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 SeptemberJune 30, 20172021


or



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


For the transition period from____________ to___________


Commission File Number: 000-12896


OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)


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


1 West Mellen101 East Queen Street, Hampton, Virginia 2366323669
(Address of principal executive offices) (Zip Code)


(757) 728-1200
(Registrant'sRegistrant’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 classTrading SymbolName of each exchange on which registered
Common Stock, $5.00 par value
OPOF
The NASDAQ Stock Market LLC

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


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company," and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
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'sissuer’s classes of common stock, as of the latest practicable date.


5,018,6785,244,635 shares of common stock ($5.00 par value) outstanding as of October 31, 2017August 9, 2021





OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

 
Page
   
Item 1.1
   
 
September as of June 30, 20172021 (unaudited) and December 31, 20162020
1
   
 
Three Months Ended September (unaudited) for the three and six months ended June 30, 20172021 and 2016 (unaudited)
Nine Months Ended September 30, 2017 and 2016 (unaudited)2020
2
   
 
Three Months Ended September (unaudited) for the three and six months ended June 30, 20172021 and 2016 (unaudited)
Nine Months Ended September 30, 2017 and 2016 (unaudited)2020
3
   
 
Nine Months Ended September (unaudited) for the three and six months ended June 30, 20172021 and 2016 (unaudited)2020
4
   
 
Nine Months Ended September (unaudited) for the six months ended June 30, 20172021 and 2016 (unaudited)2020
56
   
 67
   
Item 2.3529
   
Item 3.4742
   
Item 4.4842
   
 PART II - OTHER INFORMATION 
   
Item 1.4842
   
Item 1A.4943
   
Item 2.5043
   
Item 3.5143
   
Item 4.5143
   
Item 5.5143
   
Item 6.5244
   
 5244


i
i


GLOSSARY OF DEFINED TERMS


ALLL
2020 Annual Report on Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2020
ALLL
Allowance for Loan and Lease Losses
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bank
The Old Point National Bank of Phoebus
CET1
The CARES Act
The Coronavirus Aid, Relief, and Economic Security Act
CET1
Common Equity Tier 1
Citizens National
Citizens National Bank
Company
Old Point Financial Corporation and its subsidiaries
CRA
CBB
Community Reinvestment ActBankers Bank
ESPP
CBLR
Community Bank Leverage Ratio
EGRRCPA
Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS
earnings per share
ESPP
Employee Stock Purchase Plan
EVE
Exchange Act
Economic Value
Securities Exchange Act of Equity1934, as amended
FASB
Financial Accounting Standards Board
FHLB
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
FOMCFederal Open Market Committee
Federal Reserve
Board of Governors of the Federal Reserve System
FRB
Federal Reserve Bank
GAAP
Generally Accepted Accounting Principles
Incentive Stock Plan
Old Point Financial Corporation 2016 Incentive Stock Plan
IRS
NIM
Internal Revenue Service
Net Interest Margin
OAEM
Notes
The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031
OAEM
Other Assets Especially Mentioned
OCC
OREO
Office of the Comptroller of the Currency
OPMOld Point Mortgage
OREO
Other Real Estate Owned
Pending Acquisition
PPP
Acquisition of Citizens National pursuant to a definitive merger agreement by and among the Company, the Bank and Citizens National, dated as of October 27, 2017
Paycheck Protection Program
SEC
PPPLF
Paycheck Protection Program Liquidity Facility
SEC
Securities and Exchange Commission
TDR
SBA
Small Business Administration
SOFR
Secured overnight financing rate
TDR
Troubled Debt Restructuring
Trust
Old Point Trust & Financial Services N.A.
VIEVariable Interest Entities





PART I – FINANCIAL INFORMATION

Item 1. 
Item 1.Financial Statements.

Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets


 September 30, 2017  December 31, 2016  June 30, December 31, 
 (dollars in thousands except per share data) 
(dollars in thousands, except share data) 2021
 2020
 
 (unaudited)   *  (unaudited)   
Assets            
            
Cash and due from banks $12,496  $21,885  
$
21,118
 
$
21,799
 
Interest-bearing due from banks  1,648   1,667  
134,377
 
98,633
 
Federal funds sold  1,291   2,302   
3
  
5
 
Cash and cash equivalents  15,435   25,854  
155,498
 
120,437
 
Securities available-for-sale, at fair value  164,112   199,365  
213,211
 
186,409
 
Restricted securities, at cost  2,890   970  
1,033
 
1,367
 
Loans held for sale, at fair value  981   - 
Loans held for investment, net of allowance for loan losses of $8,951 and $8,245  692,045   595,637 
Loans held for sale 
2,284
 
14,413
 
Loans, net 
823,200
 
826,759
 
Premises and equipment, net  37,750   39,324  
32,419
 
33,613
 
Premises and equipment, held for sale 
871
 
0
 
Bank-owned life insurance  25,802   25,206  
28,817
 
28,386
 
Other real estate owned, net of valuation allowance  -   1,067 
Goodwill 
1,650
 
1,650
 
Core deposit intangible, net 
297
 
319
 
Other assets  15,482   15,543  
15,531
 
12,838
 
Total assets $954,497  $902,966  
$
1,274,811
 
$
1,226,191
 
             
Liabilities & Stockholders' Equity        
Liabilities & Stockholders’ Equity     
             
Deposits:             
Noninterest-bearing deposits $223,442  $228,641  
$
398,908
 
$
360,602
 
Savings deposits  344,654   344,452  
555,744
 
512,936
 
Time deposits  214,349   211,409  
179,365
 
193,698
 
Total deposits  782,445   784,502  
1,134,017
 
1,067,236
 
Federal funds purchased  2,000   - 
Overnight repurchase agreements  21,885   18,704  
12,239
 
6,619
 
Federal Home Loan Bank advances  45,000   - 
Federal Reserve Bank borrowings 
3,313
 
28,550
 
Other borrowings 
0
 
1,350
 
Accrued expenses and other liabilities  5,526   5,770   
5,314
  
5,291
 
Total liabilities  856,856   808,976  
1,154,883
 
1,109,046
 
             
Commitments and contingencies        
        
Stockholders' equity:        
Common stock, $5 par value, 10,000,000 shares authorized; 5,009,630 and 4,961,258 shares outstanding (includes 2,245 and zero shares of nonvested restricted stock)  25,037   24,806 
Stockholders’ equity:     
Common stock, $5 par value, 10,000,000 shares authorized; 5,244,635 and 5,224,019 shares outstanding (includes 39,103 and 29,576 of nonvested restricted stock, respectively)
 
26,028
 
25,972
 
Additional paid-in capital  17,112   16,427  
21,372
 
21,245
 
Retained earnings  58,179   56,965  
69,457
 
65,859
 
Accumulated other comprehensive loss, net  (2,687)  (4,208)
Total stockholders' equity  97,641   93,990 
Total liabilities and stockholders' equity $954,497  $902,966 
Accumulated other comprehensive income, net 
3,071
 
4,069
 
Total stockholders’ equity  
119,928
  
117,145
 
Total liabilities and stockholders’ equity 
$
1,274,811
 
$
1,226,191
 


See Notes to Consolidated Financial Statements.
*  Derived from audited Consolidated Financial Statements
- 1 -


Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income


 Three Months Ended September 30,  Nine Months Ended September 30,  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016 
 (unaudited, dollars in thousands except per share data) 
(unaudited, dollars in thousands, except per share data) 2021
  2020
  2021
  2020
 
Interest and Dividend Income:                        
Interest and fees on loans $7,642  $6,646  $21,532  $19,619 
Interest on due from banks  4   25   12   30 
Interest on federal funds sold  1   2   6   4 
Interest on securities:                
Loans, including fees 
$
8,814
  
