Old Point Financial - 10-Q quarterly report FY2023 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

☐	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 per share	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.

The number of shares outstanding of the registrant’s common stock, ($5.00 par value per share) as of November 8, 2023 was 5,038,066 shares.

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

ITEM		PAGE
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	1

	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2023 and 2022	2

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2023 and 2022	3

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2023 and 2022	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2023 and 2022	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

	Signatures	48

GLOSSARY OF ACRONYMS AND 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
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
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.

Index

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

Old Point Financial Corporation and Subsidiaries

ConsolidatedBalance Sheets

	September 30,			December 31,
(dollars in thousands, except share data)	2023			2022
	(unaudited)
Assets

Cash and due from banks	$	14,501		$	15,670
Interest-bearing due from banks		62,508			3,580
Federal funds sold		632			-
Cash and cash equivalents		77,641			19,250
Securities available-for-sale, at fair value		200,617			225,518
Restricted securities, at cost		5,176			3,434
Loans held for sale		292			421
Loans, net		1,070,834			1,016,559
Premises and equipment, net		30,262			31,008
Premises and equipment, held for sale		344			987
Bank-owned life insurance		34,826			34,049
Goodwill		1,650			1,650
Core deposit intangible, net		198			231
Other assets		25,223			22,228
Total assets	$	1,447,063		$	1,355,335

Liabilities & Stockholders' Equity

Deposits:
Noninterest-bearing deposits	$	348,316		$	418,582
Savings deposits		619,799			584,527
Time deposits		269,493			152,910
Total deposits		1,237,608			1,156,019
Overnight repurchase agreements		1,323			4,987
Federal funds purchased and other short-term borrowings		-			11,378
Federal Home Loan Bank advances		69,450			46,100
Long-term borrowings		29,636			29,538
Accrued expenses and other liabilities		9,520			8,579
Total liabilities		1,347,537			1,256,601

Stockholders' equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,038,066 and 4,999,083 shares outstanding (includes 54,593and 46,989 of nonvested restricted stock, respectively)		24,917			24,761
Additional paid-in capital		16,957			16,593
Retained earnings		81,292			78,147
Accumulated other comprehensive loss, net		(23,640	)		(20,767	)
Total stockholders' equity		99,526			98,734
Total liabilities and stockholders' equity	$	1,447,063		$	1,355,335

See accompanying notes to consolidated financial statements.

Index

Old Point Financial Corporation and Subsidiaries

ConsolidatedStatements ofIncome

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(unaudited, dollars in thousands, except share and per share data)	2023		2022		2023			2022
Interest and dividend income:
Loans, including fees	$	14,311	$	10,506	$	41,537		$	29,173
Due from banks		838		252		995			533
Federal funds sold		9		11		24			18
Securities:
Taxable		1,788		1,297		5,324			3,409
Tax-exempt		159		272		580			732
Dividends and interest on all other securities		84		30		229			58
Total interest and dividend income		17,189		12,368		48,689			33,923

Interest expense:
Checking and savings deposits		2,060		147		4,483			471
Time deposits		2,456		312		4,412			993
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		-		43		39			45
Federal Home Loan Bank advances		952		-		2,532			-
Long-term borrowings		295		295		885			885
Total interest expense		5,763		797		12,351			2,394
Net interest income		11,426		11,571		36,338			31,529
Provision for credit losses		505		402		1,242			1,073
Net interest income after provision for credit losses		10,921		11,169		35,096			30,456

Noninterest income:
Fiduciary and asset management fees		1,012		953		3,282			3,086
Service charges on deposit accounts		751		795		2,297			2,278
Other service charges, commissions and fees		1,119		1,143		3,255			3,339
Bank-owned life insurance income		263		227		776			653
Mortgage banking income		144		86		351			419
Gain (loss) on sale of available-for-sale securities, net		30		-		(134	)		-
Loss on sale of repossessed assets		-		-		(69	)		-
Gain on sale of fixed assets		-		-		200			-
Other operating income		163		161		422			605
Total noninterest income		3,482		3,365		10,380			10,380

Noninterest expense:
Salaries and employee benefits		7,830		6,821		23,236			19,854
Occupancy and equipment		1,241		1,184		3,691			3,488
Data processing		1,300		1,206		3,743			3,447
Customer development		159		136		373			298
Professional services		636		647		2,065			1,915
Employee professional development		257		230		780			769
Other taxes		251		212		698			637
ATM and other losses		154		112		563			226
Other operating expenses		1,053		1,017		3,047			2,734
Total noninterest expense		12,881		11,565		38,196			33,368
Income before income taxes		1,522		2,969		7,280			7,468
Income tax expense		160		427		1,033			1,003
Net income	$	1,362	$	2,542	$	6,247		$	6,465

Basic Earnings per Share:
Weighted average shares outstanding		5,037,558		5,015,712		5,020,269			5,095,716
Net income per share of common stock	$	0.27	$	0.51	$	1.24		$	1.27

Diluted Earnings per Share:
Weighted average shares outstanding		5,037,662		5,015,712		5,020,447			5,095,768
Net income per share of common stock	$	0.27	$	0.51	$	1.24		$	1.27

See accompanying notes to consolidated financial statements.

Index

Old Point Financial Corporation

ConsolidatedStatements ofComprehensive Income (Loss)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(unaudited, dollars in thousands)	2023			2022			2023			2022

Net income	$	1,362		$	2,542		$	6,247		$	6,465
Other comprehensive loss, net of tax
Net unrealized loss on available-for-sale securities		(3,859	)		(7,997	)		(2,979	)		(25,522	)
Reclassification for (gain) loss included in net income		(24	)		-			106			-
Other comprehensive loss, net of tax		(3,883	)		(7,997	)		(2,873	)		(25,522	)
Comprehensive income (loss)	$	(2,521	)	$	(5,455	)	$	3,374		$	(19,057	)

See accompanying notes to consolidated financial statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes inStockholders' 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			Loss			Total
Three Months Ended September 30, 2023

Balance at June 30, 2023		4,977,276		$	24,886		$	16,777		$	80,636		$	(19,757	)	$	102,542
Net income		-			-			-			1,362			-			1,362
Other comprehensive loss, net of tax		-			-			-			-			(3,883	)		(3,883	)
Employee Stock Purchase Plan share issuance		2,274			12			28			-			-			40
Restricted stock vested		3,923			19			(19	)		-			-			-
Share-based compensation expense		-			-			171			-			-			171
Cash dividends ($0.14 per share)		-			-			-			(706	)		-			(706	)

Balance at end of period		4,983,473		$	24,917		$	16,957		$	81,292		$	(23,640	)	$	99,526

Three Months Ended September 30, 2022

Balance at June 30, 2022		5,018,144		$	25,091		$	17,643		$	74,266		$	(15,850	)	$	101,150
Net income		-			-			-			2,542			-			2,542
Other comprehensive loss, net of tax		-			-			-			-			(7,997	)		(7,997	)
Employee Stock Purchase Plan share issuance		1,492			7			26			-			-			33
Common stock purchased		(69,000	)		(345	)		(1,340	)		-			-			(1,685	)
Restricted stock vested		-			-			-			-			-			-
Share-based compensation expense		-			-			121			-			-			121
Cash dividends ($0.13 per share)		-			-			-			(652	)		-			(652	)

Balance at end of period		4,950,636		$	24,753		$	16,450		$	76,156		$	(23,847	)	$	93,512

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

													Accumulated
	Shares of						Additional						Other
	Common			Common			Paid-in			Retained			Comprehensive
(dollars in thousands, except share and per share data)	Stock			Stock			Capital			Earnings			Income (Loss)			Total
Nine Months Ended September 30, 2023

Balance at December 31, 2022		4,952,094		$	24,761		$	16,593		$	78,147		$	(20,767	)	$	98,734
Net income		-			-			-			6,247			-			6,247
Other comprehensive loss, net of tax		-			-			-			-			(2,873	)		(2,873	)
Impact of adoption of ASC 326		-			-			-			(991	)		-			(991	)
Employee Stock Purchase Plan share issuance		5,453			27			74			-			-			101
Restricted stock vested		25,926			129			(129	)		-			-			-
Share-based compensation expense		-			-			419			-			-			419
Cash dividends ($0.42 per share)		-			-			-			(2,111	)		-			(2,111	)

Balance at end of period		4,983,473		$	24,917		$	16,957		$	81,292		$	(23,640	)	$	99,526

Nine Months Ended September 30, 2022

Balance at December 31, 2021		5,201,272		$	26,006		$	21,458		$	71,679		$	1,675		$	120,818
Net income		-			-			-			6,465			-			6,465
Other comprehensive loss, net of tax		-			-			-			-			(25,522	)		(25,522	)
Employee Stock Purchase Plan share issuance		4,307			21			78			-			-			99
Common stock purchased		(268,095	)		(1,340	)		(5,315	)		-			-			(6,655	)
Restricted stock vested		13,152			66			(66	)		-			-			-
Share-based compensation expense		-			-			295			-			-			295
Cash dividends ($0.39 per share)		-			-			-			(1,988	)		-			(1,988	)

Balance at end of period		4,950,636		$	24,753		$	16,450		$	76,156		$	(23,847	)	$	93,512

See accompanying notes to consolidated financial statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements ofCash Flows

