OLD POINT FINANCIAL CORP - Quarter Report: 2021 March (Form 10-Q)

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 March 31, 2021

☐	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.

5,240,433 shares of common stock ($5.00 par value) outstanding as of May 7, 2021

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

		Page

Item 1.	Financial Statements	1

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

	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2021 and 2020	2

	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2021 and 2020	3

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2021 and 2020	4

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and 2020	5

	Notes to Consolidated Financial Statements (unaudited)	6

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	Signatures	40

Index

GLOSSARY OF DEFINED TERMS

2020 Annual Report on Form 10-K		Annual Report on Form 10-K for the year ended December 31, 2020
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
CBLRF		Community Bank Leverage Ratio
EPS		earnings per share
ESPP		Employee Stock Purchase Plan
Exchange Act		Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
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
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
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

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

Cash and due from banks	$	32,418	$	21,799
Interest-bearing due from banks		144,982		98,633
Federal funds sold		4		5
Cash and cash equivalents		177,404		120,437
Securities available-for-sale, at fair value		194,518		186,409
Restricted securities, at cost		1,033		1,367
Loans held for sale		9,291		14,413
Loans, net		798,000		826,759
Premises and equipment, net		32,299		33,613
Premises and equipment, held for sale		902		-
Bank-owned life insurance		28,612		28,386
Goodwill		1,650		1,650
Core deposit intangible, net		308		319
Other assets		13,621		12,838
Total assets	$	1,257,638	$	1,226,191

Liabilities & Stockholders’ Equity

Deposits:
Noninterest-bearing deposits	$	385,079	$	360,602
Savings deposits		539,342		512,936
Time deposits		187,137		193,698
Total deposits		1,111,558		1,067,236
Overnight repurchase agreements		6,204		6,619
Federal Reserve Bank borrowings		10,995		28,550
Other borrowings		-		1,350
Accrued expenses and other liabilities		10,958		5,291
Total liabilities		1,139,715		1,109,046

Stockholders’ equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,225,295 and 5,224,019 shares outstanding (includes 29,576 of nonvested restricted stock, respectively)		25,979		25,972
Additional paid-in capital		21,324		21,245
Retained earnings		68,245		65,859
Accumulated other comprehensive income, net		2,375		4,069
Total stockholders’ equity		117,923		117,145
Total liabilities and stockholders’ equity	$	1,257,638	$	1,226,191

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Income

	Three Months Ended March 31,
(unaudited, dollars in thousands, except per share data)	2021		2020
Interest and Dividend Income:
Loans, including fees	$	9,954	$	8,827
Due from banks		43		151
Federal funds sold		-		12
Securities:
Taxable		770		864
Tax-exempt		181		86
Dividends and interest on all other securities		30		46
Total interest and dividend income		10,978		9,986

Interest Expense:
Checking and savings deposits		215		340
Time deposits		584		972
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		23		22
Federal Home Loan Bank advances		-		234
Total interest expense		822		1,568
Net interest income		10,156		8,418
Provision for loan losses		150		300
Net interest income after provision for loan losses		10,006		8,118

Noninterest Income:
Fiduciary and asset management fees		1,027		1,017
Service charges on deposit accounts		688		895
Other service charges, commissions and fees		948		943
Bank-owned life insurance income		226		231
Mortgage banking income		1,188		157
Other operating income		57		35
Total noninterest income		4,134		3,278

Noninterest Expense:
Salaries and employee benefits		6,227		5,994
Occupancy and equipment		1,202		1,266
Data processing		1,043		819
Customer development		78		114
Professional services		545		475
Employee professional development		141		220
Other taxes		251		150
ATM and other losses		139		98
Other operating expenses		932		894
Total noninterest expense		10,558		10,030
Income before income taxes		3,582		1,366
Income tax expense		570		116
Net income	$	3,012	$	1,250

Basic Earnings per Share:
Weighted average shares outstanding		5,224,501		5,200,250
Net income per share of common stock	$	0.58	$	0.24

Diluted Earnings per Share:
Weighted average shares outstanding		5,224,501		5,200,989
Net income per share of common stock	$	0.58	$	0.24

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation

Consolidated Statements of Comprehensive Income

	Three Months Ended March 31,
(unaudited, dollars in thousands)	2021			2020

Net income	$	3,012		$	1,250
Other comprehensive loss, net of tax
Net unrealized loss on available-for-sale securities		(1,694	)		(445	)
Other comprehensive loss, net of tax		(1,694	)		(445	)
Comprehensive income	$	1,318		$	805

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 MARCH 31, 2021

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

THREE MONTHS ENDED MARCH 31, 2020

Balance at December 31, 2019	5,180,105	$	25,901	$	20,959		$	62,975		$	(79	)	$	109,756
Net income	-		-		-			1,250			-			1,250
Other comprehensive loss, net of tax	-		-		-			-			(445	)		(445	)
Employee Stock Purchase Plan share issuance	858		4		17			-			-			21
Restricted stock vested	7,258		36		(36	)		-			-			-
Stock-based compensation expense	-		-		86			-			-			86
Cash dividends ($0.12 per share)	-		-		-			(624	)		-			(624	)
Balance at end of period	5,188,221	$	25,941	$	21,026		$	63,601		$	(524	)	$	110,044

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Three Months Ended March 31,
(unaudited, dollars in thousands)	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,012		$	1,250
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		538			544
Amortization of right of use lease asset		104			88
Accretion related to acquisition, net		(4	)		(20	)
Provision for loan losses		150			300
Net amortization of securities		205			154
Decrease (increase) in loans held for sale, net		5,122			(1,719	)
Income from bank owned life insurance		(226	)		(231	)
Stock compensation expense		61			86
Deferred tax benefit		(12	)		215
(Decrease) in other assets		(425	)		(573	)
Increase (decrease) in accrued expenses and other liabilities		5,667			(1,426	)
Net cash provided by (used in) operating activities		14,192			(1,332	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(16,008	)		(13,570	)
Proceeds from redemption (purchase) of restricted securities, net		334			(226	)
Proceeds from maturities and calls of available-for-sale securities		400			2,500
Proceeds from sales of available-for-sale securities		1,300			-
Paydowns on available-for-sale securities		3,850			3,459
Net (increase) decrease in loans held for investment		28,624			(12,850	)
Purchases of premises and equipment		(126	)		(368	)
Net cash provided by (used in) investing activities		18,374			(21,055	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in noninterest-bearing deposits		24,477			(4,454	)
Increase in savings deposits		26,406			29,816
Decrease in time deposits		(6,561	)		(12,322	)
Decrease in federal funds purchased, repurchase agreements and other borrowings, net		(1,765	)		(6,785	)
Increase in Federal Home Loan Bank advances		-			25,000
Repayment of Federal Home Loan Bank advances		-			(20,000	)
Repayment of Federal Reserve Bank borrowings		(17,555	)		-
Proceeds from ESPP issuance		25			21
Cash dividends paid on common stock		(626	)		(624	)
Net cash provided by financing activities		24,401			10,652

Net increase (decrease) in cash and cash equivalents		56,967			(11,735	)
Cash and cash equivalents at beginning of period		120,437			89,865
Cash and cash equivalents at end of period	$	177,404		$	78,130

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	891		$	1,639

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized (loss) gain on securities available-for-sale	$	(2,144	)	$	(563	)
Loans transferred to other real estate owned	$	-		$	236
Former bank property transferred from fixed assets to held for sale assets	$	902		$	-
Right of use lease asset and liability	$	1,277		$	672

See Notes to Consolidated Financial Statements.

Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Accounting Policies

The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (NASDAQ: OPOF) (the Company) and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at March 31, 2020 and December 31, 2020, the statements of income, comprehensive income, and changes in stockholders’ equity for the three months ended March 31, 2021 and 2020, and the statements of cash flows for the three months ended March 31, 2021 and 2020. 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 Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

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 two subsidiaries, the Bank and Trust. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of March 31, 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 March 31, 2021 include probable and estimable losses related to the pandemic. The Company expects that the pandemic will continue to have an effect on its results of operations. If economic conditions deteriorate further, 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 Board 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.

The 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 March 31, 2021, the Company had loan modifications on $7.1 million, or 0.9% of gross loans, down from approximately $7.4 million of gross loans as of December 31, 2020. Of the loans still under modifications at March 31, 2021, $2.4 million were under initial modification with the remaining $4.7 million under a subsequent modification. Initial and subsequent modifications consisted primarily of 60- or 90-day principal and interest payment deferral periods.

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 with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has formed a committee to oversee the adoption of the new standard, has engaged a third party to assist with implementation, has performed data fit gap and loss driver analyses, intends to run parallel models beginning in 2021, and is continuing to evaluate the impact that ASU No. 2016-13 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 issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows.

RECENTLY ADOPTED ACCOUNTING DEVELOPMENTS

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (ASU 2017-04). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU No. 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on its consolidated financial statements.

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, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. Treasury securities	$	6,994	$	22	$	-		$	7,016
Obligations of U.S. Government agencies		35,331		184		(83	)		35,432
Obligations of state and political subdivisions		52,029		1,568		(438	)		53,159
Mortgage-backed securities		74,306		1,847		(214	)		75,939
Money market investments		4,558		-		-			4,558
Corporate bonds and other securities		18,294		195		(75	)		18,414
	$	191,512	$	3,816	$	(810	)	$	194,518

	December 31, 2020
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. Treasury securities	$	6,980	$	63	$	-		$	7,043
Obligations of U.S. Government agencies		36,858		35		(197	)		36,696
Obligations of state and political subdivisions		43,517		2,478		-			45,995
Mortgage-backed securities		70,866		2,759		(124	)		73,501
Money market investments		4,743		-		-			4,743
Corporate bonds and other securities		18,295		158		(22	)		18,431
	$	181,259	$	5,493	$	(343	)	$	186,409

Index

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.

The Company has not recorded impairment charges through income on securities for the three months ended March 31, 2021 or 2020.

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

	March 31, 2021
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	7,094	$	7,117
Due after one year through five years		9,657		9,830
Due after five through ten years		40,403		41,494
Due after ten years		129,800		131,519
Other securities, restricted		4,558		4,558
	$	191,512	$	194,518

The Company did not recognize any net realized gains and losses on the sale of investment securities during the first quarter of 2021 or 2020.

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 impaired as of March 31, 2021 and December 31, 2020, 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, 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
Obligations of U.S. Government agencies	$	8	$	2,068	$	75	$	11,047	$	83	$	13,115
Obligations of state and policitcal subdivisions		438		15,706		-		-		438		15,706
Mortgage-backed securities		214		10,549		-		-		214		10,549
Corporate bonds and other securities		75		6,175		-		-		75		6,175
Total securities available-for-sale	$	735	$	34,498	$	75	$	11,047	$	810	$	45,545

	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		-		-		22		5,977
Total securities available-for-sale	$	148	$	23,078	$	195	$	18,476	$	343	$	41,554

The number of investments at an unrealized loss position as of March 31, 2021 and December 31, 2020 were 34 and 29, respectively. Certain investments within the Company’s portfolio had unrealized losses for more than twelve months at March 31, 2021 and December 31, 2020, as shown in the tables above. The unrealized losses were caused by changes in market interest rates and not a result of credit deterioration. Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at March 31, 2021 or December 31, 2020.

Index

Restricted Securities

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’ 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.

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)	March 31, 2021		December 31, 2020
Mortgage loans on real estate:
Residential 1-4 family	$	119,053	$	122,800
Commercial - owner occupied		161,885		153,955
Commercial - non-owner occupied		158,528		162,896
Multifamily		23,010		22,812
Construction		39,253		43,732
Second mortgages		9,947		11,178
Equity lines of credit		49,770		50,746
Total mortgage loans on real estate		561,446		568,119
Commercial and industrial loans		124,040		141,746
Consumer automobile loans		76,831		80,390
Other consumer loans		38,182		37,978
Other ⁽¹⁾		7,162		8,067
Total loans, net of deferred fees		807,661		836,300
Less: Allowance for loan losses		9,661		9,541
Loans, net of allowance and deferred fees ⁽²⁾	$	798,000	$	826,759

(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 $467 thousand and $271 thousand at March 31, 2021 and December 31, 2020, respectively.
(2)	Net deferred loan fees totaled $1.8 million and $2.1 million at March 31, 2021 and December 31, 2020, respectively.

Acquired Loans

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

(dollars in thousands)	March 31, 2021		December 31, 2020
Outstanding principal balance	$	7,739	$	8,671
Carrying amount		7,685		8,602

The Company did not have any outstanding principal balance or related carrying amount of purchased credit-impaired loans as of March 31, 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 March 31, 2021 and 2020:

(dollars in thousands)	March 31, 2021		March 31, 2020
Balance at January 1	$	-	$	72
Accretion		-		(10	)
Other changes, net		-		-
Balance at end of period	$	-	$	62

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.

Index

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.

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

Credit Quality Information
As of March 31, 2021
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	118,877	$	-	$	176	$	-	$	119,053
Commercial - owner occupied		158,564		2,444		877		-		161,885
Commercial - non-owner occupied		157,792		736		-		-		158,528
Multifamily		23,010		-		-		-		23,010
Construction		38,255		998		-		-		39,253
Second mortgages		9,947		-		-		-		9,947
Equity lines of credit		49,770		-		-		-		49,770
Total mortgage loans on real estate	$	556,215	$	4,178	$	1,053	$	-	$	561,446
Commercial and industrial loans		123,715		325		-		-		124,040
Consumer automobile loans		76,520		-		311		-		76,831
Other consumer loans		38,182		-		-		-		38,182
Other		7,162		-		-		-		7,162
Total	$	801,794	$	4,503	$	1,364	$	-	$	807,661

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	$	-	$	179	$	-	$	122,800
Commercial - owner occupied		148,738		2,462		2,755		-		153,955
Commercial - non-owner occupied		162,148		748		-		-		162,896
Multifamily		22,812		-		-		-		22,812
Construction		42,734		998		-		-		43,732
Second mortgages		11,178		-		-		-		11,178
Equity lines of credit		50,746		-		-		-		50,746
Total mortgage loans on real estate	$	560,977	$	4,208	$	2,934	$	-	$	568,119
Commercial and industrial loans		141,391		355		-		-		141,746
Consumer automobile loans		79,997		-		393		-		80,390
Other consumer loans		37,978		-		-		-		37,978
Other		8,067		-		-		-		8,067
Total	$	828,410	$	4,563	$	3,327	$	-	$	836,300

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.

