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OLD POINT FINANCIAL CORP - Quarter Report: 2023 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, 2023

or


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.

5,000,311 shares of common stock ($5.00 par value) outstanding as of May 1, 2023



OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

   
Page
     
Item 1.
1
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
27
     
Item 3.
42
     
Item 4.
42
     
 
PART II - OTHER INFORMATION
 
     
Item 1.
43
     
Item 1A.
43
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
43
     
Item 6.
44
     
 
45

i

GLOSSARY OF DEFINED TERMS

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

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)
 
2023
   
2022
 
   
(unaudited)
       
Assets
           
             
Cash and due from banks
 
$
16,253
   
$
15,670
 
Interest-bearing due from banks
   
12,594
     
3,580
 
Federal funds sold
   
222
     
-
 
Cash and cash equivalents
   
29,069
     
19,250
 
Securities available-for-sale, at fair value
   
223,913
     
225,518
 
Restricted securities, at cost
   
4,479
     
3,434
 
Loans held for sale
   
325
     
421
 
Loans, net
   
1,069,714
     
1,016,559
 
Premises and equipment, net
   
30,604
     
31,008
 
Premises and equipment, held for sale
   
987
     
987
 
Bank-owned life insurance
   
34,304
     
34,049
 
Goodwill
   
1,650
     
1,650
 
Core deposit intangible, net
   
220
     
231
 
Other assets
   
20,886
     
22,228
 
Total assets
 
$
1,416,151
   
$
1,355,335
 
                 
Liabilities & Stockholders’ Equity
               
                 
Deposits:
               
Noninterest-bearing deposits
 
$
405,160
   
$
418,582
 
Savings deposits
   
629,483
     
584,527
 
Time deposits
   
164,972
     
152,910
 
Total deposits
   
1,199,615
     
1,156,019
 
Overnight repurchase agreements
   
4,517
     
4,987
 
Federal funds purchased and other short-term borrowings     -       11,378  
Federal Home Loan Bank advances
   
72,500
     
46,100
 
Long term borrowings
   
29,570
     
29,538
 
Accrued expenses and other liabilities
   
7,351
     
8,579
 
Total liabilities
   
1,313,553
     
1,256,601
 
                 
Stockholders’ equity:
               
Common stock, $5 par value, 10,000,000 shares authorized; 5,000,331 and 4,999,083 shares outstanding (includes 46,989 of nonvested restricted stock, respectively)
   
24,767
     
24,761
 
Additional paid-in capital
   
16,727
     
16,593
 
Retained earnings
   
79,539
     
78,147
 
Accumulated other comprehensive loss, net
   
(18,435
)
   
(20,767
)
Total stockholders’ equity
   
102,598
     
98,734
 
Total liabilities and stockholders’ equity
 
$
1,416,151
   
$
1,355,335
 

See Notes to Consolidated Financial Statements.
 
1

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income

     Three Months Ended  
   
March 31,
 
(unaudited, dollars in thousands, except share and per share data)
 
2023
   
2022
 
Interest and Dividend Income:
           
Loans, including fees
 
$
13,041
   
$
9,184
 
Due from banks
   
64
     
73
 
Federal funds sold
   
6
     
1
 
Securities:
               
Taxable
   
1,764
     
989
 
Tax-exempt
   
212
     
209
 
Dividends and interest on all other securities
   
66
     
14
 
Total interest and dividend income
   
15,153
     
10,470
 
                 
Interest Expense:
               
Checking and savings deposits
   
854
     
176
 
Time deposits
   
537
     
361
 
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
   
37
     
1
 
Long term borrowings
    295       295  
Federal Home Loan Bank advances     617       -  
Total interest expense
   
2,340
     
833
 
Net interest income
   
12,813
     
9,637
 
Provision for credit losses
   
376
     
101
 
Net interest income after provision for credit losses
   
12,437
     
9,536
 
                 
Noninterest Income:
               
Fiduciary and asset management fees
   
1,116
     
1,072
 
Service charges on deposit accounts
   
753
     
722
 
Other service charges, commissions and fees
   
1,109
     
1,053
 
Bank-owned life insurance income
   
254
     
231
 
Mortgage banking income
   
95
     
220
 
Other operating income
   
94
     
217
 
Total noninterest income
   
3,421
     
3,515
 
                 
Noninterest Expense:
               
Salaries and employee benefits
   
7,363
     
6,422
 
Occupancy and equipment
   
1,195
     
1,161
 
Data processing
   
1,179
     
1,090
 
Customer development
   
113
     
93
 
Professional services
   
673
     
630
 
Employee professional development
   
234
     
264
 
Other taxes
   
213
     
213
 
ATM and other losses
   
255
     
14
 
Other operating expenses
   
943
     
826
 
Total noninterest expense
   
12,168
     
10,713
 
Income before income taxes
   
3,690
     
2,338
 
Income tax expense
   
607
     
307
 
Net income
 
$
3,083
   
$
2,031
 
                 
Basic Earnings per Share:
               
Weighted average shares outstanding
   
4,999,887
     
5,186,354
 
Net income per share of common stock
 
$
0.62
   
$
0.39
 
                 
Diluted Earnings per Share:
               
Weighted average shares outstanding
   
5,000,020
     
5,186,431
 
Net income per share of common stock
 
$
0.62
   
$
0.39
 

See Notes to Consolidated Financial Statements.

2

Old Point Financial Corporation
Consolidated Statements of Comprehensive Income (Loss)

    Three Months Ended  
   
March 31,
 
(unaudited, dollars in thousands)
 
2023
   
2022
 
             
Net income
 
$
3,083
   
$
2,031
 
Other comprehensive income (loss), net of tax
               
Net unrealized gain (loss) on available-for-sale securities
   
2,332
     
(11,133
)
Other comprehensive income (loss), net of tax
   
2,332
     
(11,133
)
Comprehensive income (loss)
 
$
5,415
   
$
(9,102
)

See Notes to Consolidated Financial Statements.

3

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity

                            Accumulated        
    Shares of           Additional           Other        
    Common     Common     Paid-in     Retained     Comprehensive        
(unaudited, dollars in thousands, except share and per share data)
 
Stock
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
THREE MONTHS ENDED MARCH 31, 2023
                         
                                     
Balance at December 31, 2022
   
4,952,094
   
$
24,761
   
$
16,593
   
$
78,147
   
$
(20,767
)
 
$
98,734
 
Net income
   
-
     
-
     
-
     
3,083
     
-
     
3,083
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
2,332
     
2,332
 
Impact of adoption of ASC 326
    -       -       -       (991 )     -       (991 )
Employee Stock Purchase Plan share issuance
   
1,248
     
6
     
27
     
-
     
-
     
33
 
Stock-based compensation expense
   
-
     
-
     
107
     
-
     
-
     
107
 
Cash dividends ($0.14 per share)
   
-
     
-
     
-
     
(700
)
   
-
     
(700
)
 
                                               
Balance at end of period
   
4,953,342
   
$
24,767
   
$
16,727
   
$
79,539
   
$
(18,435
)
 
$
102,598
 
 
                                               
THREE MONTHS ENDED MARCH 31, 2022
                                               
 
                                               
Balance at December 31, 2021
   
5,201,272
    $
26,006     $
21,458     $
71,679     $
1,675     $
120,818  
Net income
    -       -       -       2,031       -       2,031  
Other comprehensive loss, net of tax
    -       -       -       -       (11,133 )     (11,133 )
Employee Stock Purchase Plan share issuance
    1,481       7       27       -       -       34  
Common stock purchased
    (122,995 )     (615 )     (2,433 )     -       -       (3,048 )
Restricted stock vested
    8,152       41       (41 )     -       -       -  
Stock-based compensation expense
    -       -       71       -       -       71  
Cash dividends ($0.13 per share)
    -       -       -       (674 )     -       (674 )
 
                                               
Balance at end of period
    5,087,910     $
25,439     $
19,082     $
73,036     $
(9,458 )   $
108,099  

See Notes to Consolidated Financial Statements.