	Nine Months Ended September 30,
(unaudited, dollars in thousands)	2023			2022
Operating activities:
Net income	$	6,247		$	6,465
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,631			1,550
Amortization of right of use lease asset		333			240
Accretion related to acquisition, net		33			10
Amortization of subordinated debt issuance costs		98			98
Provision for credit losses		1,242			1,073
Loss on sale of securities, net		134			-
Net amortization of securities		564			923
Decrease in loans held for sale, net		129			2,513
Net gain on disposal of premises and equipment		(200	)		-
Net gain on write-down/sale of repossessed assets		69			-
Income from bank owned life insurance		(776	)		(653	)
Stock compensation expense		419			295
Increase in other assets		(2,635	)		(287	)
Increase in accrued expenses and other liabilities		704			1,557
Net cash provided by operating activities		7,992			13,784

Investing activities:
Purchases of available-for-sale securities		(15,173	)		(47,543	)
Purchase of redemption of restricted securities, net		(681	)		(355	)
Proceeds from maturities and calls of available-for-sale securities		200			3,950
Proceeds from sales of available-for-sale securities		23,171			3,950
Paydowns on available-for-sale securities		11,308			13,195
Net increase in loans held for investment		(56,267	)		(112,521	)
Purchases of bank-owned life insurance		-			(2,500	)
Purchases of premises and equipment		(885	)		(969	)
Proceeds from sale of premises and equipment		839			-
Net cash used in investing activities		(37,488	)		(142,793	)

Financing activities:
(Decrease) increase in noninterest-bearing deposits		(70,266	)		15,716
Increase in savings deposits		35,272			5,789
Increase (decrease) in time deposits		116,583			(16,296	)
Decrease in federal funds purchased, repurchase agreements and other borrowings, net		(15,042	)		(555	)
Increase in Federal Home Loan Bank advances		347,850			-
Repayment of Federal Home Loan Bank advances		(324,500	)		-
Repayment of Federal Reserve Bank borrowings		-			(480	)
Proceeds from Employee Stock Purchase Plan issuance		101			99
Repurchase of common stock		-			(6,655	)
Cash dividends paid on common stock		(2,111	)		(1,988	)
Net cash provided by (used in) financing activities		87,887			(4,370	)

Net increase (decrease) in cash and cash equivalents		58,391			(133,379	)
Cash and cash equivalents at beginning of period		19,250			187,922
Cash and cash equivalents at end of period	$	77,641		$	54,543

Supplemental discolsures of cash flow information
Cash payments for:
Interest	$	11,399		$	2,609

Supplemental schedule of noncash transactions
Unrealized gain (loss) on securities available-for-sale	$	(3,636	)	$	(32,307	)
Former bank property transferred from fixed assets to held for sale assets	$	-		$	345
Right of use lease asset and liability	$	-		$	327
Impact of adoption of ASC 326	$	991		$	-

See accompanying notes to consolidated financial statements.

Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

The Company

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 September 30, 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. In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at September 30, 2023 and December 31, 2022, the statements of income, comprehensive income (loss), and changes in stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the statements of cash flows for the nine months ended September 30, 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 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 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 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 $1.0 million.

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 other-than-temporary impairment had previously been recognized or that required an ACL.

Index

The following table illustrates the impact of ASC 326.

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

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

Loans Held for Investment

The Company makes commercial, consumer, and mortgage loans to customers. The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the ACL. 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 daysor 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 enters commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.

Allowance for Credit Losses on Loans

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

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

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

Index

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

Reserve for Unfunded Commitments

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

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACLL, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $3.2 million on loans held for investment as of September 30, 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 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 ACL 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 ACL is recognized in other comprehensive income (loss).

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

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

Index

Note 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 September 30, 2023, is in accordance with ASC 326. All securities information presented as of December 31, 2022, or a prior date 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:

	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	4,075	$	-	$	(298	)	$	3,777
Obligations of U.S. Government agencies		45,160		182		(787	)		44,555
Obligations of state and political subdivisions		58,394		-		(11,739	)		46,655
Mortgage-backed securities		93,016		-		(13,238	)		79,778
Money market investments		1,906		-		-			1,906
Corporate bonds and other securities		27,990		-		(4,044	)		23,946
	$	230,541	$	182	$	(30,106	)	$	200,617

	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.

	September 30, 2023
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	1,860	$	1,825
Due after one year through five years		9,448		8,766
Due after five through ten years		65,186		54,922
Due after ten years		152,141		133,198
Other securities, restricted		1,906		1,906
	$	230,541	$	200,617

Index

The following table shows realized gains and losses on the sale of investment securities during the three and nine months ended September 30, 2023 and 2022, respectively.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2023			2022		2023			2022
Realized gains on sales of securities	$	1,061		$	-	$	1,061		$	-
Realized losses on sales of securities		(1,031	)		-		(1,195	)		-
Net realized gain (loss)	$	30		$	-	$	(134	)	$	-

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses for which an ACL has not been recorded as of September 30, 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:

	September 30, 2023
	Less than 12 months				12 months or more				Total
	Gross				Gross				Gross				Number
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		of
(dollars in thousands)	Losses		Value		Losses		Value		Losses		Value		Securities
U.S. Treasury securities	$	-	$	-	$	298	$	3,777	$	298	$	3,777		1
Obligations of U.S. Government agencies		67		9,217		720		25,820		787		35,037		45
Obligations of state and political subdivisions		415		2,379		11,324		44,276		11,739		46,655		44
Mortgage-backed securities		987		13,087		12,251		66,691		13,238		79,778		41
Corporate bonds and other securities		154		846		3,890		22,100		4,044		22,946		25
Total securities available-for-sale	$	1,623	$	25,529	$	28,483	$	162,664	$	30,106	$	188,193		156

	December 31, 2022
	Less than 12 months				12 months or more				Total
	Gross				Gross				Gross				Number
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		of
(dollars in thousands)	Losses		Value		Losses		Value		Losses		Value		Securities
U.S. Treasury securities	$	342	$	7,671	$	-	$	-	$	342	$	7,671		4
Obligations of U.S. Government agencies		258		13,873		975		22,851		1,233		36,724		43
Obligations of state and political subdivisions		5,386		33,720		5,721		23,856		11,107		57,576		56
Mortgage-backed securities		4,157		52,717		6,804		36,196		10,961		88,913		38
Corporate bonds and other securities		1,084		12,906		1,571		11,429		2,655		24,335		21
Total securities available-for-sale	$	11,227	$	120,887	$	15,071	$	94,332	$	26,298	$	215,219		162

The number of investments in an unrealized loss position as of September 30, 2023 and December 31, 2022 were 156 and 162, respectively. The Company concluded no ACL should be recognized as of September 30, 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 FHLB, FRB, and 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 September 30, 2023, is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is in accordance with previous applicable GAAP.

Index

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

	September 30,		December 31,
(dollars in thousands)	2023		2022
Mortgage loans on real estate:
Residential 1-4 family	$	184,535	$	169,248
Commercial - owner occupied		162,611		184,586
Commercial - non-owner occupied		279,183		245,277
Multifamily		31,813		26,675
Construction and land development		94,143		77,944
Second mortgages		9,968		8,828
Equity lines of credit		53,784		54,340
Total mortgage loans on real estate		816,037		766,898
Commercial and industrial loans		73,279		72,578
Consumer automobile loans		170,637		163,018
Other consumer loans		20,309		22,251
Other ⁽¹⁾		2,416		2,340
Total loans, net of deferred fees ⁽²⁾		1,082,678		1,027,085
Less: Allowance for credit losses on loans		11,844		10,526
Loans, net of allowance and deferred fees ⁽²⁾	$	1,070,834	$	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 $264 thousand and $269thousand at September 30, 2023 and December 31, 2022, respectively.

(2)	Net deferred loan fees totaled $1.3million on September 30, 2023 and $1.0 million on December 31, 2022.

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, as of September 30, 2023.

Age Analysis of Past Due Loans as of September 30, 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	$	-	$	-	$	398	$	145	$	183,992	$	184,535
Commercial - owner occupied		-		407		-		-		162,204		162,611
Commercial - non-owner occupied		17		-		-		-		279,166		279,183
Multifamily		-		-		-		-		31,813		31,813
Construction and land development		-		-		-		1,391		92,752		94,143
Second mortgages		-		-		-		-		9,968		9,968
Equity lines of credit		-		-		-		47		53,737		53,784
Total mortgage loans on real estate	$	17	$	407	$	398	$	1,583	$	813,632	$	816,037
Commercial and industrial loans		507		17		116		335		72,304		73,279
Consumer automobile loans		2,857		264		148		-		167,368		170,637
Other consumer loans		231		375		135		-		19,568		20,309
Other		54		-		-		-		2,362		2,416
Total	$	3,666	$	1,063	$	797	$	1,918	$	1,075,234	$	1,082,678

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

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

Index

The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2023 as well as the amortized cost basis of loans on nonaccrual status and loans past due 90 days and accruing as of September 30, 2023 by class of loan.