Age Analysis of Past Due Loans as of March 31, 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	$	480	$	-	$	36	$	-	$	251	$	118,286	$	119,053
Commercial - owner occupied		-		278		-		-		878		160,729		161,885
Commercial - non-owner occupied		185		-		-		-		-		158,343		158,528
Multifamily		-		-		-		-		-		23,010		23,010
Construction		46		130		88		-		-		38,989		39,253
Second mortgages		-		-		14		-		-		9,933		9,947
Equity lines of credit		-		-		-		-		-		49,770		49,770
Total mortgage loans on real estate	$	711	$	408	$	138	$	-	$	1,129	$	559,060	$	561,446
Commercial and industrial loans		8		548		-		-		-		123,484		124,040
Consumer automobile loans		517		141		265		-		-		75,908		76,831
Other consumer loans		695		218		715		-		-		36,554		38,182
Other		19		2		1		-		-		7,140		7,162
Total	$	1,950	$	1,317	$	1,119	$	-	$	1,129	$	802,146	$	807,661

(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 - 100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.5 million at March 31, 2021.

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

(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 $1.2 million at December 31, 2020.

Index

Although the portions of the student and small business 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 and small business loans in an amount ranging from 97% to 100% of the total principal and interest of the loans as of March 31, 2021, 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

(dollars in thousands)	March 31, 2021		December 31, 2020
Mortgage loans on real estate:
Residential 1-4 family	$	251	$	311
Commercial - owner occupied		878		903
Total mortgage loans on real estate	$	1,129	$	1,214
Total	$	1,129	$	1,214

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:

	Three Months Ended March 31,
(dollars in thousand)	2021		2020
Interest income that would have been recorded under original loan terms	$	27	$	78
Actual interest income recorded for the period		-		-
Reduction in interest income on nonaccrual loans	$	27	$	78

TROUBLED DEBT RESTRUCTURINGS

The Company’s loan portfolio includes certain loans that have been modified in a TDR, 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.

There were no new TDRs in the three months ended March 31, 2021 and 2020.

At March 31, 2021 and 2020, the Company had no outstanding commitments to disburse additional funds on any TDR. The Company had no loans secured by residential 1 - 4 family real estate in the process of foreclosure at March 31, 2021 and 2020.

In the three months ended March 31, 2021 and 2020, there were no 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.

Under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act 2021, banks may elect not to categorize loan modifications as TDRs if the modifications are related to the COVID-19 pandemic, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of 60 days after the date of termination of the National Emergency by the President and January 1, 2022. All short term loan modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not considered TDRs. The Company has examined the payment accommodations granted to borrowers in response to COVID-19 and found that all borrowers were current prior to relief and were not experiencing financial difficulty prior to the COVID-19 pandemic. As of March 31, 2021, the Company had loan modifications on $7.1 million, or 0.9%, of the loan portfolio, granting primarily 60- or 90- day principal and interest payment deferrals. Loan modifications under the CARES Act are being monitored for indications of credit softening, at which time the credit will be analyzed under current underwriting standards for appropriate action and designation. The Company recognizes interest income as earned and management expects that the deferred interest will be repaid by the borrower in a future period.

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 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 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.

Index

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
									For the Three Months Ended
	As of March 31, 2021								March 31, 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	$	420	$	75	$	316	$	38	$	395	$	-
Commercial		2,597		950		441		13		1,407		-
Construction		83		-		81		-		82		1
Second mortgages		133		-		131		4		132		1
Total mortgage loans on real estate		3,233		1,025		969		55		2,016		2
Commercial and industrial loans		6		5		-		-		6		-
Other consumer loans		14		12		-		-		13		-
Total	$	3,253	$	1,042	$	969	$	55	$	2,035	$	2

Impaired Loans by Class
									For the Year Ended
	As of December 31, 2020								December 31, 2020
(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	$	474	$	366	$	87	$	1	$	458	$	10
Commercial		3,490		1,306		121		1		2,559		46
Construction		83		-		83		-		84		5
Second mortgages		133		-		133		9		134		5
Total mortgage loans on real estate		4,180		1,672		424		11		3,235		66
Commercial and industrial loans		6		6		-		-		7		-
Other consumer loans		14		14		-		-		15		1
Total	$	4,200	$	1,692	$	424	$	11	$	3,257	$	67

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.

Index

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 March 31, 2021 and December 31, 2020 management used eight twelve-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.

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 quarter of 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 the potential positive effects of governmental actions taken in response to the pandemic. With so much uncertainty, it 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. The Company’s credit administration is closely monitoring and analyzing the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the Board of Directors. 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 provision for loan losses.

Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALL, 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 credit-impaired loans reflect credit quality deterioration since origination, as it is probable at acquisition that the Company will not be able to collect all contractually required payments. These purchased credit-impaired loans are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. The purchased credit-impaired loans are segregated into pools based on loan type and credit risk. Loan type is determined based on collateral type, purpose, and lien position. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure. Purchased credit-impaired loans are written down at acquisition to fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due because the Company expects to fully collect the new carrying values of such loans, which is the new cost basis arising from purchase accounting.

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 million adequate to cover probable loan losses inherent in the loan portfolio at March 31, 2021.

Index

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, 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		(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

Individually evaluated for impairment	$	-		$	-		$	42		$	13		$	-		$	-		$	-	$	55
Collectively evaluated for impairment		741			322			2,507			4,304			1,285			261			186		9,606
Purchased credit-impaired loans		-			-			-			-			-			-					-

Ending Balance	$	741		$	322		$	2,549		$	4,317		$	1,285		$	261		$	186	$	9,661

Loans Balances:
Individually evaluated for impairment		5			81			522			1,391			12			-			-		2,011
Collectively evaluated for impairment		124,035			39,172			201,258			319,022			115,001			7,162			-		805,650
Purchased credit-impaired loans		-			-			-			-			-			-					-
Ending Balance	$	124,040		$	39,253		$	201,780		$	320,413		$	115,013		$	7,162		$	-	$	807,661

⁽¹⁾ The real estate-mortgage segment includes residential 1 – 4 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		$	-	$	9,660
Charge-offs		(25	)		-		(149	)		(654	)		(822	)		(355	)		-		(2,005	)
Recoveries		47			10		69			317			377			66			-		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	$	-		$	-	$	10		$	1		$	-		$	-		$	-	$	11
Collectively evaluated for impairment		650			339		2,550			4,433			1,302			123			133		9,530
Purchased credit-impaired loans		-			-		-			-			-			-					-

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			-			-		2,116
Collectively evaluated for impairment		141,740			43,649		206,950			315,424			118,354			8,067			-		834,184
Purchased credit-impaired loans		-			-		-			-			-			-					-
Ending Balance	$	141,746		$	43,732	$	207,536		$	316,851		$	118,368		$	8,067		$	-	$	836,300

⁽¹⁾ The real estate-mortgage segment includes residential 1 – 4 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. As stated in the Company’s 2019 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $751 thousand at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets. During 2020, the Company executed three new leases and extended two existing leases resulting in recognition of additional right-of-use asset and lease liability of $1.3 million.