4

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows

   
Three Months Ended March 31,
 
(unaudited, dollars in thousands)
 
2023
   
2022
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
3,083
   
$
2,031
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
534
     
514
 
Amortization of right of use lease asset
   
101
     
82
 
Accretion related to acquisition, net
   
11
     
(12
)
Amortization of subordinated debt issuance costs
    32
      33
 
Provision for loan losses
   
376
     
101
 
Net amortization of securities
   
186
     
288
 
Decrease in loans held for sale, net
   
96
     
1,277
 
Income from bank owned life insurance
   
(254
)
   
(231
)
Stock compensation expense
   
107
     
71
 
Decrease in other assets
   
621
     
764
 
Decrease in accrued expenses and other liabilities
   
(1,392
)
   
(386
)
Net cash provided by operating activities
   
3,501
     
4,532
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of available-for-sale securities
   
(1,145
)
   
(26,118
)
(Purchase of) proceeds from redemption of restricted securities, net
   
(1,045
)
   
(355
)
Proceeds from maturities and calls of available-for-sale securities
   
-
     
1,000
 
Proceeds from sales of available-for-sale securities
   
1,300
     
2,450
 
Paydowns on available-for-sale securities
   
4,216
     
4,586
 
Net increase in loans held for investment
   
(54,359
)
   
(12,131
)
Purchases of premises and equipment     (130 )     (197 )
Net cash used in investing activities
   
(51,163
)
   
(30,765
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
(Decrease) increase in noninterest-bearing deposits
   
(13,422
)
   
(36,381
)
Increase in savings deposits
   
44,956
     
42,320
 
Increase (decrease) in time deposits
   
12,062
     
(4,149
)
Decrease in federal funds purchased, repurchase agreements and other borrowings, net
   
(11,848
)
   
(1,008
)
Increase in Federal Home Loan Bank advances     145,500       -  
Repayment of Federal Home Loan Bank advances     (119,100 )     -  
Repayment of Federal Reserve Bank borrowings
   
-
     
(480
)
Proceeds from ESPP issuance
   
33
     
34
 
Repurchase of common stock
    -       (3,048 )
Cash dividends paid on common stock
   
(700
)
   
(674
)
Net cash provided by (used in) financing activities
   
57,481
     
(3,386
)
                 
Net increase (decrease) in cash and cash equivalents
   
9,819
     
(29,619
)
Cash and cash equivalents at beginning of period
   
19,250
     
187,922
 
Cash and cash equivalents at end of period
 
$
29,069
   
$
158,303
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash payments for:
               
Interest
 
$
2,417
   
$
1,101
 
                 
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
               
Unrealized (loss) gain on securities available-for-sale
 
$
2,952
   
$
(14,093
)
Former bank property transferred from fixed assets to held for sale assets
 
$
-
   
$
345
 
Impact of adoption of ASC 326
 
$
991
   
$
-
 

See Notes to Consolidated Financial Statements.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 1. Description of Business and Summary of Significant Accounting Policies

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

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

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

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

ESTIMATES
In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL.

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

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

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

6

The following table illustrates the impact of ASC 326.

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


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



Loans Held for Investment

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



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



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


Allowance for Credit Losses on Loans

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



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



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


7


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



Reserve for Unfunded Commitments

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



Accrued Interest Receivable

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



Allowance for Credit Losses – Available-For-Sale Securities

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



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



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



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

8

Note 2. Securities

On January 1, 2023, the Company adopted ASC 326, which made changes to the accounting for available-for-sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1. Description of Business and Summary of Significant Accounting Policies.

All securities information presented as of March 31, 2023, is in accordance with ASC 326. All securities information presented prior to March 31, 2023 is in accordance with previous applicable GAAP. See information regarding the Company’s prior accounting policies in Note 1. Significant Accounting Policies in the Company’s 2022 Form 10-K.

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

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

   
December 31, 2022
 
           Gross      Gross        
 
Amortized
     Unrealized      Unrealized      Fair  
(Dollars in thousands)
 
Cost
   
Gains
   
(Losses)
   
Value
 
U.S. Treasury securities
 
$
8,013
   
$
-
   
$
(342
)
 
$
7,671
 
Obligations of U.S. Government agencies
   
43,622
     
10
     
(1,233
)
   
42,399
 
Obligations of state and political subdivisions
   
70,491
     
-
     
(11,107
)
   
59,384
 
Mortgage-backed securities
   
99,874
     
-
     
(10,961
)
   
88,913
 
Money market investments
   
1,816
     
-
     
-
     
1,816
 
Corporate bonds and other securities
   
27,990
     
-
     
(2,655
)
   
25,335
 
   
$
251,806
   
$
10
   
$
(26,298
)
 
$
225,518
 

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

   
March 31, 2023
 
     Amortized      Fair  
(Dollars in thousands)
 
Cost
   
Value
 
Due in one year or less
 
$
1,460
   
$
1,427
 
Due after one year through five years
   
19,519
     
18,758
 
Due after five through ten years
   
64,982
     
57,497
 
Due after ten years
   
159,627
     
144,570
 
Other securities, restricted
   
1,661
     
1,661
 
   
$
247,249
   
$
223,913
 

The Company did not realize any gains or losses on the sale of investment securities during the three months ended March 31, 2023 and 2022, respectively.

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses for which an allowance for credit losses has not been recorded as of March 31, 2023 and that are deemed to be temporarily impaired as of December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:

9

   
March 31, 2023
 

 
Less than 12 months
   
12 months or more
   
Total
 

   Gross    
     Gross          
Gross
       

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

   
December 31, 2022
 

 
Less than 12 months
   
12 months or more
   
Total
 
     Gross            Gross            Gross        
     Unrealized      Fair      Unrealized      Fair      Unrealized      Fair  
(Dollars in thousands)
 
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
U.S. Treasury securities   $ 342     $ 7,671     $ -     $ -     $ 342     $ 7,671  
Obligations of U.S. Government agencies
   
258
     
13,873
     
975
     
22,851
     
1,233
     
36,724
 
Obligations of state and political subdivisions
    5,386       33,720       5,721       23,856       11,107       57,576  
Mortgage-backed securities
   
4,157
     
52,717
     
6,804
     
36,196
     
10,961
     
88,913
 
Corporate bonds and other securities
   
1,084
     
12,906
     
1,571
     
11,429
     
2,655
     
24,335
 
Total securities available-for-sale
 
$
11,227
   
$
120,887
   
$
15,071
   
$
94,332
   
$
26,298
   
$
215,219
 

The number of investments in an unrealized loss position as of March 31, 2023 and December 31, 2022 were 162, respectively. The Company concluded no allowance for credit loss should be recognized as of March 31, 2023 and December 31, 2022, based primarily on the fact that changes in fair value  were caused primarily by increases in interest rates, securities with unrealized losses had generally high credit quality, the Company intends to hold these investments to maturity, it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

