UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2021~~March 31, 2022

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

For the transition period from____________ to___________

Commission File Number: 000-12896

OLD POINT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

101 East Queen Street, Hampton, Virginia 23669

(Address of principal executive offices) (Zip Code)

(757) 728-1200

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

~~5,245,842~~5,097,102 shares of common stock ($5.00 par value) outstanding as of ~~November 9, 2021~~May 5, 2022

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

		Page

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 (unaudited) and December 31, ~~2020~~2021	1

	Consolidated Statements of Income (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	2

	Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	3

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	43

	Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	64

	Notes to Consolidated Financial Statements (unaudited)	75

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29 26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4241

Item 4.	Controls and Procedures	4241

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	4342

Item 1A.	Risk Factors	4342

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4342

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	4443

	Signatures	44

Index

GLOSSARY OF DEFINED TERMS

~~2020 Annual Report on~~2021 Form 10-K	Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021
ALLL	Allowance for Loan and Lease Losses
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	The Old Point National Bank of Phoebus
The CARES Act	The Coronavirus Aid, Relief, and Economic Security Act
CET1	Common Equity Tier 1
~~Citizens~~	~~Citizens National Bank~~
Company	Old Point Financial Corporation and its subsidiaries
CBB	Community Bankers Bank
CBLR	Community Bank Leverage Ratio Framework
COVID-19	Novel cornovirus 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
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
SEC	Securities and Exchange Commission
~~SBA~~	~~Small Business Administration~~
SOFR	Secured overnight financing rate
TDR	Troubled Debt Restructuring
Trust	Old Point Trust & Financial Services N.A.

Index

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

Old Point Financial Corporation and Subsidiaries

Consolidated Balance Sheets

	September 30,		December 31,		March 31,			December 31,
(dollars in thousands, except share data)	2021		2020		2022			2021
	(unaudited)				(unaudited)
Assets

Cash and due from banks	$	14,429	$	21,799	$	12,577		$	13,424
Interest-bearing due from banks		169,223		98,633		144,321			164,073
Federal funds sold		652		5		1,405			10,425
Cash and cash equivalents		184,304		120,437		158,303			187,922
Securities available-for-sale, at fair value		212,440		186,409		238,023			234,321
Restricted securities, at cost		1,034		1,367		1,389			1,034
Loans held for sale		5,740		14,413		2,010			3,287
Loans, net		830,467		826,759		845,714			833,661
Premises and equipment, net		32,282		33,613		31,472			32,134
Premises and equipment, held for sale		871		0		1,216			871
Bank-owned life insurance		29,012		28,386		28,370			28,168
Goodwill		1,650		1,650		1,650			1,650
Core deposit intangible, net		286		319		264			275
Other assets		13,540		12,838		16,974			14,832
Total assets	$	1,311,626	$	1,226,191	$	1,325,385		$	1,338,155

Liabilities & Stockholders' Equity

Deposits:
Noninterest-bearing deposits	$	392,986	$	360,602	$	385,150		$	421,531
Savings deposits		584,600		512,936		628,770			586,450
Time deposits		173,120		193,698		164,969			169,118
Total deposits		1,150,706		1,067,236		1,178,889			1,177,099
Overnight repurchase agreements		4,496		6,619		3,528			4,536
Federal Reserve Bank borrowings		898		28,550		0			480
Long term borrowings		29,374		1,350		29,440			29,407
Accrued expenses and other liabilities		5,385		5,291		5,429			5,815
Total liabilities		1,190,859		1,109,046		1,217,286			1,217,337

Stockholders' equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,245,842 and 5,224,019 shares outstanding (includes 39,103 and 29,576 of nonvested restricted stock, respectively)		26,034		25,972
Common stock, $5 par value, 10,000,000 shares authorized; 5,118,193 and 5,239,707 shares outstanding (includes 30,283 and 38,435 of nonvested restricted stock, respectively)						25,439			26,006
Additional paid-in capital		21,476		21,245		19,082			21,458
Retained earnings		70,683		65,859		73,036			71,679
Accumulated other comprehensive income, net		2,574		4,069
Accumulated other comprehensive (loss) income, net						(9,458	)		1,675
Total stockholders' equity		120,767		117,145		108,099			120,818
Total liabilities and stockholders' equity	$	1,311,626	$	1,226,191	$	1,325,385		$	1,338,155

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Income

	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended March 31,
(unaudited, dollars in thousands, except per share data)	2021		2020			2021		2020			2022		2021
Interest and Dividend Income:
Loans, including fees	$	9,692	$	8,788		$	28,460	$	26,539		$	9,184	$	9,954
Due from banks		68		41			163		224			73		43
Federal funds sold		0		0			0		12			1		0
Securities:
Taxable		853		720			2,414		2,296			989		770
Tax-exempt		186		141			558		364			209		181
Dividends and interest on all other securities		16		47			57		136			14		30
Total interest and dividend income		10,815		9,737			31,652		29,571			10,470		10,978

Interest Expense:
Checking and savings deposits		243		238			693		876			176		215
Time deposits		441		791			1,536		2,646			361		584
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		3		69			33		106			1		23
Long term borrowings		252		0			252		0			295		0
Federal Home Loan Bank advances		0		171			0		584
Total interest expense		939		1,269			2,514		4,212			833		822
Net interest income		9,876		8,468			29,138		25,359			9,637		10,156
Provision for loan losses		360		300			510		900			101		150
Net interest income after provision for loan losses		9,516		8,168			28,628		24,459			9,536		10,006

Noninterest Income:
Fiduciary and asset management fees		1,032		955			3,110		2,881			1,072		1,027
Service charges on deposit accounts		731		666			2,119		2,176			722		649
Other service charges, commissions and fees		1,085		1,121			3,153		3,044			1,053		987
Bank-owned life insurance income		195		207			625		630			231		226
Mortgage banking income		460		640			2,029		1,020			220		1,188
Gain on sale of available-for-sale securities, net		0		1			0		185
Gain on sale of fixed assets		0		0			0		818
Other operating income		103		67			242		139			217		57
Total noninterest income		3,606		3,657			11,278		10,893			3,515		4,134

Noninterest Expense:
Salaries and employee benefits		6,558		6,660			19,012		18,118			6,422		6,227
Occupancy and equipment		1,185		1,233			3,510		3,687			1,161		1,202
Data processing		1,187		946			3,427		2,569			1,090		1,043
Customer development		78		82			225		267			93		78
Professional services		625		467			1,790		1,532			630		545
Employee professional development		154		200			487		513			264		141
Other taxes		186		162			608		470			213		251
ATM and other losses		68		75			224		233			14		139
(Gain) on other real estate owned		0		(22	)		0		(22	)
Other operating expenses		887		861			2,738		2,531			826		932
Total noninterest expense		10,928		10,664			32,021		29,898			10,713		10,558
Income before income taxes		2,194		1,161			7,885		5,454			2,338		3,582
Income tax expense		286		61			1,123		610			307		570
Net income	$	1,908	$	1,100		$	6,762	$	4,844		$	2,031	$	3,012

Basic Earnings per Share:
Weighted average shares outstanding		5,245,042		5,221,476			5,235,749		5,213,982			5,186,354		5,224,501
Net income per share of common stock	$	0.36	$	0.21		$	1.29	$	0.93		$	0.39	$	0.58

Diluted Earnings per Share:
Weighted average shares outstanding		5,245,172		5,221,601			5,235,793		5,214,262			5,186,431		5,224,501
Net income per share of common stock	$	0.36	$	0.21		$	1.29	$	0.93		$	0.39	$	0.58

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended
September 30,

Nine Months Ended
September 30,

(unaudited, dollars in thousands) 2021
2020
2021
2020

Net income
$
1,908

$
1,100

$
6,762

$
4,844

Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on available-for-sale securities
(497
)

453

(1,495
)

4,029

Reclassification for gain included in net income
0

(1
)

0

(146
)
Other comprehensive income (loss), net of tax
(497
)

452

(1,495
)

3,883

Comprehensive income
$
1,411

$
1,552

$
5,267

$
8,727

	Three Months Ended March 31,
(unaudited, dollars in thousands)	2022			2021

Net income	$	2,031		$	3,012
Other comprehensive loss, net of tax
Net unrealized loss on available-for-sale securities		(11,133	)		(1,694	)
Other comprehensive loss, net of tax		(11,133	)		(1,694	)
Comprehensive (loss) income	$	(9,102	)	$	1,318

See Notes to Consolidated Financial Statements.

Index

~~Old Point Financial Corporation and Subsidiaries~~

~~Consolidated Statements of~~ ~~Changes in Stockholders' Equity~~

(unaudited, dollars in thousands, except share and per share data)
Shares of
Common
Stock

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)
Total
THREE MONTHS ENDED SEPTEMBER 30, 2021

Balance at June 30, 2021 5,205,532 $ 26,028 $ 21,372 $ 69,457 $ 3,071 $ 119,928
Net income - 0 0 1,908 0 1,908
Other comprehensive income, net of tax - 0 0 0 (497 ) (497 )
Employee Stock Purchase Plan share issuance 1,207 6 20 0 0 26
Restricted stock vested 0 0 0 0 0 0
Stock-based compensation expense - 0 84 0 0 84
Cash dividends ($0.13 per share) - 0 0 (682 ) 0 (682 )

Balance at end of period 5,206,739 $ 26,034 $ 21,476 $ 70,683 $ 2,574 $ 120,767

THREE MONTHS ENDED SEPTEMBER 30, 2020

Balance at June 30, 2020 5,191,217 $ 25,956 $ 21,093 $ 65,468 $ 3,352 $ 115,869
Net income - 0 0 1,100 0 1,100
Other comprehensive loss, net of tax - 0 0 0 452 452
Employee Stock Purchase Plan share issuance 1,592 8 16 0 0 24
Restricted stock vested 0 0 0 0 0 0
Stock-based compensation expense - 0 56 0 0 56
Cash dividends ($0.12 per share) - 0 0 (626 ) 0 (626 )

Balance at end of period 5,192,809 $ 25,964 $ 21,165 $ 65,942 $ 3,804 $ 116,875

~~Index~~

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes in ~~Stockholders'~~Stockholders’ Equity

(unaudited, dollars in thousands, except share and per share data)
Shares of
Common
Stock

Common
Stock

Additional
Paid-in
Capital
Retained Earnings

Accumulated
Other
Comprehensive
Income (Loss)
Total

NINE MONTHS ENDED SEPTEMBER 30, 2021

Balance at December 31, 2020 5,194,443 $ 25,972 $ 21,245 $ 65,859 $ 4,069 $ 117,145
Net income - 0 0 6,762 0 6,762
Other comprehensive loss, net of tax - 0 0 0 (1,495 ) (1,495 )
Employee Stock Purchase Plan share issuance 3,775 19 60 0 0 79
Restricted stock vested 8,521 43 (43 ) 0 0 0
Stock-based compensation expense - 0 214 0 0 214
Cash dividends ($0.37 per share) - 0 0 (1,938 ) 0 (1,938 )

Balance at end of period 5,206,739 $ 26,034 $ 21,476 $ 70,683 $ 2,574 $ 120,767

NINE MONTHS ENDED SEPTEMBER 30, 2020

Balance at December 31, 2019 5,180,105 $ 25,901 $ 20,959 $ 62,975 $ (79 ) $ 109,756
Net income - 0 0 4,844 0 4,844
Other comprehensive income, net of tax - 0 0 0 3,883 3,883
Employee Stock Purchase Plan share issuance 4,185 21 49 0 0 70
Restricted stock vested 8,519 42 (42 ) 0 0 0
Stock-based compensation expense - 0 199 0 0 199
Cash dividends ($0.36 per share) - 0 0 (1,877 ) 0 (1,877 )

Balance at end of period 5,192,809 $ 25,964 $ 21,165 $ 65,942 $ 3,804 $ 116,875

(unaudited, dollars in thousands, except share and per share data)	Shares of Common Stock			Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
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		-			0			0			2,031			0			2,031
Other comprehensive loss, net of tax		-			0			0			0			(11,133	)		(11,133	)
Employee Stock Purchase Plan share issuance		1,481			7			27			0			0			34
Common stock purchased		(122,995	)		(615	)		(2,433	)		0			0			(3,048	)
Restricted stock vested		8,152			41			(41	)		0			0			0
Stock-based compensation expense		-			0			71			0			0			71
Cash dividends ($0.13 per share)		-			0			0			(674	)		0			(674	)
Balance at end of period		5,087,910		$	25,439		$	19,082		$	73,036		$	(9,458	)	$	108,099

THREE MONTHS ENDED MARCH 31, 2021

Balance at December 31, 2020	5,194,443	$	25,972	$	21,245	$	65,859		$	4,069		$	117,145
Net income	-		0		0		3,012			0			3,012
Other comprehensive loss, net of tax	-		0		0		0			(1,694	)		(1,694	)
Employee Stock Purchase Plan share issuance	1,276		7		18		0			0			25
Stock-based compensation expense	-		0		61		0			0			61
Cash dividends ($0.12 per share)	-		0		0		(626	)		0			(626	)
Balance at end of period	5,195,719	$	25,979	$	21,324	$	68,245		$	2,375		$	117,923

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,							Three Months Ended March 31,
(unaudited, dollars in thousands)	2021			2020				2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,762		$	4,844			$	2,031			$	3,012
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,559			1,601				514				538
Amortization of right of use lease asset		266			278				82				104
Accretion related to acquisition, net		(5	)		(52	)			(12	)			(4	)
Amortization of subordinated debt issuance costs		27			0				33		��		0
Provision for loan losses		510			900				101				150
Gain on sale of securities, net		0			(185	)
Net amortization of securities on subordinated issuance costs		709			458
Decrease (increase) in loans held for sale, net		8,673			(12,065	)
Net (gain) loss on disposal of premises and equipment		0			(818	)
Net (gain) loss on write-down/sale of other real estate owned		0			(22	)
Net amortization of securities									288				205
Decrease in loans held for sale, net									1,277				5,122
Income from bank owned life insurance		(625	)		(630	)			(231	)			(226	)
Stock compensation expense		214			199				71				61
Deferred tax benefit		(12	)		(1,032	)
(Decrease) in other assets		(560	)		(1,666	)
Increase (decrease) in accrued expenses and other liabilities		94			(1,162	)
Net cash provided by (used in) operating activities		17,612			(9,352	)
Deferred tax (benefit)									0				(12	)
Decrease (increase) in other assets									764				(425	)
(Decrease) increase in accrued expenses and other liabilities									(386	)			5,667
Net cash provided by operating activities									4,532				14,192

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(55,698	)		(44,173	)			(26,118	)			(16,008	)
Proceeds from redemption (purchase) of restricted securities, net		333			(78	)
Proceeds from (purchase) redemption of restricted securities, net									(355	)			334
Proceeds from maturities and calls of available-for-sale securities		8,779			7,684				1,000				400
Proceeds from sales of available-for-sale securities		4,330			9,385				2,450				1,300
Paydowns on available-for-sale securities		13,957			8,914				4,586				3,850
Net increase in loans held for investment		(4,180	)		(124,834	)
Proceeds from sales of other real estate owned		0			40
Net (decrease) increase in loans held for investment									(12,131	)			28,624
Purchases of premises and equipment		(1,130	)		(758	)			(197	)			(126	)
Proceeds from sale of premises and equipment		31			2,204
Net cash used in investing activities		(33,578	)		(141,616	)
Net cash (used in) provided by investing activities									(30,765	)			18,374

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits		32,384			100,968
(Decrease) increase in noninterest-bearing deposits									(36,381	)			24,477
Increase in savings deposits		71,664			86,575				42,320				26,406
Decrease in time deposits		(20,578	)		(25,976	)			(4,149	)			(6,561	)
Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net		(3,473	)		(5,621	)
Increase in Federal Home Loan Bank advances		0			25,000
Repayment of Federal Home Loan Bank advances		0			(23,500	)
Increase in Federal Reserve Bank borrowings		0			37,515
Decrease in federal funds purchased, repurchase agreements and other borrowings, net									(1,008	)			(1,765	)
Repayment of Federal Reserve Bank borrowings		(27,652	)		(175	)			(480	)			(17,555	)
Increase in long term borrowings		29,347			0
Proceeds from ESPP issuance		79			70				34				25
Repurchase of common stock									(3,048	)			0
Cash dividends paid on common stock		(1,938	)		(1,877	)			(674	)			(626	)
Net cash provided by financing activities		79,833			192,979
Net cash (used in) provided by financing activities									(3,386	)			24,401

Net increase in cash and cash equivalents		63,867			42,011
Net (decrease) increase in cash and cash equivalents									(29,619	)			56,967
Cash and cash equivalents at beginning of period		120,437			89,865				187,922				120,437
Cash and cash equivalents at end of period	$	184,304		$	131,876			$	158,303			$	177,404

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,442		$	4,353			$	1,101			$	891

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized (loss) gain on securities available-for-sale	$	(1,892	)	$	4,915			$	(14,093	)		$	(2,144	)
Loans transferred to other real estate owned	$	0		$	254
Former bank property transferred from fixed assets to held for sale assets	$	902		$	0			$	345			$	902
Right of use lease asset and liability	$	0		$	862			$	0			$	1,277

See Notes to Consolidated Financial Statements.

Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

THE COMPANY

Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through 2 wholly-owned subsidiaries, the Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). As of March 31, 2022, 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. Trust 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, the Bank, and Trust. All significant intercompany balances and transactions have been eliminated in consolidation.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of ~~Old Point Financial Corporation (NASDAQ: OPOF) (the Company)~~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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the statements of income, comprehensive income (loss), and changes in ~~stockholders’~~stockholders' equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ and the statements of cash flows for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. 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 2020 Annual Report on~~Company's 2021 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 allowance for loan losses and evaluation of goodwill for impairment.

~~PRINCIPLES OF CONSOLIDATION~~

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). All significant intercompany balances and transactions have been eliminated in consolidation.

~~NATURE OF OPERATIONS~~

~~Old Point Financial Corporation is a holding company that conducts substantially all of its operations through 2 subsidiaries, the Bank and Trust.~~ The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of September 30, 2021, the Bank had 16 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.~~ Trust 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.

~~COVID-19~~

~~The~~ COVID-19 pandemic has caused a significant disruption in economic activity worldwide, including in market areas served by the Company. Estimates for the allowance for loan losses at ~~September 30, 2021~~March 31, 2022 include probable and estimable losses related to the pandemic. While there have been signals of economic recovery and a resumption of many types of business activity, there remains significant uncertainty in the probable and estimable measurement of these losses. If there are further challenges to the economic recovery, then additional provision for loan losses may be required in future periods. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Company. Depending on the severity and duration of the economic consequences of the pandemic, the Company’s goodwill may become ~~impaired.~~

On March 27, 2020, the CARES Act was enacted, which included provisions that, among other things, (i) established the PPP to provide loans guaranteed by the SBA to businesses affected by the pandemic, (ii) provided certain forms of economic stimulus, including direct payments to certain U.S. households, enhanced unemployment benefits, certain income tax benefits intended to assist businesses in surviving the economic crisis, and delayed the required implementation of certain new accounting standards for some entities, and (iii) provided limited regulatory relief to banking institutions. The federal banking agencies have eased certain bank capital requirements and reporting requirements in response to the pandemic, and have encouraged banking institutions to work prudently with borrowers affected by the pandemic by offering loan modifications that can improve borrowers’ capacity to service debt, increase the potential for financially stressed residential borrowers to keep their homes, and facilitate financial institutions’ ability to collect on their loans. The Federal Reserve also established the PPPLF to provide funding to eligible financial institutions to facilitate lending under the PPP. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, expanded on some of the benefits made available under the CARES Act, including the PPP program, and provided further economic stimulus. On March 11, 2021, President Biden signed into law the American Rescue Plan which provided a further $1.9 trillion of pandemic relief.

impairedThe Company’s business, financial condition and results of operations generally rely upon the ability of its borrowers to repay their loans, the value of collateral underlying secured loans, and the demand for loans and other products and services offered, which are highly dependent on the business environment in the Company’s primary markets. As of September ~~30, 2021,~~ ~~the Company had 0 loan modifications under the CARES Act, down from approximately~~ ~~$54 thousand as of June 30, 2021 and~~ ~~$7.4 million~~ ~~as of December~~ ~~31, 2020.~~.

~~Index~~

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU No. 2016-13 as codified in Topic 326, including ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11, ASU No. 2020-02, and ASU No. 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. ~~Smaller reporting companies who file~~The new standard will be effective for the Company beginning on January 1, 2023.