	Nonaccrual
(dollars in thousands)	January 1, 2023		September 30, 2023		Nonaccrual with no ACLL		90 Days and still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	154	$	145	$	-	$	398
Construction and land development		945		1,391		1,391		-
Equity lines of credit		-		47		47		-
Total mortgage loans on real estate		1,099		1,583		1,438		398
Commercial and industrial loans		144		335		35		116
Consumer automobile loans		-		-		-		148
Other consumer loans		-		-		-		135
Other		-		-		-		-
Total	$	1,243	$	1,918	$	1,473	$	797

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 ACL. The Company did not grant any such modifications during the third quarter of 2023.

Allowance for Credit Losses on Loans

ACLL is a material estimate for the Company. The Company estimates its ACLL 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, real estate - construction and land development, real estate – commercial (owner occupied and non-owner occupied), and other loans

•

Consumer: real estate – mortgage, and consumer loans

Each portfolio class has risk characteristics as follows:

•

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

•

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

•

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

•

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

•

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

•

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

Index

The following tables presents the activity in the ACLL by portfolio class for the nine months ended September 30, 2023.

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

For the Nine Months ended September 30, 2023
(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Land Development		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		(159	)		-		-		-		(813	)		(228	)		-			(1,200	)
Recoveries		64			-		28		-		393			41			-			526
Provision for loan losses		78			258		192		244		270			315			(6	)		1,351
Ending Balance	$	645		$	829	$	2,882	$	5,791	$	1,550		$	147		$	-		$	11,844

Individually evaluated	$	-		$	-	$	61	$	-	$	-		$	-		$	-		$	61
Collectively evaluated		645			829		2,821		5,791		1,550			147			-			11,783

Ending Balance	$	645		$	829	$	2,882	$	5,791	$	1,550		$	147		$	-		$	11,844

Loans Balances:
Individually evaluated	$	334		$	1,463	$	503	$	375	$	-		$	-		$	-		$	2,675
Collectively evaluated		72,945			92,680		279,597		441,419		190,946			2,416			-			1,080,003
Ending Balance	$	73,279		$	94,143	$	280,100	$	441,794	$	190,946		$	2,416		$	-		$	1,082,678

(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 September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Provision for credit losses:
Provision for loans		$	478		$	402	$	1,351			$	1,073
Provison (recovery) for unfunded commitments			27			-		(109	)			-
Total		$	505		$	402	$	1,242			$	1,073

Credit Quality Indicators

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

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

•

Pass: Loans are of acceptable risk.

•

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

•

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

•

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

•

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

Index

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

	September 30, 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	$	27,785	$	34,339	$	24,879	$	3,399	$	301	$	419	$	1,630	$	92,752
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		117		1,274		-		-		-		1,391
Total construction and land development	$	27,785	$	34,339	$	24,996	$	4,673	$	301	$	419	$	1,630	$	94,143

Commercial real estate - owner occupied
Pass	$	7,352	$	34,082	$	21,805	$	13,859	$	10,899	$	64,449	$	5,247	$	157,693
OAEM		-		-		-		-		237		4,396		285		4,918
Substandard		-		-		-		-		-		-		-		-
Total commercial real estate - owner occupied	$	7,352	$	34,082	$	21,805	$	13,859	$	11,136	$	68,845	$	5,532	$	162,611

Commercial real estate - non-owner occupied
Pass	$	26,999	$	53,484	$	97,508	$	39,035	$	11,419	$	48,479	$	2,259	$	279,183
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total commercial real estate - non-owner occupied	$	26,999	$	53,484	$	97,508	$	39,035	$	11,419	$	48,479	$	2,259	$	279,183

Commercial and industrial
Pass	$	15,350	$	26,931	$	5,126	$	2,441	$	2,302	$	7,174	$	13,620	$	72,944
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		335		-		335
Total commercial and industrial	$	15,350	$	26,931	$	5,126	$	2,441	$	2,302	$	7,509	$	13,620	$	73,279

Multifamily real estate
Pass	$	9,699	$	3,502	$	2,168	$	612	$	5,991	$	9,188	$	653	$	31,813
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total multifamily real estate	$	9,699	$	3,502	$	2,168	$	612	$	5,991	$	9,188	$	653	$	31,813

Residential 1-4 family
Pass	$	23,298	$	38,752	$	40,529	$	26,889	$	13,286	$	53,167	$	51,824	$	247,745
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		350		47		145		-		542
Total residential 1-4 family	$	23,298	$	38,752	$	40,529	$	27,239	$	13,333	$	53,312	$	51,824	$	248,287

Consumer - automobile
Pass	$	49,881	$	92,976	$	14,922	$	4,932	$	2,029	$	5,897	$	-	$	170,637
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total consumer - automobile	$	49,881	$	92,976	$	14,922	$	4,932	$	2,029	$	5,897	$	-	$	170,637

Consumer - other
Pass	$	294	$	630	$	424	$	125	$	14	$	16,505	$	2,317	$	20,309
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total consumer - other	$	294	$	630	$	424	$	125	$	14	$	16,505	$	2,317	$	20,309

Other
Pass	$	1,121	$	-	$	-	$	-	$	-	$	1,295	$	-	$	2,416
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total other	$	1,121	$	-	$	-	$	-	$	-	$	1,295	$	-	$	2,416

Total loans
Pass	$	161,779	$	284,696	$	207,361	$	91,292	$	46,241	$	206,573	$	77,550	$	1,075,492
OAEM		-		-		-		-		237		4,396		285		4,918
Substandard		-		-		117		1,624		47		480		-		2,268
Total loans	$	161,779	$	284,696	$	207,478	$	92,916	$	46,525	$	211,449	$	77,835	$	1,082,678

Index

The following table details the current period gross charge-offs of loans by year of origination as of September 30, 2023:

	September 30, 2023
	Current Period Charge-offs by Origination Year
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and industrial	$	-	$	140	$	15	$	4	$	-	$	-	$	-	$	159
Consumer - automobile		9		382		267		68		18		51		-		795
Consumer - other		-		-		5		-		3		10		-		18
Other ⁽¹⁾		206		22		-		-		-		-		-		228
Total	$	215	$	544	$	287	$	72	$	21	$	61	$	-	$	1,200

(1)	Gross charge-offs of other loans for the first nine months ended September 30, 2023 included $206 thousand of demand deposit overdrafts that originated in 2023.

As of September 30, 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.

Prior to the adoption of ASC 326

The following table shows the aging of the Company’s loan portfolio, by class, as of 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.

Index

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		30		1,910		10
Commercial and industrial loans		144		144		-		-		144		5
Total	$	2,180	$	1,072	$	784	$	30	$	2,054	$	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 ACLL 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.

Index

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 nonew leases executed during the nine months ended September 30, 2023. The following tables present information about the Company’s leases:

(dollars in thousands)	September 30, 2023
Lease liabilities	$	1,353
Right-of-use assets	$	1,279
Weighted average remaining lease term	3.69 years
Weighted average discount rate		2.98	%

	Three Months Ended September 30,				Nine Months September 30,
(dollars in thousands)	2023		2022		2023		2022
Operating lease cost	$	131	$	87	$	333	$	251
Total lease cost	$	131	$	87	$	333	$	251

Cash paid for amounts included in the measurement of lease liabilities	$	108	$	85	$	311	$	254

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
(dollars in thousands)	September 30, 2023
Three months ending December 31, 2023	$	107
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	$	1,447
Discount		(94	)
Lease liabilities	$	1,353

Note 5. Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both September 30, 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 Sheetsand were $1.2 million and $1.4million at September 30, 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 September 30, 2023.

Index

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				Nine Months Ended
	September 30,				September 30,				Affected Line Item on
(dollars in thousands)	2023		2022		2023		2022		Consolidated Income Statement
Tax credits and other benefits
Amortization of operating losses	$	91	$	51	$	275	$	153	ATM and other losses
Tax benefit of operating losses*		19		11		58		32	Income tax expense
Tax credits		77		89		232		267	Income tax expense
Total tax benefits	$	96	$	100	$	290	$	299

*	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. As of September 30, 2023 and December 31, 2022, the remaining credit available from these lines totaled $100.0million and $103.6 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $360.9 million and $346.5as of September 30, 2023 and December 31, 2022, respectively.

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

(dollars in thousands)	September 30, 2023			December 31, 2022
Federal funds purchased	$	-		$	11,378
Overnight repurchase agreements		1,323			4,987
Federal Home Loan Bank advances		49,450			46,100
Total short-term borrowings	$	50,773		$	62,465

Maximum month-end outstanding balance (year-to-date)	$	84,360		$	62,465
Average outstanding balance during the period	$	58,919		$	11,776
Average interest rate (year-to-date)		4.91	%		2.34	%
Average interest rate at end of period		5.61	%		4.58	%

Long-Term Borrowings

The Company had a long-term FHLB advance totaling $20.0 million outstanding at September 30, 2023 with a scheduled maturity of April 14, 2025 and a rate of 4.28%. The Company did not have any long-term FHLB advances at December 31, 2022.

On July 14, 2021, the Company completed a $30.0 million issuance, ($29.4 million, net of issuance costs) of subordinated notes (the Notes) in a private placement transaction. The Notes are due in 2031 and 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.

Index

Financial instruments whose contract amounts represent credit risk were outstanding as of September 30, 2023 and December 31, 2022 were as follows:

	September 30,		December 31,
(dollars in thousands)	2023		2022
Commitments to extend credit:
Home equity lines of credit	$	93,885	$	87,722
Commercial real estate, construction and development loans committed but not funded		84,076		67,107
Other lines of credit (principally commercial)		48,760		51,742
Total	$	226,721	$	206,571

Letters of credit	$	752	$	904

Note 8. Share-Based Compensation

Employee Stock Purchase Plan

The Company has adopted an ESPP 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.