Restricted Stock
The restricted stock 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 Credit Losses on Loans

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 Description of Business and Summary of Significant Accounting Policies. All loan information presented as of March 31, 2023 is in accordance with ASC 326. All loan information presented prior to March 31, 2023 is in accordance with previous applicable GAAP.
10


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


   
March 31,
   
December 31,
 
(dollars in thousands)
 
2023
   
2022
 
Mortgage loans on real estate:
           
Residential 1-4 family
 
$
179,607
   
$
169,248
 
Commercial - owner occupied
   
186,141
     
184,586
 
Commercial - non-owner occupied
   
244,870
     
245,277
 
Multifamily
   
32,820
     
26,675
 
Construction and land development
   
86,690
     
77,944
 
Second mortgages
   
8,962
     
8,828
 
Equity lines of credit
   
54,723
     
54,340
 
Total mortgage loans on real estate
   
793,813
     
766,898
 
Commercial and industrial loans
   
73,367
     
72,578
 
Consumer automobile loans
   
188,101
     
163,018
 
Other consumer loans
   
22,186
     
22,251
 
Other  (1)
   
3,798
     
2,340
 
Total loans, net of deferred fees (2)
   
1,081,265
     
1,027,085
 
Less:  Allowance for credit losses on loans
   
11,551
     
10,526
 
Loans, net of allowance and deferred fees (2)
 
$
1,069,714
   
$
1,016,559
 
(1)
Overdrawn accounts are reclassified as loans and included in the Other category in the table above.  Overdrawn deposit accounts, excluding internal use accounts, totaled $229 thousand and $269 thousand at March 31, 2023 and December 31, 2022, respectively.
(2)
Net deferred loan fees totaled $1.0 million on March 31, 2023 and December 31, 2022, respectively.

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


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


(dollars in thousands)
 
30 - 59 Days
Past Due
   
60 - 89 Days
Past Due
   
90 or More
Days Past
Due and still
Accruing
   
Nonaccrual
(2)
   
Total Current
Loans (1)
   
Total
Loans
 
Mortgage loans on real estate:
                                   
Residential 1-4 family
 
$
393
   
$
158
   
$
-
   
$
151
   
$
178,905
   
$
179,607
 
Commercial - owner occupied
   
-
     
93
     
-
     
-
     
186,048
     
186,141
 
Commercial - non-owner occupied
   
-
     
-
     
-
     
-
     
244,870
     
244,870
 
Multifamily
   
-
     
-
     
-
     
-
     
32,820
     
32,820
 
Construction and land development
   
-
     
-
     
-
     
829
     
85,861
     
86,690
 
Second mortgages
   
12
     
-
     
-
     
-
     
8,950
     
8,962
 
Equity lines of credit
   
62
     
-
     
47
     
-
     
54,614
     
54,723
 
Total mortgage loans on real estate
 
$
467
   
$
251
   
$
47
   
$
980
   
$
792,068
   
$
793,813
 
Commercial and industrial loans
   
343
     
-
     
506
     
-
     
72,518
     
73,367
 
Consumer automobile loans
   
1,533
     
100
     
169
     
-
     
186,299
     
188,101
 
Other consumer loans
   
720
     
85
     
-
     
-
     
21,381
     
22,186
 
Other
   
28
     
-
     
-
     
-
     
3,770
     
3,798
 
Total
 
$
3,091
   
$
436
   
$
722
   
$
980
   
$
1,076,036
   
$
1,081,265
 
(1)
For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
(2)
For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

11


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


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

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

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


Allowance for Credit Losses on Loans


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


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

Consumer: Real Estate-Mortgage and Consumer

Each portfolio class has risk characteristics as follows:


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

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

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

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

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

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

12


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



ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

For the Three Months ended March 31, 2023


(Dollars in thousands)
 
Commercial
and Industrial
   
Real Estate
Construction
   
Real Estate -
Mortgage (1)
   
Real Estate -
Commercial
   
Consumer (2)
   
Other
   
Unallocated
   
Total
 
Allowance for credit losses on loans:
                                           
Balance, beginning
 
$
673
   
$
552
   
$
2,575
   
$
4,499
   
$
2,065
   
$
156
   
$
6
   
$
10,526
 
Day 1 impact of adoption of CECL
   
(11
)
   
19
     
87
     
1,048
     
(365
)
   
(137
)
   
-
     
641
 
Charge-offs
   
-
     
-
     
-
     
-
     
(377
)
   
(72
)
   
-
     
(449
)
Recoveries
   
8
     
-
     
11
     
-
     
237
     
14
     
-
     
270
 
Provision for loan losses
   
(6
)
   
82
     
199
     
70
     
81
     
143
     
(6
)
   
563
 
Ending Balance
 
$
664
   
$
653
   
$
2,872
   
$
5,617
   
$
1,641
   
$
104
   
$
-
   
$
11,551
 
                                                                 
Individually evaluated
 
$
-
   
$
1
   
$
19
   
$
4
   
$
-
   
$
-
   
$
-
   
$
24
 
Collectively evaluated
   
664
     
652
     
2,853
     
5,613
     
1,641
     
104
     
-
     
11,527
 
                                                                 
Ending Balance
 
$
664
   
$
653
   
$
2,872
   
$
5,617
   
$
1,641
   
$
104
   
$
-
   
$
11,551
 
                                                                 
Loans Balances:
                                                               
Individually evaluated
   
-
     
903
     
466
     
401
     
-
     
-
     
-
     
1,770
 
Collectively evaluated
   
73,367
     
85,787
     
275,646
     
430,610
     
210,287
     
3,798
     
-
     
1,079,495
 
Ending Balance
 
$
73,367
   
$
86,690
   
$
276,112
   
$
431,011
   
$
210,287
   
$
3,798
   
$
-
   
$
1,081,265
 
(1)
The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.
(2)
The consumer segment includes consumer automobile loans.
 
The following table presents a breakdown of the provision for credit losses for the periods indicated.

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

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

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


Pass: Loans are of acceptable risk.

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

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

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

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

13


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


   
March 31, 2023
 
   
Term Loans Amortized Cost Basis by Origination Year
             
(dollars in thousands)
 
2023
   
2022
   
2021
   
2020
   
2019
   
Prior
   
Revolving
Loans
   
Total
 
Construction and land development
                                               
Pass
 
$
6,676
   
$
41,912
   
$
26,314
   
$
6,480
   
$
417
   
$
3,894
   
$
168
   
$
85,861
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
829
     
-
     
829
 
Total Construction
 
$
6,676
   
$
41,912
   
$
26,314
   
$
6,480
   
$
417
   
$
4,723
   
$
168
   
$
86,690
 
                                                                 
Commercial Real Estate - Owner Occupied
                                                               
Pass
 
$
579
   
$
33,062
   
$
44,991
   
$
22,770
   
$
13,142
   
$
66,459
   
$
4,750
   
$
185,753
 
OAEM
   
-
     
-
     
78
     
-
     
201
     
109
     
-
     
388
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Commercial Real Estate - Owner Occupied
 