Index

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 following tables present information about the Company’s leases:

(dollars in thousands)	March 31, 2021
Lease liabilities	$	1,277
Right-of-use assets	$	1,260
Weighted average remaining lease term	4.34 years
Weighted average discount rate		1.76	%

	Three Months Ended March 31,
Lease cost (in thousands)	2021		2020
Operating lease cost	$	104	$	88
Total lease cost	$	104	$	88

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

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 March 31, 2021
Nine months ending December 31, 2021	$	213
Twelve months ending December 31, 2022		339
Twelve months ending December 31, 2023		248
Twelve months ending December 31, 2024		240
Thereafter		309
Total undiscounted cash flows	$	1,349
Discount		(72	)
Lease liabilities	$	1,277

Note 5. Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both March 31, 2021 and December 31, 2020. 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 $2.2 million and $2.3 million at March 31, 2021 and December 31, 2020, 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. Additional capital calls expected for the funds totaled $18 thousand at March 31, 2021 and December 31, 2020, respectively, and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.

Index

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

	Three Months Ended March 31,
	2021		2020
Tax credits and other benefits
Amortization of operating losses	$	49	$	45
Tax benefit of operating losses*		10		9
Tax credits		94		103
Total tax benefits	$	104	$	112

* 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 March 31, 2021 and December 31, 2020, the remaining credit available from these lines totaled $100.0 million. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $365.6 million and $374.7 as of March 31, 2021 and December 31, 2020, respectively.

SHORT-TERM BORROWINGS

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

(dollar in thousands)	March 31, 2021			December 31, 2020
Overnight repurchase agreements	$	6,204		$	6,619
Total short-term borrowings	$	6,204		$	6,619

Maximum month-end outstanding balance	$	6,606		$	9,080
Average outstanding balance during the period	$	7,032		$	21,092
Average interest rate (year-to-date)		0.10	%		0.19	%
Average interest rate at end of period		0.10	%		0.10	%

LONG-TERM BORROWINGS

At March 31, 2021 the Company had borrowings under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF) of $11.0 million. 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.

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 acquisition. The terms of the loan included a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At December 31, 2020, the outstanding balance was $1.4 million, and the then-current interest rate was 2.61%. The Company elected to pay the loan in full during the first quarter of 2021.

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.

Index

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

	March 31,		December 31,
(dollars in thousands)	2021		2020
Commitments to extend credit:
Home equity lines of credit	$	69,138	$	66,999
Commercial real estate, construction and development loans committed but not funded		22,967		20,258
Other lines of credit (principally commercial)		67,681		64,329
Total	$	159,786	$	151,586

Letters of credit	$	4,796	$	4,841

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 March 31, 2021 only restricted stock has been granted under the Incentive Stock Plan.

Restricted stock activity for the three months ended March 31, 2021 is summarized below:

	Shares		Weighted Average Grant Date Fair Value
Nonvested, January 1, 2021		29,576	$	18.46
Issued		-		-
Vested		-		-
Forfeited		-		-
Nonvested, March 31, 2021		29,576	$	18.46

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.04 years.

There was no restricted stock granted during the three months ended March 31, 2021 and 2020.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $216 thousand as of March 31, 2021 and $134 thousand as of March 31, 2020.

Stock-based compensation expense was $61 thousand and $86 thousand for the three months ended March 31, 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 and for the first three months of 2021.

1,276 shares were purchased under the ESPP during the three months ended March 31, 2021. At March 31, 2021, the Company had 231,175 remaining shares reserved for issuance under the ESPP.

Index

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 March 31,				Affected Line Item on Consolidated Statement of Income
(dollars in thousands)	2021		2020		Affected Line Item on Consolidated Statement of Income
Available-for-sale securities
Realized gains on sales of securities	$	-	$	-	Gain on sale of available-for-sale securities, net
Tax effect		-		-	Income tax expense
	$	-	$	-

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 (Loss)

Three Months Ended March 31, 2021
Balance at beginning of period	$	4,069		$	4,069
Net other comprehensive loss		(1,694	)		(1,694	)
Balance at end of period	$	2,375		$	2,375

Three Months Ended March 31, 2020
Balance at beginning of period	$	(79	)	$	(79	)
Net other comprehensive loss		(445	)		(445	)
Balance at end of period	$	(524	)	$	(524	)

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 March 31, 2021
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(2,144	)	$	(450	)	$	(1,694	)

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

	Three Months Ended March 31, 2020
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(563	)	$	(118	)	$	(445	)

Total change in accumulated other comprehensive income, net	$	(563	)	$	(118	)	$	(445	)

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.

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

(dollars in thousands except per share data)	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
Three Months Ended March 31, 2021
Net income, basic	$	3,012		5,225	$	0.58
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	3,012		5,225	$	0.58

Three Months Ended March 31, 2020
Net income, basic	$	1,250		5,200	$	0.24
Potentially dilutive common shares - employee stock purchase program		-		1		-
Diluted	$	1,250		5,201	$	0.24

Index

The Company had no antidilutive shares outstanding in the three months ended March 31, 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.

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.

•

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

•

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

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

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

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

Index

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

			Fair Value Measurements at March 31, 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	$	7,016	$	-	$	7,016	$	-
Obligations of U.S. Government agencies		35,432		-		35,432		-
Obligations of state and political subdivisions		53,159		-		53,159		-
Mortgage-backed securities		75,939		-		75,939		-
Money market investments		4,558		-		4,558		-
Corporate bonds and other securities		18,414		-		18,414		-
Total available-for-sale securities	$	194,518	$	-	$	194,518	$	-

			Fair Value Measurements at December 31, 2020 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	7,043	$	-	$	7,043	$	-
Obligations of U.S. Government agencies		36,696		-		36,696		-
Obligations of state and political subdivisions		45,995		-		45,995		-
Mortgage-backed securities		73,501		-		73,501		-
Money market investments		4,743		-		4,743		-
Corporate bonds and other securities		18,431		-		18,431		-
Total available-for-sale securities	$	186,409	$	-	$	186,409	$	-

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

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 when due from the borrower in accordance with the contractual terms of the loan agreement. The measurement of fair value and loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable, with the vast majority of the collateral in real estate.

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.

Index

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.

Other Real Estate Owned (OREO)

Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of gain or 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.

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

			Carrying Value at March 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)
Loans
Loans held for sale	$	9,291	$	-	$	9,291	$	-

			Carrying Value at December 31, 2020
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans
Loans held for sale	$	14,413	$	-	$	14,413	$	-

The Company did not have any Level 3 Fair Value Measurements at December 31, 2021 or 2020.

