (if any) resulting from such legal proceedings will not have a material adverse effect on the Company’s business, including its consolidated financial position, results of operations, or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in our Registration Statement on Form 10, as amended, which we filed with the SEC on April 18, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description

4.1		Amended and Restated Employment Agreement, dated as of August 22, 2022, by and among John Marshall Bancorp, Inc., John Marshall Bank, and Kent D. Carstater (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 26, 2022).

4.2†		Employment Agreement, dated as of August 22, 2022, by and among John Marshall Bancorp, Inc., John Marshall Bank, and Andrew J. Peden.

31.1†		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2†		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

101.INS†		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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101.SCH†		XBRL Taxonomy Extension Schema Document

101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†		XBRL Taxonomy Extension Label Linkbase Document

101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document
104†		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

†Filed herewith.

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SIGNATURES

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.

Date: November 9, 2022


	JOHN MARSHALL BANCORP, INC.

	By:	/s/ Christopher W. Bergstrom
	Name:	Christopher W. Bergstrom
	Title:	President, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Kent D. Carstater
	Name:	Kent D. Carstater
	Title:	Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)