$
579
   
$
33,062
   
$
45,069
   
$
22,770
   
$
13,343
   
$
66,568
   
$
4,750
   
$
186,141
 
                                                                 
Commercial Real Estate - Non-Owner Occupied
                                                               
Pass
 
$
4,424
   
$
55,819
   
$
77,835
   
$
31,961
   
$
14,468
   
$
60,163
   
$
200
   
$
244,870
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Commercial Real Estate - Non-Owner Occupied
 
$
4,424
   
$
55,819
   
$
77,835
   
$
31,961
   
$
14,468
   
$
60,163
   
$
200
   
$
244,870
 
                                                                 
Commercial and Industrial
                                                               
Pass
 
$
6,446
   
$
40,444
   
$
6,615
   
$
3,241
   
$
4,766
   
$
50
   
$
11,805
   
$
73,367
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Commercial and Industrial
 
$
6,446
   
$
40,444
   
$
6,615
   
$
3,241
   
$
4,766
   
$
50
   
$
11,805
   
$
73,367
 
                                                                 
Multifamily Real Estate
                                                               
Pass
 
$
5,240
   
$
4,097
   
$
2,201
   
$
793
   
$
6,097
   
$
11,307
   
$
3,085
   
$
32,820
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Multifamily Real Estate
 
$
5,240
   
$
4,097
   
$
2,201
   
$
793
   
$
6,097
   
$
11,307
   
$
3,085
   
$
32,820
 
                                                                 
Residential 1-4 Family
                                                               
Pass
 
$
10,786
   
$
34,665
   
$
40,971
   
$
29,530
   
$
14,042
   
$
58,231
   
$
54,723
   
$
242,948
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
344
     
-
     
344
 
Total Residential 1-4 Family
 
$
10,786
   
$
34,665
   
$
40,971
   
$
29,530
   
$
14,042
   
$
58,575
   
$
54,723
   
$
243,292
 
                                                                 
Consumer - Automobile
                                                               
Pass
 
$
38,055
   
$
116,171
   
$
18,141
   
$
6,587
   
$
3,050
   
$
6,097
   
$
-
   
$
188,101
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Consumer - Automobile
 
$
38,055
   
$
116,171
   
$
18,141
   
$
6,587
   
$
3,050
   
$
6,097
   
$
-
   
$
188,101
 
                                                                 
Consumer - Other
                                                               
Pass
 
$
199
   
$
2,057
   
$
672
   
$
200
   
$
359
   
$
17,154
   
$
1,545
   
$
22,186
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Consumer - Other
 
$
199
   
$
2,057
   
$
672
   
$
200
   
$
359
   
$
17,154
   
$
1,545
   
$
22,186
 
                                                                 
Other
                                                               
Pass
 
$
2,990
   
$
-
   
$
309
   
$
-
   
$
-
   
$
499
   
$
-
   
$
3,798
 
OAEM
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total Other
 
$
2,990
   
$
-
   
$
309
   
$
-
   
$
-
   
$
499
   
$
-
   
$
3,798
 
                                                                 
Total Loans
                                                               
Pass
 
$
75,395
   
$
328,227
   
$
218,049
   
$
101,562
   
$
56,341
   
$
223,854
   
$
76,276
   
$
1,079,704
 
OAEM
   
-
     
-
     
78
     
-
     
201
     
109
     
-
     
388
 
Substandard
   
-
     
-
     
-
     
-
     
-
     
1,173
     
-
     
1,173
 
Total Loans
 
$
75,395
   
$
328,227
   
$
218,127
   
$
101,562
   
$
56,542
   
$
225,136
   
$
76,276
   
$
1,081,265
 



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


   
March 31, 2023
 
   
Current Period Charge-offs by Origination Year
             
(dollars in thousands)
 
2023
   
2022
   
2021
   
2020
   
2019
   
Prior
   
Revolving
Loans
Amortized
Cost Basis
   
Total
 
Consumer - Automobile
   
-
     
192
     
114
     
34
     
4
     
29
     
-
     
373
 
Consumer - Other
   
-
     
-
     
2
     
-
     
-
     
2
     
-
     
4
 
Other (1)
   
72
     
-
     
-
     
-
     
-
     
-
     
-
     
72
 
Total
 
$
72
   
$
192
   
$
116
   
$
34
   
$
4
   
$
31
   
$
-
   
$
449
 
(1)
Gross charge-offs of other loans for the first three months ended March 31, 2023 included $72 thousand of demand deposit overdrafts that originated in 2023.

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

14

Prior to the adoption of ASC 326

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

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

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

(1)
For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
(2)
For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.


As of December 31, 2022, the Company measured the amount of impairment by evaluating loans either in their collective homogenous pools or individually. The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the period presented. The average balances are calculated based on daily average balances.
Impaired Loans by Class
                           
For the Year Ended
 
   
As of December 31, 2022
   
December 31, 2022
 
(Dollars in thousands)
 
Unpaid Principal
Balance
   
Without
Valuation
Allowance
   
With Valuation
Allowance
   
Associated
Allowance
   
Average
Recorded
Investment
   
Interest Income
Recognized
 
Mortgage loans on real estate:
                                   
Residential 1-4 family
 
$
285
   
$
44
   
$
235
   
$
21
   
$
282
   
$
7
 
Commercial
   
430
     
55
     
358
     
3
     
420
     
-
 
Construction
   
1,321
     
829
     
191
     
6
     
1,208
     
3
 
Total mortgage loans on real estate
   
2,036
     
928
     
784
     
33
     
1,910
     
10
 
Commercial and industrial loans
   
144
     
144
     
-
     
-
     
144
     
5
 
Total
 
$
2,180
   
$
1,072
   
$
784
   
$
33
   
$
2,054
   
$
15
 

15

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


Credit Quality Information
 As of December 31, 2022
(dollars in thousands)
 
Pass
   
OAEM
   
Substandard
   
Total
 
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
169,094
   
$
-    
$
154    
$
169,248  
Commercial - owner occupied
   
184,301
      285       -       184,586  
Commercial - non-owner occupied
   
245,277
      -       -       245,277  
Multifamily
   
26,675
      -       -       26,675  
Construction
   
76,999
      -       945       77,944  
Second mortgages
   
8,828
      -       -       8,828  
Equity lines of credit
   
54,340
      -       -       54,340  
Total mortgage loans on real estate
 
$
765,514
   
$
285    
$
1,099    
$
766,898  
Commercial and industrial loans
   
72,434
      -       144       72,578  
Consumer automobile loans
   
162,738
      -       280       163,018  
Other consumer loans
   
22,251
      -       -       22,251  
Other
   
2,340
      -       -       2,340  
Total
 
$
1,025,277
   
$
285    
$
1,523    
$
1,027,085  

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

For the Year ended December 31, 2022

(Dollars in thousands)
 
Commercial
and Industrial
   
Real Estate
Construction
   
Real Estate -
Mortgage (1)
   
Real Estate -
Commercial
   
Consumer (2)
   
Other
   
Unallocated
   
Total
 
Allowance for loan losses:
                                               
Balance, beginning
 
$
683
   
$
459
   
$
2,390
   
$
4,787
   
$
1,362
   
$
184
   
$
-
   
$
9,865
 
Charge-offs
   
(297
)
   
-
     
(25
)
   
-
     
(1,368
)
   
(332
)
   
-
     
(2,022
)
Recoveries
   
134
     
-
     
61
     
22
     
648
     
112
     
-
     
977
 
Provision for loan losses
   
153
     
93
     
149
     
(310
)
   