Under the Company’s 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 nine months of 2023.

Total stock purchases under the ESPP amounted to 5,453 shares during the nine months ended September 30, 2023. At September 30, 2023, the Company had 216,325 remaining shares reserved for issuance under the ESPP.

Incentive Stock Plan

The Incentive Stock Plan permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of September 30, 2023, only restricted stock has been granted under the Incentive Stock Plan.

Restricted stock activity for the nine months ended September 30, 2023 is summarized below:

				Weighted Average
				Grant Date
	Shares			Fair Value
Nonvested, January 1, 2023		46,989		$	22.49
Issued		35,013			17.20
Vested		(25,926	)		20.25
Forfeited		(1,483	)		17.20
Nonvested, September 30, 2023		54,593		$	20.30

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.65 years.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $650 thousand as of September 30, 2023 and $591 thousand as of September 30, 2022.

Stock-based compensation expense was $171 thousand and $121 thousand for the three months ended September 30, 2023 and 2022, respectively and $419 thousand and $295 thousand for the nine months ended September 30, 2023 and 2022, respectively.

Index

Note 9. Stockholders’ Equity and Earnings per Common Share

Stockholders’ Equity – Accumulated Other Comprehensive Income (Loss)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss), by category, during the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Affected Line Item on Consolidated Statement of Income
(dollars in thousands)	2023		2022		2023			2022		Affected Line Item on Consolidated Statement of Income
Sale of securities
Realized gain (loss) on sale of securities	$	30	$	-	$	(134	)	$	-	Gain (loss) on sale of securities, net
Tax effect		6		-		(28	)		-	Income tax (benefit) expense
	$	24	$	-	$	(106	)	$	-

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 September 30, 2023
Balance at beginning of period	$	(19,757	)	$	(19,757	)
Net other comprehensive loss		(3,883	)		(3,883	)
Balance at end of period	$	(23,640	)	$	(23,640	)

Three Months Ended September 30, 2022
Balance at beginning of period	$	(15,850	)	$	(15,850	)
Net other comprehensive loss		(7,997	)		(7,997	)
Balance at end of period	$	(23,847	)	$	(23,847	)

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive (Loss) Income
Nine Months Ended September 30, 2023
Balance at beginning of period	$	(20,767	)	$	(20,767	)
Net other comprehensive loss		(2,873	)		(2,873	)
Balance at end of period	$	(23,640	)	$	(23,640	)

Nine Months Ended September 30, 2022
Balance at beginning of period	$	1,675		$	1,675
Net other comprehensive loss		(25,522	)		(25,522	)
Balance at end of period	$	(23,847	)	$	(23,847	)

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

	Three Months Ended September 30, 2023
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(4,885	)	$	(1,026	)	$	(3,859	)
Reclassification adjustment for gains recognized in income		(30	)		6			(24	)
		(4,915	)		(1,020	)		(3,883	)

Total change in accumulated other comprehensive loss, net	$	(4,915	)	$	(1,020	)	$	(3,883	)

	Three Months Ended September 30, 2022
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(10,124	)	$	(2,127	)	$	(7,997	)

Total change in accumulated other comprehensive loss, net	$	(10,124	)	$	(2,127	)	$	(7,997	)

Index

	Nine Months Ended September 30, 2023
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(3,771	)	$	(792	)	$	(2,979	)
Reclassification adjustment for losses recognized in income		134			(28	)		106
		(3,637	)		(820	)		(2,873	)

Total change in accumulated other comprehensive income, net	$	(3,637	)	$	(820	)	$	(2,873	)

	Nine Months Ended September 30, 2022
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(32,307	)	$	(6,785	)	$	(25,522	)

Total change in accumulated other comprehensive loss, net	$	(32,307	)	$	(6,785	)	$	(25,522	)

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 potentially dilutive common shares attributable to the ESPP. The Company had no antidilutive shares outstanding in the three and nine months ended September 30, 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.

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.

Index

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

Assets Measured at Fair Value on a Recurring Basis

Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive loss. 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.

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

			Fair Value Measurements at September 30, 2023 Using
(dollars in thousands)	Balance		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities
U.S. Treasury securities	$	3,777	$	-	$	3,777	$	-
Obligations of U.S. Government agencies		44,555		-		44,555		-
Obligations of state and political subdivisions		46,655		-		46,655		-
Mortgage-backed securities		79,778		-		79,778		-
Money market investments		1,906		-		1,906		-
Corporate bonds and other securities		23,946		-		23,946		-
Total available-for-sale securities		200,617		-		200,617		-
Derivatives
Interest rate lock		12		-		12		-
Interest rate swap on loans		2,114		-		2,114		-
Total assets	$	202,743	$	-	$	202,743	$	-

Liabilities:
Derivatives
Interest rate swap on loans		2,114		-		2,114		-
Total liabilities	$	2,114	$	-	$	2,114	$	-

Index

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Balance		Level 1		Level 2		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	$	-

Liabilities:
Derivatives
Interest rate swap on loans		1,447		-		1,447		-
Total liabilities	$	1,447	$	-	$	1,447	$	-

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.

As of September 30, 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.

Index

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 September 30, 2023
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Loans
Loans held for sale	$	292	$	-	$	292	$	-

			Carrying Value at December 31, 2022
(dollars in thousands)	Fair Value		Level 1		Level 2		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	%)

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

			Fair Value Measurements at September 30, 2023 Using
(dollars in thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	77,641	$	77,641	$	-	$	-
Securities available-for-sale		200,617		-		200,617		-
Restricted securities		5,176		-		5,176		-
Loans held for sale		292		-		292		-
Loans, net		1,070,834		-		-		1,027,963
Derivatives
Interest rate lock		12		-		12		-
Interest rate swap on loans		2,114		-		2,114		-
Bank owned life insurance		34,826		-		34,826		-
Accrued interest receivable		4,758		-		4,758		-

Liabilities
Deposits	$	1,237,608	$	-	$	1,234,957	$	-
Overnight repurchase agreements		1,323		-		1,323		-
Federal Home Loan Bank advances		69,450		-		69,450		-
Long term borrowings		29,636		-		24,812		-
Derivatives
Interest rate swap on loans		2,114		-		2,114		-
Accrued interest payable		1,688		-		1,688		-

Index

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Carrying Value		Level 1		Level 2		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	$	-	$	1,156,019	$	-
Federal funds purchased		11,378		-		11,378		-
Overnight repurchase agreements		4,987		-		4,987		-
Federal Reserve Bank borrowings		46,100		-		46,100		-
Long term borrowings		29,538		-		25,539		-
Derivatives
Interest rate swap on loans		1,447		-		1,447		-
Accrued interest payable		834		-		834		-

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 and nine months ended September 30, 2023 and 2022 follows:

Index

	Three Months Ended September 30, 2023
(dollars in thousands)	Bank		Wealth			Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	17,154	$	35		$	1,821		$	(1,821	)	$	17,189
Income from fiduciary activities		-		1,012			-			-			1,012
Other income		2,215		270			50			(65	)		2,470
Total operating income		19,369		1,317			1,871			(1,886	)		20,671

Expenses
Interest expense		5,468		-			295			-			5,763
Provision for credit losses		505		-			-			-			505
Salaries and employee benefits		6,589		1,018			223			-			7,830
Other expenses		4,657		347			112			(65	)		5,051
Total operating expenses		17,219		1,365			630			(65	)		19,149

Income (loss) before taxes		2,150		(48	)		1,241			(1,821	)		1,522

Income tax expense (benefit)		290		(9	)		(121	)		-			160

Net income (loss)	$	1,860	$	(39	)	$	1,362		$	(1,821	)	$	1,362

Capital expenditures	$	398	$	-		$	-		$	-		$	398

Total assets	$	1,438,599	$	6,997		$	129,495		$	(128,028	)	$	1,447,063

	Three Months Ended September 30, 2022
(dollars in thousands)	Bank		Wealth		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	12,347	$	21	$	2,968		$	(2,968	)	$	12,368
Income from fiduciary activities		-		953		-			-			953
Other income		2,085		342		50			(65	)		2,412
Total operating income		14,432		1,316		3,018			(3,033	)		15,733

Expenses
Interest expense		502		-		295			-			797
Provision for credit losses		402		-		-			-			402
Salaries and employee benefits		5,733		902		186			-			6,821
Other expenses		4,413		288		108			(65	)		4,744
Total operating expenses		11,050		1,190		589			(65	)		12,764

Income before taxes		3,382		126		2,429			(2,968	)		2,969

Income tax expense (benefit)		514		27		(114	)		-			427

Net income	$	2,868	$	99	$	2,543		$	(2,968	)	$	2,542

Capital expenditures	$	355	$	13	$	-		$	-		$	368

Total assets	$	1,308,759	$	7,163	$	123,327		$	(122,243	)	$	1,317,006

Index

	Nine Months Ended September 30, 2023
(dollars in thousands)	Bank		Wealth			Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	48,587	$	102		$	7,622		$	(7,622	)	$	48,689
Income from fiduciary activities		-		3,282			-			-			3,282
Other income		6,420		724			150			(196	)		7,098
Total operating income		55,007		4,108			7,772			(7,818	)		59,069

