NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Description of Business and Summary of Significant Accounting Policies

THE COMPANY

Headquartered in Hampton, Virginia, Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through two wholly-owned subsidiaries, the Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Wealth). The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of March 31, 2023, the Bank had 14 branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Wealth offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, the Bank and Wealth. All significant intercompany balances and transactions have been eliminated in consolidation.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at March 31, 2023 and December 31, 2022, the statements of income, comprehensive income (loss), and changes in stockholders’ equity for the three months ended March 31, 2023 and 2022, and the statements of cash flows for the three months ended March 31, 2023 and 2022. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2022 Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

ESTIMATES

In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets 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 ACL.

ADOPTION OF NEW ACCOUNTING STANDARDS

On January 1, 2023, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) model, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to unfunded credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 modified the impairment for available-for-sale debt securities, requiring credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses (ACL) is measured for such loans.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As a result of adopting ASC 326, the Company recorded a net decrease to retained earnings of $991 thousand.

The Company adopted ASC 326 using the prospective transition approach for debt securities. The adoption did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where OTTI had previously been recognized or that required an ACL.

Index

The following table illustrates the impact of ASC 326.

	December 31, 2022		January 1, 2023
(dollars in thousands)	As Previously Reported (Incurred Loss)		Impact of CECL Adoption			As Reported Under CECL
Assets
Loans
Commercial and Industrial	$	673	$	(11	)	$	662
Real Estate Construction		552		19			571
Real Estate Mortgage		2,575		87			2,662
Real Estate Commercial		4,499		1,048			5,547
Consumer		2,065		(365	)		1,700
Other		162		(137	)		25
Allowance for credit losses on loans		10,526		641			11,167
Liabilities:
Allowance for credit losses on unfunded credit exposure		51		350			401
Total Allowance for Credit Losses	$	10,577	$	991		$	11,568

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022.

Loans Held for Investment

The Company makes commercial, consumer, and mortgage, loans to customers. The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. Interest on loans is accrued based on the unpaid principal balance. Loan fees and origination costs are deferred, and the net amount is amortized as a level yield adjustment over the respective term of the related loans.

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if the full and timely collection of interest or principal becomes uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when payments are 120 days past due. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if determined to have adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

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

Allowance for Credit Losses on Loans

The provision for credit losses on loans charged to operations is an amount sufficient to bring the allowance to an estimated balance that management considers adequate to absorb expected credit losses in the Company’s loan portfolio. The ACLL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Amortized cost is the principal balance outstanding, net of any purchase premiums and discounts and net of any deferred loan fees and costs.

The ACLL represents management’s estimate of credit losses over the remaining life of the loan portfolio. Loans are charged off against the ACLL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged off amounts are recorded as increases to the ACLL.

Management’s determination of the adequacy of the ACLL is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. The ACLL is estimated by pooling loans by call code and similar risk characteristics and applying a loan-level discounted cash flows method for all loans except for its automobile, farmland, and consumer portfolios. For automobile, farmland, and consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to determine the ACLL using the remaining life method. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following one-year period. The Company considers economic forecasts and recession probabilities from highly recognized third-parties to inform the model for loss estimation. For instance, the Company considers the National unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate forecast over a one-year reasonable and supportable period, with the commercial loan portfolio being the most sensitive to fluctuations in unemployment. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Management also considers qualitative factors when estimating loan losses to take into account model limitations. While management uses available information to estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, and/or economic conditions.

Index

Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACLL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACLL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss. Typically, a loss is confirmed when the Company is moving towards foreclosure (or final disposition).

Reserve for Unfunded Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded and is included in Other Liabilities within the Company’s Consolidated Balance Sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACL reserve for loans, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $2.9 million on loans held for investment at March 31, 2023 and is included in Other Assets on the Company’s consolidated balance sheet.

Allowance for Credit Losses – Available-For-Sale Securities

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

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell if met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

Changes in the allowance for credit losses are recorded as a credit loss expense or reversal. Losses are charged against the allowance when management believe the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding interest or requirement to sell is met. Accrued interest receivable on available-for-sale securities is excluded from the estimate of credit losses.

Other accounting standards that have been adopted by the Company or issued by the FASB or other standards-setting bodies have not or are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Index

Note 3. Loans and the Allowance for Credit Losses on Loans

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 Description of Business and Summary of Significant Accounting Policies. All loan information presented as of March 31, 2023 is in accordance with ASC 326. All loan information presented prior to March 31, 2023 is in accordance with previous applicable GAAP.

Index

The following is a summary of the balances in each class of the Company’s portfolio of loans held for investment as of the dates indicated:

	March 31,		December 31,
(dollars in thousands)	2023		2022
Mortgage loans on real estate:
Residential 1-4 family	$	179,607	$	169,248
Commercial - owner occupied		186,141		184,586
Commercial - non-owner occupied		244,870		245,277
Multifamily		32,820		26,675
Construction and land development		86,690		77,944
Second mortgages		8,962		8,828
Equity lines of credit		54,723		54,340
Total mortgage loans on real estate		793,813		766,898
Commercial and industrial loans		73,367		72,578
Consumer automobile loans		188,101		163,018
Other consumer loans		22,186		22,251
Other ⁽¹⁾		3,798		2,340
Total loans, net of deferred fees ⁽²⁾		1,081,265		1,027,085
Less: Allowance for credit losses on loans		11,551		10,526
Loans, net of allowance and deferred fees ⁽²⁾	$	1,069,714	$	1,016,559

(1)	Overdrawn accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts, excluding internal use accounts, totaled $229 thousand and $269 thousand at March 31, 2023 and December 31, 2022, respectively.

(2)	Net deferred loan fees totaled $1.0 million on March 31, 2023 and December 31, 2022, respectively.

All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2023.

Age Analysis of Past Due Loans as of March 31, 2023

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual ⁽²⁾		Total Current Loans ⁽¹⁾		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	393	$	158	$	-	$	151	$	178,905	$	179,607
Commercial - owner occupied		-		93		-		-		186,048		186,141
Commercial - non-owner occupied		-		-		-		-		244,870		244,870
Multifamily		-		-		-		-		32,820		32,820
Construction and land development		-		-		-		829		85,861		86,690
Second mortgages		12		-		-		-		8,950		8,962
Equity lines of credit		62		-		47		-		54,614		54,723
Total mortgage loans on real estate	$	467	$	251	$	47	$	980	$	792,068	$	793,813
Commercial and industrial loans		343		-		506		-		72,518		73,367
Consumer automobile loans		1,533		100		169		-		186,299		188,101
Other consumer loans		720		85		-		-		21,381		22,186
Other		28		-		-		-		3,770		3,798
Total	$	3,091	$	436	$	722	$	980	$	1,076,036	$	1,081,265

(1)	For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2)	For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

Index

The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2023 as well as the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of March 31, 2023 by class of loan.

	Nonaccrual
(dollars in thousands)	January 1, 2023		March 31, 2023		Nonaccrual with no ACLL		90 Days and still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	154	$	151	$	-	$	-
Construction and land development		945		829		829		-
Equity lines of credit		-		-		-		48
Total mortgage loans on real estate		1,099		980		829		48
Commercial and industrial loans		144		-		-		505
Consumer automobile loans		-		-		-		169
Total	$	1,243	$	980	$	829	$	722

The Company did not recognize any interest income on loans on nonaccrual status as of March 31, 2023 and had no reversal of interest income as no loans were placed on nonaccrual status during the three months ended March 31, 2023.

The Company’s loan portfolio may include certain loans modified, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company closely monitors the performance of modified loans to understand the effectiveness of modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the allowance for credit losses. The Company did not grant any such modifications during the first quarter of 2023.

Allowance for Credit Losses on Loans

ACLL on the loan portfolio is a material estimate for the Company. The Company estimates its ACLL on its loan portfolio on a quarterly basis. The Company models the ACLL using two primary segments, Commercial and Consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:

•

Commercial: Commercial and Industrial, Construction and Land Development, Real Estate – Commercial (Owner Occupied and Non-Owner Occupied), and Other

•

Consumer: Real Estate-Mortgage and Consumer

Each portfolio class has risk characteristics as follows:

•

Commercial and industrial: Commercial and industrial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

•

Real estate-construction and land development: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

•

Real estate-commercial: Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.

•

Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

•

Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

•

Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.

Index

The following tables presents the activity in the ACLL by portfolio class for the three months ended March 31, 2023.

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

For the Three Months ended March 31, 2023

(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage ⁽¹⁾		Real Estate - Commercial		Consumer ⁽²⁾			Other			Unallocated			Total
Allowance for credit losses on loans:
Balance, beginning	$	673		$	552	$	2,575	$	4,499	$	2,065		$	156		$	6		$	10,526
Day 1 impact of adoption of CECL		(11	)		19		87		1,048		(365	)		(137	)		-			641
Charge-offs		-			-		-		-		(377	)		(72	)		-			(449	)
Recoveries		8			-		11		-		237			14			-			270
Provision for loan losses		(6	)		82		199		70		81			143			(6	)		563
Ending Balance	$	664		$	653	$	2,872	$	5,617	$	1,641		$	104		$	-		$	11,551

Individually evaluated	$	-		$	1	$	19	$	4	$	-		$	-		$	-		$	24
Collectively evaluated		664			652		2,853		5,613		1,641			104			-			11,527

Ending Balance	$	664		$	653	$	2,872	$	5,617	$	1,641		$	104		$	-		$	11,551

Loans Balances:
Individually evaluated		-			903		466		401		-			-			-			1,770
Collectively evaluated		73,367			85,787		275,646		430,610		210,287			3,798			-			1,079,495
Ending Balance	$	73,367		$	86,690	$	276,112	$	431,011	$	210,287		$	3,798		$	-		$	1,081,265

(1)	The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.