Index

The amendments of ASC 326, upon adoption, will be applied on a modified retrospective basis, with the ~~U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with~~cumulative effect of adopting the ~~SEC are required~~new standard being recorded as an adjustment to ~~apply~~opening retained earnings in the ~~guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.~~period of adoption. The Company has ~~formed~~established a committee to oversee the adoption of ~~the new standard,~~ASC 326. The Company has engaged a ~~third party~~vendor to assist ~~with implementation, has~~in modeling expected lifetime losses under ASC 326, gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard, performed procedures to validate the historical loan loss data ~~fit gap~~to ensure its suitability and ~~loss driver analyses, intends to run parallel models beginning in 2022,~~reliability for purposes of developing an estimate of expected credit losses under ASC 326, and is continuing to ~~evaluate~~develop and refine an approach to estimating the allowance for credit losses. The adoption of ASC 326 will result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses. The Company has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to the allowance for credit losses.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU No. 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU No. 2016-13) that introduced the current expected credit losses (CECL) model. The amendments eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs. An entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU No. 2016-13, ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU No. 2016-13, the effective dates for ASU No. 2022-02 are the same as the effective dates in ASU No. 2016-13. Early adoption is permitted if an entity has adopted ASU No. 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU No. ~~2016-13~~2022-02 will have on its consolidated financial statements.

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

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.

Note 2. Securities

Amortized costs and fair values, with gross unrealized gains and losses, of securities available-for-sale as of the dates indicated are as follows:

	March 31, 2022
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. Treasury securities	$	19,182	$	0	$	(1,287	)	$	17,895
Obligations of U.S. Government agencies		37,941		17		(711	)		37,247
Obligations of state and political subdivisions		72,566		249		(5,059	)		67,756
Mortgage-backed securities		90,968		101		(4,494	)		86,575
Money market investments		1,147		0		0			1,147
Corporate bonds and other securities		28,191		25		(813	)		27,403
	$	249,995	$	392	$	(12,364	)	$	238,023

September 30, 2021

(Dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
Value

U.S. Treasury securities
$
9,050

$
0

$
(48
)

$
9,002

Obligations of U.S. Government agencies
37,614

212

(58
)

37,768

Obligations of state and political subdivisions
51,128

1,954

(261
)

52,821

Mortgage-backed securities
84,648

1,693

(428
)

85,913

Money market investments
3,799

0

0

3,799

Corporate bonds and other securities
22,942

280

(85
)

23,137

$
209,181

$
4,139

$
(880
)

$
212,440

December 31, 2020

(Dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
Value

U.S. Treasury securities
$
6,980

$
63

$
0

$
7,043

Obligations of U.S. Government agencies
36,858

35

(197
)

36,696

Obligations of state and political subdivisions
43,517

2,478

0

45,995

Mortgage-backed securities
70,866

2,759

(124
)

73,501

Money market investments
4,743

0

0

4,743

Corporate bonds and other securities
18,295

158

(22
)

18,431

$
181,259

$
5,493

$
(343
)

$
186,409

The Company has a process in place to identify debt securities that could potentially have a credit or interest-rate related impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, and cash flow projections as indicators of credit issues. On a quarterly basis, management reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. Management considers relevant facts and circumstances in evaluating whether a credit or interest-rate related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (a) the extent and length of time the fair value has been below cost; (b) the reasons for the decline in value; (c) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (d) for fixed maturity securities, the Company’s intent to sell a security or whether it is more-likely-than-not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.

	December 31, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. Treasury securities	$	15,052	$	0	$	(148	)	$	14,904
Obligations of U.S. Government agencies		38,651		75		(168	)		38,558
Obligations of state and political subdivisions		64,132		1,948		(277	)		65,803
Mortgage-backed securities		88,511		1,348		(801	)		89,058
Money market investments		2,413		0		0			2,413
Corporate bonds and other securities		23,441		261		(117	)		23,585
	$	232,200	$	3,632	$	(1,511	)	$	234,321

Index

~~The Company has 0t recorded impairment charges through income on securities for the nine months ended September 30, 2021 or 2020.~~

The amortized cost and fair value of securities by contractual maturity are shown ~~below:~~

below.

September 30, 2021

(Dollars in thousands)

Amortized
Cost

Fair
Value

Due in one year or less $ 200 $ 200
Due after one year through five years 13,758 14,175
Due after five through ten years 52,437 53,514
Due after ten years 138,987 140,752
Other securities, restricted 3,799 3,799
$ 209,181 $ 212,440

	March 31, 2022
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	200	$	197
Due after one year through five years		16,646		16,333
Due after five through ten years		77,566		73,703
Due after ten years		154,436		146,643
Other securities, restricted		1,147		1,147
	$	249,995	$	238,023

The ~~following table summarizes the net realized~~Company did 0t realize any gains ~~and~~or losses on the sale of investment securities during the ~~periods indicated:~~three months ended March 31, 2022 and 2021, respectively.

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in thousands) 2021 2020 2021 2020
Securities Available-for-sale
Realized gains on sales of securities
$
0

$
1

$
0

$
186

Realized losses on sales of securities
0

0

0

(1
)
Net realized gain
$
0

$
1

$
0

$
185

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are ~~not~~ deemed to be ~~other-than-temporarily~~temporarily impaired as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:

	March 31, 2022
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	1,287	$	17,895	$	0	$	0	$	1,287	$	17,895
Obligations of U.S. Government agencies		643		28,149		68		4,668		711		32,817
Obligations of state and political subdivisions		4,628		52,989		431		3,820		5,059		56,809
Mortgage-backed securities		3,733		62,853		761		7,408		4,494		70,261
Corporate bonds and other securities		761		18,189		52		948		813		19,137
Total securities available-for-sale	$	11,052	$	180,075	$	1,312	$	16,844	$	12,364	$	196,919

September 30, 2021

Less than 12 months 12 months or more Total
(Dollars in thousands)
Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

U.S. Treasury securities
$
48

$
9,002

$
0

$
0

$
48

$
9,002

Obligations of U.S. Government agencies
22

4,967

36

5,374

58

10,341

Obligations of state and political subdivisions
261

13,086

0

0

261

13,086

Mortgage-backed securities
306

26,500

122

6,792

428

33,292

Corporate bonds and other securities
85

9,615

0

0

85

9,615

Total securities available-for-sale
$
722

$
63,170

$
158

$
12,166

$
880

$
75,336

December 31, 2020
Less than 12 months 12 months or more Total
(Dollars in thousands)
Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Obligations of U.S. Government agencies
$
8

$
2,810

$
189

$
17,191

$
197

$
20,001

Mortgage-backed securities
118

14,291

6

1,285

124

15,576

Corporate bonds and other securities
22

5,977

0

0

22

5,977

Total securities available-for-sale
$
148

$
23,078

$
195

$
18,476

$
343

$
41,554

	December 31, 2021
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	148	$	14,904	$	0	$	0	$	148	$	14,904
Obligations of U.S. Government agencies		131		19,181		37		5,042		168		24,223
Obligations of state and policitcal subdivisions		277		20,673		0		0		277		20,673
Mortgage-backed securities		608		35,882		193		6,450		801		42,332
Corporate bonds and other securities		117		9,833		0		0		117		9,833
Total securities available-for-sale	$	1,281	$	100,473	$	230	$	11,492	$	1,511	$	111,965

The number of investments in an unrealized loss position as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were 45139 and ~~29,~~72, respectively. Certain investments within the Company’s portfolio had unrealized losses for more than twelve months at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, as shown in the tables above. The ~~unrealized losses were caused by changes~~primary cause of the temporary impairments in the Company’s investment security portfolio was increases in market interest rates. The Company concluded that no other-than-temporary impairment existed in its securities portfolio at March 31, 2022, and 0 other-than-temporary impairment loss has been recognized in net income during the first quarter of 2022, based primarily on the following: (i) changes in fair value were caused primarily by fluctuations in interest rates, ~~and not a result of~~(ii) there were no securities with unrealized losses that were significant relative to their carrying amounts, (iii) securities with unrealized losses had generally high credit ~~deterioration. Because~~quality, (iv) the Company ~~does not intend~~intends to ~~sell the~~hold these investments until recovery of its investment and ~~management believes~~ it is ~~unlikely~~more-likely-than-not that the Company will not be required to sell ~~the~~these investments before a recovery of ~~their amortized cost basis, which may be maturity, the Company does not consider the investments~~its investment, and (v) issuers have continued to ~~be other-than-temporarily impaired at September 30, 2021 or December 31, 2020.~~

make timely payments of principal and interest.

Restricted ~~Securities~~Stock

The restricted security category is comprised of stock in the Federal Home Loan Bank of Atlanta (FHLB), the Federal Reserve Bank (FRB), and Community ~~Bankers’~~Bankers' Bank (CBB). These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB, FRB, and CBB stock are carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered.

Index

Note 3. Loans and the Allowance for Loan Losses

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:

(dollars in thousands) September 30, 2021 December 31, 2020
Mortgage loans on real estate:
Residential 1-4 family
$
116,466

$
122,800

Commercial - owner occupied
185,466

153,955

Commercial - non-owner occupied
178,372

162,896

Multifamily
20,563

22,812

Construction
62,739

43,732

Second mortgages
8,710

11,178

Equity lines of credit
49,894

50,746

Total mortgage loans on real estate
622,210

568,119

Commercial and industrial loans
91,424

141,746

Consumer automobile loans
84,597

80,390

Other consumer loans
34,786

37,978

Other ⁽¹⁾

7,134

8,067

Total loans, net of deferred fees
840,151

836,300

Less: Allowance for loan losses
9,684

9,541

Loans, net of allowance and deferred fees ⁽²⁾

$
830,467

$
826,759

(dollars in thousands)	March 31, 2022		December 31, 2021
Mortgage loans on real estate:
Residential 1-4 family	$	127,674	$	130,776
Commercial - owner occupied		198,334		198,413
Commercial - non-owner occupied		196,653		184,190
Multifamily		26,727		19,050
Construction		64,502		58,440
Second mortgages		7,346		7,877
Equity lines of credit		51,077		48,665
Total mortgage loans on real estate		672,313		647,411
Commercial and industrial loans		58,886		68,690
Consumer automobile loans		85,551		85,023
Other consumer loans		32,150		33,418
Other ⁽¹⁾		6,334		8,984
Total loans, net of deferred fees		855,234		843,526
Less: Allowance for loan losses		9,520		9,865
Loans, net of allowance and deferred fees ⁽²⁾	$	845,714	$	833,661

(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 ~~$297~~$119 thousand and ~~$271~~$304 thousand at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

(2)

Net deferred loan fees totaled ~~$1.8 million~~$790 thousand and ~~$2.1~~$1.3 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~Acquired Loans~~

~~The outstanding principal balance and the carrying amount of total acquired loans included in the consolidated balance sheets as of September 30, 2021 and December 31, 2020 are as follows:~~

(dollars in thousands) September 30, 2021 December 31, 2020
Outstanding principal balance $ 5,145 $ 8,671
Carrying amount 5,114 8,602

The Company did 0t have any outstanding principal balance or related carrying amount of purchased credit-impaired loans as of September 30, 2021 and December 31, 2020. The following table presents changes in the accretable yield on purchased credit-impaired loans, for which the Company applies FASB ASC 310-30, at September 30, 2021 and 2020:

(dollars in thousands) September 30, 2021 September 30, 2020
Balance at January 1 $ 0 $ 72
Accretion 0 (29
)
Balance at end of period $ 0 $ 43

CREDIT QUALITY INFORMATION

The Company uses internally-assigned risk grades 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.

109

Index

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

Credit Quality Information
As of March 31, 2022
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	127,510	$	0	$	164	$	0	$	127,674
Commercial - owner occupied		194,624		1,599		2,111		0		198,334
Commercial - non-owner occupied		195,729		266		658		0		196,653
Multifamily		26,727		0		0		0		26,727
Construction		62,968		536		998		0		64,502
Second mortgages		7,346		0		0		0		7,346
Equity lines of credit		51,077		0		0		0		51,077
Total mortgage loans on real estate	$	665,981	$	2,401	$	3,931	$	0	$	672,313
Commercial and industrial loans		58,631		0		255		0		58,886
Consumer automobile loans		85,531		0		20		0		85,551
Other consumer loans		32,150		0		0		0		32,150
Other		6,334		0		0		0		6,334
Total	$	848,627	$	2,401	$	4,206	$	0	$	855,234

Credit Quality Information	Credit Quality Information											Credit Quality Information
As of September 30, 2021
As of December 31, 2021												As of December 31, 2021
(dollars in thousands)		Pass		OAEM		Substandard		Doubtful		Total			Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family		$	116,296	$	0	$	170	$	0	$	116,466		$	130,584	$	0	$	192	$	0	$	130,776
Commercial - owner occupied			182,515		832		2,119		0		185,466			195,512		788		2,113		0		198,413
Commercial - non-owner occupied			177,119		521		732		0		178,372			183,093		434		663		0		184,190
Multifamily			20,563		0		0		0		20,563			19,050		0		0		0		19,050
Construction			61,613		127		999		0		62,739			57,224		218		998		0		58,440
Second mortgages			8,710		0		0		0		8,710			7,877		0		0		0		7,877
Equity lines of credit			49,894		0		0		0		49,894			48,665		0		0		0		48,665
Total mortgage loans on real estate		$	616,710	$	1,480	$	4,020	$	0	$	622,210		$	642,005	$	1,440	$	3,966	$	0	$	647,411
Commercial and industrial loans			91,156		13		255		0		91,424			68,261		0		429		0		68,690
Consumer automobile loans			84,360		0		237		0		84,597			85,002		0		21		0		85,023
Other consumer loans			34,786		0		0		0		34,786			33,418		0		0		0		33,418
Other			7,134		0		0		0		7,134			8,984		0		0		0		8,984
Total		$	834,146	$	1,493	$	4,512	$	0	$	840,151		$	837,670	$	1,440	$	4,416	$	0	$	843,526

Credit Quality Information
As of December 31, 2020
(dollars in thousands) Pass OAEM Substandard Doubtful Total
Mortgage loans on real estate:
Residential 1-4 family $ 122,621 $ 0 $ 179 $ 0 $ 122,800
Commercial - owner occupied 148,738 2,462 2,755 0 153,955
Commercial - non-owner occupied 162,148 748 0 0 162,896
Multifamily 22,812 0 0 0 22,812
Construction 42,734 998 0 0 43,732
Second mortgages 11,178 0 0 0 11,178
Equity lines of credit 50,746 0 0 0 50,746
Total mortgage loans on real estate $ 560,977 $ 4,208 $ 2,934 $ 0 $ 568,119
Commercial and industrial loans 141,391 355 0 0 141,746
Consumer automobile loans 79,997 0 393 0 80,390
Other consumer loans 37,978 0 0 0 37,978
Other 8,067 0 0 0 8,067
Total $ 828,410 $ 4,563 $ 3,327 $ 0 $ 836,300

As of March 31, 2022 and December 31, 2021, the Company did 0t have any loans internally classified as Doubtful or Loss.

Index

AGE ANALYSIS OF PAST DUE LOANS BY CLASS

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.

~~Index~~

Age Analysis of Past Due Loans as of September 30, 2021
(dollars in thousands)
30 - 59
Days Past
Due

60 - 89
Days
Past Due

90 or More
Days Past
Due and
still
Accruing
PCI
Nonaccrual
⁽²⁾

Total
Current
Loans ⁽¹⁾
Total
Loans
Mortgage loans on real estate:
Residential 1-4 family $ 74 $ 29 $ 0 $ 0 $ 238 $ 116,125 $ 116,466
Commercial - owner occupied 0 0 0 0 0 185,466 185,466
Commercial - non-owner occupied 354 0 0 0 183 177,835 178,372
Multifamily 0 0 0 0 0 20,563 20,563
Construction 0 0 0 0 0 62,739 62,739
Second mortgages 1 0 0 0 0 8,709 8,710
Equity lines of credit 0 0 0 0 0 49,894 49,894
Total mortgage loans on real estate $ 429 $ 29 $ 0 $ 0 $ 421 $ 621,331 $ 622,210
Commercial and industrial loans 141 0 0 0 0 91,283 91,424
Consumer automobile loans 771 126 264 0 3 83,433 84,597
Other consumer loans 399 331 667 0 0 33,389 34,786
Other 27 1 6 0 0 7,100 7,134
Total $ 1,767 $ 487 $ 937 $ 0 $ 424 $ 836,536 $ 840,151

Age Analysis of Past Due Loans as of March 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	$	809	$	0	$	0	$	164	$	126,701	$	127,674
Commercial - owner occupied		0		0		0		2,111		196,223		198,334
Commercial - non-owner occupied		0		0		0		659		195,994		196,653
Multifamily		0		0		0		0		26,727		26,727
Construction		0		0		0		998		63,504		64,502
Second mortgages		23		0		0		0		7,323		7,346
Equity lines of credit		51		0		0		0		51,026		51,077
Total mortgage loans on real estate	$	883	$	0	$	0	$	3,932	$	667,498	$	672,313
Commercial and industrial loans		0		4		0		255		58,627		58,886
Consumer automobile loans		1,408		68		199		0		83,876		85,551
Other consumer loans		891		28		415		0		30,816		32,150
Other		36		3		10		0		6,285		6,334
Total	$	3,218	$	103	$	624	$	4,187	$	847,102	$	855,234

(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 nonaccural column and not also in its respective past due column.

In the table above, the past due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled ~~$1.1 milion~~$409 thousand at ~~September 30, 2021.~~March 31, 2022.

Age Analysis of Past Due Loans as of December 31, 2020
(dollars in thousands)
30 - 59
Days Past
Due

60 - 89
Days Past
Due

90 or More
Days Past
Due and
still
Accruing
PCI
Nonaccrual
(2)

Total
Current
Loans (1)
Total
Loans
Mortgage loans on real estate:
Residential 1-4 family $ 478 $ 164 $ 0 $ 0 $ 311 $ 121,847 $ 122,800
Commercial - owner occupied 0 0 0 0 903 153,052 153,955
Commercial - non-owner occupied 0 0 0 0 0 162,896 162,896
Multifamily 0 0 0 0 0 22,812 22,812
Construction 0 88 0 0 0 43,644 43,732
Second mortgages 41 0 0 0 0 11,137 11,178
Equity lines of credit 0 0 0 0 0 50,746 50,746
Total mortgage loans on real estate $ 519 $ 252 $ 0 $ 0 $ 1,214 $ 566,134 $ 568,119
Commercial and industrial loans 753 0 0 0 0 140,993 141,746
Consumer automobile loans 1,159 190 196 0 0 78,845 80,390
Other consumer loans 1,120 555 548 0 0 35,755 37,978
Other 24 3 0 0 0 8,040 8,067
Total $ 3,575 $ 1,000 $ 744 $ 0 $ 1,214 $ 829,767 $ 836,300

Age Analysis of Past Due Loans as of December 31, 2021
(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	$	120	$	0	$	0	$	191	$	130,465	$	130,776
Commercial - owner occupied		0		0		0		0		198,413		198,413
Commercial - non-owner occupied		0		0		0		113		184,077		184,190
Multifamily		0		0		0		0		19,050		19,050
Construction		0		0		0		0		58,440		58,440
Second mortgages		24		0		0		0		7,853		7,877
Equity lines of credit		51		0		0		0		48,614		48,665
Total mortgage loans on real estate	$	195	$	0	$	0	$	304	$	646,912	$	647,411
Commercial and industrial loans		37		0		169		174		68,310		68,690
Consumer automobile loans		814		118		296		0		83,795		85,023
Other consumer loans		1,284		439		550		0		31,145		33,418
Other		31		3		10		0		8,940		8,984
Total	$	2,361	$	560	$	1,025	$	478	$	839,102	$	843,526

(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 nonaccural column and not also in its respective past due column.

In the table above, the past due totals include small business and student loans with principal and interest amounts that are 97 - ~~98%~~100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled ~~$1.2~~$1.4 million at December 31, ~~2020.~~2021.

1211

Index

Although the portions of the student loan portfolios that are 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans as of ~~September 30, 2021,~~March 31, 2022, management does not expect significant increases in delinquencies of these loans to have a material effect on the Company.

Under the CARES Act, borrowers who were making payments as required and were not considered past due prior to becoming affected by COVID-19 and then received payment accommodations as a result of the effects of COVID-19 generally would not be reported as past due. If the Company agreed to a payment deferral for a borrower under the CARES Act, this may result in no contractual payments being past due, and the loans are not considered past due during the period of the deferral.

NONACCRUAL LOANS

The Company generally places commercial and industrial loans (including construction loans and commercial loans secured and not secured by real estate) in nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection.

Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and consumer loans secured by real estate (including residential 1 - 4 family mortgages, second mortgages, and equity lines of credit) are not required to be placed in nonaccrual status. Although consumer loans and consumer loans secured by real estate are not required to be placed in nonaccrual status, the Company may elect to place these loans in nonaccrual status, if necessary to avoid a material overstatement of interest income. Generally, consumer loans secured by real estate are placed in nonaccrual status only when payments are 120 days past due.

Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. If a charge-off has not occurred sooner for other reasons, a consumer loan not secured by real estate will generally be placed in nonaccrual status when payments are 120 days past due. These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, when classified as a “loss,” when repayment is unreasonably protracted, when bankruptcy has been initiated, or when the loan is 120 days or more past due unless the credit is well-secured and in the process of collection.

When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the cost recovery method, until it qualifies for return to accrual status or is charged off. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

~~Nonaccrual Loans by Class~~

Nonaccrual Loans by Class					Nonaccrual Loans by Class

(dollars in thousands)	September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Mortgage loans on real estate:
Residential 1-4 family	$	238	$	311		$	164	$	191
Commercial - owner occupied		0		903			2,111		0
Commercial - non-owner occupied		183		0			659		113
Construction and land development							998		0
Total mortgage loans on real estate	$	421	$	1,214			3,932		304
Consumer loans		3		0
Commercial and industrial loans							255		174
Total	$	424	$	1,214		$	4,187	$	478

The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

Nine Months Ended September 30,
(dollars in thousand) 2021 2020
Interest income that would have been recorded under original loan terms $ 8 $ 145
Actual interest income recorded for the period 2 34
Reduction in interest income on nonaccrual loans $ 6 $ 111

	Three Months Ended March 31,
(dollars in thousand)	2022		2021
Interest income that would have been recorded under original loan terms	$	75	$	11
Actual interest income recorded for the period		4		2
Reduction in interest income on nonaccrual loans	$	71	$	9

~~Index~~

TROUBLED DEBT RESTRUCTURINGS

The Company’s loan portfolio ~~includes~~may include certain loans ~~that have been modified in a TDR,~~classified as TDRs, 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 defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.

Index

When the Company modifies a loan, management evaluates any possible impairment as ~~stated in the impaired loan section below.~~discussed further below under Impaired Loans.

There were 0 new TDRs in the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~1 new TDR in the nine months ended September 30, 2020.~~2021.

At ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company had 0 outstanding commitments to disburse additional funds on any TDR. The Company had 0 loans secured by residential 1 - 4 family real estate in the process of foreclosure at ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

In the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ there were 0 defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

All TDRs are factored into the determination of the allowance for loan losses and included in the impaired loan analysis, as discussed below.

IMPAIRED LOANS

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect ~~all amounts~~the scheduled payments of principal and interest when due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified in a TDR. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allocation in the allowance or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the ~~cost-recovery~~cash basis method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by partial charge-offs and payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if these partial charge-offs did not occur and as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes.

The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans ~~exclusive of purchased credit-impaired loans,~~ with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

~~Impaired Loans by Class~~

As of September 30, 2021
For the Nine Months Ended
September 30, 2021

(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 $ 403 $ 67 $ 306 $ 33 $ 382 $ 6
Commercial 504 250 425 13 636 1
Construction 81 0 80 0 82 3
Second mortgages 129 0 127 3 129 4
Total mortgage loans on real estate 1,117 317 938 49 1,229 14
Commercial and industrial loans 3 1 1 0 2 0
Other consumer loans 11 12 0 0 10 0
Total $ 1,131 $ 330 $ 939 $ 49 $ 1,241 $ 14

Impaired Loans by Class
									For the Three Months Ended
	As of March 31, 2022								March 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	$	301	$	0	$	296	$	28	$	298	$	2
Commercial		4,752		4,290		399		1		4,716		0
Construction		1,078		998		78		1		1,077		0
Second mortgages		125		0		123		3		124		1
Total mortgage loans on real estate		6,256		5,288		896		33		6,215		3
Commercial and industrial loans		403		404		0		0		404		3
Other consumer loans		7		5		0		0		6		0
Total	$	6,666	$	5,697	$	896	$	33	$	6,625	$	6

1413

Index

Impaired Loans by Class													Impaired Loans by Class
	Impaired Loans by Class																					For the Year Ended
	As of December 31, 2020								For the Year Ended December 31, 2020					As of December 31, 2021								December 31, 2021
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized			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	$	474	$	366	$	87	$	1	$	458	$	10		$	353	$	25	$	300	$	30	$	328	$	7
Commercial		3,490		1,306		121		1		2,559		46			610		178		413		8		601		1
Construction		83		0		83		0		84		5			80		79		0		0		80		4
Second mortgages		133		0		133		9		134		5			127		0		125		3		126		5
Total mortgage loans on real estate		4,180		1,672		424		11		3,235		66			1,170		282		838		41		1,135		17
Commercial and industrial loans		6		6		0		0		7		0			188		0		174		87		181		17
Other consumer loans		14		14		0		0		15		1			9		7		0		0		8		0
Total	$	4,200	$	1,692	$	424	$	11	$	3,257	$	67		$	1,367	$	289	$	1,012	$	128	$	1,324	$	34

ALLOWANCE FOR LOAN LOSSES

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and probable losses inherent in the loan portfolio. The Company segments the loan portfolio into categories as defined by Schedule RC-C of the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report). Loans are segmented into the following pools: commercial, real estate-construction, real estate-mortgage, consumer and other loans. The Company also sub-segments the real estate-mortgage segment into six classes: residential 1-4 family, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multifamily, second mortgages and equity lines of credit.

The Company uses an internally developed risk evaluation model in the estimation of the credit risk process. The model and assumptions used to determine the allowance are independently validated and reviewed to ensure that the theoretical foundation, assumptions, data integrity, computational processes and reporting practices are appropriate and properly documented.

Each portfolio segment 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: 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-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. 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.

•

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.

Each segment of the portfolio is pooled by risk grade or by days past due. 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. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 management used 8 12-quarter migration periods.

Management also provides an allocated component of the allowance for loans that are specifically identified as impaired, and are individually analyzed for impairment. An allocated allowance is established when the present value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower than the carrying value of that loan.

1514

Index

Loans collectively evaluated for impairment are pooled with a historical loss rate, based on migration analysis, applied to each pool, segmented by risk grade or past due, depending on the type of loan. Based on credit risk assessments and management’s analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions (including uncertainties associated with the COVID-19 pandemic), trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

Given the timing of the outbreak in the United States of the COVID-19 pandemic combined with government stimulus actions for both individuals and small businesses, management does not believe that the Company’s performance in relation to credit quality during ~~2020 or~~ the first ~~three quarters~~quarter of 2022 and 2021 was significantly impacted. The COVID-19 pandemic represents an unprecedented challenge to the global economy in general and the financial services sector in particular. However, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding supply chain disruptions, inflationary pressures, and any potential effects of governmental actions taken in response to the pandemic. With so much uncertainty, itIt is impossible for the Company to accurately predict the impact that the pandemic will have on the Company’s primary market and the overall extent to which it will affect the Company’s financial condition and results of operations. Based on capital levels, stress testing indications, prudent underwriting policies, watch credit processes, and loan concentration diversification, the Company currently expects to be able to manage the economic risks and uncertainties associated with the pandemic which may include additional increases in the provision for loan losses.

Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired or purchased performing.

~~Purchased performing loans are accounted for under ASC 310-20,~~ ~~Receivables – Nonrefundable Fees and Other Costs~~. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the purchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used.

ALLOWANCE FOR LOAN LOSSES BY SEGMENT

The total allowance reflects management’s estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of ~~$9.7~~$9.5 million adequate to cover estimable and probable loan losses inherent in the loan portfolio at ~~September 30, 2021.~~March 31, 2022.

The following tables present, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
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 ⁽²⁾			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459	$	2,390	$	4,787		$	1,362		$	184		$	0	$	9,865
Charge-offs		(296	)		0		0		0			(307	)		(97	)		0		(700	)
Recoveries		77			0		30		0			116			31			0		254
Provision for loan losses		72			45		14		(187	)		170			(13	)		0		101
Ending Balance	$	536		$	504	$	2,434	$	4,600		$	1,341		$	105		$	0	$	9,520

Individually evaluated for impairment	$	0		$	1	$	31	$	1		$	0		$	0		$	0	$	33
Collectively evaluated for impairment		536			503		2,403		4,599			1,341			105			0		9,487

Ending Balance	$	536		$	504	$	2,434	$	4,600		$	1,341		$	105		$	0	$	9,520

Loans Balances:
Individually evaluated for impairment		404			1,076		419		4,689			5			0			0		6,593
Collectively evaluated for impairment		58,482			63,426		212,405		390,298			117,696			6,334			0		848,641
Ending Balance	$	58,886		$	64,502	$	212,824	$	394,987		$	117,701		$	6,334		$	0	$	855,234

~~ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS~~

For the Nine Months ended September 30, 2021
(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 $ 650 $ 339 $ 2,560 $ 4,434 $ 1,302 $ 123 $ 133 $ 9,541
Charge-offs (24
)
0 (1
)
0 (664
)
(216 ) 0 (905 )
Recoveries 33 0 66 44 310 85 0 538
Provision for loan losses 47 152 (341
)
239
373 173 (133 ) 510
Ending Balance $ 706 $ 491 $ 2,284 $ 4,717 $ 1,321 $ 165 $ 0 $ 9,684

Individually evaluated for impairment $ 0 $ 0 $ 36 $ 13 $ 0 $ 0 $ 0 $ 49
Collectively evaluated for impairment 706 491 2,248 4,704 1,321 165 0 9,635

Ending Balance $ 706 $ 491 $ 2,284 $ 4,717 $ 1,321 $ 165 $ 0 $ 9,684

Loans Balances:
Individually evaluated for impairment 2 80 500 675 12 0 0 1,269
Collectively evaluated for impairment 91,422 62,659 195,133 363,163 119,371 7,134 0 838,882
Ending Balance $ 91,424 $ 62,739 $ 195,633 $ 363,838 $ 119,383 $ 7,134 $ 0 $ 840,151

(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.

For the Year ended December 31, 2020
(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 $ 1,244 $ 258 $ 2,505 $ 3,663 $ 1,694 $ 296 $ 0 $ 9,660
Charge-offs (25
)
0 (149
)
(654
)
(822
)
(355
)
0 (2,005
)
Recoveries 47 10 69 317 377 66 0 886
Provision for loan losses (616
)
71 135 1,108 53 116 133 1,000
Ending Balance $ 650 $ 339 $ 2,560 $ 4,434 $ 1,302 $ 123 $ 133 $ 9,541

Individually evaluated for impairment $ 0 $ 0 $ 10 $ 1 $ 0 $ 0 $ 0 $ 11
Collectively evaluated for impairment 650 339 2,550 4,433 1,302 123 133 9,530

Ending Balance $ 650 $ 339 $ 2,560 $ 4,434 $ 1,302 $ 123 $ 133 $ 9,541

Loans Balances:
Individually evaluated for impairment 6 83 586 1,427 14 0 0 2,116
Collectively evaluated for impairment 141,740 43,649 206,950 315,424 118,354 8,067 0 834,184
Ending Balance $ 141,746 $ 43,732 $ 207,536 $ 316,851 $ 118,368 $ 8,067 $ 0 $ 836,300

(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 4. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transition method provided by ASU No. 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The right-of-use asset and lease liability are included in ~~other assets~~ ~~and~~ ~~other liabilities, respectively, in the consolidated balance sheets. There were 0 new leases executed during 2021.~~

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

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

The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets. There were 0 new leases executed during 2022. The following tables present information about the Company’s leases:

(dollars in thousands)	September 30, 2021			March 31, 2022
Lease liabilities	$	1,121		$	960
Right-of-use assets	$	1,098		$	935
Weighted average remaining lease term	3.81 years			3.39 years
Weighted average discount rate		1.71	%		1.73	%

	Three Months Ended March 31,
Lease cost (in thousands)	2022		2021
Operating lease cost	$	82	$	104
Total lease cost	$	82	$	104

Cash paid for amounts included in the measurement of lease liabilities	$	84	$	139

Three Months Ended September 30, Nine Months Ended September 30,
Lease cost (in thousands)
2021
2020
2021
2020

Operating lease cost $ 81 $ 99 $ 266 $ 278
Total lease cost $ 81 $ 99 $ 266 $ 278

Cash paid for amounts included in the measurement of lease liabilities $ 82 $ 97 $ 269 $ 274

1716

Index

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

Lease payments due (in thousands)	As of September 30, 2021			As of March 31, 2022
Three months ending December 31, 2021	$	83
Twelve months ending December 31, 2022		339
Nine months ending December 31, 2022				$	255
Twelve months ending December 31, 2023		248			248
Twelve months ending December 31, 2024		240			240
Twelve months ending December 31, 2025					193
Thereafter		309			70
Total undiscounted cash flows	$	1,219		$	1,006
Discount		(98	)		(46	)
Lease liabilities	$	1,121		$	960

Note 5. Low-Income Housing Tax Credits

The Company was invested in 4 separate housing equity funds at both ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia; develop and implement strategies to maintain projects as low-income housing; deliver Federal Low Income Housing Credits to investors; allocate tax losses and other possible tax benefits to investors; and preserve and protect project assets.

The investments in these funds were recorded as other assets on the consolidated balance sheets and were ~~$2.1~~$1.8 million and ~~$2.3~~$1.9 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The expected terms of these investments and the related tax benefits run through 2033. ~~Total projected tax credits to be received for 2021 are $361 thousand, which is based on the most recent quarterly estimates received from the funds.~~ There were 0 additional capital calls expected for the funds at ~~September 30, 2021. Additional capital calls expected for the funds totaled $18 thousand at December~~March 31, ~~2020 and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.~~2022.

The table below summarizes the tax credits and other tax benefits recognized by the Company related to these investments during the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2021		2020		2022		2021
Tax credits and other benefits
Amortization of operating losses	$	51	$	45	$	151	$	136	$	51	$	49
Tax benefit of operating losses*		11		10		32		29		11		10
Tax credits		89		105		272		314		89		94
Total tax benefits	$	100	$	115	$	304	$	343	$	100	$	104

*	* Computed using a 21% tax rate.

Note 6. Borrowings

The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Short-term borrowings sources consist of federal funds purchased, overnight repurchase agreements (which are secured transactions with customers that generally mature within one to four days), and advances from the FHLB.

The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the remaining credit available from these lines totaled $115.0 ~~million and $100.0~~ million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of ~~$380.3~~$399.0 million and ~~$374.7~~$391.3 as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~Index~~

SHORT-TERM BORROWINGS

The following table presents total short-term borrowings as of the dates indicated:

(dollar in thousands)	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Overnight repurchase agreements	$	4,496		$	6,619		$	3,528		$	4,536
Total short-term borrowings	$	4,496		$	6,619		$	3,528		$	4,536

Maximum month-end outstanding balance	$	12,239		$	9,080		$	3,735		$	12,239
Average outstanding balance during the period	$	8,116		$	21,092		$	4,227		$	7,293
Average interest rate (year-to-date)		0.10	%		0.19	%		0.07	%		0.10	%
Average interest rate at end of period		0.10	%		0.10	%		0.07	%		0.10	%

Index

LONG-TERM BORROWINGS

At ~~September 30, 2021~~March 31, 2022 the Company had fully repaid the borrowings under the FRB’s ~~PPPLF of $898 thousand. These borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of which will mature within 24 months of origination.~~ ~~NaN new advances were made pursuant to the PPPLF as of the program’s expiration on July 30, 2021.~~

The Company also obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens National Bank (Citizens) acquisition. The terms of the loan included a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. PPPLF. At December 31, ~~2020,~~2021 the Company had $480 thousandoutstanding ~~balance was $1.4 million, and~~in long-term borrowings under the ~~then-current interest rate was 2.61%. The Company elected to pay the loan in full during the first quarter of 2021.~~PPPLF.

On July 14, 2021, the Company completed the issuance of $29.4 million, net of issuance costs, or $30.0 million in aggregate principal amount of subordinated notes (the Notes) due in 2031 in a private placement transaction. The Notes bear interest at a fixed rate of 3.5% for five years and at the ~~three month~~three-month SOFR plus 286 basis points, resetting quarterly, thereafter.

Note 7. Commitments and Contingencies

CREDIT-RELATED FINANCIAL INSTRUMENTS

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making such commitments as it does for on-balance-sheet instruments.

The following financial instruments whose contract amounts represent credit risk were outstanding at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

	September 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Commitments to extend credit:
Home equity lines of credit	$	70,168	$	66,999	$	80,187	$	71,751
Commercial real estate, construction and development loans committed but not funded		48,386		20,258		53,197		42,683
Other lines of credit (principally commercial)		66,671		64,329		60,414		52,695
Total	$	185,225	$	151,586	$	193,798	$	167,129

Letters of credit	$	3,568	$	4,841	$	3,611	$	3,617

Note 8. Share-Based Compensation

The Company has adopted an employee stock purchase plan and offers share-based compensation through its equity compensation plan. Share-based compensation arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights. Accounting standards require all share-based payments to employees to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.

The 2016 Incentive Stock Plan (the Incentive Stock Plan) permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of ~~September 30, 2021~~March 31, 2022 only restricted stock has been granted under the Incentive Stock Plan.

~~Index~~

Restricted stock activity for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 is summarized below:

	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested, January 1, 2021		29,576		$	18.46
Nonvested, January 1, 2022							38,435		$	20.49
Issued		18,048			22.35		0			0
Vested		(8,521	)		17.50		(8,152	)		21.68
Forfeited		0			0		0			0
Nonvested, September 30, 2021		39,103		$	20.46
Nonvested, March 31, 2022							30,283		$	20.17

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is ~~1.52~~1.31 years.

~~The fair value of~~There was 0 restricted stock granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020 was $403 thousand and $298 thousand,~~ respectively.

Index

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled ~~$411~~$278 thousand as of ~~September 30, 2021~~March 31, 2022 and ~~$314~~$216 thousand as of ~~September 30, 2020.~~March 31, 2021.

Stock-based compensation expense was ~~$84~~$71 thousand and ~~$56~~$61 thousand for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and $214 thousand and $199 thousand for the nine months ended September 30, 2021 and 2020,~~ respectively.

Under the Company's Employee Stock Purchase Plan (ESPP), substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company's common stock. Shares of stock are issued quarterly at a discount to the market price of the Company's stock on the day of purchase, which can range from 0-15% and was set at 5% for ~~2020~~2021 and for the first ~~nine~~three months of ~~2021.~~2022.

~~3,775 shares were purchased~~Total stock purchases under the ESPP amounted to 1,481 shares during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. At ~~September 30, 2021,~~March 31, 2022, the Company had ~~228,676~~226,062 remaining shares reserved for issuance under the ESPP.

Note 9. Stockholders’ Equity and Earnings per Share

STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive Income (Loss)

The following table presents information on amounts reclassified out of accumulated other comprehensive income (loss), by category, during the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item on Consolidated Statement of Income	Three Months Ended March 31,				Affected Line Item on Consolidated Statement of Income
(dollars in thousands)	2021		2020		2021		2020		Affected Line Item on Consolidated Statement of Income	2022		2021		Affected Line Item on Consolidated Statement of Income
Available-for-sale securities
Realized gains on sales of securities	$	0	$	1	$	0	$	185	Gain on sale of available-for-sale securities, net	$	0	$	0	Gain on sale of available-for-sale securities, net
Tax effect		0		0		0		39	Income tax expense		0		0	Income tax expense
	$	0	$	1	$	0	$	146		$	0	$	0

The following tables present the changes in accumulated other comprehensive income (loss), by category, net of tax, for the periods indicated:

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

Nine Months Ended September 30, 2021
Three Months Ended March 31, 2022
Balance at beginning of period	$	4,069		$	4,069		$	1,675		$	1,675
Net other comprehensive loss		(1,495	)		(1,495	)		(11,133	)		(11,133	)
Balance at end of period	$	2,574		$	2,574		$	(9,458	)	$	(9,458	)

Nine Months Ended September 30, 2020
Three Months Ended March 31, 2021
Balance at beginning of period	$	(79	)	$	(79	)	$	4,069		$	4,069
Net other comprehensive income		3,883			3,883
Net other comprehensive loss								(1,694	)		(1,694	)
Balance at end of period	$	3,804		$	3,804		$	2,375		$	2,375

(dollars in thousands)
Unrealized Gains
(Losses) on
Available-for-Sale
Securities

Accumulated Other
Comprehensive Income

Three Months Ended September 30, 2021

Balance at beginning of period
$
3,071

$
3,071

Net other comprehensive loss
(497
)

(497
)
Balance at end of period
$
2,574

$
2,574

Three Months Ended September 30, 2020

Balance at beginning of period
$
3,352

$
3,352

Net other comprehensive income
452

452

Balance at end of period
$
3,804

$
3,804

~~Index~~

The following tables present the change in each component of accumulated other comprehensive income (loss) on a pre-tax and after-tax basis for the periods indicated.