Index

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

			Fair Value Measurements at March 31, 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	$	177,404	$	177,404	$	-	$	-
Securities available-for-sale		194,518		-		194,518		-
Restricted securities		1,033		-		1,033		-
Loans held for sale		9,291		-		9,291		-
Loans, net of allowances for loan losses		798,000		-		-		801,357
Bank owned life insurance		28,612		-		28,612		-
Accrued interest receivable		3,302		-		3,302		-

Liabilities
Deposits	$	1,111,558	$	-	$	1,114,120	$	-
Overnight repurchase agreements		6,204		-		6,204		-
Federal Reserve Bank borrowings		10,995		-		10,995		-
Accrued interest payable		311		-		311		-

			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	$	-	$	-
Securities available-for-sale		186,409		-		186,409		-
Restricted securities		1,367		-		1,367		-
Loans held for sale		14,413		-		14,413		-
Loans, net of allowances for loan losses		826,759		-		-		826,083
Bank owned life insurance		28,386		-		28,386		-
Accrued interest receivable		3,613		-		3,613		-

Liabilities
Deposits	$	1,067,236	$	-	$	1,070,236	$	-
Overnight repurchase agreements		6,619		-		6,619		-
Federal Reserve Bank borrowings		28,550		-		28,550		-
Other borrowings		1,350		-		1,350		-
Accrued interest payable		384		-		384		-

Note 11. Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: The Old Point National Bank of Phoebus (the Bank), Old Point 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 and dividends received from the Bank and Trust companies. The Company has no other segments.

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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.

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

	Three Months Ended March 31, 2021
(dollars in thousands)	Bank		Trust		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	10,973	$	5	$	3,148		$	(3,148	)	$	10,978
Income from fiduciary activities		-		1,027		-			-			1,027
Other income		2,866		256		50			(65	)		3,107
Total operating income		13,839		1,288		3,198			(3,213	)		15,112

Expenses
Interest expense		818		-		4			-			822
Provision for loan losses		150		-		-			-			150
Salaries and employee benefits		5,320		743		164			-			6,227
Other expenses		4,063		279		54			(65	)		4,331
Total operating expenses		10,351		1,022		222			(65	)		11,530

Income before taxes		3,488		266		2,976			(3,148	)		3,582

Income tax expense (benefit)		550		56		(36	)		-			570

Net income	$	2,938	$	210	$	3,012		$	(3,148	)	$	3,012

Capital expenditures	$	121	$	5	$	-		$	-		$	126

Total assets	$	1,250,353	$	7,003	$	117,956		$	(117,674	)	$	1,257,638

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	Three Months Ended March 31, 2020
(dollars in thousands)	Bank		Trust		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	9,963	$	23	$	1,439		$	(1,439	)	$	9,986
Income from fiduciary activities		-		1,017		-			-			1,017
Other income		1,990		286		50			(65	)		2,261
Total operating income		11,953		1,326		1,489			(1,504	)		13,264

Expenses
Interest expense		1,548		-		20			-			1,568
Provision for loan losses		300		-		-			-			300
Salaries and employee benefits		4,988		814		192			-			5,994
Other expenses		3,682		342		77			(65	)		4,036
Total operating expenses		10,518		1,156		289			(65	)		11,898

Income before taxes		1,435		170		1,200			(1,439	)		1,366

Income tax expense (benefit)		129		37		(50	)		-			116

Net income	$	1,306	$	133	$	1,250		$	(1,439	)	$	1,250

Capital expenditures	$	368	$	-	$	-		$	-		$	368

Total assets	$	1,058,955	$	6,774	$	111,861		$	(112,313	)	$	1,065,277

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 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.

Item 2.

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the 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 Form 10-K and management’s discussion and analysis for the year ended December 31, 2020. Highlighted in the discussion are material changes from prior reporting periods and certain identifiable trends affecting the Company. Results of operations for the three months ended March 31, 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

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; 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, future dividend payments, net interest margin compression and items affecting net interest margin, strategic business initiatives and the anticipated effects thereof, lending under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA), margin compression, asset quality, adequacy of allowances for loan losses and the level of future chargeoffs, liquidity and 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:

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•

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 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 of recovery when the pandemic subsides and the heightened impact it has 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 Board), 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

These risks and uncertainties, in addition to the risks and uncertainties identified in the Company’s 2020 Annual Report on Form 10-K, the Company’s Quarterly Reports on Form 10-Q, and Current Reports on Form 8-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.

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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 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 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) and Old Point Trust & Financial Services, N. A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County. 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. Due to orders issued by the Governor of Virginia and in an abundance of caution for the health of our customers and employees, during 2020 the Company closed lobbies of all branches but remained fully operational through appointments and drive thru capabilities. Beginning on May 3, 2021, the Company’s branch lobbies have fully re-opened for service. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and impaired their ability to fulfill their financial obligations to the Company. The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations due to net interest margin compression. 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 actively assisted both customers and non-customers in obtaining loans through the PPP administered by the SBA. Additionally, the Company is working with customers affected by COVID-19 through payment deferrals and is tracking all payment accommodations to customers to identify and quantify any impact they might have on the Company. As of March 31, 2021, the Company had loan modifications on $7.1 million, or 0.9% of gross loans, down from approximately $7.4 million, or 0.9% of gross loans as of December 31, 2020. Of the loans still under modifications at March 31, 2021, $2.4 million were under initial modification with the remaining $4.7 million under a subsequent modification. Initial and subsequent modifications consisted primarily of 60- or 90-day principal and interest payment deferral periods. Continued uncertainty regarding the duration and scope of the pandemic and related effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses and resulting provision for loan losses.

The Company currently expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital levels. However, the ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations, liquidity position and resources, credit quality, and capital levels is currently not yet estimable and 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.

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.

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The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses. Accordingly, the Company’s significant accounting policies are discussed in Note 1 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company’s 2020 Annual Report on Form 10-K.

Executive Overview

For the three months ended March 31, 2021 net income was $3.0 million, or $0.58 earnings per diluted common share. This compares to net income of $1.3 million, or $0.24 earnings per diluted common share, for the first quarter of 2020. This increase was principally attributable to increased net interest income, decreased provision for loan losses, and increased noninterest income driven by increased mortgage banking income.

Highlights of the quarter are as follows:

•

Return on average assets (ROA) was 0.99% compared to 0.17% in the prior quarter and 0.48% in the first quarter of 2020.

•

Return on average equity (ROE) was 10.3% compared to 1.8% in the prior quarter and 4.5% in the first quarter of 2020.

•

Net interest margin (NIM) improved to 3.58% from 3.52% in the first quarter of 2020 and 3.16% in the prior quarter. NIM on a fully tax-equivalent basis (FTE) improved to 3.60% from 3.53% in the first quarter of 2020 and 3.18% in the prior quarter

•

Total assets were $1.3 billion at March 31, 2021, growing $31.4 million or 2.6% from December 31, 2020.