(2)	The consumer segment includes consumer automobile loans.

The following table presents a breakdown of the provision for credit losses for the periods indicated.

	Three Months Ended March 31,
(dollars in thousands)	2023			2022
Provision for credit losses:
Provision (recovery) for loans	$	563		$	101
Provision for unfunded commitments		(187	)		-
Total	$	376		$	101

Credit Quality Indicators

Credit quality indicators are utilized to help estimate the collectability of each loan. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, the Company uses internally-assigned risk grades as the primary indicator to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company’s internally assigned risk grades are as follows:

•

Pass: Loans are of acceptable risk.

•

Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.

•

Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.

•

Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.

•

Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

Index

The following tables present credit quality exposures by internally assigned risk ratings originated as of the dates indicated:

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Construction and land development
Pass	$	6,676	$	41,912	$	26,314	$	6,480	$	417	$	3,894	$	168	$	85,861
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		829		-		829
Total Construction	$	6,676	$	41,912	$	26,314	$	6,480	$	417	$	4,723	$	168	$	86,690

Commercial Real Estate - Owner Occupied
Pass	$	579	$	33,062	$	44,991	$	22,770	$	13,142	$	66,459	$	4,750	$	185,753
OAEM		-		-		78		-		201		109		-		388
Substandard		-		-		-		-		-		-		-		-
Total Commercial Real Estate - Owner Occupied	$	579	$	33,062	$	45,069	$	22,770	$	13,343	$	66,568	$	4,750	$	186,141

Commercial Real Estate - Non-Owner Occupied
Pass	$	4,424	$	55,819	$	77,835	$	31,961	$	14,468	$	60,163	$	200	$	244,870
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Commercial Real Estate - Non-Owner Occupied	$	4,424	$	55,819	$	77,835	$	31,961	$	14,468	$	60,163	$	200	$	244,870

Commercial and Industrial
Pass	$	6,446	$	40,444	$	6,615	$	3,241	$	4,766	$	50	$	11,805	$	73,367
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Commercial and Industrial	$	6,446	$	40,444	$	6,615	$	3,241	$	4,766	$	50	$	11,805	$	73,367

Multifamily Real Estate
Pass	$	5,240	$	4,097	$	2,201	$	793	$	6,097	$	11,307	$	3,085	$	32,820
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Multifamily Real Estate	$	5,240	$	4,097	$	2,201	$	793	$	6,097	$	11,307	$	3,085	$	32,820

Residential 1-4 Family
Pass	$	10,786	$	34,665	$	40,971	$	29,530	$	14,042	$	58,231	$	54,723	$	242,948
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		344		-		344
Total Residential 1-4 Family	$	10,786	$	34,665	$	40,971	$	29,530	$	14,042	$	58,575	$	54,723	$	243,292

Consumer - Automobile
Pass	$	38,055	$	116,171	$	18,141	$	6,587	$	3,050	$	6,097	$	-	$	188,101
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Consumer - Automobile	$	38,055	$	116,171	$	18,141	$	6,587	$	3,050	$	6,097	$	-	$	188,101

Consumer - Other
Pass	$	199	$	2,057	$	672	$	200	$	359	$	17,154	$	1,545	$	22,186
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Consumer - Other	$	199	$	2,057	$	672	$	200	$	359	$	17,154	$	1,545	$	22,186

Other
Pass	$	2,990	$	-	$	309	$	-	$	-	$	499	$	-	$	3,798
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Other	$	2,990	$	-	$	309	$	-	$	-	$	499	$	-	$	3,798

Total Loans
Pass	$	75,395	$	328,227	$	218,049	$	101,562	$	56,341	$	223,854	$	76,276	$	1,079,704
OAEM		-		-		78		-		201		109		-		388
Substandard		-		-		-		-		-		1,173		-		1,173
Total Loans	$	75,395	$	328,227	$	218,127	$	101,562	$	56,542	$	225,136	$	76,276	$	1,081,265

The following table details the current period gross charge-offs of loans by year of origination as of March 31, 2023:

	March 31, 2023
	Current Period Charge-offs by Origination Year
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer - Automobile		-		192		114		34		4		29		-		373
Consumer - Other		-		-		2		-		-		2		-		4
Other ⁽¹⁾		72		-		-		-		-		-		-		72
Total	$	72	$	192	$	116	$	34	$	4	$	31	$	-	$	449

(1)	Gross charge-offs of other loans for the first three months ended March 31, 2023 included $72 thousand of demand deposit overdrafts that originated in 2023.

As of March 31, 2023, the Company had no collateral dependent loans for which repayment was expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty.

Index

Prior to the adoption of ASC 326

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2022.

Age Analysis of Past Due Loans as of December 31, 2022

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual ⁽²⁾		Total Current Loans ⁽¹⁾		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	290	$	-	$	525	$	154	$	168,279	$	169,248
Commercial - owner occupied		20		-		-		-		184,566		184,586
Commercial - non-owner occupied		206		-		-		-		245,071		245,277
Multifamily		-		-		-		-		26,675		26,675
Construction and land development		-		-		-		945		76,999		77,944
Second mortgages		19		-		-		-		8,809		8,828
Equity lines of credit		56		288		-		-		53,996		54,340
Total mortgage loans on real estate	$	591	$	288	$	525	$	1,099	$	764,395	$	766,898
Commercial and industrial loans		221		284		23		144		71,906		72,578
Consumer automobile loans		1,538		221		212		-		161,047		163,018
Other consumer loans		445		372		80		-		21,354		22,251
Other		47		-		-		-		2,293		2,340
Total	$	2,842	$	1,165	$	840	$	1,243	$	1,020,995	$	1,027,085

(1)	For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2)	For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

As of December 31, 2022, the Company measured the amount of impairment by evaluating loans either in their collective homogenous pools or individually. The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the period presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class

									For the Year Ended
	As of December 31, 2022								December 31, 2022
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	285	$	44	$	235	$	21	$	282	$	7
Commercial		430		55		358		3		420		-
Construction		1,321		829		191		6		1,208		3
Total mortgage loans on real estate		2,036		928		784		33		1,910		10
Commercial and industrial loans		144		144		-		-		144		5
Total	$	2,180	$	1,072	$	784	$	33	$	2,054	$	15

Index

The following tables present credit quality exposures by internally assigned risk ratings as of December 31, 2022:

Credit Quality Information

As of December 31, 2022

(dollars in thousands)	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	169,094	$	-	$	154	$	169,248
Commercial - owner occupied		184,301		285		-		184,586
Commercial - non-owner occupied		245,277		-		-		245,277
Multifamily		26,675		-		-		26,675
Construction		76,999		-		945		77,944
Second mortgages		8,828		-		-		8,828
Equity lines of credit		54,340		-		-		54,340
Total mortgage loans on real estate	$	765,514	$	285	$	1,099	$	766,898
Commercial and industrial loans		72,434		-		144		72,578
Consumer automobile loans		162,738		-		280		163,018
Other consumer loans		22,251		-		-		22,251
Other		2,340		-		-		2,340
Total	$	1,025,277	$	285	$	1,523	$	1,027,085

The following tables presents the activity in the ALLL by portfolio segment for the year ended December 31, 2022.

For the Year ended December 31, 2022

(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage ⁽¹⁾			Real Estate - Commercial			Consumer ⁽²⁾			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459	$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(297	)		-		(25	)		-			(1,368	)		(332	)		-		(2,022	)
Recoveries		134			-		61			22			648			112			-		977
Provision for loan losses		153			93		149			(310	)		1,423			192			6		1,706
Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526

Individually evaluated for impairment	$	-		$	6	$	21		$	3		$	-		$	-		$	-	$	30
Collectively evaluated for impairment		673			546		2,554			4,496			2,065			156			6		10,496

Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526

Loans Balances:
Individually evaluated for impairment		144			1,020		279			413			-			-			-		1,856
Collectively evaluated for impairment		72,434			76,924		258,812			429,450			185,269			2,340			-		1,025,229
Ending Balance	$	72,578		$	77,944	$	259,091		$	429,863		$	185,269		$	2,340		$	-	$	1,027,085

(1)	The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.

(2)	The consumer segment includes consumer automobile loans.

Note 10. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topics of FASB ASU No. 2010-06, FASB ASU No. 2011-04, and FASB ASU No. 2016-01, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

Index

In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model used by the Company’s bond accounting service provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. The second source is a third party vendor the Company utilizes to provide fair value exit pricing for loans and interest bearing deposits in accordance with guidance.

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

•

Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

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

•

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

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

Assets Measured at Fair Value on a Recurring Basis

Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities.