	Three Months Ended September 30, 2021									Three Months Ended March 31, 2022
(dollars in thousands)	Pretax			Tax			Net-of-Tax			Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(629	)	$	(133	)	$	(497	)	$	(14,093	)	$	(2,960	)	$	(11,133	)

Total change in accumulated other comprehensive income, net	$	(629	)	$	(133	)	$	(497	)	$	(14,093	)	$	(2,960	)	$	(11,133	)

	Three Months Ended September 30, 2020
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	573		$	120		$	453
Reclassification adjustment for gains recognized in income		(1	)		0			(1	)

Total change in accumulated other comprehensive income, net	$	572		$	120		$	452

	Nine Months Ended September 30, 2021									Three Months Ended March 31, 2021
(dollars in thousands)	Pretax			Tax			Net-of-Tax			Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(1,892	)	$	(397	)	$	(1,495	)	$	(2,144	)	$	(450	)	$	(1,694	)

Total change in accumulated other comprehensive income, net	$	(1,892	)	$	(397	)	$	(1,495	)	$	(2,144	)	$	(450	)	$	(1,694	)

	Nine Months Ended September 30, 2020
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	5,100		$	1,071		$	4,029
Reclassification adjustment for gains recognized in income		(185	)		(39	)		(146	)

Total change in accumulated other comprehensive income, net	$	4,915		$	1,032		$	3,883

Index

EARNINGS PER COMMON SHARE

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares attributable to the ~~employee stock purchase plan.~~ESPP.

~~Index~~

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

(dollars in thousands except per share data)	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount		Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
Three Months Ended September 30, 2021
Three Months Ended March 31, 2022
Net income, basic	$	1,908		5,245	$	0.36	$	2,031		5,186	$	0.39
Potentially dilutive common shares - employee stock purchase program		-		0		-		-		0		-
Diluted	$	1,908		5,245	$	0.36	$	2,031		5,186	$	0.39

Three Months Ended September 30, 2020
Three Months Ended March 31, 2021
Net income, basic	$	1,100		5,221	$	0.21	$	3,012		5,225	$	0.58
Potentially dilutive common shares - employee stock purchase program		-		1		-		-		0		-
Diluted	$	1,100		5,222	$	0.21	$	3,012		5,225	$	0.58

Nine Months Ended September 30, 2021
Net income, basic	$	6,762		5,236	$	1.29
Potentially dilutive common shares - employee stock purchase program		-		0		-
Diluted	$	6,762		5,236	$	1.29

Nine Months Ended September 30, 2020
Net income, basic	$	4,844		5,214	$	0.93
Potentially dilutive common shares - employee stock purchase program		-		0		-
Diluted	$	4,844		5,214	$	0.93

The Company had 0 antidilutive shares outstanding in the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.

The Company has a share repurchase program which was authorized by the Board of Directors in October 2021 to repurchase up to 10% of the Company’s issued and outstanding common stock through November 30,2022. During the first quarter of 2022, 122,995 shares, for an aggregate purchase price of $3.0 million, were repurchased by the Company under this plan.

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.

In estimating the fair value of assets and liabilities, the Company relies mainly on two sources. The first source is the Company’s bond accounting service provider, which uses a model to determine 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.

Index

•

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.

~~Index~~

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 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.

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 September 30, 2021 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
$
9,002

$
0

$
9,002

$
0

Obligations of U.S. Government agencies
37,768

0

37,768

0

Obligations of state and political subdivisions
52,821

0

52,821

0

Mortgage-backed securities
85,913

0

85,913

0

Money market investments
3,799

0

3,799

0

Corporate bonds and other securities
23,137

0

23,137

0

Total available-for-sale securities
$
212,440

$
0

$
212,440

$
0

			Fair Value Measurements at December 31, 2020 Using								Fair Value Measurements at March 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)		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	$	7,043	$	0	$	7,043	$	0	$	17,895	$	0	$	17,895	$	0
Obligations of U.S. Government agencies		36,696		0		36,696		0		37,247		0		37,247		0
Obligations of state and political subdivisions		45,995		0		45,995		0		67,756		0		67,756		0
Mortgage-backed securities		73,501		0		73,501		0		86,575		0		86,575		0
Money market investments		4,743		0		4,743		0		1,147		0		1,147		0
Corporate bonds and other securities		18,431		0		18,431		0		27,403		0		27,403		0
Total available-for-sale securities	$	186,409	$	0	$	186,409	$	0		238,023		0		238,023		0
Derivatives
Interest rate lock										76		0		76		0
Interest rate swap on loans										377		0		377		0
Total assets									$	238,476	$	0	$	238,476	$	0

Liabilities:
Derivatives
Interest rate swap on loans										377		0		377		0
Total liabilities									$	377	$	0	$	377	$	0

2321

Index

			Fair Value Measurements at December 31, 2021 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	$	14,904	$	0	$	14,904	$	0
Obligations of U.S. Government agencies		38,558		0		38,558		0
Obligations of state and political subdivisions		65,803		0		65,803		0
Mortgage-backed securities		89,058		0		89,058		0
Money market investments		2,413		0		2,413		0
Corporate bonds and other securities		23,585		0		23,585		0
Total available-for-sale securities	$	234,321	$	0	$	234,321	$	0
Derivatives
Interest rate lock		43		0		43		0
Interest rate swap on loans		181		0		181		0
Total assets	$	234,545	$	0	$	234,545	$	0

Liabilities:
Derivatives
Interest rate swap on loans		181		0		181		0
Total liabilities	$	181	$	0	$	181	$	0

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.

Impaired loans

The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal. Evaluations utilize many of the same techniques as appraisals, and are typically performed by independent appraisers. Once received, appraisals and evaluations are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on management’s best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are considered Level 3.

Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. Because the loan is discounted at its effective rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as part of the provision for loan losses on the Consolidated Statements of Income.

Index

Other Real Estate Owned (OREO)

Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management reasonably believes the transaction will be consummated in accordance with the terms of the contract, fair value is based on the sale price in that contract (Level 1). If management has recent information about the sale of identical properties, such as when selling multiple condominium units on the same property, the remaining units would be valued based on the observed market data (Level 2). Lacking either a contract or such recent data, management would obtain an appraisal or evaluation of the value of the collateral as discussed above under Impaired Loans (Level 3). After the asset has been booked, a new appraisal or evaluation is obtained when management has reason to believe the fair value of the property may have changed and no later than two years after the last appraisal or evaluation was received. Any fair value adjustments to OREO below the original book value are recorded in the period incurred and expensed against current earnings.

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.

~~Index~~

The following table presents the assets carried inon 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 inon the consolidated balance sheets at fair value and, as such, are not included in the tables below.

			Carrying Value at September 30, 2021								Carrying Value at March 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)		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	$	5,740	$	0	$	5,740	$	0	$	2,010	$	0	$	2,010	$	0

			Carrying Value at December 31, 2020								Carrying Value at December 31, 2021
(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)		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:
Commercial loans									$	87	$	0	$	0	$	87
Total									$	87	$	0	$	0	$	87

Loans
Loans held for sale	$	14,413	$	0	$	14,413	$	0	$	3,287	$	0	$	3,287	$	0

The ~~Company did not have any~~following tables display the quantitative information about Level 3 Fair Value Measurements ~~at September 30, 2021 or December 31, 2020.~~

as of the dates indicated.

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at December 31, 2021		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Commercial loans	$	87	Market comparables	Selling costs		0.00% -8.00% (7.00	%)

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 September 30, 2021 Using								Fair Value Measurements at March 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)		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	$	184,304	$	184,304	$	0	$	0	$	158,303	$	158,303	$	0	$	0
Securities available-for-sale		212,440		0		212,440		0		238,023		0		238,023		0
Restricted securities		1,034		0		1,034		0		1,389		0		1,389		0
Loans held for sale		5,740		0		5,740		0		2,010		0		2,010		0
Loans, net of allowances for loan losses		830,467		0		0		831,464		845,714		0		0		835,035
Derivatives
Interest rate lock										76		0		76		0
Interest rate swap on loans										377		0		377		0
Bank owned life insurance		29,012		0		29,012		0		28,370		0		28,370		0
Accrued interest receivable		3,308		0		3,308		0		3,230		0		3,230		0

Liabilities
Deposits	$	1,150,706	$	0	$	1,153,293	$	0	$	1,178,889	$	0	$	1,181,358	$	0
Overnight repurchase agreements		4,496		0		4,496		0		3,528		0		3,528		0
Federal Reserve Bank borrowings		898		0		898		0
Long term borrowings		29,374		0		29,424		0		29,440		0		29,088		0
Derivatives
Interest rate swap on loans										377		0		377		0
Accrued interest payable		456		0		456		0		392		0		392		0

			Fair Value Measurements at December 31, 2021 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	$	187,922	$	187,922	$	0	$	0
Securities available-for-sale		234,321		0		234,321		0
Restricted securities		1,034		0		1,034		0
Loans held for sale		3,287		0		3,287		0
Loans, net of allowances for loan losses		833,661		0		0		834,693
Derivatives
Interest rate lock		43		0		43		0
Interest rate swap on loans		181		0		181		0
Bank owned life insurance		28,168		0		28,168		0
Accrued interest receivable		3,339		0		3,339		0

Liabilities
Deposits	$	1,177,099	$	0	$	1,179,631	$	0
Overnight repurchase agreements		4,536		0		4,536		0
Federal Reserve Bank borrowings		480		0		480		0
Long term borrowings		29,407		0		29,657		0
Derivatives
Interest rate swap on loans		181		0		181		0
Accrued interest payable		693		0		693		0

2524

Index

Fair Value Measurements at December 31, 2020 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
$
120,437

$
120,437

$
0

$
0

Securities available-for-sale
186,409

0

186,409

0

Restricted securities
1,367

0

1,367

0

Loans held for sale
14,413

0

14,413

0

Loans, net of allowances for loan losses
826,759

0

0

826,083

Bank owned life insurance
28,386

0

28,386

0

Accrued interest receivable
3,613

0

3,613

0

Liabilities
Deposits
$
1,067,236

$
0

$
1,070,236

$
0

Overnight repurchase agreements
6,619

0

6,619

0

Federal Reserve Bank borrowings
28,550

0

28,550

0

Other borrowings
1,350

0

1,350

0

Accrued interest payable
384

0

384

0

Note 11. Segment Reporting

The Company operates in a decentralized fashion in 3 principal business segments: ~~The Old Point National~~the Bank, ~~of Phoebus (the Bank), Old Point~~the Trust, ~~& Financial Services, N.A. (Trust),~~ and the Company ~~as a separate segment~~ (for purposes of this Note, the Parent). Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly ~~fees~~interest and dividends received from the Bank and Trust companies. The Company has no other segments.

The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.

~~Index~~

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ follows:

Three Months Ended September 30, 2021
(dollars in thousands) Bank Trust Parent Eliminations Consolidated
Revenues
Interest and dividend income
$
10,809

$
6

$
2,281

$
(2,281
)

$
10,815

Income from fiduciary activities
0

1,032

0

0

1,032

Other income
2,341

249

50

(66
)

2,574

Total operating income
13,150

1,287

2,331

(2,347
)

14,421

Expenses
Interest expense
688

0

251

0

939

Provision for loan losses
360

0

0

0

360

Salaries and employee benefits
5,644

746

168

0

6,558

Other expenses
4,077

257

102

(66
)

4,370

Total operating expenses
10,769

1,003

521

(66
)

12,227

Income before taxes
2,381

284

1,810

(2,281
)

2,194

Income tax expense (benefit)
325

59

(98
)

0

286

Net income
$
2,056

$
225

$
1,908

$
(2,281
)

$
1,908

Capital expenditures
$
370

$
0

$
0

$
0

$
370

Total assets
$
1,304,291

$
7,222

$
150,442

$
(150,329
)

$
1,311,626

	Three Months Ended March 31, 2022
(dollars in thousands)	Bank		Trust		Unconsolidated Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	10,456	$	14	$	850		$	(850	)	$	10,470
Income from fiduciary activities		0		1,072		0			0			1,072
Other income		2,179		279		50			(65	)		2,443
Total operating income		12,635		1,365		900			(915	)		13,985

Expenses
Interest expense		538		0		295			0			833
Provision for loan losses		101		0		0			0			101
Salaries and employee benefits		5,429		848		145			0			6,422
Other expenses		3,888		294		174			(65	)		4,291
Total operating expenses		9,956		1,142		614			(65	)		11,647

Income before taxes		2,679		223		286			(850	)		2,338

Income tax expense (benefit)		377		48		(118	)		0			307

Net income	$	2,302	$	175	$	404		$	(850	)	$	2,031

Capital expenditures	$	197	$	0	$	0		$	0		$	197

Total assets	$	1,317,803	$	7,125	$	137,819		$	(137,362	)	$	1,325,385

Three Months Ended September 30, 2020
(dollars in thousands) Bank Trust Parent Eliminations Consolidated
Revenues
Interest and dividend income
$
9,732

$
6

$
1,244

$
(1,245
)

$
9,737

Income from fiduciary activities
0

955

0

0

955

Other income
2,483

234

50

(65
)

2,702

Total operating income
12,215

1,195

1,294

(1,310
)

13,394

Expenses
Interest expense
1,258

0

11

0

1,269

Provision for loan losses
300

0

0

0

300

Salaries and employee benefits
5,746

760

154

0

6,660

Other expenses
3,752

249

68

(65
)

4,004

Total operating expenses
11,056

1,009

233

(65
)

12,233

Income before taxes
1,159

186

1,061

(1,245
)

1,161

Income tax expense (benefit)
61

39

(39
)

0

61

Net income
$
1,098

$
147

$
1,100

$
(1,245
)

$
1,100

Capital expenditures
$
86

$
10

$
0

$
0

$
96

Total assets
$
1,249,144

$
6,961

$
118,423

$
(118,435
)

$
1,256,093

~~Index~~

Nine Months Ended September 30, 2021
(dollars in thousands) Bank Trust Unconsolidated Parent Eliminations Consolidated
Revenues
Interest and dividend income
$
31,635

$
17

$
7,458

$
(7,458
)

$
31,652

Income from fiduciary activities
0

3,110

0

0

3,110

Other income
7,426

788

150

(196
)

8,168

Total operating income
39,061

3,915

7,608

(7,654
)

42,930

Expenses
Interest expense
2,258

0

256

0

2,514

Provision for loan losses
510

0

0

0

510

Salaries and employee benefits
16,263

2,253

496

0

19,012

Other expenses
12,139

788

278

(196
)

13,009

Total operating expenses
31,170

3,041

1,030

(196
)

35,045

Income before taxes
7,891

874

6,578

(7,458
)

7,885

Income tax expense (benefit)
1,123

184

(184
)

0

1,123

Net income
$
6,768

$
690

$
6,762

$
(7,458
)

$
6,762

Capital expenditures
$
1,089

$
41

$
0

$
0

$
1,130

Total assets
$
1,304,291

$
7,222

$
150,442

$
(150,329
)

$
1,311,626

	Nine Months Ended September 30, 2020												Three Months Ended March 31, 2021
(dollars in thousands)	Bank		Trust		Unconsolidated Parent			Eliminations			Consolidated		Bank		Trust		Unconsolidated Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	29,532	$	40	$	5,362		$	(5,363	)	$	29,571	$	10,973	$	5	$	3,148		$	(3,148	)	$	10,978
Income from fiduciary activities		0		2,881		0			0			2,881		0		1,027		0			0			1,027
Other income		7,289		769		150			(196	)		8,012		2,866		256		50			(65	)		3,107
Total operating income		36,821		3,690		5,512			(5,559	)		40,464		13,839		1,288		3,198			(3,213	)		15,112

Expenses
Interest expense		4,167		0		45			0			4,212		818		0		4			0			822
Provision for loan losses		900		0		0			0			900		150		0		0			0			150
Salaries and employee benefits		15,305		2,315		498			0			18,118		5,320		743		164			0			6,227
Other expenses		10,886		827		263			(196	)		11,780		4,063		279		54			(65	)		4,331
Total operating expenses		31,258		3,142		806			(196	)		35,010		10,351		1,022		222			(65	)		11,530

Income before taxes		5,563		548		4,706			(5,363	)		5,454		3,488		266		2,976			(3,148	)		3,582

Income tax expense (benefit)		631		117		(138	)		0			610		550		56		(36	)		0			570

Net income	$	4,932	$	431	$	4,844		$	(5,363	)	$	4,844	$	2,938	$	210	$	3,012		$	(3,148	)	$	3,012

Capital expenditures	$	742	$	16	$	0		$	0		$	758	$	121	$	5	$	0		$	0		$	126

Total assets	$	1,249,144	$	6,961	$	118,423		$	(118,435	)	$	1,256,093	$	1,250,353	$	7,003	$	117,956		$	(117,674	)	$	1,257,638

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s ~~2020~~2021 Annual Report on Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.

2825

Index

Item 2.

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

~~Management’s~~The following discussion supplements and ~~analysis is presented to aid~~provides information about the ~~reader in understanding and evaluating~~major components of the ~~financial condition and~~ results of operations, financial condition, liquidity and capital resources of ~~Old Point Financial Corporation and its subsidiaries (collectively,~~ the ~~Company).~~Company. 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 data included in this report, as well as the Company’s ~~2020 Annual Report on~~2021 Form ~~10-K~~10-K. In addition to current and ~~management’s~~historical information, the following discussion and analysis ~~for~~contains forward-looking statements within the ~~year ended December 31, 2020. Highlighted in~~meaning of the ~~discussion are material changes from prior reporting periods~~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 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 ~~certain identifiable trends affecting the Company.~~Aanlysis of Financial Condition and Results of Operations.” Results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ 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.

~~Cautionary Statement Regarding Forward-Looking Statements~~Overview

~~This report contains statements concerning~~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, the Trust, 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. Trust’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 Trust.

Net income for the three months ended March 31, 2022 was $2.0 million ($0.39 per diluted share) compared to $3.0 million ($0.58 per diluted share) for the three months ended March 31, 2021. Total assets of $1.3 billion as of March 31, 2022 decreased by $12.8 million from December 31, 2021.

Key factors affecting comparisons of consolidated net income for the three months ended March 31, 2022 are as follows. Comparisons are to the three months ended March 31, 2021 unless otherwise stated.

Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), increased $106.9 million, or 14.4%;

Average earning assets increased $95.8 million, or 8.3%;

Interest income decreased $508 thousand, or 4.6%. The Company recognized net PPP origination fees of $408 thousand in the first quarter of 2022 compared to $1.6 million in the first quarter of 2021;

Interest expense increased $11 thousand, or 1.3%, due primarily to an increase in long term borrowings partially offset by lower rates and shifts in funding to lower cost deposits;

Net Interest Margin (NIM) was 3.14% for the first quarter of 2022 compared to 3.58% for the first quarter of 2021. The decrease was due primarily to lower accretion of net PPP origination fees;

Fiduciary and asset management fees and other service charges, commissions and fees increased $45 thousand, or 4.4%, and $105 thousand, or 11.1%, respectively;

Mortgage banking income decreased $968 thousand or 81.5% due to declines in mortgage industry volume and rising interest rates; and

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 in a private placement transaction. The Notes initially bear interest at a fixed rate of 3.50% for five years and convert to the three-month SOFR plus 286 basis points, resetting quarterly, thereafter. Interest expense attributable to these subordinated notes impacted the Company’s ~~expectations, plans, objectives or beliefs regarding future~~net interest income and net interest margin for the first quarter of 2022 but not for the corresponding 2021 period.

For more information about financial ~~performance and other statements~~measures that are not ~~historical facts. These statements may constitute “forward-looking statements”~~calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.

Capital Management and Dividends

Total equity was $108.1 million at March 31, 2022, compared to $120.8 million at December 31, 2021. Total equity decreased $12.7 million at March 31, 2022 compared to December 31, 2021, due primarily to unrealized losses in the market value of securities available for sale, which are recognized as ~~defined~~a component of accumulated other comprehensive (loss) income, and the repurchase of shares under the Company’s share repurchase program, partially offset by ~~federal~~net income. The Company’s securities ~~laws~~available for sale are fixed income debt securities, and ~~may include, but~~their decline in market value during the first quarter of 2022 was a result of increases in market interest rates. The Company expects to recover its investments in debt securities through scheduled payments of principal and interest and unrealized losses are not ~~limited to: statements regarding~~ expected ~~future operations and financial performance;~~to affect the Company’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations; certain items that management does not expect to have an ongoing impact on consolidated net income; net interest margin compression and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof, forgiveness of loans originated under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA) and the related impact on the Company’s results of operations; asset quality; adequacy of allowances for loan losses and the level of future chargeoffs; liquidity andearnings or regulatory capital levels; the Company’s assessment of and ability to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the Bank and its customers and employees, perpetrated by third-party cybercriminals; the effect of future market and industry trends and the effects of future interest rate levels and fluctuations. 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:~~

~~interest rates, such as volatility in short-term interest rates~~ or ~~yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates~~

~~general business conditions, as well as conditions within the financial markets~~

general economic conditions, including unemployment levels, supply chain disruptions, and slowdowns in economic growth, and particularly related to further and sustained economic impacts of the COVID-19 pandemic

the effectiveness of the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace and durability of economic recovery and the heightened impact that COVID-19 may have on many of the risks described herein

potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act, as subsequently amended

~~the Company’s branch realignment initiatives~~

~~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

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), and the effect of these policies on interest rates and business in our markets

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

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

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

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

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

~~the quality or composition of the loan portfolios and the value of the collateral securing those loans~~

~~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 net interest margin~~

~~the level of net charge-offs on loans and the adequacy of our allowance for loan and lease losses~~

~~performance of the Company’s dealer lending program~~

~~deposit flows~~

~~the strength of the Company’s counterparties~~

~~competition from both banks and non-banks~~

~~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 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~~

~~accounting principles, policies and guidelines and elections made by the Company thereunder~~

its subsidiaries.