Expenses
Interest expense		11,466		-			885			-			12,351
Provision for credit losses		1,242		-			-			-			1,242
Salaries and employee benefits		19,419		3,191			626			-			23,236
Other expenses		13,786		992			378			(196	)		14,960
Total operating expenses		45,913		4,183			1,889			(196	)		51,789

Income (loss) before taxes		9,094		(75	)		5,883			(7,622	)		7,280

Income tax expense (benefit)		1,409		(12	)		(364	)		-			1,033

Net income (loss)	$	7,685	$	(63	)	$	6,247		$	(7,622	)	$	6,247

Capital expenditures	$	885	$	-		$	-		$	-		$	885

Total assets	$	1,438,599	$	6,997		$	129,495		$	(128,028	)	$	1,447,063

	Nine Months Ended September 30, 2022
(dollars in thousands)	Bank		Wealth		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	33,871	$	52	$	7,826		$	(7,826	)	$	33,923
Income from fiduciary activities		-		3,086		-			-			3,086
Other income		6,394		946		150			(196	)		7,294
Total operating income		40,265		4,084		7,976			(8,022	)		44,303

Expenses
Interest expense		1,509		-		885			-			2,394
Provision for credit losses		1,073		-		-			-			1,073
Salaries and employee benefits		16,704		2,643		507			-			19,854
Other expenses		12,363		867		480			(196	)		13,514
Total operating expenses		31,649		3,510		1,872			(196	)		36,835

Income before taxes		8,616		574		6,104			(7,826	)		7,468

Income tax expense (benefit)		1,243		122		(362	)		-			1,003

Net income	$	7,373	$	452	$	6,466		$	(7,826	)	$	6,465

Capital expenditures	$	956	$	13	$	-		$	-		$	969

Total assets	$	1,308,759	$	7,163	$	123,327		$	(122,243	)	$	1,317,006

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 Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.

Index

Item 2.

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

The following discussion is intended to assist readers in understanding and evaluating 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 and nine months ended September 30, 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.

Net income for the three months ended September 30, 2023 was $1.4 million ($0.27 per diluted share) compared to $2.5 million ($0.51 per diluted share) for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, net income was $6.2 million, or $1.24 per diluted common share, and $6.5 million, or $1.27 per diluted common share, respectively.

Key factors affecting comparisons of consolidated net income for the three and nine months ended September 30, 2023 are as follows. Comparisons are to the three and nine months ended September 30, 2022 unless otherwise stated.

•

Total assets were $1.4 billion at September 30, 2023, growing $91.7 million or 6.8% from December 31, 2022.

•

Net loans held for investment grew $54.3 million, or 5.3%, from December 31, 2022 and $125.7 million, or 13.3% from September 30, 2022.

•

Total deposits increased $81.6 million, or 7.1%, from December 31, 2022 and $55.3 million, or 4.7% from September 30, 2022.

•

Nonperforming assets were $2.7 million at September 30, 2023 down from $4.7 million at September 30, 2022.

•

Average earning assets of $1.4 and $1.3 billion for the quarter and nine months ended September 30, 2023 grew $135.7 million, or 11.1%, and $90.5 million, or 7.3%, compared to the prior year comparative periods, respectively.

•

Average interest-bearing liabilities were $984.3 million for the quarter ended September 30, 2023, up $208.4 million or 26.9%, compared to the prior year comparative period. For the nine months ended September 30, 2023 and 2022, average interest-bearing liabilities were $925.1 million and $786.6 million, respectively.

•

NIM was 3.33% in the third quarter of 2023, compared to 3.67% in the second quarter of 2023 and 3.75% in the third quarter of 2022. NIM on a fully tax-equivalent basis (FTE) (non-GAAP) was 3.35% in the third quarter of 2023, 3.69% in the linked quarter and 3.78% in the third quarter of 2022.

•

Net interest income for the third quarter of 2023, decreased $145 thousand, or 1.3% compared to the third quarter of 2022, and decreased $673 thousand, or 5.6%, compared to the second quarter of 2023. For the nine months ended September 30, 2023 and 2022, net interest income was $36.3 million and $31.5 million, respectively.

•

Liquidity as of September 30, 2023, defined as cash and due from banks, unpledged securities, and available secured borrowing capacity, totaled $407.6 million, representing 28.2% of total assets.

Capital Management and Dividends

Total equity was $99.5 million as of September 30, 2023, compared to $98.7 million at December 31, 2022. Total equity increased $792 thousand at September 30, 2023 compared to December 31, 2022, due primarily to $6.2 million of net income for the year partially offset by unrealized losses in the market value of securities available-for-sale, which are recognized as a component of accumulated other comprehensive loss, dividends, and 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 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 the earnings or regulatory capital of the Company or its subsidiaries.

Index

For the third quarter of 2023, the Company declared dividends of $0.14 per share, an increase of 7.7% over dividends of $0.13 per share declared in the third quarter of 2022. For the nine months ended September 30, 2023, dividends declared were $0.42 per share compared to $0.39 per share for the nine months ended September 30, 2022. The dividend represents a payout ratio of 33.8% of EPS for the first nine months 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. See “Table 13. Regulatory Capital” below for additional information.

At September 30, 2023, the book value per share of the Company’s common stock was $19.75, and tangible book value per share (non-GAAP) was $19.39, compared to $19.75 and $19.37, respectively, at December 31, 2022. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Critical Accounting Estimates

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

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

Allowance for Credit Losses on Loans

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

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

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

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

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

Index

Results of Operations

Net Interest Income

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

Net interest income for the third quarter of 2023 was $11.4 million, a decrease of $145 thousand, or 1.3%, from the third quarter of 2022. The decrease from the prior year quarter is due primarily to higher average interest-bearing liabilities at higher average rates partially offset by higher average earning asset balances at higher average yields. For the nine months ended September 30, 2023 and 2022, net interest income was $36.3 million and $31.5 million, respectively. The increase from the prior-year comparative period 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 $11.5 million for the third quarter of 2023, a decrease of $186 thousand from the 2022 comparative quarter. For the nine months ended September 30, 2023 and 2022, net interest income, on a fully tax-equivalent basis (non-GAAP), was $36.5 million and $31.8 million, respectively. NIM for the third quarter of 2023 was 3.33%, a decrease from 3.75% for the prior year quarter. For the nine months ended September 30, 2023 and 2022, NIM was 3.67% and 3.42%, respectively. On a fully tax-equivalent basis (non-GAAP), NIM was 3.35% and 3.68%, for the three and nine months ended September 30, 2023, respectively, compared to 3.78% and 3.44% for the respective prior year comparative periods.

Average earning asset balances for the third quarter increased $135.7 million compared to the third quarter of 2022 with yields on average earning assets increasing 99 basis points due to deployment of liquidity into higher earning assets and the effects of the rising interest rate environment. During the first nine months of 2023, average earning assets increased $90.5 million over the 2022 comparative period.

Average loans increased $148.1 million, or 15.8%, and $183.9 million, or 20.6%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods of 2022. The increase in average loans outstanding in 2023 compared to 2022 was due primarily to growth in construction and land development, residential real estate, commercial real estate, and indirect consumer segments of the loan portfolio. Average loan yields were higher for the third quarter and first nine months of 2023 by 78 basis points and 79 basis points, respectively, compared to the same periods of 2022 due primarily to the effects of rising interest rates.

Average securities available for sale decreased $30.2 million and $21.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022, due primarily to fluctuations in fair market value and sale activity. The average yield on the investment securities portfolio increased 107 basis points and 130 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022 due primarily to the effects of rising interest rates on the Company’s variable rate investment securities portfolio.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, increased $16.2 million and decreased $72.3 million for the third quarter and first nine months of 2023, compared to the respective periods in 2022 due primarily to deployment of liquidity in loans held for investment. The average yield on interest-bearing deposits in other banks increased 320 basis points for the third quarter and 451 for the first nine months of 2023 compared to the same periods in 2022 due to rising interest rates. The FRB increased the interest rate on excess cash reserve balances to 5.40 percent during the third quarter of 2023.

Average interest-bearing liabilities increased $208.4 million for the third quarter of 2023 compared to the same period of 2022, with costs increasing 191 basis points. The higher interest cost on liabilities was due to higher interest rates on money market and time deposits as well as additional borrowing costs associated with federal funds purchased and short and long term FHLB advances during the period to help fund loan growth. Average money market and interest-bearing demand deposits increased $66.2 million and $51.3 million for the third quarter and first nine months of 2023, respectively, and average time deposits increased $107.2 million and $42.8 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. Average savings deposits declined $24.8 million for the third quarter of 2023 and $20.4 million for the first nine months of 2023, compared to the same periods in 2022. Average noninterest-bearing demand deposits decreased $73.2 million for the third quarter of 2023 and $37.6 million for the first nine months of 2023, compared to the same periods of 2022. The average cost of interest-bearing deposits increased 178 basis points for the third quarter of 2023 and 118 basis points for the first nine months of 2023, compared to the same periods in 2022, due primarily to higher rates on deposits driven by depositors seeking increased yields and competitive pricing pressures. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity and the pace with which customers move funds from other deposit products into or out of time deposit products.