$
8,924
  
$
18,768
  
$
17,751
 
Due from banks  
52
   
32
   
95
   
183
 
Federal funds sold  
0
   
0
   
0
   
12
 
Securities:                
Taxable  487   357   1,474   1,376   
791
   
712
   
1,561
   
1,576
 
Tax-exempt  385   371   1,232   1,131   
191
   
137
   
372
   
223
 
Dividends and interest on all other securities  49   35   98   76   
11
   
43
   
41
   
89
 
Total interest and dividend income  8,568   7,436   24,354   22,236   
9,859
   
9,848
   
20,837
   
19,834
 
                                
Interest Expense:                                
Interest on savings deposits  103   56   240   165 
Interest on time deposits  560   538   1,599   1,572 
Interest on federal funds purchased, securities sold under agreements to repurchase and other borrowings  13   6   26   20 
Interest on Federal Home Loan Bank advances  161   33   233   177 
Checking and savings deposits  
235
   
298
   
450
   
638
 
Time deposits  
511
   
883
   
1,095
   
1,855
 
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
  
7
   
15
   
30
   
37
 
Federal Home Loan Bank advances  
0
   
179
   
0
   
413
 
Total interest expense  837   633   2,098   1,934   
753
   
1,375
   
1,575
   
2,943
 
Net interest income  7,731   6,803   22,256   20,302   
9,106
   
8,473
   
19,262
   
16,891
 
Provision for (recovery of) loan losses  1,275   (100)  2,925   1,300 
Net interest income, after provision for (recovery of) loan losses  6,456   6,903   19,331   19,002 
Provision for loan losses  
0
   
300
   
150
   
600
 
Net interest income after provision for loan losses  
9,106
   
8,173
   
19,112
   
16,291
 
                                
Noninterest Income:                                
Income from fiduciary activities  903   858   2,820   2,636 
Fiduciary and asset management fees  
1,051
   
909
   
2,078
   
1,926
 
Service charges on deposit accounts  1,001   1,039   2,844   3,035   
700
   
615
   
1,388
   
1,510
 
Other service charges, commissions and fees  1,050   968   3,141   3,019   
1,120
   
980
   
2,068
   
1,923
 
Income from bank-owned life insurance  198   215   595   647 
Income from mortgage banking activities  172   187   462   276 
Bank-owned life insurance income  
204
   
192
   
430
   
423
 
Mortgage banking income  
381
   
223
   
1,569
   
380
 
Gain on sale of available-for-sale securities, net  2   7   89   522   
0
   
184
   
0
   
184
 
Gain on acquisition of Old Point Mortgage  -   -   550   - 
Gain on sale of fixed assets  
0
   
818
   
0
   
818
 
Other operating income  35   53   114   143   
82
   
37
   
139
   
72
 
Total noninterest income  3,361   3,327   10,615   10,278   
3,538
   
3,958
   
7,672
   
7,236
 
                                
Noninterest Expense:                                
Salaries and employee benefits  5,104   5,063   15,650   15,107   
6,227
   
5,464
   
12,454
   
11,458
 
Occupancy and equipment  1,444   1,373   4,347   4,121   
1,123
   
1,188
   
2,325
   
2,454
 
Data processing  473   419   1,328   1,276   
1,197
   
804
   
2,240
   
1,623
 
FDIC insurance  128   66   322   387 
Customer development  153   146   451   450   
69
   
71
   
147
   
185
 
Legal and audit expenses  216   372   604   869 
Other outside service fees  292   200   797   561 
Professional services  
620
   
590
   
1,165
   
1,065
 
Employee professional development  196   147   651   474   
192
   
93
   
333
   
313
 
Loan expenses  302   46   483   103 
Capital stock tax  141   128   422   390 
Other taxes  
171
   
158
   
422
   
308
 
ATM and other losses  103   131   435   301   
17
   
60
   
156
   
158
 
Prepayment fee on Federal Home Loan Bank advance  -   -   -   391 
Loss (gain) on other real estate owned  -   45   (18)  153 
Other operating expenses  564   553   1,620   1,682   
919
   
776
   
1,851
   
1,670
 
Total noninterest expense  9,116   8,689   27,092   26,265   
10,535
   
9,204
   
21,093
   
19,234
 
Income before income taxes  701   1,541   2,854   3,015   
2,109
   
2,927
   
5,691
   
4,293
 
Income tax expense (benefit)  (56)  212   (6)  113 
Income tax expense  
267
   
433
   
837
   
549
 
Net income $757  $1,329  $2,860  $2,902  
$
1,842
  
$
2,494
  
$
4,854
  
$
3,744
 
                                
Basic earnings per share                
Basic Earnings per Share:                
Weighted average shares outstanding  4,993,805   4,959,009   4,985,135   4,959,009   
5,237,479
   