2926

Index

~~These risks~~For the first quarter of 2022 the Company declared dividends of $0.13 per share, an increase of 8.3% over dividends of $0.12 per share declared in the first quarter of 2021. The Board of Directors of the Company continually reviews the amount of cash dividends per share and ~~uncertainties, in addition~~the resulting dividend payout ratio. The Company’s principal goals related to the ~~risks and uncertainties identified in~~maintenance of capital are to provide adequate capital to support the Company’s ~~2020 Annual Report on Form 10-K,~~risk profile consistent with the ~~Company’s Quarterly Reports on Form 10-Q,~~board approved risk appetite, provide financial flexibility to support future growth and ~~Current Reports on Form 8-K should be considered in evaluating~~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 forward-looking statements contained herein. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions,Bank are ~~not statements of historical fact, and are~~calculated based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. 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 undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which it is made, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.

~~Available Information~~

The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). ~~This reference~~regulatory guidance related to the ~~Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings.~~ ~~The information available on the Company’s Internet website is not part~~measurement of ~~this Form 10-Q or any other report filed by the Company with the SEC. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at~~ ~~www.sec.gov~~.

~~About Old Point Financial Corporation~~

~~The Company is the parent company of The Old Point National Bank of Phoebus (the Bank)~~capital and Old Point Trust & Financial Services, N.A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads and Richmond regions. The Bank currently has 16 branch offices. The Bank also has a loan production office in Richmond and a mortgage loan origination office in Charlotte, NC. Trust is a wealth management services provider.

~~On April 1, 2018, the Company~~ acquired Citizens National Bank (Citizens). Under the terms of the merger agreement, Citizens stockholders received 0.1041 shares of Company stock and $2.19 in cash for each share of Citizens stock. Systems integration was completed in May 2018.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The outbreak of COVID-19 has caused a significant disruption in economic activity worldwide, and has had a significant impact on business and customers in our market areas and on our results of operations, which the Company expects may continue. During 2021, the economy has, with certain setbacks, started to reopen and wider vaccine distribution and the easing of restrictions related to COVID-19 appear to be improving economic conditions. However, substantial uncertainty remains about critical factors that may affect the economy and employment, including case trends of COVID-19 in the U.S.; the impact of COVID-19 variants; the efficacy of a vaccine against COVID-19; vaccination rates; potential re-tightening of policies that had previously allowed businesses to open and restrictions related to COVID-19 to ease due to a resurgence in COVID-19; supply chain disruption; any further government stimulus efforts, including the nature, timing and extent of such stimulus; and the pace and durability of any economic recovery. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently not yet estimable and the Company believes that it will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. The Company’s results of operations may be impacted by elevated loans losses, net interest margin compression, falling demand for loans, and potential impairments of securities available for sale and goodwill. ~~The Company currently expects to manage through the negative impacts of the COVID-19 pandemic by maintaining sufficient liquidity and capital levels.~~risk-weighted assets.

The Company ~~actively assisted both customers and non-customers in obtaining loans through the PPP administered~~has a share repurchase program which was authorized by the ~~SBA. Additionally,~~Board of Directors in October 2021 to repurchase up to 10% of the Company’s issued and outstanding common stock through November 30, 2022. During the first quarter of 2022, 122,995 shares, for an aggregate purchase price of $3.0 million, were repurchased by the Company ~~has worked with customers affected by COVID-19 through payment deferrals~~under this plan.

At March 31, 2022, the book value per share of the Company’s common stock was $21.12, and ~~tracked all payment accommodations~~tangible book value per share (non-GAAP) was $20.75, compared to ~~customers to identify~~$23.06 and ~~quantify any impact they might have on the Company. As of September 30, 2021, the Company had no loans under modification, down from $54 thousand~~$22.69, respectively, at ~~June 30, 2021 and $7.4 million as of~~ December 31, ~~2020. Continued uncertainty regarding~~2021. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the duration and scope of the pandemic, related effects of COVID-19, and the pace and durability of any economic recovery may negatively impact management assumptions and estimates, such as the allowance for loan losses and resulting provision for loan losses.most directly comparable financial measures calculated in accordance with U.S. GAAP.

~~Index~~

Critical Accounting ~~Policies and~~ 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.

Allowance for Loan Losses

The ~~critical accounting and reporting policies include the Company’s accounting for the~~ allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. ~~Accordingly,~~Loan losses are charged against the allowance when it is believed the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in the Company’s judgment, will be adequate to absorb probable and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, management considers a range of possible assumptions and outcomes related to the various factors identified above. Under alternative assumptions that we considered in developing our estimate of an allowance that will be adequate to absorb probable and estimable losses inherent in the loan portfolio at March 31, 2022, our estimate of the allowance varied between $8 million and $10 million.

For further information concerning accounting policies, ~~are discussed in~~refer to Note 11. Significant Accounting Policies of the Notes to ~~the~~ Consolidated Financial Statements included in ~~this quarterly report on Form 10-Q,~~Item 8. “Financial Statements and ~~are discussed in further detail in~~Supplementary Data” of the Company’s ~~2020 Annual Report on~~2021 Form 10-K.

~~Executive Overview~~

~~For the three months ended September 30, 2021 net income was $1.9 million, or $0.36 earnings per diluted common share. This compares to net income~~Results of ~~$1.1 million, or $0.21 earnings per diluted common share, for the third quarter of 2020.~~ ~~The increase was principally attributable to increased net interest income partially offset by increased noninterest expense and provision for loan losses.~~

For the nine months ended September 30, 2021 and 2020, net income was $6.8 million, or $1.29 earnings per diluted common share, and $4.8 million, or $0.93 earnings per diluted common share, respectively. The increase was primarily attributable to increased net interest income, decreased provision for loan losses, and increased noninterest income partially offset by increased noninterest expense.

~~Highlights of the quarter are as follows:~~

~~Total assets were $1.3 billion at September 30, 2021, growing $85.4 million or 7.0% from December 31, 2020.~~

Net loans grew $3.7 million from December 31, 2020. PPP loans outstanding at September 30, 2021 were $36.3 million compared to $86.0 million at December 31, 2020. Excluding the decline in PPP loans outstanding, net loans held for investment (non-GAAP) grew $53.4 million, or 7.2%, from December 31, 2020 to September 30, 2021.

~~Deposits grew $83.5 million to $1.2 billion at September 30, 2021 from December 31, 2020.~~

Non-performing assets (NPAs) decreased to $1.4 million at September 30, 2021 compared to $2.0 million at December 31, 2020 and $5.7 million as of September 30, 2020. NPAs as a percentage of total assets was 0.10% at September 30, 2021, which compared to 0.16% at December 31, 2020 and 0.45% at September 30, 2020.

~~Average earning assets year to date grew $116.7 million, or 11.0%, to $1.2 billion as of September 30, 2021 compared to $1.1 billion as of September 30, 2020.~~

~~Book value per share and tangible book value per share (non-GAAP) at September 30, 2021 increased 0.7%, over June 30, 2021 and 2.9% and 3.0%, respectively from September 30, 2020.~~

~~Net interest income was $9.9 million for the third quarter of 2021, increasing from $9.1 million for the prior quarter and $8.5 million for the third quarter of 2020.~~

~~Net interest margin improved to 3.24% for the third quarter of 2021 from 3.10% for the second quarter of 2021 and 2.91% for the third quarter of 2020.~~

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 ~~net interest margin~~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.

For the first quarter of 2022, net interest income was $9.6 million, an decrease of $519 thousand or 5.1% from the first quarter of 2021. The decrease was primarily due to significant growth in average earning asset balances at lower average earning yields. Lower average earning yields were in part driven by accelerated recognition of net deferred fees related to PPP forgiveness at a lower volume during the first quarter of 2022. This was partially offset by higher average interest-bearing liabilities at lower average rates.

3127

Index

~~For~~The NIM was 3.14% for the ~~third~~ quarter ~~of 2021, net interest income was $9.9 million, an increase of $1.4 million or 16.6% from the third quarter of 2020. The increase was primarily due~~ended March 31, 2022 as compared to significantly higher balances in average earning assets and accelerated recognition of deferred fees and costs related to PPP forgiveness partially offset by higher average interest bearing liabilities at lower average rates. The compression on yield and cost was primarily due to the reduction of the federal funds target rate in3.58% for the first quarter of 2020 by the Federal Reserve to a range of 0.00% to 0.25% in response to the COVID-19 pandemic, but is also impacted by PPP loan originations (which bear interest at a rate of 1%) and higher levels of liquidity. Average earning assets increased year-over-year by $51.8 million, or 4.5%. The average tax-equivalent yield on earning assets for the third quarter of 2021 increased by 20 basis points compared to the same period of 2020. Average interest bearing liabilities increased $10.7 million, or 1.4%, and the average rate on interest-bearing liabilities for the quarter ended September 30, 2021 was 0.18%, down from 0.66% for the same period of 2020, benefiting from the lower rate environment and reduced interest expense related to repayment of higher-cost long-term borrowings during 2020.

~~For the nine months ended September 30, 2021 and 2020, net interest income was $29.1 million and $25.4 million, respectively.~~2021. Net interest income, on a fully tax-equivalent basis, was ~~$29.3~~$9.7 million for the ~~nine months ended September 30, 2021, compared to $25.5 million for the nine months ended September 30, 2020, an increase~~first quarter of ~~$3.8 million, or 15.0%.~~ ~~The increase was driven by the growth in average earning assets and the lower cost~~2022, a decrease of ~~funds compared to the first nine months of 2020, tempered by the impacts of lower yields on earning assets and increases in average interest bearing liabilities. Accelerated recognition of deferred fees and costs related to PPP forgiveness also positively impacted net interest income for~~$510 thousand from the 2021 period. Average earning assets for the nine months ended September 30, 2021 increased $116.7 million, or 11.0%, compared to the first nine months of 2020, primarily due to growth in loans (including PPP loans) and investment securities, funded by deposit growth. Average interest bearing liabilities increased $27.5 million, or 3.8%, for the nine months ended September 30, 2021 compared to the comparative 2020 period. The average tax-equivalent yield and average interest bearing cost decreased by 12 basis points and 33 basis points, respectively, for the first nine months of 2021 compared to the first nine months of 2020.

~~The NIM for the third quarter of 2021 was 3.24%, an increase from 2.91% for the third quarter of 2020.~~quarter. On a fully tax-equivalent basis, ~~(FTE),~~ NIM ~~increased to 3.26%~~was 3.16% and 3.60%, for the ~~third quarter of~~quarters ended March 31, 2022 and 2021, ~~up from 2.92% for the prior year quarter. For the first nine months of 2021 and 2020, NIM was 3.30% and 3.18%, respectively, and NIM (FTE) was 3.32% and 3.20%,~~ respectively. Average loan yields were ~~higher for the third quarter of 2021 compared to the same period of 2020~~lower by ~~58 basis points. For the nine months ended September 30, 2021, average loans yields were higher by 23~~52 basis points ~~over the same period of 2020. While~~due to the lower interest rate environment which resulted in lower average yields on new loan originations, including PPP loans, which earn interest at a fixed 1%, and repricing within the existing loan ~~portfolio, average loan yields were higher due to~~portfolio. Lower levels of accelerated recognition of deferred fees and costs related to PPP forgiveness also contributed to the decrease when comparing the 2022 and ~~the collection of prepayment penalties on one commercial relationship.~~2021 quarters. Loan fees and costs related to PPP loans are deferred at time of loan origination, are amortized into interest income over the remaining ~~term~~terms of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of ~~$2.7~~$408 thousand and $1.6 million were recognized in ~~the~~ first ~~nine months~~quarter of ~~2021.~~2022 and 2021, respectively. As of ~~September 30, 2021,~~March 31, 2022, unamortized net deferred PPP fees were ~~$1.1 million.~~ ~~For more information about these FTE financial measures, please see “Non-GAAP Financial Measures” below.~~ $284 thousand. Subordinated debt interest expense also impacted the NIM for the first quarter of 2022 but not for the first quarter of 2021. High levels of liquidity invested at lower yielding short-term levels in the low interest rate environment also continue to impact the NIM. For more information about these FTE financial measures, please see “Non-GAAP Financial Measures” below.

Average loans, which includes both loans held for investment and loans held for sale, increased $28.4 million to $863.9 million for the quarter ended March 31, 2022, compared to 2021. Average loans held for investment included $12.9 million and $69.7 million of average balances of loans originated under the PPP for 2022 and 2021, respectively. The increase in average loans outstanding in 2022 compared to 2021 was due primarily to growth in the commercial real estate, automobile, and consumer real estate segments of the loan portfolio. Average securities available for sale increased $49.7 million for 2022, compared to 2021, due primarily to higher purchases of securities. The average yield on the securities portfolio on a taxable-equivalent basis decreased 1 basis points for first quarter of 2022, compared to the first quarter of 2021.

Average money market, savings and interest-bearing demand deposits increased ~~$93.7~~$67.2 million ~~and $102.7 million for the third quarter and first nine months of 2021, respectively,~~ and average time deposits decreased ~~$29.7 million and $30.0~~$23.4 million, for the ~~third~~ quarter ~~and first nine months of 2021,~~ended March 31, 2022, respectively, compared to the same ~~periods~~period in ~~2020,~~2021, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift from time deposits as a result of lower interest rates. Average noninterest-bearing demand deposits increased ~~$36.5~~$46.0 million for the ~~third~~ quarter ~~of 2021 and increased $75.2 million for the first nine months of 2021,~~ended March 31, 2022 compared to ~~the same periods in 2020.~~March 31, 2021. The average cost of interest-bearing deposits decreased ~~24 basis points for the third quarter of 2021 and decreased 30~~16 basis points for the first ~~nine months~~quarter of ~~2021,~~2022 compared to the ~~same periods in 2020,~~2021 comparatvie period, due primarily to lower rates on deposits and a shift in composition from time deposits. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.

Average borrowings decreased ~~$53.3 million for the third quarter of 2021 and decreased $45.2~~$7.8 million for the first ~~nine months~~quarter of ~~2021,~~2022 compared to the same ~~periods~~period in ~~2020~~2021 due primarily to the repayment of PPPLF borrowings during 2021 ~~and~~primarily offset by long-term borrowings ~~in 2020.~~related to the issuance of subordinated notes by the Company during July 2021. The average cost of borrowings increased ~~174 basis points during the third quarter of 2021 and 18~~318 basis points during the first ~~nine months~~quarter of ~~2021,~~2022 compared to ~~the same periods in 2020~~2021 due primarily to the issuance of subordinated notes by the Company during July ~~2021 partially offset~~2021.

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,
	2022								2021
(dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate**			Average Balance			Interest Income/ Expense		Yield/ Rate**
ASSETS
Loans*	$	863,897		$	9,196		4.32	%	$	835,349		$	9,965		4.84	%
Investment securities:
Taxable		201,940			989		1.99	%		159,516			770		1.96	%
Tax-exempt*		37,007			265		2.90	%		29,696			229		3.12	%
Total investment securities		238,947			1,254		2.13	%		189,212			999		2.14	%
Interest-bearing due from banks		137,601			73		0.22	%		124,347			43		0.14	%
Federal funds sold		4,441			1		0.09	%		4			-		0.04	%
Other investments		1,142			14		4.90	%		1,319			30		9.16	%
Total earning assets		1,246,028		$	10,538		3.43	%		1,150,231		$	11,037		3.89	%
Allowance for loan losses		(9,989	)							(9,648	)
Other non-earning assets		93,796								97,123
Total assets	$	1,329,835							$	1,237,706
		��
LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	75,129		$	3		0.02	%	$	67,759		$	3		0.02	%
Money market deposit accounts		389,368			163		0.17	%		347,530			201		0.24	%
Savings accounts		126,258			10		0.03	%		108,262			11		0.04	%
Time deposits		167,859			361		0.87	%		191,298			584		1.24	%
Total time and savings deposits		758,614			537		0.29	%		714,849			799		0.45	%
Federal funds purchased, repurchase agreements and other borrowings		4,589			1		0.10	%		26,253			23		0.35	%
Long term borrowings		29,419			295		4.01	%		-			-		0.00	%
Total interest-bearing liabilities		792,622			833		0.43	%		741,102			822		0.45	%
Demand deposits		414,080								368,073
Other liabilities		5,368								9,906
Stockholders' equity		117,765								118,625
Total liabilities and stockholders' equity	$	1,329,835							$	1,237,706
Net interest margin				$	9,705		3.16	%				$	10,215		3.60	%

Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $68 thousand and $59 thousand for March 31, 2022 and 2021, 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 ~~repayment~~interaction of ~~higher-cost long-term borrowings during 2020.~~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, 2022 from 2021 Increase (Decrease)
	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans	$	345		$	(1,114	)	$	(769	)
Investment securities:
Taxable		208			11			219
Tax-exempt		57			(21	)		36
Total investment securities		265			(10	)		255

Federal funds sold		0			1			1
Other investments **		1			13			14
Total earning assets		611			(1,110	)		(499	)

INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		0			(0	)		-
Money market deposit accounts		25			(63	)		(38	)
Savings accounts		2			(3	)		(1	)
Time deposits		(73	)		(150	)		(223	)
Total time and savings deposits		(46	)		(216	)		(262	)
Federal funds purchased, repurchaseagreements and other borrowings		(19	)		(3	)		(22	)
Long term borrowings		-			295			295
Total interest-bearing liabilities		(65	)		76			11

Change in net interest income	$	676		$	(1,186	)	$	(510	)
* Computed on a fully tax-equivalent basis, non-GAAP, 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, and the extent or continuing impact of government stimulus measures, which are inherently uncertain, and (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic ~~environment;~~environment. During the first quarter of 2022, market interest rates increased and ~~(3)~~ the ~~recognition of net deferred fees on PPP loans, which~~Company is ~~subject~~asset sensitive at March 31, 2022; however, the Company can give no assurance as to the ~~timing~~ultimate impact of ~~repayment~~rising interest rates or ~~forgiveness.~~

~~The following tables show analyses of average earning assets, interest-bearing liabilities and rates and yields~~as to when or for how long the ~~periods indicated. Nonaccrual loans are included~~Company may experience an increase in ~~loans outstanding.~~

~~Index~~

~~AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES~~

For the quarter ended September 30,
2021 2020
(dollars in thousands)
Average
Balance

Interest
Income/
Expense

Yield/
Rate**

Average
Balance

Interest
Income/
Expense

Yield/
Rate**

ASSETS
Loans*
$
838,376

$
9,704

4.59
%

$
873,772

$
8,801

4.01
%
Investment securities:
Taxable
183,759

853

1.84
%

147,942

721

1.94
%
Tax-exempt*
32,243

236

2.90
%

19,795

177

3.56
%
Total investment securities
216,002

1,089

2.00
%

167,737

898

2.13
%
Interest-bearing due from banks
153,671

68

0.18
%

114,646

41

0.14
%
Federal funds sold
1,958

-

0.07
%

5

-

0.04
%
Other investments
1,033

16

5.91
%

3,098

46

5.90
%
Total earning assets
1,211,040

$
10,877

3.56
%

1,159,258

$
9,786

3.36
%
Allowance for loan losses
(9,486
)

(9,739
)

Other non-earning assets
97,907

100,984

Total assets
$
1,299,461

$
1,250,503

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts
$
72,371

$
3

0.02
%

$
54,065

$
3

0.02
%
Money market deposit accounts
379,170

228

0.24
%

319,674

222

0.28
%
Savings accounts
115,862

12

0.04
%

99,933

13

0.05
%
Time deposits
175,541

441

1.00
%

205,240

791

1.53
%
Total time and savings deposits
742,944

684

0.36
%

678,912

1,029

0.60
%
Federal funds purchased, repurchase agreements and other borrowings

10,840

3

0.15
%

48,740

69

0.56
%
Long terrn borrowings
25,301

252

3.95
%

-

-

0.00
%
Federal Home Loan Bank advances
-

-

0.00
%

40,706

171

1.67
%
Total interest-bearing liabilities
779,085

939

0.48
%

768,358

1,269

0.66
%
Demand deposits
393,591

357,078

Other liabilities
5,007

7,880

Stockholders' equity
121,778

117,187

Total liabilities and stockholders' equity
$
1,299,461

$
1,250,503

Net interest margin
$
9,938

3.26
%

$
8,517

2.92
%

*Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $62 thousand and $49 thousand for September 30, 2021 and 2020, respectively.