The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s IRLCs are classified as Level 2.

The Company recognizes interest rate swaps on loans at fair value. The Company has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All of the Company’s interest rate swaps on loans are classified as Level 2.

Index

The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:

			Fair Value Measurements at March 31, 2023 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities
U.S. Treasury securities	$	7,748	$	-	$	7,748	$	-
Obligations of U.S. Government agencies		39,741		-		39,741		-
Obligations of state and political subdivisions		60,653		-		60,653		-
Mortgage-backed securities		88,696		-		88,696		-
Money market investments		1,661		-		1,661		-
Corporate bonds and other securities		25,414		-		25,414		-
Total available-for-sale securities		223,913		-		223,913		-
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Total assets	$	225,391	$	-	$	225,391	$	-

Liabilities:
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Total liabilities	$	1,478	$	-	$	1,478	$	-

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	7,671	$	-	$	7,671	$	-
Obligations of U.S. Government agencies		42,399		-		42,399		-
Obligations of state and political subdivisions		59,384		-		59,384		-
Mortgage-backed securities		88,913		-		88,913		-
Money market investments		1,816		-		1,816		-
Corporate bonds and other securities		25,335		-		25,335		-
Total available-for-sale securities	$	225,518	$	-	$	225,518	$	-
Derivatives
Interest rate lock		23		-		23		-
Interest rate swap on loans		1,447		-		1,447		-
Total assets	$	226,988	$	-	$	226,988	$	-

Assets Measured at Fair Value on a Nonrecurring Basis

Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

Other Real Estate Owned (OREO)

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Company obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the ability and intent with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

Index

At March 31, 2023 and December 31, 2022 there was no OREO that was measured at fair value.

Loans Held For Sale

Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income.

The following table presents the assets carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate rather than at a market rate. These loans are not carried on the consolidated balance sheets at fair value and, as such, are not included in the tables below.

			Carrying Value at March 31, 2023
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans
Loans held for sale	$	325	$	-	$	325	$	-

			Carrying Value at December 31, 2022
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Mortgage loans on real estate:
Construction	$	110	$	-	$	-	$	110
Total	$	110	$	-	$	-	$	110

Loans
Loans held for sale	$	421	$	-	$	421	$	-

The following table displays quantitative information about Level 3 Fair Value Measurements as of December 31, 2022.

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at December 31, 2022		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Construction	$	110	Market comparables	Selling costs		3.00% -8.00% (7.25	%)

Index

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments as of the dates indicated are as follows:

			Fair Value Measurements at March 31, 2023 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	29,069	$	29,069	$	-	$	-
Securities available-for-sale		223,913		-		223,913		-
Restricted securities		4,479		-		4,479		-
Loans held for sale		325		-		325		-
Loans, net		1,069,714		-		-		1,047,941
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Bank owned life insurance		34,304		-		34,304		-
Accrued interest receivable		4,427		-		4,427		-

Liabilities
Deposits	$	1,199,615	$	-	$	1,200,738	$	-
Overnight repurchase agreements		4,517		-		4,517		-
Federal Home Loan Bank advances		72,500		-		72,500		-
Long term borrowings		29,570		-		25,356		-
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Accrued interest payable		725		-		725		-

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	19,250	$	19,250	$	-	$	-
Securities available-for-sale		225,518		-		225,518		-
Restricted securities		3,434		-		3,434		-
Loans held for sale		421		-		421		-
Loans, net		1,016,559		-		-		996,807
Derivatives
Interest rate lock		23		-		23		-
Interest rate swap on loans		1,447		-		1,447		-
Bank owned life insurance		34,049		-		34,049		-
Accrued interest receivable		4,253		-		4,253		-

Liabilities
Deposits	$	1,156,019	$	-	$	1,179,631	$	-
Federal funds purchased		11,378		-		-		-
Overnight repurchase agreements		4,987		-		4,536		-
Federal Reserve Bank borrowings		46,100		-		480		-
Long term borrowings		29,538		-		29,657		-
Derivatives
Interest rate swap on loans		1,447		-		1,447		-
Accrued interest payable		834		-		834		-

Index

Item 2.

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

The following discussion is intended to assist readers in understanding and evaluation the results of operations, financial condition, liquidity and capital resources of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Wealth. This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements, the notes to the financial statements, and the other financial information contained elsewhere in this report, as well as the Company’s 2022 Form 10-K. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on the Company’s future business, financial condition or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” at the end of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

Overview

The Company’s primary goals are to maximize earnings by maintaining strong asset quality and deploying capital in profitable growth initiatives that will enhance long-term stockholder value. The Company operates in three principal business segments: the Bank, Wealth, and the Company as a separate segment, the Parent. Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities, fees earned on deposit accounts, debit card interchange, and treasury and commercial services and mortgage banking income. Wealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly fees and dividends received from the Bank and Wealth Management.

Net income for the three months ended March 31, 2023 was $3.1 million ($0.62 per diluted share) compared to $2.0 million ($0.39 per diluted share) for the three months ended March 31, 2022. Total assets of $1.4 billion as of March 31, 2023 increased by $60.8 million from December 31, 2022.

Key factors affecting comparisons of consolidated net income for the three months ended March 31, 2023 are as follows. Comparisons are to the three months ended March 31, 2022 unless otherwise stated.

•

Net loans held for investment grew $53.2 million, or 5.2%, from December 31, 2022. Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP), grew $54.2 million, or 5.3%, from December 31, 2022 and $233.1 million, or 27.5%, from March 31, 2022.

•

Total deposits increased $43.6 million, or 3.8%, from December 31, 2022.

•

Return on average equity (ROE) increased to 12.5% for the first quarter of 2023, compared to 11.0% for the fourth quarter of 2022, and 7.0% for the prior year quarter.

•

Net income improved $440 thousand, or 16.7%, to $3.1 million for the first quarter of 2023 from $2.6 million for the fourth quarter of 2022, and $1.1 million, or 51.8%, from $2.0 million in the 2022 comparative quarter.

•

Net interest margin (NIM) was 4.02% in the first quarter of 2023, compared to 3.14% in the first quarter of 2022. NIM on a fully tax-equivalent basis (FTE) (non-GAAP) was 4.04% in the first quarter of 2022 and 3.16% in the first quarter of 2022.

•

Net interest income for the first quarter of 2023, decreased $96 thousand, or 0.7%, compared to the prior quarter and increased $3.2 million, or 33.0%, compared to the first quarter of 2022.

•

Provision for credit losses of $376 thousand was recognized for the first quarter of 2023, compared to $633 thousand for the fourth quarter of 2022 and $101 thousand for the first quarter of 2022.

•

Noninterest expense decreased $119 thousand, or 1.0%, to $12.2 million for the first quarter of 2023, compared to $12.3 million for the fourth quarter of 2022 but increased $1.5 million, or 13.6%, from the first quarter of 2022.

•

On January 1, 2023, the Company adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in a decrease to opening retained earnings of $991 thousand.

For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.

Capital Management and Dividends

Total equity was $102.6 million at March 31, 2023, compared to $98.7 million at December 31, 2022. Total equity increased $3.9 million at March 31, 2023 compared to December 31, 2022, due primarily to lower unrealized losses in the market value of securities available-for-sale, which are recognized as a component of accumulated other comprehensive loss, and net income, partially offset by the adoption of CECL and dividends. The Company’s securities available for sale are fixed income debt securities, and their unrealized loss position is a result of increases in market interest rates rather than credit quality issues. The Company expects to recover its investments in debt securities through scheduled payments of principal and interest and unrealized losses are not expected to affect net income or regulatory capital of the Company or its subsidiaries.

Index

For the first quarter of 2023 and 2022, the Company declared dividends of $0.14 per share and $0.13 per share, respectively. The dividend represents a payout ratio of 22.7% of earnings per share for the first quarter of 2023. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements, and expected future earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for the Bank are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

At March 31, 2023, the book value per share of the Company’s common stock was $20.52, and tangible book value per share (non-GAAP) was $20.14, compared to $19.75 and $19.37, respectively, at December 31, 2022. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Critical Accounting Estimates

The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.

For further information on the Company’s critical accounting estimates, refer to Note 1, Description of Business and Summary of Significant Accounting Policies and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in its 2022 Form 10-K.

Allowance for Credit Losses on Loans

The ACLL represents the estimated balance the Company considers adequate to absorb expected credit losses over the expected contractual life of the loan portfolio. The ACLL is estimated using a loan-level discounted cash flows method for all loans with the exception of its automobile, farmland, and consumer portfolios. For the automobile, farmland, and consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to determine the ACLL using the remaining life methods.

Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in future periods. There are both internal factors (i.e. loan balances, credit quality, and the contractual lives of loans) and external factors (i.e. economic conditions such as trends in interest rates, GDP, inflation, and unemployment) that can impact the ACLL estimate.

For instance, the Company considers the national unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate forecast over a one-year reasonable and supportable period, with the commercial loan portfolio being the most sensitive to fluctuations in unemployment. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Company reviews its ACLL estimation process regularly for appropriateness as the economic and internal environment are constantly changing. While the ACLL estimate represents management’s current estimate of expected credit losses, due to uncertainty surrounding internal and external factors, there is potential that the estimate may not be adequate over time to cover credit losses in the portfolio. While management uses available information to estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, economic conditions and/or other factors.