1,423
     
192
     
6
     
1,706
 
Ending Balance
 
$
673
   
$
552
   
$
2,575
   
$
4,499
   
$
2,065
   
$
156
   
$
6
   
$
10,526
 
                                                                 
Individually evaluated for impairment
 
$
-
   
$
6
   
$
21
   
$
3
   
$
-
   
$
-
   
$
-
   
$
30
 
Collectively evaluated for impairment
   
673
     
546
     
2,554
     
4,496
     
2,065
     
156
     
6
     
10,496
 
                                                                 
Ending Balance
 
$
673
   
$
552
   
$
2,575
   
$
4,499
   
$
2,065
   
$
156
   
$
6
   
$
10,526
 
                                                                 
Loans Balances:
                                                               
Individually evaluated for impairment
   
144
     
1,020
     
279
     
413
     
-
     
-
     
-
     
1,856
 
Collectively evaluated for impairment
   
72,434
     
76,924
     
258,812
     
429,450
     
185,269
     
2,340
     
-
     
1,025,229
 
Ending Balance
 
$
72,578
   
$
77,944
   
$
259,091
   
$
429,863
   
$
185,269
   
$
2,340
   
$
-
   
$
1,027,085
 
(1)
The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.
(2)
The consumer segment includes consumer automobile loans.

Note 4. Leases

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

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

The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets. There were no new leases executed during the first three months of 2023. The following tables present information about the Company’s leases:

16

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

   
Three Months Ended March 31,
 
Lease cost (in thousands)
 
2023
   
2022
 
Operating lease cost
 
$
101
   
$
82
 
Total lease cost
 
$
101
   
$
82
 
                 
Cash paid for amounts included in the measurement of lease liabilities
 
$
91
   
$
84
 

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

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

Note 5. Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both March 31, 2023 and December 31, 2022. 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 $1.3 million and $1.4 million at March 31, 2023 and December 31, 2022, respectively. The expected terms of these investments and the related tax benefits run through 2033. There were no additional capital calls expected for the funds at March 31, 2023.

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

     Three Months Ended  
   
March 31,
 
(dollars in thousands)
 
2023
   
2022
 
Tax credits and other benefits
           
Amortization of operating losses
 
$
92
   
$
51
 
Tax benefit of operating losses*
    19
      11
 
Tax credits
   
77
     
89
 
Total tax benefits
 
$
96
   
$
100
 

* Computed using a 21% tax rate.

Note 6. Borrowings

Short-Term 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, 2023 and December 31, 2022, the remaining credit available from these lines totaled $100.0 million and $103.6 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $331.6 million and $346.5 as of March 31, 2023 and December 31, 2022, respectively.

17

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

(dollars in thousands)
 
March 31, 2023
   
December 31, 2022
 
Federal funds purchased
  $
-     $
11,378  
Overnight repurchase agreements
 

4,517
   
4,987  
Federal Home Loan Bank advances
    72,500       46,100  
Total short-term borrowings
 
$
77,017
   
$
62,465
 
                 
Maximum month-end outstanding balance
 
$
84,360
   
$
62,465
 
Average outstanding balance during the period
 
$
60,585
   
$
11,776
 
Average interest rate (year-to-date)
   
4.38
%
    2.34 %
Average interest rate at end of period
   
4.58
%
   
4.58
%

Long-Term Borrowings
At December 31, 2022 the Company had fully repaid the borrowings under the FRB’s PPPLF.

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

Note 7. Commitments and Contingencies

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

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

The following financial instruments whose contract amounts represent credit risk were outstanding at March 31, 2023 and December 31, 2022:


 
March 31,
   
December 31,
 
(dollars in thousands)
 
2023
   
2022
 
Commitments to extend credit:
           
Home equity lines of credit
 
$
92,012
   
$
87,722
 
Commercial real estate, construction and development loans committed but not funded
   
61,751
     
67,107
 
Other lines of credit (principally commercial)
   
45,345
     
51,742
 
Total
 
$
199,108
   
$
206,571
 
                 
Letters of credit
 
$
437
   
$
904
 

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 and non-employee directors 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, 2023 only restricted stock has been granted under the Incentive Stock Plan.

18

Restricted stock activity for the three months ended March 31, 2023 is summarized below:

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

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 0.95 years.

There was no restricted stock granted during the three months ended March 31, 2023 and 2022, respectively.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $386 thousand as of March 31, 2023 and $278 thousand as of March 31, 2022.

Stock-based compensation expense was $107 thousand and $71 thousand for the three months ended March 31, 2023 and 2022, 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 2022 and for the first three months of 2023.

Total stock purchases under the ESPP amounted to 1,248 shares during the three months ended March 31, 2023. At March 31, 2023, the Company had 220,530 remaining shares reserved for issuance under the ESPP.

Note 9. Stockholders’ Equity and Earnings per Common Share

Stockholders’ Equity – Accumulated Other Comprehensive Income (Loss)
There were no amounts reclassified out of accumulated other comprehensive income (loss), by category, during the three month periods ended March 31, 2023 or 2022, respectively.

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
(Loss)
Income
 
             
Three Months Ended March 31, 2023
           
Balance at beginning of period
 
$
(20,767
)
 
$
(20,767
)
Net other comprehensive income
   
2,332
     
2,332
 
Balance at end of period
 
$
(18,435
)
 
$
(18,435
)
                 
Three Months Ended March 31, 2022
               
Balance at beginning of period
 
$
1,675
   
$
1,675
 
Net other comprehensive loss
   
(11,133
)
   
(11,133
)
Balance at end of period
 
$
(9,458
)
 
$
(9,458
)

19

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, 2023
 
(dollars in thousands)
 
Pretax
   
Tax
   
Net-of-Tax
 
Unrealized gains on available-for-sale securities:
                 
Unrealized holding gains arising during the period
 
$
2,952
 
$
620
 
$
2,332
 
                       
Total change in accumulated other comprehensive income, net
 
$
2,952
 
$
620
 
$
2,332

   
Three Months Ended March 31, 2022
 
(dollars in thousands)
 
Pretax
   
Tax
   
Net-of-Tax
 
Unrealized losses on available-for-sale securities:
                 
Unrealized holding losses arising during the period
 
$
(14,093
)
 
$
(2,960
)
 
$
(11,133
)
                         
Total change in accumulated other comprehensive loss, net
 
$
(14,093
)
 
$
(2,960
)
 
$
(11,133
)

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 ESPP.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2023 and 2022:

(dollars in thousands except per share data)
 
Net Income Available to
Common Shareholders
(Numerator)
   
Weighted Average
Common Shares
(Denominator)
   
Per Share
Amount
 
Three Months Ended March 31, 2023
                 
Net income, basic
 
$
3,083
     
5,000
   
$
0.62
 
Potentially dilutive common shares - employee stock purchase program
   
-
     
-
     
-
 
Diluted
 
$
3,083
     
5,000
   
$
0.62
 
                         
Three Months Ended March 31, 2022
                       
Net income, basic
 
$
2,031
     
5,186
   
$
0.39
 
Potentially dilutive common shares - employee stock purchase program
   
-
     
-
     
-
 
Diluted
 
$
2,031
     
5,186
   
$
0.39
 

The Company had no antidilutive shares outstanding in the three months ended March 31, 2023 and 2022, 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.