•

Deposits grew $44.3 million to $1.1 billion at March 31, 2021 from December 31, 2020.

•

Non-performing assets (NPAs) increased slightly to $2.2 million at March 31, 2021 compared to $2.0 million at December 31, 2020, but decreased significantly from $7.0 million as of March 31, 2020. NPAs as a percentage of total assets was 0.18% at March 31, 2021, which compared to 0.16% at December 31, 2020 and 0.65% at March 31, 2020.

•

Net interest income improved to $10.2 million for the first quarter of 2021, compared to $9.4 million for the fourth quarter of 2020 and $8.4 million for the first quarter of 2020.

•

Noninterest income was $4.1 million for the first quarter of 2021, increasing from $3.8 million for the fourth quarter of 2020 and $3.3 million for the first quarter of 2020.

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 is calculated by dividing tax-equivalent net interest income by average earning assets.

For the first quarter of 2021, net interest income was $10.2 million, an increase of $1.7 million or 20.7% from the first quarter of 2020. The increase was primarily due to the impact of significant growth in average earning asset balances at lower average earning yields partially offset by higher average interest bearing liabilities balances at lower average interest bearing costs. The compression on yield and cost was primarily due to the reduction of the federal funds target rate by the Federal Reserve to a range of 0.00% to 0.25% in March 2020 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 $187.2 million, or 19.4%. The average tax-equivalent yield on earning assets for the first quarter of 2021 decreased by 30 basis points compared to the same period of 2020 but was positively impacted by accelerated recognition of deferred fees and costs related to PPP forgiveness in the first quarter of 2021. Average interest bearing liabilities increased $54.1 million, or 7.9%, and the average rate on interest-bearing liabilities for the quarter ended March 31, 2021 was 0.45%, down from 0.92% 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.

The NIM for the first quarter of 2021 was 3.58%, an increase from 3.52% for the first quarter of 2020. On a fully tax-equivalent basis, (FTE), NIM increased to 3.60% for the first quarter of 2021, up from 3.53% for the prior year quarter. Average loan yields were lower for the first quarter of 2021 compared to the same period of 2020 due to the lower interest rate environment which resulted in lower average yields on new loan originations and repricing within the existing loan portfolio. PPP loans earn at a fixed interest rate of 1%. Loan fees and costs related to PPP loans are deferred at time of loan origination, are amortized into interest income over the remaining term of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $1.6 million were recognized in 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” and “Reconciliation of Certain Non-GAAP Financial Measures,” below.

Index

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, the timing and extent of any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment (3) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.

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

AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES
	For the quarter ended March 31,
	2021								2020
(dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate**			Average Balance			Interest Income/ Expense		Yield/ Rate**
ASSETS
Loans*	$	835,349		$	9,965		4.84	%	$	754,710		$	8,839		4.71	%
Investment securities:
Taxable		159,516			770		1.96	%		142,853			863		2.43	%
Tax-exempt*		29,696			229		3.12	%		11,223			110		3.93	%
Total investment securities		189,212			999		2.14	%		154,076			973		2.54	%
Interest-bearing due from banks		124,347			43		0.14	%		47,931			151		1.27	%
Federal funds sold		4			-		0.04	%		3,367			12		1.45	%
Other investments		1,319			30		9.16	%		2,991			46		6.15	%
Total earning assets		1,150,231		$	11,037		3.89	%		963,075		$	10,021		4.19	%
Allowance for loan losses		(9,648	)							(9,636	)
Other non-earning assets		97,123								103,101
Total assets	$	1,237,706							$	1,056,540

LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	67,759	$	3	0.02	%	$	49,222	$	3	0.02	%
Money market deposit accounts		347,530		201	0.24	%		280,955		317	0.45	%
Savings accounts		108,262		11	0.04	%		86,607		20	0.09	%
Time deposits		191,298		584	1.24	%		223,126		972	1.75	%
Total time and savings deposits		714,849		799	0.45	%		639,910		1,312	0.82	%
Federal funds purchased, repurchase agreements and other borrowings		26,253		23	0.35	%		8,595		22	1.03	%
Federal Home Loan Bank advances		-		-	0.00	%		38,484		234	2.45	%
Total interest-bearing liabilities		741,102		822	0.45	%		686,989		1,568	0.92	%
Demand deposits		368,073						253,429
Other liabilities		9,906						4,093
Stockholders’ equity		118,625						112,029
Total liabilities and stockholders’ equity	$	1,237,706					$	1,056,540
Net interest margin			$	10,215	3.60	%			$	8,453	3.53	%
Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $59 thousand and $35 thousand for March 31, 2021 and 2020, respectively. *Annualized

Provision for Loan Losses and Credity 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 to 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 March 31, 2021, the Company recorded $150 thousand for the provision for loan losses. For the first quarter of 2020, the Company recognized $300 thousand provision for loan losses.

Index

The allowance for loan and lease losses (ALLL) was $9.7 million at March 31, 2021 and $9.5 million at December 31, 2020. The ALLL as a percentage of loans held for investment was 1.20% at March 31, 2021 compared to 1.14% at December 31, 2020. The increase from December 31, 2020 to March 31, 2021 is primarily related to lower outstanding loan balances and increased qualititative reserves. The decrease in the ALLL as a percentage of loans held for investment at March 31, 2021 compared to March 31, 2020 was primarily attributable to PPP loan originations, creating a 0.10% compression at March 31, 2021. Excluding PPP loans, which are 100% guaranteed by the SBA, the ALLL as a percentage of loans held for investment was 1.30% at March 31, 2021 and 1.27% at December 31, 2020. Historical annualized net charge offs as a percentage of average loans outstanding decreased to 0.01% for the first quarter of 2021 compared to 0.15% in the first quarter of 2020. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” and “Reconciliation of Certain Non-GAAP Financial Measures,” below.

As of March 31, 2021, compared to December 31, 2020, there have not been 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 6 basis point reduction in the historical loss rate as a percentage of loans evaluated collectively for impairment overall, but are being offset by a 6 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 March 31, 2021, the Company had loan modifications of $7.1 million, or less than 1% of gross loans, down slightly from $7.4 million as of December 31, 2020. Of the loans still under modifications at March 31, 2021, $2.4 million were under initial modification with the remaining $4.7 million under a subsequent modification. Initial and subsequent modifications consisted primarily of 60- or 90-day principal and interest payment deferral periods. Of the modified loans, $4.0 million, or 56.1%, was secured by owner occupied commercial real estate, and $2.3 million, or 32.1%, was secured by various other types of real estate. 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 $4.1 million in the three months ended March 31, 2021, an increase of $856 thousand or 26.1% from the first quarter of 2020. The quarter over quarter increase was primarily driven by an increase in mortgage banking income 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. This increase was slightly offset by decreases in service charges on deposit accounts. The decrease in service charges on deposit accounts was primarily impacted by lower nonsufficient funds, or NSF, fees which historically trend downward during periods of economic uncertainty and lower service charges due to higher deposit balances.