Index

During 2022 and continuing into 2023, market interest rates significantly increased. While the Company expects asset yields to continue to rise, the Company expects the cost of funds to continue to rise during the fourth quarter of 2023. The extent to which rising interest rates will ultimately affect the Company’s NIM is uncertain and depends on a number of complex factors, certain of which will be outside of the Company’s control.

For more information about the Company’s fully taxable-equivalent financial measures, please see “Non-GAAP Financial Measures” below.

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 September 30,
	2023								2022
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate**			Balance			Expense		Rate**
ASSETS
Loans*	$	1,086,180		$	14,311		5.23	%	$	938,110		$	10,516		4.45	%
Investment securities:
Taxable		176,445			1,788		4.02	%		190,728			1,297		2.70	%
Tax-exempt*		30,128			201		2.64	%		46,046			345		2.97	%
Total investment securities		206,573			1,989		3.82	%		236,774			1,642		2.75	%
Interest-bearing due from banks		61,446			838		5.41	%		45,250			252		2.21	%
Federal funds sold		714			9		5.16	%		2,201			11		2.05	%
Other investments		4,808			84		6.84	%		1,650			30		6.92	%
Total earning assets		1,359,721		$	17,231		5.03	%		1,223,985		$	12,451		4.04	%
Allowance for credit losses		(11,912	)							(10,015	)
Other non-earning assets		105,130								99,676
Total assets	$	1,452,939							$	1,313,646

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	91,139		$	4		0.01	%	$	79,620		$	3		0.01	%
Money market deposit accounts		430,236			204		1.89	%		375,555			135		0.14	%
Savings accounts		98,758			8		0.03	%		123,604			9		0.03	%
Time deposits		263,167			2,456		3.70	%		155,989			312		0.79	%
Total time and savings deposits		883,300			4,516		2.03	%		734,768			459		0.25	%
Federal funds purchased, repurchase agreements and other borrowings		1,972			-		0.05	%		11,667			43		1.46	%
Federal Home Loan Bank advances		69,450			952		5.36	%		-			-		0.00	%
Long term borrowings		29,619			295		3.90	%		29,485			295		3.92	%
Total interest-bearing liabilities		984,341			5,763		2.32	%		775,920			797		0.41	%
Demand deposits		356,752								429,928
Other liabilities		8,996								5,500
Stockholders' equity		102,850								102,298
Total liabilities and stockholders' equity	$	1,452,939							$	1,313,646
Net interest margin				$	11,468		3.35	%				$	11,654		3.78	%

*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $42 thousand and $83 thousand for September 30, 2023 and 2022, respectively.

**Annualized

Index

	For the nine months ended September 30,
	2023								2022
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate**			Balance			Expense		Rate**
ASSETS
Loans*	$	1,077,038		$	41,539		5.16	%	$	893,133		$	29,206		4.37	%
Investment securities:
Taxable		181,969			5,324		3.91	%		196,475			3,409		2.32	%
Tax-exempt*		35,365			734		2.77	%		42,208			927		2.94	%
Total investment securities		217,334			6,058		3.73	%		238,683			4,336		2.43	%
Interest-bearing due from banks		25,385			995		5.24	%		97,642			533		0.73	%
Federal funds sold		670			24		4.79	%		3,514			18		0.70	%
Other investments		4,420			229		6.91	%		1,396			58		5.47	%
Total earning assets		1,324,847		$	48,845		4.93	%		1,234,368		$	34,151		3.70	%
Allowance for credit losses		(11,663	)							(9,861	)
Other nonearning assets		105,462								96,897
Total assets	$	1,418,646							$	1,321,404

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	80,672		$	9		0.02	%	$	75,641		$	8		0.01	%
Money market deposit accounts		432,224			4,450		1.38	%		385,929			433		0.15	%
Savings accounts		106,537			24		0.03	%		126,965			30		0.03	%
Time deposits		204,647			4,412		2.88	%		161,885			993		0.82	%
Total time and savings deposits		824,080			8,895		1.44	%		750,420			1,464		0.26	%
Federal funds purchased, repurchase agreements and other borrowings		4,941			39		1.07	%		6,753			45		0.88	%
Federal Home Loan Bank advances		66,505			2,532		5.09	%		-			-		0.00	%
Long term borrowings		29,585			885		4.00	%		29,453			885		4.02	%
Total interest-bearing liabilities		925,111			12,351		1.79	%		786,626			2,394		0.41	%
Demand deposits		382,908								420,527
Other liabilities		8,492								5,649
Stockholders' equity		102,135								108,602
Total liabilities and stockholders' equity	$	1,418,646							$	1,321,404
Net interest margin				$	36,494		3.68	%				$	31,757		3.44	%

*Computed on a fully tax-equivalent (non-GAAP) basis using a 21% rate, adjusting interest income by $156 thousand and $228 thousand for September 30, 2023 and 2022, respectively.

**Annualized

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

Index

TABLE 2: VOLUME AND RATE ANALYSIS*

	Three months ended September 30, 2023 from 2022
	Increase (Decrease)
	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans*	$	1,660		$	2,135		$	3,795
Investment securities:
Taxable		(97	)		588			491
Tax-exempt*		(119	)		(25	)		(144	)
Total investment securities		(216	)		563			347

Federal funds sold		(7	)		5			(2	)
Other investments**		147			493			640
Total earning assets		1,584			3,196			4,780

INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		-			1			1
Money market deposit accounts		20			1,894			1,914
Savings accounts		(2	)		1			(1	)
Time deposits		215			1,928			2,143
Total time and savings deposits		233			3,824			4,057
Federal funds purchased, repurchase agreements and other borrowings		(36	)		(7	)		(43	)
Federal Home Loan Bank advances		-			952			952
Long term borrowings		1			(1	)		-
Total interest-bearing liabilities		198			4,768			4,966

Change in net interest income	$	1,386		$	(1,572	)	$	(186	)

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

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

	Nine months ended September 30, 2023 from 2022
	Increase (Decrease)
	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans*	$	6,014		$	6,319		$	12,333
Investment securities:
Taxable		(252	)		2,167			1,915
Tax-exempt*		(150	)		(43	)		(193	)
Total investment securities		(402	)		2,124			1,722

Federal funds sold		(15	)		21			6
Other investments**		(268	)		901			633
Total earning assets		5,329			9,365			14,694

INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		1			-			1
Money market deposit accounts		52			3,965			4,017
Savings accounts		(5	)		(1	)		(6	)
Time deposits		262			3,157			3,419
Total time and savings deposits		310			7,121			7,431
Federal funds purchased, repurchase agreements and other borrowings		(12	)		6			(6	)
Federal Home Loan Bank advances		-			2,532			2,532
Long term borrowings		4			(4	)		-
Total interest-bearing liabilities		302			9,655			9,957

Change in net interest income	$	5,027		$	(290	)	$	4,737

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

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

Index

The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, 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, increased competition for deposits, changes in customer behavior in response to changes in interest rates, or from changes in the availability of certain types of wholesale funding.

Provision for Credit Losses

For the three months ended September 30, 2023, the Company recognized a provision for credit losses of $505 thousand compared to $402 thousand for the three months ended September 30, 2022. The provision for credit losses for the third quarter of 2023 reflected a provision of $478 thousand for loans and a provision for unfunded commitments of $27 thousand. The provision for credit losses was $1.2 million for the first nine months of 2023, compared to $1.1 million for the first nine months of 2022. Charged-off loans totaled $1.2 million and $1.7 million in the first nine months of 2023 and 2022, respectively. Recoveries amounted to $526 thousand and $693 thousand for the nine months ended September 30, 2023 and 2022, respectively. The Company’s annualized net loans charged off to average loans were 0.10% for the third quarter of 2023 compared to 0.16% for the third quarter of 2022. The increased provision for credit losses for the three and nine months ended September 30, 2023 compared to the same periods in 2022 is primarily due to growth in the loan portfolio and continued uncertainty in the economic outlook.

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.

Noninterest Income

Total noninterest income was $3.5 million for the third quarter of 2023, increasing $118 thousand compared to the third quarter of 2022. The increase over the prior year quarter was primarily driven by increases in fiduciary and asset management fees, bank-owned life insurance income, and mortgage banking income, partially offset by decreases in service charges on deposit accounts and other service charges, commissions, and fees. Noninterest income for the nine months ended September 30, 2023 stayed flat at $10.4 million compared to the nine months ended September 30, 2022. Gains on sales of fixed assets of $200 thousand and losses on sales of available-for-sale securities and repossessed assets of $134 thousand and $69 thousand, respectively, were recognized during the second and third quarter of 2023 which impacted the quarterly and year-to-date comparatives and are not expected to be repeated.

Noninterest Expense

Noninterest expense totaled $12.9 million for the third quarter of 2023 compared to $11.6 million for the third quarter of 2022. The increase over the prior year quarter was primarily driven by increased salaries and employee benefit expense, occupancy and equipment, and data processing. The increase in salaries and employee 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 nine months 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. For the nine months ended September 30, 2023, noninterest expense increased $4.8 million, or 14.5% over the nine months ended September 30, 2022, primarily due to increases in salaries and employee benefits, data processing, ATM and other losses, and other operating expenses.