For further information concerning accounting policies, refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 3. Loans and the Allowance for Credit Losses on Loans included in Item 1. “Financial Statements” above, as well as Note 1, Significant Accounting Policies included in Item 8 “Financial Statements and Supplementary Data” of the Company’s 2022 Form 10-K.

Index

Results of Operations

Net Interest Income

The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The NIM is calculated by dividing net interest income by average earning assets, or on a fully tax-equivalent basis, tax-equivalent net interest income by average earning assets.

Net interest income for the first quarter of 2023 was $12.8 million, an increase of $3.2 million, or 33.0%, from the first quarter of 2022. The increase from the prior-year comparative quarter was due primarily to deployment of lower yielding cash to fund growth in higher yielding loans and investments, and higher average yields on earning asset balances due to the effect of rising market interest rates, partially offset by higher average interest-bearing liabilities at higher average rates.

Net interest income, on a fully tax-equivalent basis (non-GAAP), was $12.9 million for the first quarter of 2023, an increase of $3.2 million from the 2022 comparative quarter. NIM for the first quarter of 2023 was 4.02%, an increase from 3.14% for the prior year quarter. On a fully tax-equivalent basis (non-GAAP), NIM was 4.04% and 3.16%, for the three months ended March 31, 2023 and 2022, respectively.

Average loans increased $192.0 million, or 22.2%, for the first three months of 2023 compared to the prior year comparative period. The increase in average loans outstanding in 2023 compared to 2022 was due primarily to growth in the real estate mortgage, commercial real estate, automobile, and consumer segments of the loan portfolio. Average loan yields were higher in the first three months of 2023 compared to the same period of 2022, due primarily to the effects of rising interest rates. During 2022 and continuing into 2023, market interest rates increased, and while the Company expects asset yields to continue to rise, the cost of funds is expected to rise at a faster pace. The extent to which rising interest rates will ultimately affect the Company’s NIM is uncertain. For more information about these FTE financial measures, please see “Non-GAAP Financial Measures” below.

Average securities available for sale decreased $14.5 million during the first three months of 2023, compared to the same period in 2022, due primarily to fluctuations in fair market value. The average yield on the securities portfolio on a fully tax-equivalent basis increased 154 basis points for the first three months of 2023 compared to the same period in 2022.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $131.0 million for the first three months of 2023, compared to the same period in 2022 due primarily to deployment of liquidity in loans held for investment. The average yield on interest-bearing deposits in other banks increased 372 basis points for the first three months of 2023 compared to the same period in 2022 due to rising interest rates. The Federal Reserve Bank increased the interest rate on excess cash reserve balances from 0.10 percent at the end of 2020 to 5.15 percent during the second quarter of 2023.

Average money market, savings and interest-bearing demand deposits, in aggregate, increased $24.3 million first three months of 2023, respectively, and average time deposits decreased $19.3 million for the first three months of 2023, compared to the same periods in 2022. Average noninterest-bearing demand deposits increased $15.8 million for the first quarter of 2023 compared to the same periods of 2022. The average cost of interest-bearing deposits increased 45 basis points for the first quarter of 2023, compared to the same period in 2022, due primarily to higher rates on deposits driven by depositors seeking increased yields and competitive pricing pressures. As the rising interest rate environment lengthens, average cost of funding will continue to increase at a faster pace. Changes in rates take effect immediately for interest checking, money market and savings accounts, while changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity. Average borrowings increased $56.1 million for the first three months of 2023 compared to the same period in 2022 as average loan growth outpaced average deposit growth over the comparative periods.

Index

The following table shows analyses of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.

TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

	For the quarters ended March 31,
	2023								2022
	Average Balance			Interest Income/ Expense		Yield/ Rate**			Average Balance			Interest Income/ Expense		Yield/ Rate**

(dollars in thousands)
ASSETS
Loans*	$	1,055,878		$	13,042		5.01	%	$	863,897		$	9,196		4.32	%
Investment securities:
Taxable		186,292			1,764		3.84	%		201,940			989		1.99	%
Tax-exempt*		38,206			268		2.85	%		37,007			265		2.90	%
Total investment securities		224,498			2,032		3.67	%		238,947			1,254		2.13	%
Interest-bearing due from banks		6,596			64		3.94	%		137,601			73		0.22	%
Federal funds sold		577			6		4.23	%		4,441			1		0.09	%
Other investments		3,632			66		7.32	%		1,142			14		4.90	%
Total earning assets		1,291,181		$	15,210		4.78	%		1,246,028		$	10,538		3.43	%
Allowance for loan losses		(11,339	)							(9,989	)
Other non-earning assets		104,511								93,796
Total assets	$	1,384,353							$	1,329,835

LIABILITIES AND STOCKHOLDERS’ EQUITY

Time and savings deposits:
Interest-bearing transaction accounts	$	70,254	$	3	0.02	%	$	75,129	$	3	0.02	%
Money market deposit accounts		428,941		842	0.80	%		389,368		163	0.17	%
Savings accounts		115,880		9	0.03	%		126,258		10	0.03	%
Time deposits		148,563		537	1.47	%		167,859		361	0.87	%
Total time and savings deposits		763,638		1,391	0.74	%		758,614		537	0.29	%
Federal funds purchased, repurchase agreements and other borrowings		7,959		37	1.91	%		4,589		1	0.10	%
Federal Home Loan Bank advances		52,626		617	4.69	%		-		-	0.00	%
Long term borrowings		29,551		295	4.00	%		29,419		295	4.01	%
Total interest-bearing liabilities		853,774		2,340	1.11	%		792,622		833	0.43	%
Demand deposits		429,928						414,080
Other liabilities		8,347						5,368
Stockholders’ equity		100,453						117,765
Total liabilities and stockholders’ equity	$	1,392,502					$	1,329,835
Net interest margin			$	12,870	4.04	%			$	9,705	3.16	%

*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $57 thousand and $68 thousand for March 31, 2023 and 2022, respectively.

**Annualized

Interest income and expense are affected by fluctuations in interest rates, by changes in volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income. The Company calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not show separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.

Index

TABLE 2: VOLUME AND RATE ANALYSIS*

	Three months ended March 31, 2023 from 2022 Increase (Decrease)

	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans*	$	2,044		$	1,802		$	3,846
Investment securities:
Taxable		(77	)		852			775
Tax-exempt*		9			(6	)		3
Total investment securities		(68	)		846			778

Federal funds sold		(1	)		6			5
Other investments**		(39	)		82			43
Total earning assets		1,936			2,736			4,672

INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		-			-			-
Money market deposit accounts		17			662			679
Savings accounts		(1	)		-			(1	)
Time deposits		(41	)		217			176
Total time and savings deposits		(25	)		879			854
Federal funds purchased, repurchase agreements and other borrowings		1			35			36
Federal Home Loan Bank advances		-			617			617
Long term borrowings		1			(1	)		-
Total interest-bearing liabilities		(23	)		1,530			1,507

Change in net interest income	$	1,959		$	1,206		$	3,165

* Computed on a fully tax-equivalent basis using a 21% rate.

** Other investments include interest-bearing balances due from banks.

The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, inflationary pressures, the timing and extent of any economic recovery, which are inherently uncertain; (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment; and (3) possible changes in the composition of interest-bearing liabilities, which may result from decreased deposit balances or increased competition for deposits, or from changes in the availability of certain types of wholesale funding.

Provision for Credit Losses

For the three months ended March 31, 2023, the Company recognized a provision for credit losses of $376 thousand compared to $101 thousand for the three months ended March 31, 2022. The provision for credit losses for the first quarter of 2023 reflected a provision of $563 thousand for loans and a recovery of provision for unfunded commitments of $187 thousand. The increase in provision expense for loans was due primarily to growth in the portfolio. The recovery of provision for unfunded commitments was due to fluctuations in utilization levels. Charged-off loans totaled $449 thousand and $700 thousand in the first three months of 2023 and 2022, respectively. Recoveries amounted to $270 thousand and $254 thousand for the three months ended March 31, 2023 and 2022, respectively. The Company’s annualized net loans charged off to average loans were 0.07% for the first quarter of 2023 compared to 0.21% for the first quarter of 2022.

The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the provision for loan losses.

Index

Noninterest Income

Total noninterest income was $3.4 million for the first quarter of 2023 compared to $3.5 million for the first quarter of 2022. Although fiduciary and asset management fees, service charges on deposit accounts, other service charges, commissions and fees, and bank-owned life insurance increased compared to the prior year quarter, these increases were offset by lower mortgage banking income and other operating income. The decrease in mortgage banking income for the first quarter of 2023 compared to the first quarter of 2022 was due to declines in volume of mortgage originations attributable to changes in mortgage market conditions.