**Annualized

~~Index~~

~~AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES~~

For the nine months ended September 30,
2021 2020
(dollars in thousands)
Average
Balance

Interest
Income/
Expense

Yield/
Rate

Average
Balance

Interest
Income/
Expense

Yield/
Rate

ASSETS
Loans*
$
835,107

$
28,495

4.56
%

$
819,325

$
26,577

4.33
%
Investment securities:
Taxable
168,800

2,414

1.91
%

141,746

2,296

2.16
%
Tax-exempt*
31,596

706

2.99
%

16,635

460

3.69
%
Total investment securities
200,396

3,120

2.08
%

158,381

2,756

2.32
%
Interest-bearing due from banks
143,112

163

0.15
%

81,779

224

0.37
%
Federal funds sold
662

-

0.07
%

1,122

12

1.45
%
Other investments
1,128

57

6.64
%

3,080

136

5.86
%
Total earning assets
1,180,405

$
31,835

3.61
%

1,063,687

$
29,705

3.73
%
Allowance for loan losses
(9,584
)

(9,667
)

Other nonearning assets
100,366

106,970

Total assets
$
1,271,187

$
1,160,990

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts
$
70,238

$
10

0.02
%

$
53,254

$
9

0.02
%
Money market deposit accounts
366,580

649

0.24
%

300,290

823

0.37
%
Savings accounts
112,723

34

0.04
%

93,306

44

0.06
%
Time deposits
183,534

1,536

1.12
%

213,553

2,646

1.65
%
Total time and savings deposits
733,075

2,229

0.41
%

660,403

3,522

0.71
%

Federal funds purchased, repurchase agreements and other borrowings

17,143

33

0.26
%

30,465

106

0.47
%
Long terrn borrowings
8,526

252

3.95
%

-

-

0.00
%
Federal Home Loan Bank advances
-

-

0.00
%

40,398

584

1.93
%
Total interest-bearing liabilities
758,744

2,514

0.44
%

731,266

4,212

0.77
%
Demand deposits
385,427

310,199

Other liabilities
6,997

5,328

Stockholders' equity
120,019

114,197

Total liabilities and stockholders' equity
$
1,271,187

$
1,160,990

Net interest margin
$
29,321

3.32
%

$
25,493

3.20
%

*Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $183 thousand and $134 thousand for September 30, 2021 and 2020, respectively.

**Annualized

the NIM.

Provision for Loan Losses ~~and Credit Quality~~

The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the portfolio. This expense is based on management's estimate of probable credit losses inherent toin the loan portfolio. Management's evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions including uncertainties associated with the COVID-19 pandemic, were used in developing estimated loss factors for determining the loan loss provision. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate.

For the three months ended ~~September 30, 2021,~~March 31, 2022, the Company recognized a provision for loan losses of ~~$360~~$101 thousand compared to a provision of ~~$300~~$150 thousand for the ~~third~~first quarter of ~~2020.~~2021. The ~~higher~~lower provision expense during the ~~third~~first quarter of ~~2021~~2022 was driven primarily by the ~~downgrade~~shift of one large commercial ~~relationship. The provision~~relationship from pooled to individually impaired with no specific reserve, partially offset by qualitative factor adjustments for ~~loan losses was $510~~volume trends. Charged-off loans totaled $700 thousand in the first ~~nine months~~quarter of ~~2021,~~2022, compared to ~~$900~~$316 thousand in the first ~~nine months~~quarter of ~~2020.~~2021. Recoveries amounted to $254 thousand and $286 thousand for the quarters ended March 31, 2022 and 2021, respectively. The Company’s annualized net loans charged off to average loans were 0.21% for the first quarter of 2022 as compared to 0.01% for the first quarter of 2021.

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 loan loss provision.

3430

Index

~~The allowance for loan and lease losses (ALLL) was~~ $9.7 million at September 30, 2021 and $9.5 million at December 31, 2020, respectively. The ALLL as a percentage of loans held for investment was 1.15% and 1.14% at September 30, 2021 and December 31, 2020, respectively. Excluding PPP loans, which are 100% guaranteed by the SBA, the ALLL as a percentage of loans held for investment was 1.20% at September 30, 2021 and 1.27% at December 31, 2020. The decrease in ALLL as a percentage of loans held for investment, excluding PPP loans, was primarily attributable to an increase in loans held for investment combined with improving historical loss rates and slight improvement in qualitative factors related to the COVID-19 pandemic, partially offset by the downgrade of one commercial relationship. Quarterly annualized net charge offs as a percentage of average loans outstanding was 0.07% for the third quarter of 2021 compared to 0.04% in the third quarter of 2020. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.

As of September 30, 2021, compared to December 31, 2020, asset quality remains very strong with no significant changes in the overall credit quality of the loan portfolio, however the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration. Low levels of NPAs and year-over-year quantitative historical loss rates continue to demonstrate improvement, resulting in a 10 basis point reduction in the historical loss rate as a percentage of loans evaluated collectively for impairment overall, but are being partially offset by a 2 basis point increase in qualitative factor components primarily related to economic uncertainty stemming from the COVID-19 pandemic. As the economic impact of the COVID-19 pandemic continues to evolve, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses.

The Company has made loan modifications under the CARES Act, enacted on March 27, 2020, and subsequently amended by the Consolidated Appropriations Act 2021, which provided that certain loan modifications that were (1) related to COVID-19 and (2) for loans that were not more than 30 days past due as of December 31, 2019 are not required to be designated as TDRs. At September 30, 2021, the Company had no loan modifications under the CARES Act compared to $54 thousand at June 30, 2021 and $7.4 million as of December 31, 2020. The Company recognizes interest income as earned and management expects that the deferred interest owed on each such loan modification will be repaid by the borrower in a future period.

Noninterest Income

Noninterest income was ~~$3.6~~$3.5 million ~~and $11.3 million , respectively, in~~for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$51~~$619 thousand or ~~1.4%~~15.0% from the ~~third~~first quarter of ~~2020 and an increase of $385 thousand, or 3.5%, from the nine months ended September 30, 2020.~~2021. Although fiduciary and asset management fees, ~~and~~ service charges on deposit accounts, other service charges, commissions and fees, bank-owned life insurance income, and other operating income increased compared to the prior year quarter, these increases were offset by lower mortgage banking income driven by reductions in volume which were attributable to changes in mortgage market conditions, resulting in a decline in ~~the~~ noninterest income for the ~~third~~first quarter of ~~2021~~2022 when compared to the prior year quarter. Year over year, fiduciary and asset management fees, other service charges, commission and fees, and mortgage banking income increased while service charges on deposit accounts decreased primarily due to lower nonsufficient funds, or NSF, fees which historically trend downward during periods of economic uncertainty and lower service charges due to higher deposit balances. Mortgage banking income increased primarily due to (i) higher volume resulting from the current interest rate environment, (ii) higher gains on sales of loans as a result of higher margins on loan originated for resale and (iii) expansion of the mortgage lending team.

~~Noninterest Expense~~

~~Noninterest expense was $10.9 million for the third quarter of 2021, an increase of $264 thousand, or 2.5%, from the third quarter of 2020.~~ The increase over the prior year quarter is primarily driven by (i) increased data processing expense related to implementation and transition of bank-wide technology enhancements; (ii) increased professional services; and (iii) other operating expenses primarily related to FDIC assessments and bank franchise tax. Salary and benefit expense decreased compared to the prior year quarter primarily due to decreased salary expense related to the 2020 early retirement incentive plan and decreased overtime levels.

Noninterest expense increased $2.1 million, or 7.1%, to $32.0 million for the nine months ended September 30, 2021 compared to $29.9 million for the prior year comparative period. The drivers of the year-over-year increase are higher salary and employee benefits related to lower levels of PPP deferred cost recognition, increased data processing expense related to bank-wide technology enhancements, and increased professional services and other operating expenses. Total salaries and benefits costs increased $894 thousand, or 4.9%, when comparing the nine months ended September 30, 2021 to the same period in 2020. The increase in salaries and employee benefits is primarily attributable to (i) increased commission expense related to higher mortgage loan origination volume in 2021; (ii) increased temporary employee expense; and (iii) lower levels of deferred costs related to PPP loan origination, partially offset by reduced salary expense related primarily to lower full time equivalent employee levels. The costs related to PPP loan originations were deferred at time of origination and are being amortized to interest income over the remaining lives of the loans, which may be 24 or 60 months at origination. These costs are amortized against the related loan fees received for the origination of the PPP loans. Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans.

~~Index~~

As part of the Company’s roadmap for implementing bank-wide technology and efficiency initiatives, during 2021, the Company has fully implemented a new loan origination system and a new online appointment scheduling solution as well as completing an ATM upgrade project. During the fourth quarter of 2021, the Company expects to finalize implementation of a new deposit origination platform and a new online account opening solution. The Company is also on track to complete upgrades to critical infrastructure software related to imaging and to implement a new data analytics solution and teller system during the fourth quarter of 2021. These initiatives have driven an increase of $858 thousand from the nine months ended September 30, 2020 to the nine months ended September 30, 2021 and are expected to continue to contribute to increased noninterest expenses during the implementation and transition timeframes as our operational structure pivoted from in-house to outsourced environments and shifted costs previously included in occupancy and equipment expense. The Company expects to continue its bank-wide technology initiative implementations into 2022.

The Company continues to focus on ~~balance sheet repositioning~~diversifying noninterest income through ~~disposition of under-utilized real estate~~efforts to expand Trust, insurance, and ~~branch optimization, as well as digital initiatives that complement this repositioning. The Company has also benefited from the early retirement transitions to redeploy resources in highly skilled~~mortgage banking activities, and ~~experienced relationship officers as well as officers with expertise in creating efficiencies through improvements in operations~~a continued focus on business checking and ~~technology.~~other corporate services.

~~Increase in other tax expenses~~Noninterest Expense

Noninterest expense was $10.7 million for the first quarter of 2022, an increase of $155 thousand, or 1.5%, compared to $10.6 million for the first quarter of 2021. The increase over the prior year quarter was primarily driven by ~~resolution of certain tax credits~~increased salary and benefit expense and employee professional development related to ~~bank franchise tax of $94 thousand~~recruiting partially offset by decreased ATM and ~~increases in~~other losses and other operating ~~expense is primarily~~expenses. The increase in salary and benefits was related to ~~increased FDIC assessments~~lower commission expense of $215 thousand offset by lower deferred loan costs of $381 thousand.

During the first quarter of 2022, the Company completed implementation of a new online account opening solution, continues to navigate the ongoing roadmap for bank-wide technology and ~~loan processing expense due to increased volume levels.~~operating efficiency initiatives, is actively assessing major vendor contracts and relationships, and completed the closure of two branches, creating a more streamlined branch footprint.

The Company’s income tax expense ~~increased $225~~decreased $263 thousand for the ~~third~~first quarter ~~and $513 thousand for first nine months~~ of ~~2021~~2022 when compared to the same ~~periods~~period in ~~2020~~2021 primarily due to changes in the levels of net income and ~~lower federal income~~the mix of effective tax ~~credits for investment in certain housing projects.~~exempt income. The effective federal income tax rates for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~was 13.0%~~were 13.1% and ~~14.2% and the effective tax rates for the three and nine months ended September 30, 2020 was 5.3% and 11.2%~~15.9%, respectively.

Balance Sheet Review

~~Unless otherwise noted, all comparisons in this section are between balances at~~At March 31, 2022, the Company had total assets of $1.3 billion, a decrease of $12.8 million compared to assets as of December 31, ~~2020 and September 30,~~ 2021.

~~Total assets of $1.3 billion as of September 30, 2021 increased by $85.4 million from December 31, 2020.~~ Net loans held for investment increased ~~$3.7~~$12.1 million or ~~0.5%~~1.5%, from $833.7 million at December 31, ~~2020~~2021 to ~~$830.5~~$845.7 million at September 30, 2021. The change in net loans held for investment was primarily attributed to a decline of $49.7 million in the PPP loan segment due to forgiveness of $98.0 million of PPP loans, which was partially offset by new PPP originations of $48.3 million. March 31, 2022. Loans held for investment, excluding PPP (non-GAAP), grew ~~7.2%~~2.8%, or ~~$53.4~~$23.2 million, driven by loan growth in the following segments: commercial real estate of ~~$32.0~~$12.6 million, construction, land development, and other land loans of ~~$19.2~~$6.1 million, and ~~automobile~~multi-family residential real estate of ~~$4.2~~$7.7 million. This segmented growth was partially offset by a decrease in PPP loans of $11.5 million. Cash and cash equivalents ~~increased $63.9~~decreased $29.6 million or ~~53.0%.~~ ~~Securities~~15.8% from December 31, 2021 to March 31, 2022, and securities available for sale ~~at fair value,~~ increased ~~$26.0~~$3.7 million ~~from December 31, 2020 to $212.4 million at September 30, 2021,~~or 1.6% over the same period as additional liquidity provided by growth in deposit accounts ~~continues to be~~was deployed in the Company’s investment portfolio.

Total deposits of $1.2 billion as of March 31, 2022 increased ~~$83.5~~$1.8 million, or ~~7.8%, to $1.2 billion at September 30,~~0.2% from December 31, 2021. Noninterest-bearing deposits ~~increased $32.4~~decreased $36.4 million, or ~~9.0%~~8.6%, savings deposits increased ~~$71.7~~$42.3 million, or ~~14.0%~~7.2%, and time deposits decreased ~~$20.6~~$4.1 million, or ~~10.6%~~2.5%. ~~Growth in the Company’s deposits~~Liquidity continues to be ~~driven~~impacted by record cumulative levels of consumer savings, government stimulus, and PPP loan related deposits. ~~Key strategies continue to be expanding the low cost deposit base and re-pricing to reduce interest expense and buffer NIM compression during this low rate environment.~~

~~Total borrowings decreased $1.8 million from December 31, 2020 to September 30, 2021.~~ The ~~primary drivers of~~Company utilized the ~~decrease were repayment of borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) partially offset by the issuance of subordinated notes during the third quarter of 2021.~~ PPPLF ~~was~~ initiated by the Federal Reserve Bank to partially fund PPP loan ~~originations, resulting in~~originations. PPPLF borrowings were fully repaid during the ~~Company borrowing $898 thousand as~~first quarter of ~~September 30, 2021 as~~2022 compared to ~~$28.6 million~~$480 thousand at December 31, ~~2020. PPPLF borrowings are fully collateralized by PPP loans~~2021. The Company also utilizes FHLB advances as a source of liquidity as needed. At March 31, 2022 and ~~will mature in concert with the underlying collateral, all of which will mature within 24 months of origination. On July 14,~~December 31, 2021, the Company completed the issuance of $30.0 million in aggregate principal amount of subordinated notes due in 2031 in a private placement transaction. The subordinated notes initially bear interest at a fixed rate of 3.50% for five years and at the three month SOFR plus 286 basis points, resetting quarterly, thereafter. The notes were structured to qualify as Tier 2 capital for regulatory purposes, and the proceeds will be used for general corporate purposes.had no FHLB advances.

~~Average assets~~Securities Portfolio

When comparing March 31, 2022 to December 31, 2021, securities available-for-sale increased $3.7 million, or 1.5%. The majority of the change was due primarily to purchases of U.S. Treasury securities, securities issued by state and political subdivisions, and corporate bonds and other securities to deploy additional liquidity provided by growth in deposit accounts rather than holding in lower yielding cash reserves.

The Company’s strategy for the ~~first nine months of 2021 increased $110.2 million, or 9.5%, compared~~securities portfolio is primarily intended to manage the ~~first nine months of 2020. Comparing the first nine months of 2021~~portfolio’s susceptibility to ~~the first nine months of 2020,~~ ~~average loans increased $15.8 million,~~interest rate risk and ~~average investment~~to provide liquidity to fund loan growth. The securities ~~increased $42.0 million. Total average deposits increased $147.9 million with year-over-year average balance increases of 24.3% in non-interest bearing deposits~~portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and ~~23.0% in savings deposits, including interest-bearing transaction and money market accounts. Average borrowings decreased $45.2 million.~~to manage tax exposure when necessary.

3631

Index

~~Liquidity~~

~~Liquidity is the ability~~The following table sets forth a summary 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. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of September 30, 2021, the Bank’s unpledged, available-for-sale securities totaled $145.3 million. The Company’s primary external source of liquidity is advances from the FHLB. In addition, the Company had cash and cash equivalents of $184.3 million at September 30, 2021, including interest-bearing deposits in other banks of $169.2 million, that could provide additional liquidity to the Companyportfolio:

~~A major source of~~

TABLE 3: SECURITIES PORTFOLIO

(Dollars in thousands)	March 31, 2022		December 31, 2021
U.S. Treasury securities	$	17,895	$	14,904
Obligations of U.S. Government agencies		37,247		38,558
Obligations of state and political subdivisions		67,756		65,803
Mortgage-backed securities		86,575		89,058
Money market investments		1,147		2,413
Corporate bonds and other securities		27,403		23,585
		238,023		234,321
Restricted securities:
Federal Home Loan Bank stock	$	682		383
Federal Reserve Bank stock		665		609
Community Bankers' Bank stock		42		42
		1,389		1,034
Total Securities	$	239,412	$	235,355

For more information about 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 third quarter of 2021, the Company had $380.3 million in FHLB borrowing availability based on loans and securities ~~currently~~ available for ~~pledging. The Company believes that~~sale, including information about securities in an unrealized loss position at March 31, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the ~~availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds~~heading Note 2, Securities in the form of federal funds lines of credit with correspondent banks. As of the end of the third quarter of 2021, the Company had $115.0 million available in federal funds lines to address any short-term borrowing needs.this Quarterly Report on Form 10-Q.

~~As disclosed in the Company’s consolidated statements~~Loan Portfolio

The following table shows a breakdown of ~~cash flows, net cash provided~~total loans by ~~operating activities was $17.6 million, net cash used in investing activities was $33.6 million,~~segment at March 31, 2022 and net cash provided by financing activities was $79.8 million for the nine months ended September 30, 2021. Combined, this contributed to a $63.9 million increase in cash and cash equivalents for the nine months ended September 30,December 31, 2021.

Management is not aware of any market or institutional trends, events or uncertainties, other than potential impacts from the COVID-19 pandemic, that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations.

TABLE 5: LOAN PORTFOLIO

	March 31,		December 31,
(Dollars in thousands)	2022		2021
Commercial and industrial	$	58,886	$	68,690
Real estate-construction		64,502		58,440
Real estate-mortgage (1)		212,824		206,368
Real estate-commercial		394,987		382,603
Consumer		117,701		118,441
Other		6,334		8,984
Ending Balance	$	855,234	$	843,526

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

Based on the North American Industry Classification System code, there are no categories of loans that exceed 10% of total loans other than the categories disclosed in the preceding table.

As of March 31, 2022, the total loan portfolio increased by $11.7 million or 1.4% from December 31, 2021, primarily due to increases in real estate construction, real estate mortgage, and real estate-commercial which were offset by reductions in commercial and industrial due to a decline of $11.5 million in PPP loans outstanding. Net loans held for investment increased 1.5% from December 31, 2021 to March 31, 2022. Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), grew 2.8%.

For more information about the Company’s ~~management of liquid assets,~~loan portfolio at March 31, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the ~~availability of borrowed funds,~~heading Note 3, Loans and the Company's 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.Allowance for Loan Losses in this Quarterly Report on Form 10-Q.

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. 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.

Index

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, ~~that are accruing interest~~ and ~~not performing according to their modified terms, and OREO. OREO consists of~~other real estate ~~from~~owned (OREO). Restructured loans are loans with terms that were modified in a ~~foreclosure~~troubled debt restructuring (TDR) for borrowers experiencing financial difficulties. Refer to Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Loan Losses in this Quarterly Report on ~~loan collateral.~~ ~~The Company had no OREO as of September 30, 2021 and December 31, 2020.~~Form 10-Q for more information.