Noninterest Expense

Noninterest expense was $10.6 million for the first quarter of 2021, an increase of $528 thousand, or 5.3%, from the first quarter of 2020. The quarter-over-quarter and year-over-year increases are primarily related to salaries and employee benefits, data processing, and other taxes expense, partially offset by decreases in occupancy and equipment, customer development, and employee professional development.

Total salaries and benefits costs increased $233 thousand, or 3.9%, when comparing the first quarters of 2021 and 2020. The increase in salaries and employee benefits is primarily attributable to (i) the addition of highly skilled bankers in lending, information technology, and operations management to the team later in 2020; and (ii) increased commission expense related to higher mortgage loan origination volume in 2021 which were partially offset by the deferral of costs related to PPP loan origination. 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.

The Company’s 2021 roadmap for implementation of bank-wide technology and efficiency initiatives includes the full roll-out of a new loan origination system, upgrades to critical infrastructure software related to imaging, and implementations of a new data analytics solution, deposit origination platform, teller systems, online appointment scheduling, and online account opening. These initiatives have driven an increase of $224 thousand from the quarter ended March 31, 2020 to the quarter ended March 31, 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 throughout 2021.

Decreases in customer development and employee professional development expenses for the three months ended 2021 over the comparative 2020 period is directly related to the COVID-19 pandemic. The increase in other tax expenses was driven by resolution of certain tax credits related to bank franchise tax of $94 thousand.

Index

The Company’s income tax expense for the first quarter of 2021 increased $454 thousand when compared to the same period in 2020 primarily due to overall higher net income and lower federal income tax credits for investment in certain housing projects. The effective federal income tax rates for the three months ended March 31, 2021 was 15.9% and the effective tax rates for the three months ended March 31, 2020 was 8.5%.

Balance Sheet Review

Unless otherwise noted, all comparisons in this section are between balances at December 31, 2020 and March 31, 2021.

Total assets as of March 31, 2021 were $1.3 billion, an increase of $31.4 million or 2.6%, compared to $1.2 billion at December 31, 2020. Net loans held for investment decreased $28.8 million, or 3.5%, from December 31, 2020 to $798.0 million. The change in net loans held for investment was primarily attributed to declines of $19.2 million in the PPP loan segment and $3.2 million in the indirect automobile segment. PPP loan forgiveness of $55.0 million was partially offset by originations of new PPP loans of $35.8 million. Cash and cash equivalents increased $57.0 million, or 47.3%. Securities available-for-sale increased $8.1 million, or 4.4% from December 31, 2020 to $194.6 million at March 31, 2021, as additional liquidity provided by growth in deposit accounts continues to be deployed in the Company’s investment portfolio.

Total deposits increased $44.3 million, or 4.2%, to $1.1 billion at March 31, 2021. Noninterest-bearing deposits increased $24.5 million, or 6.8%, savings deposits increased $26.4 million, or 5.2%, and time deposits decreased $6.6 million, or 3.4%. The impact of government stimulus, PPP loan related deposits, and higher levels of consumer savings were primary drivers of the increase in total deposits. Expanding the low cost deposit base and re-pricing to reduce interest expense continue to be key strategies to buffer NIM compression during the current low rate environment. Total borrowings decreased $19.3 million. The primary driver of the decrease was repayment of borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) initiated by the Federal Reserve to partially fund PPP loan originations, resulting in the Company borrowing $11.0 million as of March 31, 2021 as compared to $28.6 million at December 31, 2020. PPPLF 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.

Average assets for the first three months of 2021 increased $181.2 million, or 17.2%, compared to the first three months of 2020. Comparing the first three months of 2021 to the first three months of 2020, average loans increased $80.6 million, and average investment securities increased $35.1 million. Total average deposits increased $189.6 million with year-over-year average balance increases of 45.2% in non-interest bearing deposits and 25.6% in savings deposits, including interest-bearing transaction and money market accounts. Average borrowings decreased $20.8 million.

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. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of March 31, 2021, the Bank’s unpledged, available-for-sale securities totaled $116.3 million. The Company’s primary external source of liquidity is advances from the FHLB. In addition, the Company had cash and cash equivalents of $177.4 million at March 31, 2021, including interest-bearing deposits in other banks of $150.0 million, that could provide additional liquidity to the Company

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 2021, the Company had $365.6 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. As of the end of the first quarter of 2021, the Company had $100.0 million available in federal funds lines to address any short-term borrowing needs.

As disclosed in the Company’s consolidated statements of cash flows, net cash provided by operating activities was $14.2 million, net cash provided by investing activities was $18.4 million, and net cash provided by financing activities was $24.4 million for the three months ended March 31, 2021. Combined, this contributed to a $57.0 million increase in cash and cash equivalents for the three months ended March 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.

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.

Index

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.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. OREO consists of real estate from a foreclosure on loan collateral. The Company had no OREO as of March 31, 2021 and December 31, 2020.

The majority of the loans past due 90 days or more and accruing interest at March 31, 2021 are student and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. When a loan changes from “past due 90 days or more and accruing interest” status to “nonaccrual” status, the loan is reviewed for impairment. In most cases, if the loan is considered impaired, then the difference between the value of the collateral and the principal amount outstanding on the loan is charged off. 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 the allowance for loan losses to cover the anticipated deficiency, based on information available to management at that time.

In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance 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.

Index

The following table presents information on nonperforming assets, as of the dates indicated:

NONPERFORMING ASSETS
(dollars in thousands)	March 31, 2021		December 31, 2020		Increase (Decrease)
Nonaccrual loans
Real estate-mortgage (1)	$	251	$	311	$	(60	)
Real estate-commercial		878		903		(25	)
Total nonaccrual loans	$	1,129	$	1,214	$	(85	)

Loans past due 90 days or more and accruing interest
Real estate-construction	$	88	$	-	$	88
Real estate-mortgage (1)		50		-		50
Real estate-commercial		-		-		-
Consumer loans (2)	$	981	$	744	$	237
Total loans past due 90 days or more and accruing interest	$	1,119	$	744	$	375

Restructured loans
Real estate-construction	$	82	$	83	$	(1	)
Real estate-mortgage (1)		481		492		(11	)
Real estate-commercial		1,318		1,352		(34	)
Total restructured loans	$	1,881	$	1,927	$	(46	)
Less nonaccrual restructured loans (included above)		1,088		1,120		(32	)
Less restructured loans currently in compliance (3)		793		807		(14	)
Net nonperforming, accruing restructured loans	$	-	$	-	$	-
Nonperforming loans	$	2,248	$	1,958	$	290

Total nonperforming assets	$	2,248	$	1,958	$	290
(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 federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $693 thousand at March 31, 2021 and $547 thousand at December 31, 2020. (3) As of March 31, 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 March 31, 2021 were $2.2 million, $291 thousand lower than nonperforming assets as of December 31, 2020. Nonaccrual loans decreased $85 thousand when comparing the balances as of March 31, 2021 to December 31, 2020. See Note 3 of the Notes 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 regarding 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 March 31, 2021 was related to one large credit relationship of $878 thousand, representing 77.8% of the $1.1 million of nonaccrual loans at March 31, 2021. This relationship has been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover the outstanding principal balance. 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.