Noninterest Expense

Noninterest expense totaled $12.2 million for the first quarter of 2023 compared to $10.7 million for the first quarter of 2022. The increase over the prior year quarter was primarily driven by increased salary and benefit expense, data processing, ATM and other losses, and other operating expenses. The increase in salary and benefits was primarily driven by the addition of revenue producing officers, a return to normalized position vacancy levels, incentive compensation expense, and lower deferred loan costs. The Company completed negotiations with a major vendor relationship during the fourth quarter of 2022 which began reducing certain existing cost structures during the first quarter of 2023 and will provide an opportunity for operational leverage for future growth at fixed cost levels. Several other major vendor contracts and relationships continue to be assessed and negotiated as a key component of efforts to reduce noninterest expense levels while improving operational efficiency.

The Company’s income tax expense increased $300 thousand for the first quarter of 2023 when compared to the same period in 2022 primarily due to changes in the levels of pre-tax income and the mix of effective tax-exempt income. The effective federal income tax rates for the three months ended March 31, 2023 and 2022 was 16.5% and 13.1%, respectively.

Balance Sheet Review

At March 31, 2023, the Company had total assets of $1.4 billion, an increase of $60.8 million compared to assets as of December 31, 2022.

Net loans held for investment increased $53.2 million or 5.2%, from $1.0 billion at December 31, 2022 to $1.1 billion at March 31, 2023, driven by diversified loan growth in the following segments: construction, land development, and other land loans of $8.7 million, residential real estate of $17.1 million, and indirect automobile of $25.0 million. Cash and cash equivalents increased $9.8 million from December 31, 2022 to March 31, 2023. Securities available for sale, at fair value, decreased $1.6 million or 0.7% over the same period due to increases in the rate environment.

Total deposits of $1.2 billion as of March 31, 2023 increased $43.6 million, or 3.8% from December 31, 2022. Noninterest-bearing deposits decreased $15.4 million, or 3.2%, savings deposits increased $45.0 million, or 7.7%, and time deposits increased $12.1 million, or 7.9%, as depositors shift into higher yielding deposit products.

The Company utilizes FHLB advances as a primary source of liquidity as needed. At March 31, 2023 and December 31, 2022, the Company had FHLB advances of $72.5 million and $46.1 million, respectively.

Securities Portfolio

When comparing March 31, 2023 to December 31, 2022, securities available-for-sale decreased $1.6 million, or 0.7%. The change in market value was due primarily to changes in market interest rates.

The Company’s strategy for the securities portfolio is primarily intended to manage the portfolio’s susceptibility to interest rate risk and to provide liquidity to fund loan growth. The securities portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when necessary.

The following table sets forth a summary of the securities portfolio in dollar amounts at fair value and as a percentage of the Company’s total securities available-for-sale as of the dates indicated:

Index

TABLE 3: SECURITIES PORTFOLIO

	March 31,				December 31,
(Dollars in thousands)	2023				2022
U.S. Treasury securities	$	7,748	3	%	$	7,671	3	%
Obligations of U.S. Government agencies		39,741	17	%		42,399	19	%
Obligations of state and political subdivisions		60,653	27	%		59,384	26	%
Mortgage-backed securities		88,696	39	%		88,913	39	%
Money market investments		1,661	1	%		1,816	1	%
Corporate bonds and other securities		25,414	11	%		25,335	11	%
		223,913	98	%		225,518	99	%
Restricted securities:
Federal Home Loan Bank stock	$	3,754	2	%		2,709	1	%
Federal Reserve Bank stock		683	-			683	-
Community Bankers’ Bank stock		42	-			42	-
		4,479				3,434
Total Securities	$	228,392	100	%	$	228,952	100	%

The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of March 31, 2023.

TABLE 4: MATURITY OF SECURITIES

	1 year or less
(Dollars in thousands)	2023			1-5 years			5-10 years			Over 10 years			Total
U.S. Treasury securities	$	-		$	7,748		$	-		$	-		$	7,748
Weighted average yield		-			2.75	%		-			-			2.75	%

Obligations of U.S. Government agencies	$	779		$	4,418		$	2,788		$	31,756		$	39,741
Weighted average yield		0.73	%		2.22	%		4.25	%		5.73	%		5.14	%

Obligations of state and policitcal subdivisions	$	164		$	1,271		$	18,786		$	40,432		$	60,653
Weighted average yield		0.75	%		2.95	%		2.22	%		2.72	%		2.57	%

Mortgage-backed securities	$	-		$	5,321		$	10,994		$	72,381		$	88,696
Weighted average yield		-			3.92	%		2.29	%		2.93	%		2.91	%

Money market investments	$	1,661		$	-		$	-		$	-		$	1,661
Weighted average yield		4.28	%		-			-			-			4.28	%

Corporate bonds and other securities	$	484		$	-		$	24,930		$	-		$	25,414
Weighted average yield		3.44	%		-			4.44	%		-			4.44	%

Federal Home Loan Bank stock	$	-		$	-		$	-		$	3,754		$	3,754
Weighted average yield		-			-			-			6.37	%		6.37	%

Federal Reserve Bank stock	$	-		$	-		$	-		$	683		$	683
Weighted average yield		-			-			-			6.00	%		6.00	%

Community Bankers’ Bank stock	$	-		$	-		$	-		$	42		$	42
Weighted average yield		-			-			-			0.00	%		0.00	%
Total Securities	$	3,088		$	18,758		$	57,498		$	149,048		$	228,392
Weighted average yield		2.99	%		2.97	%		3.29	%		3.54	%		3.43	%

The table above is based on maturity; therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average yield is calculated on a fully tax-equivalent basis using a 21% rate on a pro rata basis for each security based on its relative amortized cost.

For more information about the Company’s securities available-for-sale, including information about securities in an unrealized loss position at March 31, 2023 and December 31, 2022, see Part I, Item 1, “Financial Statements” under the heading Note 2, Securities in this Quarterly Report on Form 10-Q.

Index

Loan Portfolio

The following table shows a breakdown of total loans by segment at March 31, 2023 and December 31, 2022.

TABLE 5: LOAN PORTFOLIO

	March 31,		December 31,
(Dollars in thousands)	2023		2022
Commercial and industrial	$	73,367	$	72,578
Real estate-construction		86,690		77,944
Real estate-mortgage (1)		276,112		259,091
Real estate-commercial		431,011		429,863
Consumer		210,287		185,269
Other		3,798		2,340
Ending Balance	$	1,081,265	$	1,027,085

(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.

The maturity distribution and rate sensitivity of the Company’s loan portfolio at March 31, 2023 is presented below:

TABLE 6: MATURITY/REPRICING SCHEDULE OF LOAN PORTFOLIO

(Dollars in thousands)	As of March 31, 2023
(Dollars in thousands)	Commercial and industrial		Real estate-construction		Real estate-mortgage (1)		Real estate-commercial		Consumer		Other		Total
Variable Rate:
Within 1 year	$	12,451	$	55,381	$	68,605	$	42,876	$	8,067	$	2,991	$	190,371
1 to 5 years		505		447		21,859		29,041		2		498		52,352
5 to 15 years		-		1,964		43,462		1,046		25		-		46,497
After 15 years		-		486		-		-		77		-		563
Fixed Rate:
Within 1 year	$	1,318	$	8,835	$	5,139	$	19,805	$	3,023	$	-	$	38,120
1 to 5 years		21,070		11,585		41,533		188,361		69,295		-		331,844
5 to 15 years		38,023		7,947		39,446		144,400		120,153		309		350,278
After 15 years		-		45		56,068		5,482		9,645		-		71,240
	$	73,367	$	86,690	$	276,112	$	431,011	$	210,287	$	3,798	$	1,081,265

(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.

For more information about the Company’s loan portfolio at March 31, 2023 and December 31, 2022, see Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q.

Nonperforming Assets

The following table summarizes information concerning credit ratios and nonperforming assets. Balances and ratios presented as of March 31, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 are presented in accordance with previously applicable GAAP.

The Company continued to experience historically low levels of nonperforming assets in 2023, however, the economic environment could be impact performance, which could increase NPAs in future periods. Refer to Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q for more information.

Index

TABLE 7: NONPERFORMING ASSETS

	March 31,			December 31,
(dollars in thousands)	2023			2022
Total loans	$	1,081,265		$	1,027,085
Nonaccrual loans	$	980		$	1,243
Loans past due 90 days or more and accruing interest		722		$	840
Total Nonperforming Assets	$	1,702		$	2,083
ACLL	$	11,551		$	10,526
Nonaccrual loans to total loans		0.09	%		0.12	%
ACLL to total loans		1.07	%		1.02	%
ACLL to nonaccrual loans		1178.67	%		846.82	%
Annualized year-to-date net charge-offs to average loans		0.07	%		0.02	%

The adoption of ASC 326 replaced previous impaired loan and TDR accounting guidance, and the evaluation of ACLL includes loans previously designated as impaired or TDRs together with other loans that share similar risk characteristics.

Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. For a detailed discussion of the Company’s nonperforming assets, refer to Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q.

Allowance for Credit Losses

At March 31, 2023, the ACL was $11.8 million, comprised of ACLL of $11.6 million and a reserve for unfunded commitments of $214 thousand. The increase in the ACLL during the first quarter of 2023 was due primarily to growth in the portfolio and the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $641 thousand. The following table summarizes the ACL as of March 31, 2023.