20

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

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


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

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

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

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

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

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

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

21

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

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

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

Assets Measured at Fair Value on a Nonrecurring Basis
Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

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

22

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

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

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

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

         
Carrying Value at December 31, 2022
 
(dollars in thousands)
 
Fair Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans
                       
Mortgage loans on real estate:
                       
Construction
  $ 110     $ -     $ -     $ 110  
Total
  $ 110     $ -     $ -     $ 110  
                                 
Loans
                               
Loans held for sale
 
$
421
   
$
-
   
$
421
   
$
-
 

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


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

23

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

         
Fair Value Measurements at March 31, 2023 Using
 
(dollars in thousands)
 
Carrying Value
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets
                       
Cash and cash equivalents
 
$
29,069
   
$
29,069
   
$
-
   
$
-
 
Securities available-for-sale
   
223,913
     
-
     
223,913
     
-
 
Restricted securities
   
4,479
     
-
     
4,479
     
-
 
Loans held for sale
   
325
     
-
     
325
     
-
 
Loans, net
   
1,069,714
     
-
     
-
     
1,047,941
 
Derivatives
                               
Interest rate swap on loans
    1,478       -       1,478       -  
Bank owned life insurance
   
34,304
     
-
     
34,304
     
-
 
Accrued interest receivable
   
4,427
     
-
     
4,427
     
-
 
                                 
Liabilities
                               
Deposits
 
$
1,199,615
   
$
-
   
$
1,200,738
   
$
-
 
Overnight repurchase agreements
   
4,517
     
-
     
4,517
     
-
 
Federal Home Loan Bank advances
    72,500       -       72,500       -  
Long term borrowings
    29,570
      -
      25,356
      -
 
Derivatives
                               
Interest rate swap on loans
    1,478       -       1,478       -  
Accrued interest payable
   
725
     
-
     
725
     
-
 

         
Fair Value Measurements at December 31, 2022 Using
 
(dollars in thousands)
 
Carrying Value
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets
                       
Cash and cash equivalents
 
$
19,250
   
$
19,250
   
$
-
   
$
-
 
Securities available-for-sale
   
225,518
     
-
     
225,518
     
-
 
Restricted securities
   
3,434
     
-
     
3,434
     
-
 
Loans held for sale
   
421
     
-
     
421
     
-
 
Loans, net
   
1,016,559
     
-
     
-
     
996,807
 
Derivatives
                               
Interest rate lock
    23       -       23       -  
Interest rate swap on loans
    1,447       -       1,447       -  
Bank owned life insurance
   
34,049
     
-
     
34,049
     
-
 
Accrued interest receivable
   
4,253
     
-
     
4,253
     
-
 
                                 
Liabilities
                               
Deposits
 
$
1,156,019
   
$
-
   
$
1,179,631
   
$
-
 
Federal funds purchased
    11,378       -       -       -  
Overnight repurchase agreements
   
4,987
     
-
     
4,536
     
-
 
Federal Reserve Bank borrowings
   
46,100
     
-
     
480
     
-
 
Long term borrowings
    29,538       -       29,657       -  
Derivatives
                               
Interest rate swap on loans
    1,447       -       1,447       -  
Accrued interest payable
   
834
     
-
     
834
     
-
 

24

Note 11. Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: the Bank, Wealth, and the Company (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. Wealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly interest and dividends received from the Bank and Wealth. The Company has no other segments. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.

Information about reportable segments, and reconciliation of such information to the Consolidated Financial Statements as of and for the three months ended March 31, 2023 and 2022 follows:

   
Three Months Ended March 31, 2023
 
(dollars in thousands)
 
Bank
   
Wealth
   
Parent
   
Eliminations
   
Consolidated
 
Revenues
                             
Interest and dividend income
 
$
15,121
   
$
32
   
$
3,505
   
$
(3,505
)
 
$
15,153
 
Income from fiduciary activities
   
-
     
1,116
     
-
     
-
     
1,116
 
Other income
   
2,066
     
254
     
50
     
(65
)
   
2,305
 
Total operating income
   
17,187
     
1,402
     
3,555
     
(3,570
)
   
18,574
 
                                         
Expenses
                                       
Interest expense
   
2,045
     
-
     
295
     
-
     
2,340
 
Provision for credit losses
   
376
     
-
     
-
     
-
     
376
 
Salaries and employee benefits
   
6,085
     
1,074
     
204
     
-
     
7,363
 
Other expenses
   
4,481
     
304
     
85
     
(65
)
   
4,805
 
Total operating expenses
   
12,987
     
1,378
     
584
     
(65
)
   
14,884
 
                                         
Income before taxes
   
4,200
     
24
     
2,971
     
(3,505
)
   
3,690
 
                                         
Income tax expense (benefit)
   
713
     
6
     
(112
)
   
-
     
607
 
                                         
Net income
 
$
3,487
   
$
18
   
$
3,083
   
$
(3,505
)
 
$
3,083
 
                                         
Capital expenditures
 
$
130
   
$
-
   
$
-
   
$
-
   
$
130
 
                                         
Total assets
 
$
1,407,919
   
$
7,093
   
$
132,434
   
$
(131,295
)
 
$
1,416,151
 
25


   
Three Months Ended March 31, 2022
 
(dollars in thousands)
 
Bank
   
Wealth
   
Parent
   
Eliminations
   
Consolidated
 
Revenues
                             
Interest and dividend income
 
$
10,456
   
$
14
   
$
850
   
$
(850
)
 
$
10,470
 
Income from fiduciary activities
   
-
     
1,072
     
-
     
-
     
1,072
 
Other income
   
2,179
     
279
     
50
     
(65
)
   
2,443
 
Total operating income
   
12,635
     
1,365
     
900
     
(915
)
   
13,985
 
                                         
Expenses
                                       
Interest expense
   
538
     
-
     
295
     
-
     
833
 
Provision for loan losses
   
101
     
-
     
-
     
-
     
101
 
Salaries and employee benefits
   
5,429
     
848
     
145
     
-
     
6,422
 
Other expenses
   
3,888
     
294
     
174
     
(65
)
   
4,291
 
Total operating expenses
   
9,956
     
1,142
     
614
     
(65
)
   
11,647
 
                                         
Income before taxes
   
2,679
     
223
     
286
     
(850
)
   
2,338
 
                                         
Income tax expense (benefit)
   
377
     
48
     
(118
)
   
-
     
307
 
                                         
Net income
 
$
2,302
   
$
175
   
$
404
   
$
(850
)
 
$
2,031
 
                                         
Capital expenditures
 
$
197
   
$
-
   
$
-
   
$
-
   
$
197
 
                                         
Total assets
 
$
1,317,803
   
$
7,125
   
$
137,819
   
$
(137,362
)
 
$
1,325,385
 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 2022 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.