Loans past due 90 days or more and accruing interest increased $376 thousand. As of March 31, 2021, $693 thousand of the $1.1 million of loans past due 90 days or more and accruing interest were government-guaranteed student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company.

Index

Total restructured loans decreased by $46 thousand from December 31, 2020 to March 31, 2021 primarily due to pay-offs and paydowns. 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 to work with problem loan relationships to identify any payment shortfall and assist these borrowers to improve performance or correct the problems.

Allowance for Loan Losses

The allowance for loan losses is based on several components. 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 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 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, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of March 31, 2021 and December 31, 2020, the impaired loan component of the allowance for loan losses was $55 thousand and $11 thousand, respectively.

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 March 31, 2021 and December 31, 2020 included factors related to the COVID-19 pandemic.

Historical loss is the final component of the allowance for loan losses and is calculated based on the migration 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 loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the 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 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 internally assigned risk grades: substandard, other assets especially mentioned (OAEM, rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of Doubtful or Loss, but as of March 31, 2021 and December 31, 2020 the Company had no loans in these categories.

The overall historical loss rate from December 31, 2020 to March 31, 2021, decreased 6 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality combined with continued improvement in non-performing assets. For the same period, the qualitative factor components increased 6 basis points 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 to March 31, 2021, the economic impact of the COVID-19 pandemic and the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration, potentially resulting in 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 $9.7 million as of March 31, 2021 and $9.5 million at December 31, 2020. 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 COVID-19 pandemic or effects of federal government relief programs present indications of economic instability that is other than temporary in nature.

Index

The allowance for loan losses was 1.20% of total loans held for investment on March 31, 2021 and 1.14% on December 31, 2020. The increase from December 31, 2020 to March 31, 2021 is primarily related to lower outstanding loan balances and increased qualititative reserves. The decrease in the ALLL as a percentage of loans held for investment at March 31, 2021 compared to March 31, 2020 was primarily attributable to PPP loan originations, creating a 0.10% compression at March 31, 2021. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.30% at March 31, 2021 and 1.27% at December 31, 2020. 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” and “Reconciliation of Certain Non-GAAP Financial Measures,” below. As of March 31, 2021, the allowance for loan losses was 429.95% of nonperforming loans and nonperforming assets, respectively; this compares to 487.3% of both nonperforming loans and nonperforming assets as of December 31, 2020. Management believes it has provided an adequate reserve for nonperforming loans at March 31, 2021.

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 PCI) or purchased performing.

A PCI loan will be removed from a pool (at its carrying value) only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan. For purposes of removing the loan from the pool, the carrying value is deemed to equal the amount of principal cash flows received in lieu of the loan balance. This treatment ensures that the percentage yield calculation used to recognize accretable yield on the pool of loans is not affected.

Quarterly, management will evaluate purchased credit-impaired loans based on updated future expected cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows; these changes are disclosed in Note 3 “Loans and Allowance for Loan Losses.”

The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference, which represents the estimate of credit losses expected to occur and was considered in determining the fair value of loan at the acquisition date. Any subsequent increases in expected cash flows over those expected at the acquisition date in excess of fair value are adjusted through an increase in the accretable yield on a prospective basis; any decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.

The Company’s policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by the quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan.

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. 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.

Capital Resources

Total stockholders’ equity as of March 31, 2021 was $117.9 million, an increase of $778 thousand or 0.7% from $117.1 million at December 31, 2020. The increase was the result of increased retained earnings partially offset by net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income on the consolidated balance sheets. The movement in the unrealized gain/loss position was driven by changes in market rates and shift in portfolio composition.

Index

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the board approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total for the Bank capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

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 FRB to expand the applicability of its 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 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 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 Form 10-K.

On September 17, 2019 the federal bank regulatory agencies 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, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework.

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

	2021 Regulatory Minimums			March 31, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		12.02	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		12.02	%
Tier 1 Leverage to Average Assets		4.000	%		8.79	%
Total Capital to Risk-Weighted Assets		8.000	%		13.13	%
Capital Conservation Buffer		2.500	%		5.13	%
Risk-Weighted Assets (in thousands)				$	880,840

Book value per share was $22.57 at March 31, 2021 as compared to $21.16 at March 31, 2020. Cash dividends were $626 thousand and $624 thousand or $0.12 per share in the first three months of 2021 and 2020, respectively.

Contractual Obligations

In the normal course of business there are various outstanding contractual obligations of 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.

The Company 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 acquisition. The Company elected to pay the loan in full during the first quarter of 2021.

As of March 31, 2021, there have been no material changes outside the ordinary course of business in the Company’s contractual obligations disclosed in the Company’s 2020 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

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

Index

Non-GAAP Financial Measures

In reporting the results of the quarter ended March 31, 2021, 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.

	Three Months Ended March 31,
(dollar in thousands, except per share data)	2021			2020
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)	$	10,156		$	8,418
FTE adjustment		59			35
Net interest income (FTE) (non-GAAP)	$	10,215		$	8,453
Noninterest income (GAAP)		4,134			3,278
Total revenue (FTE) (non-GAAP)	$	14,349		$	11,731
Noninterest expense (GAAP)		10,558			10,030

Average earning assets	$	1,150,231		$	963,075
Net interest margin		3.58	%		3.52	%
Net interest margin (FTE) (non-GAAP)		3.60	%		3.53	%

Efficiency ratio		73.88	%		85.76	%
Efficiency ratio (FTE) (non-GAAP)		73.58	%		85.50	%

ALLL as a Percentage of Loans Held for Investment	March 31, 2021			December 31, 2020
Loans held for investment (net of deferred fees and costs) (GAAP)	$	807,661		$	836,300
Less PPP originations		66,805			85,983
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP)	$	740,856		$	750,317

ALLL	$	9,961		$	9,541

ALLL as a Percentage of Loans Held for Investment		1.20	%		1.14	%
ALLL as a Percentage of Loans Held for Investment, net of PPP originations		1.30	%		1.27	%

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 first quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

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

Item 1A.

Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2020 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon vesting of restricted stock awards to satisfy tax withholding requirements. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the three months ended March 31, 2021, the Company did not repurchase any shares related to the equity compensation plan awards.

During the three months ended March 31, 2021, the Company did not repurchase any shares pursuant to the Company’s stock repurchase program. The Company is authorized to repurchase, during any given calendar year, up to an aggregate of 5 percent of the shares of the Company’s common stock outstanding as of January 1 of that calendar year.

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 Annual Meeting of Stockholders.

Index

Item 6.

Exhibits.

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)

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

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

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited for March 31, 2021), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (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)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OLD POINT FINANCIAL CORPORATION

May 14, 2021	/s/Robert F. Shuford, Jr.
	Robert F. Shuford, Jr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)

May 14, 2021	/s/Elizabeth T. Beale
	Elizabeth T. Beale
	Chief Financial Officer & Senior Vice President/Finance
	(Principal Financial & Accounting Officer)