(Dollars in thousands)	March 31, 2023
Total ACLL	$	11,551
Total Reserve for Unfunded Commitments		214
Total ACL	$	11,765
ACLL to total loans		1.07	%
ACL to total loans		1.09	%

For more information regarding the ACL and ACLL, refer to Part I, Item 1, “Financial Statements” under the heading Note 1. Description of Business and Summary of Significant Accounting Policies and Note 3. Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q.

The ACLL represents an amount that, in management’s judgement, will be adequate to absorb expected credit losses in the loan portfolio; however, if elevated levels of risk are identified, provision for credit losses may increase in future periods. The following tables present the Company’s loan loss experience for the periods indicated:

Index

TABLE 8: ALLOWANCE FOR CREDIT LOSSES ON LOANS

For the three months ended March 31, 2023
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction			Real Estate - Mortgage ⁽¹⁾			Real Estate - Commercial			Consumer			Other			Unallocated			Total
Allowance for credit losses on loans:
Balance, beginning	$	673		$	552		$	2,575		$	4,499		$	2,065		$	156		$	6		$	10,526
Day 1 impact of adoption of CECL		(11	)		19			87			1,048			(365	)		(137	)		-			641
Charge-offs		-			-			-			-			(377	)		(72	)		-			(449	)
Recoveries		8			-			11			-			237			14			-			270
Provision for credit losses		(6	)		82			199			70			81			143			(6	)		563
Ending Balance	$	664		$	653		$	2,872		$	5,617		$	1,641		$	104		$	-		$	11,551

Average loans		77,014			81,771			268,620			425,751			200,020			2,702						1,055,878
Ratio of net charge-offs to average loans		-0.01	%		0.00	%		0.00	%		0.00	%		0.07	%		2.15	%					0.02	%

For the three months ended March 31, 2022
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction			Real Estate - Mortgage ⁽¹⁾			Real Estate - Commercial			Consumer			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459		$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(296	)		-			-			-			(307	)		(97	)		-		(700	)
Recoveries		77			-			30			-			116			31			-		254
Provision for loan losses		72			45			14			(187	)		170			(13	)		-		101
Ending Balance	$	536		$	504		$	2,434		$	4,600		$	1,341		$	105		$	-	$	9,520

Average loans		67,002			60,513			212,063			398,547			116,691			7,375					862,191
Ratio of net charge-offs to average loans		0.33	%		0.00	%		-0.01	%		0.00	%		0.16	%		0.89	%				0.05	%

(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.

The following table shows the amount of the ACLL allocated to each category and the ratio of corresponding outstanding loan balances as of the periods indicated. Although the ACLL is allocated into these categories, the entire ACLL is available to cover credit losses in any category.

TABLE 9: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS

	March 31,					December 31,
	2023					2022
(Dollars in thousands)	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial and industrial	$	664		6.79	%	$	673		7.07	%
Real estate-construction		653		8.02	%		552		7.59	%
Real estate-mortgage (1)		2,872		25.54	%		2,575		25.23	%
Real estate-commercial		5,617		39.86	%		4,499		41.85	%
Consumer		1,641		19.45	%		2,065		18.04	%
Other		104		0.35	%		156		0.23	%
Unallocated		-		-			6		-
Ending Balance	$	11,551		100.00	%	$	10,526		100.00	%

(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.

Deposits

The Company’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Company’s deposits are principally provided by individuals and businesses located within the communities served.

As of December 31, 2022, total deposits were $1.2 billion, an increase of $43.6 million, or 3.8%, compared to December 31, 2022. The following table presents average balances and average rates paid on deposits for the periods presented.

Index

TABLE 10: DEPOSITS

	Three Months ended March 31,
	2023					2022
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Interest-bearing transaction	$	70,254		0.02	%	$	75,129		0.02	%
Money market		428,941		0.80	%		389,368		0.17	%
Savings		115,880		0.03	%		126,258		0.03	%
Time deposits		148,563		1.47	%		167,859		0.87	%
Total interest bearing		763,638		0.74	%		758,614		0.29	%
Demand		429,928					414,080
Total deposits	$	1,193,566				$	1,172,694

As of March 31, 2023 and 2022, the estimated amounts of total uninsured deposits were $235.0 million and $273.7 million, respectively. The following table shows maturities of the estimated amounts of uninsured time deposits at March 31, 2023. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank’s regulatory reporting requirements.

TABLE 11: MATURITIES OF UNINSURED TIME DEPOSITS

	As of March 31,
(dollars in thousands)	2023
Maturing in:
Within 3 months	$	11,883
4 through 6 months		5,817
7 through 12 months		14,006
Greater than 12 months		22,000
	$	53,706

Capital Resources

Total stockholders’ equity as of March 31, 2023 was $102.6 million, up 3.9% from $98.7 million on December 31, 2022. The increase was primarily due to lower unrealized losses in the market value of securities available for sale, which are recognized as a component of accumulated other comprehensive loss, and net income, partially offset by the adoption of CECL. The Company’s securities available-for-sale are fixed income debt securities, and their unrealized loss position is a result of changes in market interest rates rather than credit quality issues. The Company expects to recover its investments in debt securities through scheduled payments of principal and interest and unrealized losses are not expected to affect the net income or regulatory capital of the Company or its subsidiaries.

The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s and the Bank’s capital is regularly reviewed. The Company targets regulatory capital levels that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. While the Company will continue to look for opportunities to invest capital in profitable growth, the Company will also consider investing capital in other transactions, such as share repurchases, that facilitate improving shareholder return, as measured by ROE and EPS.

The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for credit losses. In addition, the Bank has made the one-time irrevocable election to continue treating accumulated other comprehensive income under regulatory standards that were in place prior to the Basel III Capital Rules in order to eliminate volatility of regulatory capital that can result from fluctuations in accumulated other comprehensive (loss) income and the inclusion of accumulated other comprehensive (loss) income in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in accumulated other comprehensive (loss) income, including unrealized losses on securities available for sale, do not affect regulatory capital amounts

shown in the table below for the Bank

Pursuant to applicable regulations and regulatory guidance, the Company is treated as a small bank holding company and will not be subject to regulatory capital requirements. For more information, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s 2022 Form 10-K.

On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

Index

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework.

The following is a summary of the Bank’s capital ratios as of March 31, 2023 and December 31, 2022. As shown below, these ratios were all well above the recommended regulatory minimum levels.

TABLE 12: REGULATORY CAPITAL

	2023 Regulatory Minimums			March 31, 2023			2022 Regulatory Minimums			December 31, 2022
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		11.12	%		4.500	%		10.80	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		11.12	%		6.000	%		10.80	%
Tier 1 Leverage to Average Assets		4.000	%		9.74	%		4.000	%		9.43	%
Total Capital to Risk-Weighted Assets		8.000	%		12.08	%		8.000	%		11.70	%
Capital Conservation Buffer		2.500	%		4.08	%		2.500	%		3.70	%
Risk-Weighted Assets (in thousands)				$	1,225,088					$	1,177,600

On July 14, 2021, the Company issued $30.0 million in aggregate principal amount of 3.50% fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction. The Notes initially bear interest at a fixed rate of 3.50% for five years and convert to three-month SOFR plus 286 basis points, resetting quarterly, thereafter. The Notes were structured to qualify as Tier 2 capital for regulatory purposes and are included in the Company’s Tier 2 capital as of March 31, 2023 and December 31, 2022.

Liquidity

Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. Additional sources of liquidity available to the Company include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposits and the capacity to borrow additional funds.

A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB and FRB. As of the end of the first quarter of 2023, the Company had $404.1 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks.

Based on the Company’s management of liquid assets, the availability of borrowed funds, and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs. The Bank also participates in the IntraFi Cash Sweep, a product which provides the Bank the capability of providing additional deposit insurance to customers through three types of account arrangements. The Company experienced a change in liquidity mix beginning during the fourth quarter of 2022 as short-term FHLB borrowings were utilized to fund loan growth. Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. The Company is closely monitoring changes in the industry and market conditions that may affect the Company’s liquidity, including the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio as a result of rising market interest rates and developments in the financial services industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company’s operations.

The following table sets forth information relating to the Company’s sources of liquidity and the outstanding commitments for use of liquidity at March 31, 2023. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.

Index

TABLE 13: LIQUIDITY SOURCES AND USES

	March 31,
	2023
(dollars in thousands)	Total		In Use		Available
Sources:
Federal funds lines of credit	$	100,000	$	-	$	100,000
Federal Home Loan Bank advances		404,145		72,500		331,645
Federal funds sold & balances at the Federal Reserve						11,234
Securities, available for sale and unpledged at fair value						141,004
Total short-term funding sources					$	583,883

Uses: ⁽¹⁾
Unfunded loan commitments and lending lines of credit						80,876
Letters of credit						131
Total potential short-term funding uses						81,007
Liquidity coverage ratio						720.8	%

(1) Represents partial draw levels based on loan segment.

As a result of the ability to generate liquidity through liability funding and management of liquid assets, management believes the Company maintains overall liquidity sufficient to satisfy operational requirements and contractual obligations. The Company’s internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company’s primary external source of liquidity is advances from the FHLB.