26

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

27

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

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

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

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

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

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

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

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

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

28

Results of Operations

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

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

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

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

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

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

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

29

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

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

   
For the quarters ended March 31,
 
   
2023
   
2022
 
       
Average
Balance
       
Interest
Income/
Expense
         
Yield/
Rate**
         
Average
Balance
       
Interest
Income/
Expense
         
Yield/
Rate**
 
   
(dollars in thousands)
 
ASSETS
                                   
Loans*
 
$
1,055,878
   
$
13,042
     
5.01
%
 
$
863,897
   
$
9,196
     
4.32
%
Investment securities:
                                               
Taxable
   
186,292
     
1,764
     
3.84
%
   
201,940
     
989
     
1.99
%
Tax-exempt*
   
38,206
     
268
     
2.85
%
   
37,007
     
265
     
2.90
%
Total investment securities
   
224,498
     
2,032
     
3.67
%
   
238,947
     
1,254
     
2.13
%
Interest-bearing due from banks
   
6,596
     
64
     
3.94
%
   
137,601
     
73
     
0.22
%
Federal funds sold
   
577
     
6
     
4.23
%
   
4,441
     
1
     
0.09
%
Other investments
   
3,632
     
66
     
7.32
%
   
1,142
     
14
     
4.90
%
Total earning assets
   
1,291,181
   
$
15,210
     
4.78
%
   
1,246,028
   
$
10,538
     
3.43
%
Allowance for loan losses
   
(11,339
)
                   
(9,989
)
               
Other non-earning assets
   
104,511
                     
93,796
                 
Total assets
 
$
1,384,353
                   
$
1,329,835
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
                                   
Interest-bearing transaction accounts
 
$
70,254
   
$
3
     
0.02
%
 
$
75,129
   
$
3
     
0.02
%
Money market deposit accounts
   
428,941
     
842
     
0.80
%
   
389,368
     
163
     
0.17
%
Savings accounts
   
115,880
     
9
     
0.03
%
   
126,258
     
10
     
0.03
%
Time deposits
   
148,563
     
537
     
1.47
%
   
167,859
     
361
     
0.87
%
Total time and savings deposits
   
763,638
     
1,391
     
0.74
%
   
758,614
     
537
     
0.29
%
Federal funds purchased, repurchase
agreements and other borrowings
       
7,959
          
37
          
1.91
 
%
       
4,589
          
1
          
0.10
 
%
Federal Home Loan Bank advances
   
52,626
     
617
     
4.69
%
   
-
     
-
     
0.00
%
Long term borrowings
   
29,551
     
295
     
4.00
%
   
29,419
     
295
     
4.01
%
Total interest-bearing liabilities
   
853,774
     
2,340
     
1.11
%
   
792,622
     
833
     
0.43
%
Demand deposits
   
429,928
                     
414,080
                 
Other liabilities
   
8,347
                     
5,368
                 
Stockholders’ equity
   
100,453
                     
117,765
                 
Total liabilities and stockholders’ equity
 
$
1,392,502
                   
$
1,329,835
                 
Net interest margin
         
$
12,870
     
4.04
%
         
$
9,705
     
3.16
%
*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $57 thousand and $68 thousand for March 31, 2023 and 2022, respectively.
**Annualized
 
Interest income and expense are affected by fluctuations in interest rates, by changes in volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income.  The Company calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not show separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
30

TABLE 2: VOLUME AND RATE ANALYSIS*

   
Three months ended March 31, 2023 from 2022
Increase (Decrease)
 
     
   
Due to Changes in:
       
(dollars in thousands)
 
Volume
   
Rate
   
Total
 
EARNING ASSETS
                 
Loans*
 
$
2,044
   
$
1,802
   
$
3,846
 
Investment securities:
                       
Taxable
   
(77
)
   
852
     
775
 
Tax-exempt*
   
9
     
(6
)
   
3
 
Total investment securities
   
(68
)
   
846
     
778
 
                         
Federal funds sold
   
(1
)
   
6
     
5
 
Other investments**
   
(39
)
   
82
     
43
 
Total earning assets
   
1,936
     
2,736
     
4,672
 
                         
INTEREST-BEARING LIABILITIES
                       
Interest-bearing transaction accounts
   
-
     
-
     
-
 
Money market deposit accounts
   
17
     
662
     
679
 
Savings accounts
   
(1
)
   
-
     
(1
)
Time deposits
   
(41
)
   
217
     
176
 
Total time and savings deposits
   
(25
)
   
879
     
854
 
Federal funds purchased, repurchase
agreements and other borrowings
       
1
          
35
          
36
  
Federal Home Loan Bank advances
   
-
     
617
     
617
 
Long term borrowings
   
1
     
(1
)
   
-
 
Total interest-bearing liabilities
   
(23
)
   
1,530
     
1,507
 
                         
Change in net interest income
 
$
1,959
   
$
1,206
   
$
3,165
 
* Computed on a fully tax-equivalent basis using a 21% rate.
** Other investments include interest-bearing balances due from banks.

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

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

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

31

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

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

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

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

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

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

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

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

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

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

32

TABLE 3: SECURITIES PORTFOLIO

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

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

TABLE 4: MATURITY OF SECURITIES

   
1 year or less
                         
(Dollars in thousands)
 
2023
   
1-5 years
   
5-10 years
   
Over 10 years
   
Total
 
U.S. Treasury securities
 
$
-
   
$
7,748
   
$
-
   
$
-
   
$
7,748
 
Weighted average yield
   
-
     
2.75
%
   
-
     
-
     
2.75
%
                                         
Obligations of U.S. Government agencies
 
$
779
   
$
4,418
   
$
2,788
   
$
31,756
   
$
39,741
 
Weighted average yield
   
0.73
%
   
2.22
%
   
4.25
%
   
5.73
%
   
5.14
%
                                         
Obligations of state and policitcal subdivisions
 
$
164
   
$
1,271
   
$
18,786
   
$
40,432
   
$
60,653
 
Weighted average yield
   
0.75
%
   
2.95
%
   
2.22
%
   
2.72
%
   
2.57
%
                                         
Mortgage-backed securities
 
$
-
   
$
5,321
   
$
10,994
   
$
72,381
   
$
88,696
 
Weighted average yield
   
-
     
3.92
%
   
2.29
%
   
2.93
%
   
2.91
%
                                         
Money market investments
 
$
1,661
   
$
-
   
$
-
   
$
-
   
$
1,661
 
Weighted average yield
   
4.28
%
   
-
     
-
     
-
     
4.28
%
                                         
Corporate bonds and other securities
 
$
484
   
$
-
   
$
24,930
   
$
-
   
$
25,414
 
Weighted average yield
   
3.44
%
   
-
     
4.44
%
   
-
     
4.44
%
                                         
Federal Home Loan Bank stock
 
$
-
   
$
-
   
$
-
   
$
3,754
   
$
3,754
 
Weighted average yield
   
-
     
-
     
-
     
6.37
%
   
6.37
%
                                         
Federal Reserve Bank stock
 
$
-
   
$
-
   
$
-
   
$
683
   
$
683
 
Weighted average yield
   
-
     
-
     
-
     
6.00
%
   
6.00
%
                                         
Community Bankers’ Bank stock
 
$
-
   
$
-
   
$
-
   
$
42
   
$
42
 
Weighted average yield
   
-
     
-
     
-
     
0.00
%
   
0.00
%
Total Securities
 
$
3,088
   
$
18,758
   
$
57,498
   
$
149,048
   
$
228,392
 
Weighted average yield
   
2.99
%
   
2.97
%
   
3.29
%
   
3.54
%
   
3.43
%

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

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

33

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

TABLE 5: LOAN PORTFOLIO

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

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

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

TABLE 6: MATURITY/REPRICING SCHEDULE OF LOAN PORTFOLIO

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

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

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

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

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

34

TABLE 7: NONPERFORMING ASSETS

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

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

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

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

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

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

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

35

TABLE 8: ALLOWANCE FOR CREDIT LOSSES ON LOANS

For the three months ended March 31, 2023
 
(Dollars in thousands)
 