Nonperforming assets increased by $3.3 million from $1.5 million at December 31, 2021 to $4.8 million at March 31, 2022. The ~~majority~~total at March 31, 2022 consisted of ~~the~~$624 thousand in loans still accruing interest but past due 90 days or more and ~~accruing interest~~$4.2 million in nonaccrual loans. All of the nonaccrual loans are classified as impaired and 93.9% of the nonaccrual loans at ~~September 30, 2021~~March 31, 2022 were secured by real estate. Impaired loans are ~~student loans with principal and interest amounts that are 97 - 98% guaranteed by~~a component of the ~~federal government.~~allowance for loan losses. When a loan changes from ~~“past~~“90 days past due ~~90 days or more and~~but still accruing interest” ~~status~~ to “nonaccrual” status, the loan is normally reviewed for impairment. ~~In most cases, if the loan~~If impairment is ~~considered impaired,~~identified, then the ~~difference between~~Company records a charge-off based on the value of the collateral ~~and~~or the ~~principal amount outstanding on~~present value of the ~~loan is charged off.~~loan’s expected future cash flows, discounted at the loan's effective interest rate. If the Company is waiting on an appraisal to determine the collateral’s value, ~~or is in negotiations with the borrower or other parties that may affect the value of the collateral,~~ management allocates funds to cover the deficiency to the allowance for loan losses ~~to cover the anticipated deficiency,~~ based on information available to management at ~~that~~the time.

InThe recorded investment in impaired loans increased to $6.6 million as of March 31, 2022 from $1.3 million as of December 31, 2021 as detailed in Part I, Item 1, “Financial Statements” under the ~~case~~heading Note 3, Loans and the Allowance for Loan Losses in this Quarterly Report on Form 10-Q. The majority of these loans were collateralized.

The following table presents information concerning the aggregate amount of nonperforming assets, which includes nonaccrual loans, past due loans, TDRs and OREO:

TABLE 6: NONPERFORMING ASSETS
	March 31,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans
Commercial and industrial	$	255		$	174
Real estate-construction		998			-
Real estate-mortgage (1)		164			191
Real estate-commercial		2,770			113
Total nonaccrual loans	$	4,187		$	478

Loans past due 90 days or more and accruing interest
Commercial and industrial	$	-		$	169
Consumer loans (2)		614			846
Other		10			10
Total loans past due 90 days or more and accruing interest	$	624		$	1,025

Restructured loans
Real estate-construction	$	78		$	79
Real estate-mortgage (1)		418			450
Real estate-commercial		399			413
Total restructured loans	$	895		$	942
Less nonaccrual restructured loans (included above)		164			191
Less restructured loans currently in compliance (3)		731			751
Net nonperforming, accruing restructured loans	$	-		$	-
Nonperforming loans	$	4,811		$	1,503

Total nonperforming assets	$	4,811		$	1,503

Interest income that would have been recorded under original loan terms on nonaccrual loans above	$	75		$	11
Interest income recorded for the period on nonaccrual loans included above	$	4		$	2

Total loans	$	855,234		$	843,526
ALLL	$	9,520		$	9,865
Nonaccrual loans to total loans		0.49	%		0.06	%
ALLL to total loans		1.11	%		1.17	%
ALLL to nonaccrual loans		227.37	%		2063.81	%

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

(2) Amounts listed include student loans and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the ~~restructuring may be~~federal government. The past due principal portion of these guaranteed loans totaled $409 thousand at March 31, 2022 and $711 thousand at December 31, 2021. For additional information, refer to ~~modify to an unsecured loan (e.g., a short sale)~~Note 3, Loans and Allowance for Loan Losses included inPart I, Item 1, “Financial Statements” of this report on Quarterly Report on Form 10-Q.

(3) Amounts listed represent restructured loans that ~~the borrower can afford to repay. In these circumstances, the entire balance~~are in compliance with their modified terms as of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower’s ability to repay the modified loan.date presented.

3733

Index

~~The following~~As shown in the table ~~presents information on nonperforming assets,~~above, as of ~~the dates indicated:~~

~~NONPERFORMING ASSETS~~

(dollars in thousands)
September 30,
2021

December 31,
2020

Increase
(Decrease)

Nonaccrual loans
Real estate-mortgage (1)
$
-

$
311

$
(311
)
Real estate-commercial
421

903

(482
)
Construction
-

-

-

Consumer loans
3

-

3

Total nonaccrual loans $ 424 $ 1,214 $ (790 )

Loans past due 90 days or more and accruing interest
Real estate-mortgage (1)
$
-

$
-

$
-

Consumer loans (2)
$
937

$
744

$
193

Total loans past due 90 days or more and accruing interest $ 937 $ 744 $ 193

Restructured loans
Real estate-construction
$
81

$
83

$
(2
)
Real estate-mortgage (1)
459

492

(33
)
Real estate-commercial
425

1,352

(927
)
Total restructured loans $ 965 $ 1,927 $ (962 )
Less nonaccrual restructured loans (included above)
196

1,120

(924
)
Less restructured loans currently in compliance (3)
769

807

(38
)
Net nonperforming, accruing restructured loans
$
-

$
-

$
-

Nonperforming loans $ 1,361 $ 1,958 $ (597 )

Total nonperforming assets $ 1,361 $ 1,958 $ (597 )

~~(1)~~

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

~~(2)~~

Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $666 thousand at September 30, 2021 and $547 thousand at December 31, 2020.

~~(3)~~

~~As of September 30, 2021 and December 31, 2020, all of the Company's restructured accruing loans were performing in compliance with their modified terms.~~

~~Nonperforming assets as of September 30, 2021 were $1.4 million, $597 thousand lower than nonperforming assets as of December~~March 31, ~~2020. Nonaccrual loans decreased $790 thousand when comparing the balances as of September 30, 2021~~2022 compared to December 31, ~~2020.~~2021, the nonaccrual loan category increased by $3.7 million and the 90-days past due and still accruing interest category decreased by $401 thousand or 39.1%. The ~~decrease~~increase in nonaccrual loans during the first quarter of 2022 was ~~primarily~~ driven by one well-secured large commercial relationship which was downgraded during the ~~sale~~fourth quarter of ~~one~~2021 and became impaired and placed on nonaccrual status during the first quarter of 2022.

The nonaccrual loans at March 31, 2022 were related to eight credit ~~relationship, resulting~~relationships. All loans in ~~a recovery of $43 thousand. See Note 3 of the Notes~~these relationships have been analyzed to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for additional information about the change in nonaccrual loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regardingdetermine whether the cash flow anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.

~~The majority~~ of the balance of nonaccrual loans at September 30, 2021 was related to one credit relationship of $183 thousand, representing 43.2% of the $424 thousand of nonaccrual loans at September 30, 2021. This relationship has been analyzedborrower and ~~the Company believes that~~ the collateral pledged to secure the loans is sufficient to cover ~~the~~ outstanding principal ~~balance.~~balances. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to ~~collect.~~collect.

~~Index~~

~~Loans past due 90 days or more and accruing interest increased $193 thousand. As~~The majority of ~~September 30, 2021, $667 thousand of~~ the ~~$937 thousand of~~ loans past due 90 days or more and still accruing interest at March 31, 2022 ($409 thousand) were ~~government-guaranteed~~ student ~~loans on which the Company expects to experience minimal losses. Because the~~loans. The federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the ~~loans,~~loans; as such, management does not expect even a significant ~~increases~~increase in past due student loans to have a material effect on the Company.

Total restructured loans decreased by $962 thousand from December 31, 2020 to September 30, 2021 primarily due to the sale of one large commercial loan. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. ~~This allows management~~For a detailed discussion of the Company’s nonperforming assets, refer to ~~work with problem loan relationships to identify any payment shortfall~~Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and ~~assist these borrowers to improve performance or correct~~ the ~~problems.~~Allowance for Loan Losses in this Quarterly Report on Form 10-Q.

The Allowance for Loan Losses

The allowance for loan losses is based on several components. In evaluating the adequacy of the allowance, each segment of the loan portfolio is divided into several pools of loans:

1.	Specific identification (regardless of risk rating)

2.	Pool–substandard

3.	Pool–other assets especially mentioned (OAEM) (rated just above substandard)

4.	Pool–pass loans (all other rated loans)

The first component of the allowance for loan losses is determined based on specifically identified loans that may become impaired. These loans are individually analyzed for impairment and include nonperforming loans and both performing and nonperforming TDRs. This component may also include loans considered impaired for other reasons, such as outdated financial information on the borrower or guarantors or financial problems of the borrower, including operating losses, marginal working capital, inadequate cash flow, or business interruptions. Changes in TDRs and nonperforming loans affect the dollar amount of the allowance. Increases in the impairment allowance for TDRs and nonperforming loans are reflected as an increase in the allowance for loan losses except in situations where the TDR or nonperforming loan does not require a specific allocation (i.e., the discounted present value of expected future cash flows or the collateral value is considered sufficient).

The majority of the ~~Company’s~~Company's TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company ~~is waiting~~has not yet received a current appraisal on ~~an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral,~~loans being reviewed for impairment, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the impaired loan component of the allowance for loan losses ~~was $49~~amounted to $33 thousand and ~~$11~~$128 thousand, respectively. The decrease in the impaired loan component is due primarily to the charge-off of one credit relationship. The impaired loan component of the allowance for loan losses is reflected as a valuation allowance related to impaired loans in Note 3, Loans and the Allowance for Loan Losses included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q.

The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes in certain loans, changes in underwriting, changes in management and legal and regulatory ~~changes, and as of September 30, 2021 and December 31, 2020 included factors related to the COVID-19 pandemic.~~changes.

Historical loss is the final component of the allowance for loan ~~losses and is calculated based on the migration~~losses. The calculation of loans from performing to charge-off over a period of time that management deems appropriate to provide a reasonable estimate of losses inherent in the loan portfolio. Historical loss is based on eight migration periods of twelve quarters each.

~~Both~~ the historical loss ~~and qualitative factor components of the allowance are applied to~~component is conducted on loans evaluated collectively for ~~impairment. The portfolio is segmented~~impairment and uses migration analysis with eight migration periods covering twelve quarters each on pooled segments. These segments are based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the ~~call report~~Call Report applicable to the Bank.

Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the ~~loan’s~~loan's payments are current (including loans 1 – 29 days past due), ~~or are~~ 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the ~~Company’s~~Company's internally assigned risk grades: substandard, other assets especially mentioned ~~(OAEM, rated~~(rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of ~~Doubtful~~doubtful or ~~Loss,~~loss, but as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, the Company had no loans in these categories.

Index

The overall historical loss rate from December 31, ~~2020~~2021 to ~~September 30, 2021, decreased 10~~March 31, 2022, improved 8 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset ~~quality combined with sustained levels of non-performing assets.~~quality. For the same period, the qualitative factor components increased 21 basis ~~points~~point as a percentage of loans evaluated collectively for impairment overall. This increase was primarily due to ~~segment~~ adjustments for ~~economic conditions and uncertainty related to the COVID-19 pandemic and~~ change in volume for certain segments. While there have not been significant changes in overall credit quality of the loan portfolio from December 31, ~~2020~~2021 to ~~September 30, 2021,~~March 31, 2022, management will continue to monitor economic recovery challenges at macro and micro levels, including levels of inflation, the ~~economic impact~~impacts of ~~the~~new COVID-19 ~~pandemic~~variants, expansion and ~~the effects~~contraction of pandemic-related government stimulus ~~including PPP loans,~~efforts, supply chain disruption, and employment levels, which may be delaying signs of credit ~~deterioration, potentially resulting in~~deterioration. If there are further challenges to the economic recovery, elevated levels of risk within the loan portfolio ~~which~~ may require additional increases in the allowance for loan losses.

On a combined basis, the historical loss and qualitative factor components amounted to ~~$9.6~~$9.5 million as of ~~September 30, 2021~~March 31, 2022 and ~~$9.5~~$9.7 million atas of December 31, ~~2020.~~2021. Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to identify areas within the loan portfolio which may create elevated levels of risk should the economic environment created by ~~the~~uncertainty related to COVID-19 pandemic ~~or effects of federal government relief programs~~ present indications of economic instability that is other than temporary in nature.

39Overall Change in Allowance

~~Index~~

As a result of management's analysis, the Company added, through the provision, $101 thousand to the ALLL for the quarter ended March 31, 2022. The ~~allowance for loan losses was 1.15% and 1.14%~~ALLL, as a percentage of ~~total~~period-end loans held for investment, ~~on September 30, 2021~~was 1.11% and 1.17% at March 31, 2022 and December 31, ~~2020,~~2021, respectively. The decrease in the ALLL as a percentage of loans held for investment at March 31, 2022 compared to the December 31, 2021 was primarily attributable to: (i) an increase in loans held for investment, excluding PPP loans (non-GAAP); (ii) continued improvement in historical qualitative loss rates; and (iii) the shift of one large commercial relationship from pooled to individually impaired with no specific reserve, partially offset by qualitative factor adjustments for volume trends. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.12% and 1.20% at ~~September 30, 2021~~March 31 2022 and ~~1.27% at~~ December 31, ~~2020. The decrease in the ALLL as a percentage of loans held for investment, excluding PPP loans, from December 31, 2020 to September 30,~~ 2021, is primarily related to higher outstanding loan balances, excluding PPP, combined with decreasing historical loss rates partially offset by increased qualitative reserves and the downgrade of one large commercial relationship.respectively. Loans held for investment excluding PPP loans is a non-GAAP financial measure. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below. AsManagement believes that the allowance has been appropriately funded for losses on existing loans, based on currently available information. Low levels of ~~September 30, 2021,~~past dues and year-over-year quantitative historical loss rates continue to demonstrate improvement. The Company will continue to monitor the loan portfolio, levels of nonperforming assets, and the sustainability of improving asset quality trends experienced closely and make changes to the allowance for loan losses ~~was 711.5%~~when necessary. As the economic impact of ~~nonperforming~~the COVID-19 pandemic continues to evolve, elevated levels of risk within the loan portfolio may require additional increases in the ALLL.

The allowance for loan losses represents an amount that, in management’s judgement, will be adequate to absorb probable and estimable losses inherent in the loan portfolio. The provision for loan losses increase the allowance and loans charged-off, net of recoveries, reduce the allowance. The following table presents the Company’s loan loss experience for the periods indicated:

TABLE 7: ALLOWANCE FOR LOAN LOSSES

For the three month 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	%

For the three month ended March 31, 2021

(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	$	650		$	339		$	2,560		$	4,434		$	1,302		$	123		$	133	$	9,541
Charge-offs		(4	)		-			(1	)		-			(197	)		(114	)		-		(316	)
Recoveries		2			-			14			1			213			56			-		286
Provision for loan losses		93			(17	)		(24	)		(118	)		(33	)		196			53		150
Ending Balance	$	741		$	322		$	2,549		$	4,317		$	1,285		$	261		$	186	$	9,661

Average loans		128,458			42,744			205,115			323,380			116,981			8,764					825,442
Ratio of net charge-offs to average loans		0.00	%		0.00	%		-0.01	%		0.00	%		-0.01	%		0.66	%				0.00	%

(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and ~~nonperforming assets, respectively; this compares~~equity lines of credit.

Index

The following table shows the amount of the allowance for loan losses allocated to ~~487.3%~~each category and the ratio of ~~both nonperforming loans and nonperforming assets~~corresponding outstanding loan balances as of ~~December~~the periods indicated. Although the allowance for loan losses is allocated into these categories, the entire allowance for loan losses is available to cover loan losses in any category.

TABLE 8: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	March 31,					December 31,
	2022					2021
(Dollars in thousands)	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial and industrial	$	536		6.89	%	$	683		8.14	%
Real estate-construction		504		7.54	%		459		6.93	%
Real estate-mortgage (1)		2,434		24.88	%		2,390		24.46	%
Real estate-commercial		4,600		46.18	%		4,787		45.36	%
Consumer		1,341		13.76	%		1,362		14.04	%
Other		105		0.74	%		184		1.07	%
Ending Balance	$	9,520		100.00	%	$	9,865		100.00	%

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

Deposits

The following table shows the average balances and average rates paid on deposits for the periods presented.

TABLE 9: DEPOSITS

	Three months ended March 31,
	2022					2021
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Interest-bearing transaction	$	75,129		0.02	%	$	67,759		0.02	%
Money market		389,368		0.17	%		347,530		0.24	%
Savings		126,258		0.03	%		108,262		0.04	%
Time deposits		167,859		0.87	%		191,298		1.24	%
Total interest bearing		758,614		0.29	%		714,849		0.45	%
Demand		414,080					368,073
Total deposits	$	1,172,694				$	1,082,922

The Company’s average total deposits were $1.2 billion for the three months ended March 31, ~~2020. Management believes it has provided~~2022, an ~~adequate reserve~~increase of $89.8 million or 8.3% from average total deposits for ~~nonperforming loans at September 30,~~the three months ended March 31, 2021. Demand deposit and money market account categories had the largest increases, totaling $46.0 million and $41.8 million, respectively. Average time deposits, which is the Company’s most expensive deposit category, decreased by a total of $23.4 million as seen in the table above. The average rate paid on interest-bearing deposits by the Company in 2022 was 0.29% compared to 0.45% in 2021.

~~Acquired loans are recorded at their fair value at acquisition date without carryover~~The impact of government stimulus, PPP loan related deposits, and higher levels of consumer savings were primary drivers of the ~~acquiree’s previously established ALLL, as credit discounts are included~~increase in total deposits. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.

As of March 31, 2022 and 2021, the ~~determination~~estimated amounts of ~~fair value.~~total uninsured deposits were $273.7 million and $240.7 million, respectively. The ~~fair value~~following table shows maturities of the ~~loans~~estimated amounts of uninsured time deposits at March 31, 2022. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is ~~determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected~~calculated based on the ~~loans~~same methodologies and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired (or PCI) or purchased performing.assumptions used for purposes of the Bank’s regulatory reporting requirements.

~~Purchased performing loans are accounted for under ASC 310-20,~~

~~Receivables – Nonrefundable Fees and Other Costs~~36. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the purchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used. The adequacy of the remaining discount as compared to the reserve that would be required under the Company’s allowance for loan loss methodology is evaluated quarterly. Should the methodology reserve exceed the remaining discount, additional provision would be recognized.

Index

TABLE 10: MATURITIES OF UNINSURED TIME DEPOSITS

	As of March 31,
(dollars in thousands)	2022		2021
Maturing in:
Within 3 months	$	12,631	$	13,006
4 through 6 months		8,512		4,381
7 through 12 months		4,397		8,913
Greater than 12 months		13,226		16,020
	$	38,766	$	42,320

Capital Resources

Total ~~stockholders’~~stockholders' equity as of ~~September 30, 2021~~March 31, 2022 was $108.1 million, down 10.5% from $120.8 million ~~an increase of $3.6 million or 3.1% from $117.1 million at~~on December 31, ~~2020.~~ 2021. The ~~increase~~decrease was related to unrealized losses in the ~~result~~market value of ~~increased retained earnings partially offset by net unrealized loss on available-for-sale~~ securities available for sale, which are recognized as a component of accumulated other comprehensive (loss) income ~~on the consolidated balance sheets. The movement in the unrealized gain/loss position~~and was driven by ~~changes~~increases in market interest rates, and ~~shift in portfolio composition.~~the repurchase of 122,995 shares, for an aggregate purchase price of $3.0 million, under the Company’s share repurchase program, partially offset by retained earnings.

The ~~maintenance of appropriate levels~~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 ~~a management priority and is monitored on a regular basis.~~regularly reviewed. The ~~Company’s principal goals related to the maintenance~~Company targets regulatory capital levels that will assure an adequate level 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~~anticipated asset growth and ~~client needs, comply with relevant laws,~~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 earnings per share.

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 ~~supervisory guidance, and provide a competitive return to stockholders. Risk-based~~supplemental capital ~~ratios, which include CET1 capital,~~(Tier 2). Tier 1 capital consists of common stockholders' equity less goodwill. Tier 2 capital consists of certain qualifying debt and ~~Total capital~~a qualifying portion of the allowance for ~~the Bank are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.~~loan losses.

In June 2013, the federal bank regulatory agencies adopted the Basel III Capital Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The EGRRCPA, enacted in May 2018, required action by the ~~Federal Reserve~~FRB to expand the applicability of its ~~small bank holding company policy statement,~~Small Bank Holding Company Policy Statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the ~~Federal Reserve~~FRB issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will ~~no longer~~not be subject to regulatory capital requirements. For an overview of the Basel III Capital Rules and the EGRRCPA, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s ~~2020 Annual Report on~~2021 Form 10-K.

On September 17, 2019 the ~~federal bank regulatory agencies~~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.

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than ~~9 percent,~~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.

4037

Index

The following is a summary of the Bank’s capital ratios ~~at September 30,~~as of March 31, 2022 and December 31, 2021. As shown below, these ratios were all well above the recommended regulatory minimum levels.