In the ordinary course of business the Company has entered into contractual obligations and has made other commitments to make future payments. As of March 31, 2023, there have been no material changes outside the ordinary course of business as disclosed in the Company’s contractual obligations disclosed in the Company’s 2022 Form 10-K.

Off-Balance Sheet Arrangements

As of March 31, 2023, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2022 Form 10-K.

Non-GAAP Financial Measures

In reporting the results as of and for the three months ended March 31, 2023, the Company has provided supplemental financial measures on a tax equivalent, tangible, or adjusted basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.

Index

TABLE 14: Non-GAAP FINANCIAL MEASURES

	Three Months Ended March 31,
(dollar in thousands, except share and per share data)	2023			2022
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)	$	12,813		$	9,637
FTE adjustment		57			68
Net interest income (FTE) (non-GAAP)	$	12,870		$	9,705
Noninterest income (GAAP)		3,421			3,515
Total revenue (FTE) (non-GAAP)	$	16,291		$	13,220
Noninterest expense (GAAP)		12,168			10,713

Average earning assets	$	1,291,181		$	1,246,028
Net interest margin		4.02	%		3.14	%
Net interest margin (FTE) (non-GAAP)		4.04	%		3.16	%

Efficiency ratio		74.95	%		81.46	%
Efficiency ratio (FTE) (non-GAAP)		74.69	%		81.04	%

Tangible Book Value Per Share	March 31, 2023		December 31, 2022
Total Stockholders Equity (GAAP)	$	102,598	$	98,734
Less goodwill		1,650		1,650
Less core deposit intangible		220		231
Tangible Stockholders Equity (non-GAAP)	$	100,728	$	96,853
Shares issued and outstanding, including nonvested restricted stock		5,000,331		4,999,083

Book value per share	$	20.52	$	19.75
Tangible book value per share	$	20.14	$	19.37

ACLL as a Percentage of Loans Held for Investment	March 31, 2023			December 31, 2022			March 31, 2022
Loans held for investment (net of deferred fees and costs) (GAAP)	$	1,081,265		$	1,027,085		$	855,234
Less PPP originations		471			530			7,509
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP)	$	1,080,794		$	1,026,555		$	847,725
ACLL	$	11,551		$	10,526		$	9,520
ACLL as a Percentage of Loans Held for Investment		1.07	%		1.02	%		1.11	%
ACLL as a Percentage of Loans Held for Investment, net of PPP originations		1.07	%		1.03	%		1.12	%

Index

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of the Company’s management, as well as estimates and assumptions made by, and information available to, management, as of the time such statements are made. These statements are inherently uncertain, and there can be no assurance that the underlying beliefs, estimates, or assumptions will prove to be accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those anticipated by such statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its business or operations. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation: statements regarding strategic business initiatives, including vendor review initiatives and new vendor relationships, and the future financial impact of those initiatives; expected future operations and financial performance; current and future interest rate levels and fluctuations and potential impacts on the Company’s NIM, future financial and economic conditions, industry conditions, and loan demand; impacts of economic uncertainties; performance of loan and securities portfolios, asset quality, future levels of the ALLL and the provision for credit losses and the level of future charge-offs; deposit growth; management’s belief regarding liquidity and capital resources; the Company’s technology and efficiency initiatives and anticipated completion timelines; changes in NIM and items affecting NIM; expected future recovery of investments in debt securities; expected impact of unrealized losses on earnings and regulatory capital of the Company or the Bank; liquidity and capital levels; cybersecurity risks; inflation; the effect of future market and industry trends; and other statements that include projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in or the effects of:

•

interest rates and yields, such as increases or volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates, and the impacts on macroeconomic conditions, customer and client behavior, the Company’s funding costs, and the Company’s loan and securities portfolios

•

inflation and its impacts on economic growth and customer and client behavior

•

adverse developments in the financial services industry, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior

•

the sufficiency of liquidity

•

general economic and business conditions in the United States generally and particularly in the Company’s service area, including unemployment levels, supply chain disruptions, higher inflation, slowdowns in economic growth, continuing economic impacts of the COVID-19 pandemic, and the ongoing conflict between Russia and Ukraine, and the impacts on customer and client behavior

•

conditions within the financial markets and in the banking industry, as well as the financial condition and capital adequacy of other participants in the banking industry, and the market reactions thereto

•

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System (the Federal Reserve), the effect of these policies on interest rates and business in our markets and any changes associated with the current administration

•

the quality or composition of the loan or securities portfolios and changes therein

•

effectiveness of expense control initiatives

•

an insufficient ACL or volatility in the ACL resulting from the CECL methodology, either alone or as may be affected by inflation, changing interest rates, or other factors

•

the Company’s liquidity and capital positions

•

the value of securities held in the Company’s investment portfolios

•

deposit flows

•

the Company’s technology, efficiency, and other strategic initiatives

•

the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB

•

future levels of government defense spending particularly in the Company’s service areas

•

uncertainty over future federal spending or budget priorities, particularly in connection with the Department of Defense, on the Company’s service areas

•

the impact of potential changes in the political landscape and related policy changes, including monetary, regulatory and trade policies

•

the U.S. Government’s guarantee of repayment of student or small business loans purchased by the Company

•

potential claims, damages and fines related to litigation or government actions

•

demand for loan products and the impact of changes in demand on loan growth

•

changes in the volume and mix of interest-earning assets and interest-bearing liabilities

•

the effects of management’s investment strategy and strategy to manage the NIM

•

the level of net charge-offs on loans

•

performance of the Company’s dealer lending program

•

the Company’s branch realignment initiatives

Index

•

the strength of the Company’s counterparties

•

the Company’s ability to compete in the market for financial services and increased competition from both banks and non-banks, including fintech companies

•

demand for financial services in the Company’s market area

•

implementation of new technologies

•

the Company’s ability to develop and maintain secure and reliable electronic systems

•

any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or their service providers

•

reliance on third parties for key services

•

cyber threats, attacks or events

•

the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies

•

the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, financial crises, political crises, war and other geopolitical conflicts, such as the war between Russia and Ukraine, or public health events, such as the COVID-19 pandemic, and of governmental and societal responses thereto, on, among other things, the Company’s operations, liquidity and credit quality

•

the use of inaccurate assumptions in management’s modeling systems

•

technological risks and developments

•

the commercial and residential real estate markets

•

the demand in the secondary residential mortgage loan markets

•

expansion of the Company’s product offerings

•

effectiveness of expense reduction plans

•

changes in accounting principles, standards, rules and interpretations and elections made by the Company thereunder, and the related impact on the Company’s financial statements.

These risks and uncertainties, and the factors discussed in more detail in Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2022 Form 10-K should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements are not statements of historical fact. Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not intend or assume any obligation to update, revise, or clarify any forward-looking statements that may be made from time to time or on behalf of the Company, whether as a result of new information, future events, or otherwise, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures. Management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report 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 SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Index

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

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

There are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A.

Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2022 Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon vesting of restricted stock awards to satisfy tax withholding requirements. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the three months ended March 31, 2023, the Company did not repurchase any shares related to the equity compensation plan awards.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

None.

Index

Item 6.

Exhibits.

Exhibit No.	Description
3.1	Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009)

3.1.1	Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016)

3.2	Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016)

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 Section 906 of the Sarbanes-Oxley Act of 2002

101	The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for March 31, 2023), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)

104	The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in Inline XBRL (included with Exhibit 101)

Index

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.

	OLD POINT FINANCIAL CORPORATION

May 15, 2023	/s/Robert F. Shuford, Jr.
	Robert F. Shuford, Jr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)

May 15, 2023	/s/Elizabeth T. Beale
	Elizabeth T. Beale
	Chief Financial Officer & Senior Vice President/Finance
	(Principal Financial & Accounting Officer)

Virginia		54-1265373
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $5.00 par value	OPOF	The NASDAQ Stock Market LLC

Large accelerated filer	☐	Accelerated filer ☐
Non-accelerated filer	☒	Smaller reporting company ☒
		Emerging growth company ☐

	March 31,			December 31,
(dollars in thousands, except share data)	2023			2022
	(unaudited)
Assets

Cash and due from banks	$	16,253		$	15,670
Interest-bearing due from banks		12,594			3,580
Federal funds sold		222			-
Cash and cash equivalents		29,069			19,250
Securities available-for-sale, at fair value		223,913			225,518
Restricted securities, at cost		4,479			3,434
Loans held for sale		325			421
Loans, net		1,069,714			1,016,559
Premises and equipment, net		30,604			31,008
Premises and equipment, held for sale		987			987
Bank-owned life insurance		34,304			34,049
Goodwill		1,650			1,650
Core deposit intangible, net		220			231
Other assets		20,886			22,228
Total assets	$	1,416,151		$	1,355,335

Liabilities & Stockholders’ Equity

Deposits:
Noninterest-bearing deposits	$	405,160		$	418,582
Savings deposits		629,483			584,527
Time deposits		164,972			152,910
Total deposits		1,199,615			1,156,019
Overnight repurchase agreements		4,517			4,987
Federal funds purchased and other short-term borrowings		-			11,378
Federal Home Loan Bank advances		72,500			46,100
Long term borrowings		29,570			29,538
Accrued expenses and other liabilities		7,351			8,579
Total liabilities		1,313,553			1,256,601