Commercial
and Industrial
   
Real Estate Construction
   
Real Estate -
Mortgage (1)
   
Real Estate -
Commercial
   
Consumer
   
Other
   
Unallocated
   
Total
 
Allowance for credit losses on loans:
                                           
Balance, beginning
 
$
673
   
$
552
   
$
2,575
   
$
4,499
   
$
2,065
   
$
156
   
$
6
   
$
10,526
 
Day 1 impact of adoption of CECL
   
(11
)
   
19
     
87
     
1,048
     
(365
)
   
(137
)
   
-
     
641
 
Charge-offs
   
-
     
-
     
-
     
-
     
(377
)
   
(72
)
   
-
     
(449
)
Recoveries
   
8
     
-
     
11
     
-
     
237
     
14
     
-
     
270
 
Provision for credit losses
   
(6
)
   
82
     
199
     
70
     
81
     
143
     
(6
)
   
563
 
Ending Balance
 
$
664
   
$
653
   
$
2,872
   
$
5,617
   
$
1,641
   
$
104
   
$
-
   
$
11,551
 
                                                                 
Average loans
   
77,014
     
81,771
     
268,620
     
425,751
     
200,020
     
2,702
             
1,055,878
 
Ratio of net charge-offs to average
loans
   
-0.01
%
   
0.00
%
   
0.00
%
   
0.00
%
   
0.07
%
   
2.15
%
           
0.02
%

For the three months ended March 31, 2022
 
(Dollars in thousands)
 
Commercial
and Industrial
   
Real Estate Construction
   
Real Estate
- Mortgage (1)

 
Real Estate -
Commercial
   
Consumer
   
Other
   
Unallocated
   
Total
 
Allowance for loan losses:
               
                             
Balance, beginning
 
$
683
   
$
459
   
$
2,390

 
$
4,787
   
$
1,362
   
$
184
   
$
-
   
$
9,865
 
Charge-offs
   
(296
)
   
-
     
-

   
-
     
(307
)
   
(97
)
   
-
     
(700
)
Recoveries
   
77
     
-
     
30

   
-
     
116
     
31
     
-
     
254
 
Provision for loan losses
   
72
     
45
     
14

   
(187
)
   
170
     
(13
)
   
-
     
101
 
Ending Balance
 
$
536
   
$
504
   
$
2,434

 
$
4,600
   
$
1,341
   
$
105
   
$
-
   
$
9,520
 
                       
                                       
Average loans
   
67,002
     
60,513
     
212,063

   
398,547
     
116,691
     
7,375
             
862,191
 
Ratio of net charge-offs to average
loans
   
0.33
%
   
0.00
%
   
-0.01
%
   
0.00
%
   
0.16
%
   
0.89
%
           
0.05
%

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

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

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

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

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

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

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

36

TABLE 10: DEPOSITS

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

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

TABLE 11: MATURITIES OF UNINSURED TIME DEPOSITS

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

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

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

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

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

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

37

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

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

TABLE 12: REGULATORY CAPITAL

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

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

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

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

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

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

38

TABLE 13: LIQUIDITY SOURCES AND USES

   
March 31,
 
   
2023
 
(dollars in thousands)
 
Total
   
In Use
   
Available
 
Sources:
                 
Federal funds lines of credit
 
$
100,000
   
$
-
   
$
100,000
 
Federal Home Loan Bank advances
   
404,145
     
72,500
     
331,645
 
Federal funds sold & balances at the Federal Reserve
                   
11,234
 
Securities, available for sale and unpledged at fair value
                   
141,004
 
Total short-term funding sources
                 
$
583,883
 
                         
Uses: (1)
                       
Unfunded loan commitments and lending lines of credit
                   
80,876
 
Letters of credit
                   
131
 
Total potential short-term funding uses
                   
81,007
 
Liquidity coverage ratio
                   
720.8
%

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

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

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

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

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

39

TABLE 14: Non-GAAP FINANCIAL MEASURES

   
Three Months Ended March 31,
 
(dollar in thousands, except share and per share data)
 
2023
   
2022
 
Fully Taxable Equivalent Net Interest Income
           
Net interest income (GAAP)
 
$
12,813
   
$
9,637
 
FTE adjustment
   
57
     
68
 
Net interest income (FTE) (non-GAAP)
 
$
12,870
   
$
9,705
 
Noninterest income (GAAP)
   
3,421
     
3,515
 
Total revenue (FTE) (non-GAAP)
 
$
16,291
   
$
13,220
 
Noninterest expense (GAAP)
   
12,168
     
10,713
 
                 
Average earning assets
 
$
1,291,181
   
$
1,246,028
 
Net interest margin
   
4.02
%
   
3.14
%
Net interest margin (FTE) (non-GAAP)
   
4.04
%
   
3.16
%
                 
Efficiency ratio
   
74.95
%
   
81.46
%
Efficiency ratio (FTE) (non-GAAP)
   
74.69
%
   
81.04
%

Tangible Book Value Per Share
 
March 31, 2023
   
December 31, 2022
 
Total Stockholders Equity (GAAP)
 
$
102,598
   
$
98,734
 
Less goodwill
   
1,650
     
1,650
 
Less core deposit intangible
   
220
     
231
 
Tangible Stockholders Equity (non-GAAP)
 
$
100,728
   
$
96,853
 
Shares issued and outstanding, including nonvested restricted stock
   
5,000,331
     
4,999,083
 
                 
Book value per share
 
$
20.52
   
$
19.75
 
Tangible book value per share
 
$
20.14
   
$
19.37
 

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

40

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


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

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

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

the sufficiency of liquidity

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

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

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

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

effectiveness of expense control initiatives

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

the Company’s liquidity and capital positions

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

deposit flows

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

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

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

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

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

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

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

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

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

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

the level of net charge-offs on loans

performance of the Company’s dealer lending program

the Company’s branch realignment initiatives

41


the strength of the Company’s counterparties

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

demand for financial services in the Company’s market area

implementation of new technologies

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

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

reliance on third parties for key services

cyber threats, attacks or events

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

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

the use of inaccurate assumptions in management’s modeling systems

technological risks and developments

the commercial and residential real estate markets

the demand in the secondary residential mortgage loan markets

expansion of the Company’s product offerings

effectiveness of expense reduction plans

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

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.
Controls and Procedures.

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

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

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

42

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

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings.

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

Item 1A.
Risk Factors.

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

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

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

Item 3.
Defaults Upon Senior Securities.

None.

Item 4.
Mine Safety Disclosures.

None.

Item 5.
Other Information.

None.

43

Item 6.
Exhibits.

Exhibit
No.
Description
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)
   
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)
   
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)
   
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for March 31, 2023), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)
   
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in Inline XBRL (included with Exhibit 101)

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SIGNATURES

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


OLD POINT FINANCIAL CORPORATION

 
May 15, 2023
/s/Robert F. Shuford, Jr.

Robert F. Shuford, Jr.

Chairman, President & Chief Executive Officer

(Principal Executive Officer)

 
May 15, 2023
/s/Elizabeth T. Beale

Elizabeth T. Beale

Chief Financial Officer & Senior Vice President/Finance

(Principal Financial & Accounting Officer)


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