TABLE 11: REGULATORY CAPITAL

2021
Regulatory
Minimums
September 30, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets
4.500
%

12.33
%
Tier 1 Capital to Risk-Weighted Assets
6.000
%

12.33
%
Tier 1 Leverage to Average Assets
4.000
%

9.22
%
Total Capital to Risk-Weighted Assets
8.000
%

13.34
%
Capital Conservation Buffer
2.500
%

5.34
%
Risk-Weighted Assets (in thousands)
$
959,995

	2022 Regulatory Minimums			March 31, 2022			2021 Regulatory Minimums			December 31, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		12.19	%		4.500	%		12.57	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		12.19	%		6.000	%		12.57	%
Tier 1 Leverage to Average Assets		4.000	%		9.18	%		4.000	%		9.09	%
Total Capital to Risk-Weighted Assets		8.000	%		13.15	%		8.000	%		13.61	%
Capital Conservation Buffer		2.500	%		5.15	%		2.500	%		5.61	%
Risk-Weighted Assets (in thousands)				$	995,172					$	952,218

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 ~~at the~~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 ~~the Company expects that the Notes will be~~are included in ~~certain~~the Company’s Tier 2 capital as of March 31, 2022 and December 31, 2021.

Effective October 19, 2021, the Company’s Board of Directors approved a stock repurchase program. The Company is authorized pursuant to this program to repurchase up to 10% of the Company’s ~~regulatory capital ratios as~~issued and outstanding common stock through November 30, 2022. Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of ~~September 30, 2021~~authorized and ~~thereafter.~~

~~Book value per share was $23.02 at September 30, 2021 as compared to $22.38 at September 30, 2020. Cash dividends were $1.9 million or $0.37 per share~~unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program, if any, will be determined by management in its discretion and will depend on a number of factors, including the ~~first nine months of 2021 and $1.9 million or $0.36 per share in the first nine months of 2020, respectively.~~

~~Contractual Obligations~~

~~In the normal course of business there are various outstanding contractual obligations~~market price of the shares as a percentage of tangible book value, general market and economic conditions, applicable legal requirements and other conditions, and there is no assurance that the Company ~~that~~ will ~~require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require cash outflows.~~

purchase any shares under the program. The Company ~~obtained a loan maturing on April 1, 2023 from a correspondent bank during~~repurchased 122,995 shares of the ~~second quarter~~Company’s common stock at an aggregate cost of ~~2018 to provide partial funding for the Citizens acquisition. The Company elected to pay the loan in full~~$3.0 million under this plan during the first quarter of 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.

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 2022, the Company had $399.0 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 Company's 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. 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. 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, 2022. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.

Index

TABLE 12: LIQUIDITY SOURCES AND USES

	March 31,
	2022
(dollars in thousands)	Total		In Use		Available
Sources:
Federal funds lines of credit	$	115,000	$	-	$	115,000
Federal Home Loan Bank advances		399,020		-		399,020
Federal funds sold & balances at the Federal Reserve						141,964
Securities, available for sale and unpledged at fair value						176,084
Total short-term funding sources					$	832,068

Uses: ⁽¹⁾
Unfunded loan commitments and lending lines of credit						74,457
Letters of credit						1,083
Total potential short-term funding uses						75,540
Liquidity coverage ratio						1101.5	%
(1) Represents partial draw levels based on loan segment.

The Company’s operating activities provided $4.5 million of cash during the three months ended March 31, 2022, compared to $14.2 million provided during the comparative 2021 period. The Company’s investing activities used $30.8 million of cash during the first quarter of 2022, compared to $18.4 million of cash provided during the first quarter of 2021. The Company’s financing activities used $3.4 million and provided $24.4 million of cash during the three months ended March 31, 2022 and 2021, respectively.

Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity or operations. 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.

~~On July 14, 2021,~~ In the ordinary course of business the Company ~~issued $30.0 million in aggregate principal amount of 3.50% fixed-to-floating rate subordinated notes due 2031~~ ~~in a private placement transaction. The Notes initially bear interest at a fixed rate of 3.50% for five years~~has entered into contractual obligations and ~~at the three month SOFR plus 286 basis points, resetting quarterly, thereafter.~~

has made other commitments to make future payments. As of ~~September 30, 2021,~~March 31, 2022, 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 ~~2020 Annual Report on~~2021 Form 10-K.

Off-Balance Sheet Arrangements

As of ~~September 30, 2021,~~March 31, 2022, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s ~~2020 Annual Report on~~2021 Form 10-K.

Non-GAAP Financial Measures

In reporting the results of the quarter ended ~~September 30, 2021,~~March 31, 2022, the Company has provided supplemental financial measures on a tax equivalent or an 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.

4139

Index

Three Months Ended September 30, Nine Months Ended September 30,
(dollar in thousands, except per share data) 2021 2020 2021 2020
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)
$
9,876

$
8,468

$
29,138

$
25,359

FTE adjustment
62

49

183

134

Net interest income (FTE) (non-GAAP)
$
9,938

$
8,517

$
29,321

$
25,493

Noninterest income (GAAP)
3,606

3,657

11,278

10,893

Total revenue (FTE) (non-GAAP)
$
13,544

$
12,174

$
40,599

$
36,386

Noninterest expense (GAAP)
10,928

10,664

32,021

29,898

Average earning assets
$
1,211,040

$
1,159,258

$
1,180,405

$
1,063,687

Net interest margin
3.24
%

2.91
%

3.30
%

3.18
%
Net interest margin (FTE) (non-GAAP)
3.26
%

2.92
%

3.32
%

3.20
%

Efficiency ratio
81.06
%

87.95
%

79.23
%

82.47
%
Efficiency ratio (FTE) (non-GAAP)
80.69
%

87.59
%

78.87
%

82.17
%

Tangible Book Value Per Share September 30, 2021 June 30, 2021 September 30, 2020
Total Stockholders Equity (GAAP)
$
120,767

$
119,928

$
116,875

Less goodwill
1,650

1,650

1,650

Less core deposit intangible
286

297

330

Tangible Stockholders Equity (non-GAAP)
$
118,831

$
117,981

$
114,895

Shares issued an d outstanding
5,245,842

5,244,635

5,222,385

Book value per share
$
23.02

$
22.87

$
22.38

Tangible book value per share
$
22.65

$
22.50

$
22.00

ALLL as a Percentage of Loans Held for Investment September 30, 2021 December 31, 2020
Loans held for investment (net of deferred fees and costs) (GAAP)
$
840,151

$
836,300

Less PPP originations
36,320

85,983

Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP)
$
803,831

$
750,317

ALLL
$
9,684

$
9,541

ALLL as a Percentage of Loans Held for Investment
1.15
%

1.14
%

ALLL as a Percentage of Loans Held for Investment, net of PPP originations
1.20
%

1.27
%

TABLE 13: Non-GAAP FINACIAL MEASURES

	Three Months Ended March 31,
(dollar in thousands, except per share data)	2022			2021
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)	$	9,637		$	10,156
FTE adjustment		68			59
Net interest income (FTE) (non-GAAP)	$	9,705		$	10,215
Noninterest income (GAAP)		3,515			4,134
Total revenue (FTE) (non-GAAP)	$	13,220		$	14,349
Noninterest expense (GAAP)		10,713			10,558

Average earning assets	$	1,246,028		$	1,150,231
Net interest margin		3.14	%		3.58	%
Net interest margin (FTE) (non-GAAP)		3.16	%		3.60	%

Tangible Book Value Per Share	March 31, 2022			December 31, 2021
Total Stockholders Equity (GAAP)	$	108,099		$	120,818
Less goodwill		1,650			1,650
Less core deposit intangible		264			275
Tangible Stockholders Equity (non-GAAP)	$	106,185		$	118,893

Shares issued and outstanding		5,118,193			5,239,707

Book value per share	$	21.12		$	23.06
Tangible book value per share	$	20.75		$	22.69

ALLL as a Percentage of Loans Held for Investment	March 31, 2022			December 31, 2021			March 31, 2021
Loans held for investment (net of deferred fees and costs) (GAAP)	$	855,234		$	843,526		$	807,661
Less PPP originations		7,509			19,008			66,805
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP)	$	847,725		$	824,518		$	740,856

ALLL	$	9,520		$	9,865		$	9,661

ALLL as a Percentage of Loans Held for Investment		1.11	%		1.17	%		1.20	%
ALLL as a Percentage of Loans Held for Investment, net of PPP originations		1.12	%		1.20	%		1.30	%

Cautionary Statement Regarding Forward-Looking Statements

This report contains statements concerning the Company’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to: statements regarding expected future operations and financial performance; current and future interest rate levels and fluctuations; the Company’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations; certain items that management does not expect to have an ongoing impact on consolidated net income; net interest margin compression and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof, forgiveness of loans originated under the Paycheck Protection Program (PPP) of the Small Business Administration and the related impact on the Company’s results of operations; asset quality; adequacy of allowances for loan losses and the level of future chargeoffs; liquidity and capital levels; and the effect of future market and industry trends. 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:

interest rates, 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 and the Company’s funding costs

general business conditions, as well as conditions within the financial markets

general economic conditions, including unemployment levels, supply chain disruptions, higher inflation, and slowdowns in economic growth, including related to further and sustained economic impacts of the COVID-19 pandemic

the Company’s branch realignment initiatives

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

Index

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, and the effect of these policies on interest rates and business in our markets

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

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

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

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

the quality or composition of the loan portfolios and the value of the collateral securing those loans

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 net interest margin

the level of net charge-offs on loans and the adequacy of our allowance for loan and lease losses

performance of the Company’s dealer lending program

deposit flows

the strength of the Company’s counterparties

competition from both banks and non-banks

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

potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine, or public health events, such as the COVID-19 pandemic, and of governmental and societal responses thereto

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

accounting principles, policies and guidelines and elections made by the Company thereunder

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Company’s 2021 Form 10-K should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. 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 undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which it is made, 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 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.

Index

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.

Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s second quarter ended ~~September 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Index~~

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 ~~2020 Annual Report on~~2021 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 ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Company did not repurchase any shares related to the equity compensation plan ~~awards and the Company did not repurchase any shares pursuant to a stock repurchase program.~~awards.

Effective October 19, 2021, the Company’s Board of Directors approved a stock repurchase ~~program.~~program (the Repurchase Program). The Company is authorized pursuant to this program to repurchase up to 10% of the Company’s issued and outstanding common stock through November 30, 2022. Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the ~~Securities~~ Exchange Act ~~of 1934, as amended,~~ and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the ~~program, if any,~~Repurchase Program will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares as a percentage of tangible book value, general market and economic conditions, applicable legal requirements and other ~~conditions, and there is no assurance that~~conditions. There were 122,995 shares repurchased under the 2021 Repurchase Program during the first quarter of 2022. As of March 31, 2022, the Company ~~will purchase any~~has made aggregate common stock repurchases of 129,595 shares for an aggregate cost of $3.2 million under the ~~program.~~Repurchase Program.

The following table summarizes repurchases of the Company’s common stock that occurred during the three months ended March 31, 2022.

Period	Total number of shares repurchased		Average price paid per share ($)		Total number of shares purchased as part of publicly announced plans or programs		Maximum number (or approximaate dollar value) of shares that may yet be purchased under the plans or programs ($)
January 1, 2022 - January 31, 2022		30,143	$	23.85		30,143	$	13,282,928
February 1, 2022 - February 28, 2022		23,752		24.41		23,752		12,703,136
March 1, 2022 - March 31, 2022		69,100		25.32		69,100	$	10,953,747
Total		122,995	$	24.68		122,995

Index

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

Information Required by Item 407(c)(3) of Regulation S-K:

The Company has made no changes to the process by which security holders may recommend nominees to its Board of Directors, which is discussed in the Company's Proxy Statement for the Company’s ~~2021~~2022 Annual Meeting of Stockholders.

~~Index~~

Item 6.

Exhibits.

~~Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 16, 2021)~~

~~Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 16, 2021)~~

The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended ~~September 30, 2021,~~March 31, 2022, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for ~~September 30, 2021)~~March 31, 2022), (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)

(dollars in thousands)	September 30, 2021		September 30, 2020
Balance at January 1	$	0	$	72
Accretion		0		(29	)
Balance at end of period	$	0	$	43

	As of September 30, 2021								For the Nine Months Ended September 30, 2021
(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	$	403	$	67	$	306	$	33	$	382	$	6
Commercial		504		250		425		13		636		1
Construction		81		0		80		0		82		3
Second mortgages		129		0		127		3		129		4
Total mortgage loans on real estate		1,117		317		938		49		1,229		14
Commercial and industrial loans		3		1		1		0		2		0
Other consumer loans		11		12		0		0		10		0
Total	$	1,131	$	330	$	939	$	49	$	1,241	$	14

For the Year ended December 31, 2021
(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	$	650		$	339	$	2,560		$	4,434	$	1,302		$	123		$	133		$	9,541
Charge-offs		(27	)		0		(14	)		0		(800	)		(278	)		0			(1,119	)
Recoveries		41			0		76			44		390			98			0			649
Provision for loan losses		19			120		(232	)		309		470			241			(133	)		794
Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	0		$	9,865

Individually evaluated for impairment	$	87		$	0	$	33		$	8	$	0		$	0		$	0		$	128
Collectively evaluated for impairment		596			459		2,357			4,779		1,362			184			0			9,737

Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	0		$	9,865

Loans Balances:
Individually evaluated for impairment		174			79		450			591		7			0			0			1,301
Collectively evaluated for impairment		68,516			58,361		205,918			382,012		118,434			8,984			0			842,225
Ending Balance	$	68,690		$	58,440	$	206,368		$	382,603	$	118,441		$	8,984		$	0		$	843,526

For the Year ended December 31, 2020
(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	$	1,244		$	258	$	2,505		$	3,663		$	1,694		$	296		$	0	$	9,660
Charge-offs		(25	)		0		(149	)		(654	)		(822	)		(355	)		0		(2,005	)
Recoveries		47			10		69			317			377			66			0		886
Provision for loan losses		(616	)		71		135			1,108			53			116			133		1,000
Ending Balance	$	650		$	339	$	2,560		$	4,434		$	1,302		$	123		$	133	$	9,541

Individually evaluated for impairment	$	0		$	0	$	10		$	1		$	0		$	0		$	0	$	11
Collectively evaluated for impairment		650			339		2,550			4,433			1,302			123			133		9,530

Ending Balance	$	650		$	339	$	2,560		$	4,434		$	1,302		$	123		$	133	$	9,541

Loans Balances:
Individually evaluated for impairment		6			83		586			1,427			14			0			0		2,116
Collectively evaluated for impairment		141,740			43,649		206,950			315,424			118,354			8,067			0		834,184
Ending Balance	$	141,746		$	43,732	$	207,536		$	316,851		$	118,368		$	8,067		$	0	$	836,300

	Three Months Ended September 30,				Nine Months Ended September 30,
Lease cost (in thousands)	2021		2020		2021		2020
Operating lease cost	$	81	$	99	$	266	$	278
Total lease cost	$	81	$	99	$	266	$	278

Cash paid for amounts included in the measurement of lease liabilities	$	82	$	97	$	269	$	274

	For the quarter ended September 30,
	2021								2020
(dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate**			Average Balance			Interest Income/ Expense		Yield/ Rate**
ASSETS
Loans*	$	838,376		$	9,704		4.59	%	$	873,772		$	8,801		4.01	%
Investment securities:
Taxable		183,759			853		1.84	%		147,942			721		1.94	%
Tax-exempt*		32,243			236		2.90	%		19,795			177		3.56	%
Total investment securities		216,002			1,089		2.00	%		167,737			898		2.13	%
Interest-bearing due from banks		153,671			68		0.18	%		114,646			41		0.14	%
Federal funds sold		1,958			-		0.07	%		5			-		0.04	%
Other investments		1,033			16		5.91	%		3,098			46		5.90	%
Total earning assets		1,211,040		$	10,877		3.56	%		1,159,258		$	9,786		3.36	%
Allowance for loan losses		(9,486	)							(9,739	)
Other non-earning assets		97,907								100,984
Total assets	$	1,299,461							$	1,250,503

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	72,371		$	3		0.02	%	$	54,065		$	3		0.02	%
Money market deposit accounts		379,170			228		0.24	%		319,674			222		0.28	%
Savings accounts		115,862			12		0.04	%		99,933			13		0.05	%
Time deposits		175,541			441		1.00	%		205,240			791		1.53	%
Total time and savings deposits		742,944			684		0.36	%		678,912			1,029		0.60	%
Federal funds purchased, repurchase agreements and other borrowings		10,840			3		0.15	%		48,740			69		0.56	%
Long terrn borrowings		25,301			252		3.95	%		-			-		0.00	%
Federal Home Loan Bank advances		-			-		0.00	%		40,706			171		1.67	%
Total interest-bearing liabilities		779,085			939		0.48	%		768,358			1,269		0.66	%
Demand deposits		393,591								357,078
Other liabilities		5,007								7,880
Stockholders' equity		121,778								117,187
Total liabilities and stockholders' equity	$	1,299,461							$	1,250,503
Net interest margin				$	9,938		3.26	%				$	8,517		2.92	%

	For the nine months ended September 30,
	2021								2020
(dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
ASSETS
Loans*	$	835,107		$	28,495		4.56	%	$	819,325		$	26,577		4.33	%
Investment securities:
Taxable		168,800			2,414		1.91	%		141,746			2,296		2.16	%
Tax-exempt*		31,596			706		2.99	%		16,635			460		3.69	%
Total investment securities		200,396			3,120		2.08	%		158,381			2,756		2.32	%
Interest-bearing due from banks		143,112			163		0.15	%		81,779			224		0.37	%
Federal funds sold		662			-		0.07	%		1,122			12		1.45	%
Other investments		1,128			57		6.64	%		3,080			136		5.86	%
Total earning assets		1,180,405		$	31,835		3.61	%		1,063,687		$	29,705		3.73	%
Allowance for loan losses		(9,584	)							(9,667	)
Other nonearning assets		100,366								106,970
Total assets	$	1,271,187							$	1,160,990

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	70,238		$	10		0.02	%	$	53,254		$	9		0.02	%
Money market deposit accounts		366,580			649		0.24	%		300,290			823		0.37	%
Savings accounts		112,723			34		0.04	%		93,306			44		0.06	%
Time deposits		183,534			1,536		1.12	%		213,553			2,646		1.65	%
Total time and savings deposits		733,075			2,229		0.41	%		660,403			3,522		0.71	%

Federal funds purchased, repurchase agreements and other borrowings		17,143			33		0.26	%		30,465			106		0.47	%
Long terrn borrowings		8,526			252		3.95	%		-			-		0.00	%
Federal Home Loan Bank advances		-			-		0.00	%		40,398			584		1.93	%
Total interest-bearing liabilities		758,744			2,514		0.44	%		731,266			4,212		0.77	%
Demand deposits		385,427								310,199
Other liabilities		6,997								5,328
Stockholders' equity		120,019								114,197
Total liabilities and stockholders' equity	$	1,271,187							$	1,160,990
Net interest margin				$	29,321		3.32	%				$	25,493		3.20	%

(dollars in thousands)	September 30, 2021		December 31, 2020		Increase (Decrease)
Nonaccrual loans
Real estate-mortgage (1)	$	-	$	311	$	(311	)
Real estate-commercial		421		903		(482	)
Construction		-		-		-
Consumer loans		3		-		3
Total nonaccrual loans	$	424	$	1,214	$	(790	)

Loans past due 90 days or more and accruing interest
Real estate-mortgage (1)	$	-	$	-	$	-
Consumer loans (2)	$	937	$	744	$	193
Total loans past due 90 days or more and accruing interest	$	937	$	744	$	193

Restructured loans
Real estate-construction	$	81	$	83	$	(2	)
Real estate-mortgage (1)		459		492		(33	)
Real estate-commercial		425		1,352		(927	)
Total restructured loans	$	965	$	1,927	$	(962	)
Less nonaccrual restructured loans (included above)		196		1,120		(924	)
Less restructured loans currently in compliance (3)		769		807		(38	)
Net nonperforming, accruing restructured loans	$	-	$	-	$	-
Nonperforming loans	$	1,361	$	1,958	$	(597	)

Total nonperforming assets	$	1,361	$	1,958	$	(597	)

Exhibit No.		Description
2.1		Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)

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)

~~4.1~~		~~Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 16, 2021)~~

~~10.1~~		~~Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 16, 2021)~~

~~10.14.1~~		Amendment No. 1 to Settlement Agreement, dated August 12, 2021, among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe (incorporated by reference to Exhibit 10.14.1 to Form 10-Q filed August 16, 2021).

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 ~~September 30, 2021,~~March 31, 2022, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for ~~September 30, 2021)~~March 31, 2022), (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 ~~September 30, 2021,~~March 31, 2022, formatted in Inline XBRL (included with Exhibit 101)

	OLD POINT FINANCIAL CORPORATION

~~November 15, 2021~~May 16, 2022	/s/Robert F. Shuford, Jr.
	Robert F. Shuford, Jr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)

~~November 15, 2021~~May 16, 2022	/s/Elizabeth T. Beale
	Elizabeth T. Beale
	Chief Financial Officer & Senior Vice President/Finance
	(Principal Financial & Accounting Officer)