Stockholders’ equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,000,331 and 4,999,083 shares outstanding (includes 46,989 of nonvested restricted stock, respectively)		24,767			24,761
Additional paid-in capital		16,727			16,593
Retained earnings		79,539			78,147
Accumulated other comprehensive loss, net		(18,435	)		(20,767	)
Total stockholders’ equity		102,598			98,734
Total liabilities and stockholders’ equity	$	1,416,151		$	1,355,335

	Three Months Ended
	March 31,
(unaudited, dollars in thousands, except share and per share data)	2023		2022
Interest and Dividend Income:
Loans, including fees	$	13,041	$	9,184
Due from banks		64		73
Federal funds sold		6		1
Securities:
Taxable		1,764		989
Tax-exempt		212		209
Dividends and interest on all other securities		66		14
Total interest and dividend income		15,153		10,470

Interest Expense:
Checking and savings deposits		854		176
Time deposits		537		361
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		37		1
Long term borrowings		295		295
Federal Home Loan Bank advances		617		-
Total interest expense		2,340		833
Net interest income		12,813		9,637
Provision for credit losses		376		101
Net interest income after provision for credit losses		12,437		9,536

Noninterest Income:
Fiduciary and asset management fees		1,116		1,072
Service charges on deposit accounts		753		722
Other service charges, commissions and fees		1,109		1,053
Bank-owned life insurance income		254		231
Mortgage banking income		95		220
Other operating income		94		217
Total noninterest income		3,421		3,515

Noninterest Expense:
Salaries and employee benefits		7,363		6,422
Occupancy and equipment		1,195		1,161
Data processing		1,179		1,090
Customer development		113		93
Professional services		673		630
Employee professional development		234		264
Other taxes		213		213
ATM and other losses		255		14
Other operating expenses		943		826
Total noninterest expense		12,168		10,713
Income before income taxes		3,690		2,338
Income tax expense		607		307
Net income	$	3,083	$	2,031

Basic Earnings per Share:
Weighted average shares outstanding		4,999,887		5,186,354
Net income per share of common stock	$	0.62	$	0.39

Diluted Earnings per Share:
Weighted average shares outstanding		5,000,020		5,186,431
Net income per share of common stock	$	0.62	$	0.39

		Page

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022	1

	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2023 and 2022	2

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2023 and 2022	3

	Consolidated Statements of Changes in Stockholders' Equity (unaudited) for the three months ended March 31, 2023 and 2022	4

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2023 and 2022	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

	Signatures	45

2022 Form 10-K	Annual Report on Form 10-K for the year ended December 31, 2022
ACL	Allowance for Credit Losses
ACLL	Allowance for Credit Losses on Loans, a component of ACL
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	The Old Point National Bank of Phoebus
CECL	Current Expected Credit Losses
CET1	Common Equity Tier 1
Company	Old Point Financial Corporation and its subsidiaries
CBB	Community Bankers Bank
CBLR	Community Bank Leverage Ratio Framework
COVID-19	Novel coronavirus disease 2019
EGRRCPA	Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS	earnings per share
ESPP	Employee Stock Purchase Plan
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FHLB	Federal Home Loan Bank
Federal Reserve	Board of Governors of the Federal Reserve System
FRB	Federal Reserve Bank
GAAP	Generally Accepted Accounting Principles
Incentive Stock Plan	Old Point Financial Corporation 2016 Incentive Stock Plan
IRLC	Interest Rate Lock Commitments
NIM	Net Interest Margin
Notes	The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031
OAEM	Other Assets Especially Mentioned
OREO	Other Real Estate Owned
PPP	Paycheck Protection Program
PPPLF	Paycheck Protection Program Liquidity Facility
ROE	Return on Average Equity
SEC	U.S. Securities and Exchange Commission
SOFR	Secured overnight financing rate
TDR	Troubled Debt Restructuring
Wealth	Old Point Trust & Financial Services N.A.

	Three Months Ended
	March 31,
(unaudited, dollars in thousands)	2023		2022

Net income	$	3,083	$	2,031
Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on available-for-sale securities		2,332		(11,133	)
Other comprehensive income (loss), net of tax		2,332		(11,133	)
Comprehensive income (loss)	$	5,415	$	(9,102	)

													Accumulated
	Shares of						Additional						Other
	Common			Common			Paid-in			Retained			Comprehensive
(unaudited, dollars in thousands, except share and per share data)	Stock			Stock			Capital			Earnings			Income (Loss)			Total
THREE MONTHS ENDED MARCH 31, 2023

Balance at December 31, 2022		4,952,094		$	24,761		$	16,593		$	78,147		$	(20,767	)	$	98,734
Net income		-			-			-			3,083			-			3,083
Other comprehensive income, net of tax		-			-			-			-			2,332			2,332
Impact of adoption of ASC 326		-			-			-			(991	)		-			(991	)
Employee Stock Purchase Plan share issuance		1,248			6			27			-			-			33
Stock-based compensation expense		-			-			107			-			-			107
Cash dividends ($0.14 per share)		-			-			-			(700	)		-			(700	)

Balance at end of period		4,953,342		$	24,767		$	16,727		$	79,539		$	(18,435	)	$	102,598

THREE MONTHS ENDED MARCH 31, 2022

Balance at December 31, 2021		5,201,272		$	26,006		$	21,458		$	71,679		$	1,675		$	120,818
Net income		-			-			-			2,031			-			2,031
Other comprehensive loss, net of tax		-			-			-			-			(11,133	)		(11,133	)
Employee Stock Purchase Plan share issuance		1,481			7			27			-			-			34
Common stock purchased		(122,995	)		(615	)		(2,433	)		-			-			(3,048	)
Restricted stock vested		8,152			41			(41	)		-			-			-
Stock-based compensation expense		-			-			71			-			-			71
Cash dividends ($0.13 per share)		-			-			-			(674	)		-			(674	)

Balance at end of period		5,087,910		$	25,439		$	19,082		$	73,036		$	(9,458	)	$	108,099

	March 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	8,013	$	-	$	(265	)	$	7,748
Obligations of U.S. Government agencies		40,680		24		(963	)		39,741
Obligations of state and political subdivisions		70,351		-		(9,698	)		60,653
Mortgage-backed securities		98,554		-		(9,858	)		88,696
Money market investments		1,661		-		-			1,661
Corporate bonds and other securities		27,990		-		(2,576	)		25,414
	$	247,249	$	24	$	(23,360	)	$	223,913

	March 31, 2023
	Less than 12 months				12 months or more				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(Dollars in thousands)	Losses		Value		Losses		Value		Losses		Value
U.S. Treasury securities	$	20	$	3,902	$	245	$	3,846	$	265	$	7,748
Obligations of U.S. Government agencies		53		7,558		910		26,736		963		34,294
Obligations of state and political subdivisions		381		7,247		9,317		53,406		9,698		60,653
Mortgage-backed securities		817		22,700		9,041		65,996		9,858		88,696
Corporate bonds and other securities		249		4,991		2,327		19,423		2,576		24,414
Total securities available-for-sale	$	1,520	$	46,398	$	21,840	$	169,407	$	23,360	$	215,805

(dollars in thousands)	March 31, 2023
Lease liabilities	$	1,552
Right-of-use assets	$	1,478
Weighted average remaining lease term	4.04 years
Weighted average discount rate		2.91	%

	Three Months Ended March 31,
Lease cost (in thousands)	2023		2022
Operating lease cost	$	101	$	82
Total lease cost	$	101	$	82

Cash paid for amounts included in the measurement of lease liabilities	$	91	$	84

	As of
Lease payments due (in thousands)	March 31, 2023
Nine months ending December 31, 2023	$	326
Twelve months ending December 31, 2024		436
Twelve months ending December 31, 2025		395
Twelve months ending December 31, 2026		278
Thereafter		231
Total undiscounted cash flows	$	1,666
Discount		(114	)
Lease liabilities	$	1,552

			Weighted Average
			Grant Date
	Shares		Fair Value
Nonvested, January 1, 2023		46,989	$	22.49
Issued		-		-
Vested		-		-
Forfeited		-		-
Nonvested, March 31, 2023		46,989	$	22.49

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive (Loss) Income

Three Months Ended March 31, 2023
Balance at beginning of period	$	(20,767	)	$	(20,767	)
Net other comprehensive income		2,332			2,332
Balance at end of period	$	(18,435	)	$	(18,435	)

Three Months Ended March 31, 2022
Balance at beginning of period	$	1,675		$	1,675
Net other comprehensive loss		(11,133	)		(11,133	)
Balance at end of period	$	(9,458	)	$	(9,458	)

	Three Months Ended March 31, 2023
(dollars in thousands)	Pretax		Tax		Net-of-Tax
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	2,952	$	620	$	2,332

Total change in accumulated other comprehensive income, net	$	2,952	$	620	$	2,332

(dollars in thousands except per share data)	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
Three Months Ended March 31, 2023
Net income, basic	$	3,083		5,000	$	0.62
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	3,083		5,000	$	0.62

Three Months Ended March 31, 2022
Net income, basic	$	2,031		5,186	$	0.39
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	2,031		5,186	$	0.39