The Company’s income tax expense decreased $106 thousand for the third quarter compared against the second quarter and increased $30 thousand for the first nine months 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 and nine months ended September 30, 2023 were 10.5% and 14.2%, respectively, and the effective tax rates for the three and nine months ended September 30, 2022 were 14.4% and 13.4%, respectively.

Balance Sheet Review

As of September 30, 2023, the Company had total assets of $1.4 billion, an increase of $91.7 million compared to assets at December 31, 2022.

Net loans held for investment increased $54.3 million or 5.3%, from $1.0 billion at December 31, 2022 to $1.1 billion as of September 30, 2023, driven by diversified loan growth in the following segments: construction and land development of $16.2 million, residential real estate of $21.0 million, commercial real estate of $11.9 million, and consumer loans of $5.7 million. Cash and cash equivalents increased $58.4 million from December 31, 2022 to September 30, 2023. Securities available-for-sale, at fair value, decreased $24.9 million from December 31, 2022 to $200.6 million as of September 30, 2023 driven primarily by unrealized losses due to the rise in interest rates.

Total deposits of $1.2 billion as of September 30, 2023 increased $81.6 million, or 7.1% from December 31, 2022. Noninterest-bearing deposits decreased $70.3 million, or 16.8%, savings deposits increased $35.3 million, or 6.0%, and time deposits increased $116.6 million, or 76.2%, driven by depositors seeking increased yields and pricing competition.

Index

The Company utilizes FHLB advances as a primary source of liquidity as needed. As of September 30, 2023 and December 31, 2022, the Company had FHLB advances of $69.5 million and $46.1 million, respectively. Decreases in overnight repurchase agreements and federal funds purchased were offset by an increase in FHLB advances as the Company used additional borrowings to help fund loan growth during the first nine months of 2023.

Securities Portfolio

When comparing September 30, 2023 to December 31, 2022, securities available-for-sale decreased $24.9 million, or 11.0%, due to an investment sale and normal cash flows from the portfolio. 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:

TABLE 3: SECURITIES PORTFOLIO

	September 30,				December 31,
(dollars in thousands)	2023				2022
U.S. Treasury securities	$	3,777	2	%	$	7,671	3	%
Obligations of U.S. Government agencies		44,555	22	%		42,399	19	%
Obligations of state and political subdivisions		46,655	23	%		59,384	26	%
Mortgage-backed securities		79,778	38	%		88,913	39	%
Money market investments		1,906	1	%		1,816	1	%
Corporate bonds and other securities		23,946	12	%		25,335	11	%
		200,617	98	%		225,518	99	%
Restricted securities:
Federal Home Loan Bank stock	$	4,242	2	%		2,709	1	%
Federal Reserve Bank stock		892	-			683	-
Community Bankers' Bank stock		42	-			42	-
		5,176				3,434
Total Securities	$	205,793	100	%	$	228,952	100	%

The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of September 30, 2023.

Index

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	$	-		$	3,777		$	-		$	-		$	3,777
Weighted average yield		-			1.70	%		-			-			1.70	%

Obligations of U.S. Government agencies	$	1,169		$	3,572		$	2,177		$	37,637		$	44,555
Weighted average yield		0.77	%		2.35	%		4.51	%		6.47	%		5.90	%

Obligations of state and political subdivisions	$	167		$	1,417		$	18,692		$	26,379		$	46,655
Weighted average yield		0.75	%		2.74	%		2.21	%		2.47	%		2.37	%

Mortgage-backed securities	$	-		$	-		$	10,595		$	69,183		$	79,778
Weighted average yield		-			-			2.28	%		3.09	%		2.98	%

Money market investments	$	1,906		$	-		$	-		$	-		$	1,906
Weighted average yield		4.59	%		-			-			-			4.59	%

Corporate bonds and other securities	$	488		$	-		$	23,458		$	-		$	23,946
Weighted average yield		3.44	%		-			4.43	%		-			4.43	%

Federal Home Loan Bank stock	$	-		$	-		$	-		$	4,242		$	4,242
Weighted average yield		-			-			-			6.98	%		6.98	%

Federal Reserve Bank stock	$	-		$	-		$	-		$	892		$	892
Weighted average yield		-			-			-			4.78	%		4.78	%

Community Bankers' Bank stock	$	-		$	-		$	-		$	42		$	42
Weighted average yield		-			-			-			0.00	%		0.00	%
Total Securities	$	3,730		$	8,766		$	54,922		$	138,375		$	205,793
Weighted average yield		2.62	%		2.13	%		3.27	%		3.99	%		3.70	%

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 as of September 30, 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.

Loan Portfolio

The following table shows a breakdown of total loans by segment at September 30, 2023 and December 31, 2022.

TABLE 5: LOAN PORTFOLIO

	September 30,		December 31,
(dollars in thousands)	2023		2022
Commercial and industrial	$	73,279	$	72,578
Real estate-construction		94,143		77,944
Real estate-mortgage (1)		280,100		259,091
Real estate-commercial		441,794		429,863
Consumer (2)		190,946		185,269
Other		2,416		2,340
Ending Balance	$	1,082,678	$	1,027,085

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

(2) The consumer segment includes consumer automobile loans.

The maturity distribution and rate sensitivity of the Company's loan portfolio as of September 30, 2023 is presented below:

Index

TABLE 6: MATURITY/REPRICING SCHEDULE OF LOAN PORTFOLIO

	As of September 30, 2023
(dollars in thousands)	Commercial and industrial		Real estate-construction		Real estate-mortgage (1)		Real estate-commercial		Consumer (2)		Other		Total
Variable Rate:
Within 1 year	$	14,668	$	55,433	$	62,666	$	43,650	$	7,764	$	1,898	$	186,079
1 to 5 years		408		38		26,698		25,096		2		128		52,370
5 to 15 years		-		4,788		36,579		970		26		-		42,363
After 15 years		-		-		-		-		77		-		77
Fixed Rate:
Within 1 year	$	1,519	$	7,930	$	7,427	$	24,741	$	1,512	$	98	$	43,227
1 to 5 years		27,375		16,365		43,419		198,650		87,395		-		373,204
5 to 15 years		29,309		9,545		40,037		143,305		84,965		292		307,453
After 15 years		-		44		63,274		5,383		9,204		-		77,905
	$	73,279	$	94,143	$	280,100	$	441,795	$	190,945	$	2,416	$	1,082,678

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

(2) The consumer segment includes consumer automobile loans.

For more information about the Company’s loan portfolio as of September 30, 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 September 30, 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 low levels of NPAs in 2023, however, the economic environment could 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.

TABLE 7: NONPERFORMING ASSETS

	September 30,			December 31,
(dollars in thousands)	2023			2022
Total loans	$	1,082,678		$	1,027,085
Nonaccrual loans		1,918			1,243
Loans past due 90 days or more and accruing interest		797			840
Total Nonperforming Assets	$	2,715		$	2,083
ACLL	$	11,844		$	10,526
Nonaccrual loans to total loans		0.18	%		0.12	%
ACLL to total loans		1.09	%		1.02	%
ACLL to nonaccrual loans		617.52	%		846.82	%
Annualized year-to-date net charge-offs to average loans		0.08	%		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

As of September 30, 2023, the ACL was $12.1 million, comprised of ACLL of $11.8 million and a reserve for unfunded commitments of $293 thousand. The increase in the ACLL during the first nine months 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 September 30, 2023.

Index

TABLE 8: ALLOWANCE FOR CREDIT LOSSES

(dollars in thousands)	September 30, 2023
Total ACLL	$	11,844
Total reserve for unfunded commitments		293
Total ACL	$	12,137
ACLL 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:

TABLE 9: ALLOWANCE FOR CREDIT LOSSES ON LOANS

For the nine months ended September 30, 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		(159	)		-			-			-			(813	)		(228	)		-			(1,200	)
Recoveries		64			-			28			-			393			41			-			526
Provision for credit losses		78			258			192			244			270			315			(6	)		1,351
Ending Balance	$	645		$	829		$	2,882		$	5,791		$	1,550		$	147		$	-		$	11,844

Average loans		75,770			88,728			274,034			436,135			200,071			2,300						1,077,038
Ratio of net charge-offs to average loans		0.13	%		0.00	%		-0.01	%		0.00	%		0.21	%		8.13	%					0.06	%

For the nine months ended September 30, 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	)		-			(1,095	)		(281	)		-		(1,698	)
Recoveries		131			-			52			22			389			99			-		693
Provision for loan losses		107			70			190			(464	)		982			188			-		1,073
Ending Balance	$	624		$	529		$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933

Average loans		67,481			65,368			227,401			400,889			123,895			6,810					891,844
Ratio of net charge-offs to average loans		0.25	%		0.00	%		-0.01	%		-0.01	%		0.57	%		2.67	%				0.11	%

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

(2) The consumer segment includes consumer automobile loans.

Index

For the Three Months ended September 30, 2023
(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	$	666		$	707		$	2,880		$	5,709		$	1,590		$	99		$	-	$	11,651
Charge-offs		(108	)		-			-			-			(279	)		(59	)		-		(446	)
Recoveries		52			-			8			-			81			20			-		161
Provision for credit losses		35			122			(6	)		82			158			87			-		478
Ending Balance	$	645		$	829		$	2,882		$	5,791		$	1,550		$	147		$	-	$	11,844

Average loans		75,848			88,266			280,221			441,878			197,421			2,546					1,086,180
Ratio of net charge-offs to average loans		0.07	%		0.00	%		0.00	%		0.00	%		0.10	%		1.53	%				0.03	%

For the Three Months ended September 30, 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	$	596		$	479		$	2,676		$	4,436		$	1,482		$	227		$	-	$	9,896
Charge-offs		(1	)		-			(22	)		-			(473	)		(91	)		-		(587	)
Recoveries		4			-			12			22			170			14			-		222
Provision for loan losses		25			50			(59	)		(113	)		459			40			-		402
Ending Balance	$	624		$	529		$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933

Average loans		63,999			64,907			254,594			408,791			139,147			6,098					937,536
Ratio of net charge-offs to average loans		0.00	%		0.00	%		0.00	%		-0.01	%		0.22	%		1.26	%				0.04	%

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

(2) The consumer segment includes consumer automobile loans.

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 10: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS

	September 30,					December 31,
	2023					2022
(dollars in thousands)	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial and industrial	$	645		6.77	%	$	673		7.07	%
Real estate-construction		829		8.70	%		552		7.59	%
Real estate-mortgage (1)		2,882		25.87	%		2,575		25.23	%
Real estate-commercial		5,791		40.81	%		4,499		41.85	%
Consumer (2)		1,550		17.64	%		2,065		18.04	%
Other		147		0.22	%		156		0.23	%
Unallocated		-		-			6		-
Ending Balance	$	11,844		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.

(2) The consumer segment includes consumer automobile loans.

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 September 30, 2023, total deposits were $1.2 billion, an increase of $81.6 million, or 7.1%, compared to December 31, 2022. The following table presents average balances and average rates paid on deposits for the periods presented.

Index

TABLE 11: DEPOSITS

	Nine months ended September 30,
	2023					2022
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Interest-bearing transaction	$	80,672		0.02	%	$	75,641		0.01	%
Money market		432,224		1.38	%		385,929		0.15	%
Savings		106,537		0.03	%		126,965		0.03	%
Time deposits		204,647		2.88	%		161,885		0.82	%
Total interest bearing		824,080		1.44	%		750,420		0.26	%
Demand		382,908					420,527
Total deposits	$	1,206,988				$	1,170,947

As of September 30, 2023 and December 31, 2022, the estimated amounts of total uninsured deposits were approximately $216.1 million and $254.7 million, respectively. The following table shows maturities of the estimated amounts of uninsured time deposits as of September 30, 2023. The estimate of uninsured deposits generally represents 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 12: MATURITIES OF UNINSURED TIME DEPOSITS

	As of September 30,
(dollars in thousands)	2023
Maturing in:
Within 3 months	$	31,109
4 through 6 months		24,796
7 through 12 months		18,158
Greater than 12 months		10,169
	$	84,232

Capital Resources

Total stockholders' equity as of September 30, 2023 was $99.5 million, up 0.8% from $98.7 million on December 31, 2022. The increase was primarily related to current year earnings, partially offset by unrealized losses in the market value of securities available for sale, which are recorded as a component of accumulated other comprehensive loss, the adoption of CECL and dividends paid by the Company. 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 ACL. 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, but transactions that would cause the Bank to realize such unrealized losses would affect such regulatory capital amounts.

Index

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.

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 September 30, 2023 and December 31, 2022. As shown below, these ratios were all well above the recommended regulatory minimum levels.

TABLE 13: REGULATORY CAPITAL

	2023						2022
	Regulatory						Regulatory
(dollars in thousands)	Minimums			September 30, 2023			Minimums			December 31, 2022
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		11.28	%		4.500	%		10.80	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		11.28	%		6.000	%		10.80	%
Total Capital to Risk-Weighted Assets		8.000	%		12.26	%		8.000	%		11.70	%
Tier 1 Leverage to Average Assets		4.000	%		9.46	%		4.000	%		9.43	%
Risk-Weighted Assets				$	1,232,099					$	1,177,600

The Basel III Capital Rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a Common Equity Tier 1 capital risk-based ratio of 7.0 percent, a Tier 1 capital risk-based ratio of 8.5 percent, and a Total capital risk-based ratio of 10.5 percent. The Bank exceeded these ratios as of September 30, 2023 and December 31, 2022.

On July 14, 2021, the Company issued $30.0 million ($29.4 million, net of issuance costs) of 3.5 percent 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 3.5 percent 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 September 30, 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 September 30, 2023, the Company had $430.4 million in total 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.

Index

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 as of September 30, 2023. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.

TABLE 14: LIQUIDITY SOURCES AND USES

	September 30,
	2023
(dollars in thousands)	Total		In Use		Available
Sources:
Federal funds lines of credit	$	100,000	$	-	$	100,000
Federal Home Loan Bank advances		430,380		69,450		360,930
Federal funds sold & balances at the Federal Reserve		-		-		62,722
Securities, available for sale and unpledged at fair value		-		-		119,905
Total funding sources					$	643,557

Uses: ⁽¹⁾
Unfunded loan commitments and lending lines of credit						89,807
Letters of credit						226
Total potential short-term funding uses						90,033
Liquidity coverage ratio						714.8	%

(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 September 30, 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 September 30, 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 and nine months ended September 30, 2023, the Company has provided supplemental financial measures on a tax equivalent, tangible, or adjusted basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.

Index

TABLE 15: Non-GAAP FINANCIAL MEASURES

	Three Months Ended									Nine Months Ended September 30,
(dollar in thousands, except share and per share data)	September 30, 2023			June 30, 2023			September 30, 2022			2023			2022
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)	$	11,426		$	12,099		$	11,571		$	36,338		$	31,526
FTE adjustment		42			56			83			156			228
Net interest income (FTE) (non-GAAP)	$	11,468		$	12,155		$	11,654		$	36,494		$	31,754
Noninterest income (GAAP)		3,482			3,477			3,365			10,380			10,380
Total revenue (FTE) (non-GAAP)	$	14,950		$	15,632		$	15,019		$	46,874		$	42,134
Noninterest expense (GAAP)		12,881			13,147			11,565			38,196			33,368

Average earning assets	$	1,359,721		$	1,322,886		$	1,223,985		$	1,324,847		$	1,234,368
Net interest margin		3.33	%		3.67	%		3.75	%		3.67	%		3.42	%
Net interest margin (FTE) (non-GAAP)		3.35	%		3.69	%		3.78	%		3.68	%		3.44	%

Efficiency ratio		86.40	%		84.41	%		77.43	%		81.76	%		79.62	%
Efficiency ratio (FTE) (non-GAAP)		86.16	%		84.10	%		77.01	%		81.49	%		79.19	%

Tangible Book Value Per Share	September 30, 2023		September 30, 2022		December 31, 2022
Total Stockholders Equity (GAAP)	$	99,526	$	93,512	$	98,734
Less goodwill		1,650		1,650		1,650
Less core deposit intangible		198		242		231
Tangible Stockholders Equity (non-GAAP)	$	97,678	$	91,620	$	96,853

Shares issued and outstanding, including nonvested restricted stock		5,038,066		4,996,728		4,999,083

Book value per share	$	19.75	$	18.71	$	19.75
Tangible book value per share	$	19.39	$	18.34	$	19.37

Index

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of the Company’s management, as well as estimates and assumptions made by, and information available to, management, as of the time such statements are made. These statements are inherently uncertain, and there can be no assurance that the underlying beliefs, estimates, or assumptions will prove to be accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those anticipated by such statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses 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 ACLL and the provision for credit losses and the level of future charge-offs; deposit growth; management’s belief regarding liquidity and capital resources; 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 effect of these policies on interest rates and business in our markets and any changes associated with the current administration

•

conditions in the banking industry and the financial condition and capital adequacy of other participants in the banking industry, and market, supervisory and regulatory reactions thereto

•

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

Index

•

performance of the Company’s dealer lending program

•

the Company’s branch realignment initiatives

•

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 the conflict between Israel and Hamas], 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 control initiatives

•

changes in management

•

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

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.

Controls and Procedures.

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

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

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

Index

Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s third quarter ended September 30, 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.

An investment in the Company’s securities involves risks. In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the information addressed under “Cautionary Statement Regarding Forward-Looking Statements,” investors in the Company’s securities should carefully consider the risk factors discussed in the Company’s 2022 Form 10-K. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.

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, Use of Proceeds, and Issuer Purchases of Equity Securities.

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 September 30, 2023, the Company did not repurchase any shares related to the equity compensation plan awards.

During the nine months ended September 30, 2023, the Company did not have an effective share repurchase program that was authorized by the Company’s Board of Directors.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

None.

Index

Item 6.

Exhibits.

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

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

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

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

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

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

101	The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for September 30, 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 September 30, 2023, formatted in Inline XBRL (included with Exhibit 101)

Index

SIGNATURES

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

	OLD POINT FINANCIAL CORPORATION

Date: November 13, 2023	/s/Robert F. Shuford, Jr.
	Robert F. Shuford, Jr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)

Date: November 13, 2023	/s/Paul M. Pickett
	Paul M. Pickett
	Chief Financial Officer & Senior Vice President/Finance
	(Principal Financial & Accounting Officer)

Old Point Financial - 10-Q quarterly report FY2023 Q3

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