5,220,137
   
5,231,026
   
5,210,139
 
Net income per share of common stock $$0.15  $$0.27  $$0.57  $$0.59  
$
0.35
  
$
0.48
  
$
0.93
  
$
0.72
 
                                
Diluted earnings per share                
Diluted Earnings per Share:                
Weighted average shares outstanding  5,003,785   4,959,009   4,997,231   4,959,009   
5,237,479
   
5,220,262
   
5,231,026
   
5,210,573
 
Net income per share of common stock $$0.15  $$0.27  $$0.57  $$0.59  
$
0.35
  
$
0.48
  
$
0.93
  
$
0.72
 


See Notes to Consolidated Financial Statements.

-

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income


Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
2017  2016  2017  2016 
(unaudited, dollars in thousands) 2021  2020  2021  2020 
(unaudited, dollars in thousands)             
Net income $757  $1,329  $2,860  $2,902  
$
1,842
  
$
2,494
  
$
4,854
  
$
3,744
 
Other comprehensive income (loss), net of tax                                
Net unrealized gain (loss) on available-for-sale securities  57   (299)  1,521   1,877   
696
   
4,021
   
(998
)
  
3,576
 
Reclassification for gain included in net income  
0
   
(145
)
  
0
   
(145
)
Other comprehensive income (loss), net of tax  
696
   
3,876
   
(998
)
  
3,431
 
Comprehensive income $814  $1,030  $4,381  $4,779  
$
2,538
  
$
6,370
  
$
3,856
  
$
7,175
 


See Notes to Consolidated Financial Statements.

-

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

  
Shares of
Common
Stock
  
Common
Stock
  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Loss
  Total 
  (unaudited, dollars in thousands except per share data) 
NINE MONTHS ENDED SEPTEMBER 30, 2017             
                   
Balance at beginning of period  4,961,258  $24,806  $16,427  $56,965  $(4,208) $93,990 
Net income  -   -   -   2,860   -   2,860 
Other comprehensive income, net of tax  -   -   -   -   1,521   1,521 
Exercise of stock options  48,287   241   727   -   -   968 
Employee Stock Purchase Plan share issuance  2,523   13   58   -   -   71 
Repurchase of common stock related to stock option exercises  (4,683)  (23)  (109)  -   -   (132)
Stock-based compensation expense  -   -   9   -   -   9 
Cash dividends ($0.33 per share)  -   -   -   (1,646)  -   (1,646)
                         
Balance at end of period  5,007,385  $25,037  $17,112  $58,179  $(2,687) $97,641 
                  
                  
NINE MONTHS ENDED SEPTEMBER 30, 2016                 
                         
Balance at beginning of period  4,959,009  $24,795  $16,392  $55,151  $(3,162) $93,176 
Net income  -   -   -   2,902   -   2,902 
Other comprehensive income, net of tax  -   -   -   -   1,877   1,877 
Cash dividends ($0.30 per share)  -   -   -   (1,488)  -   (1,488)
                         
Balance at end of period  4,959,009  $24,795  $16,392  $56,565  $(1,285) $96,467 


See Notes to Consolidated Financial Statements.
(unaudited, dollars in thousands, except share and per share data) Shares of Common Stock  Common Stock  Additional Paid-in Capital  Retained Earnings  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
THREE MONTHS ENDED JUNE 30, 2021                  
                   
Balance at March 31, 2020  5,195,719  $25,979  $21,324  $68,245  $2,375  $117,923 
Net income  -   0   0   1,842   0   1,842 
Other comprehensive income, net of tax  -   0   0   0   696   696 
Employee Stock Purchase Plan share issuance  1,292   6   22   0   0   28 
Restricted stock vested  8,521   43   (43)  0   0   0 
Stock-based compensation expense  -   0   69   0   0   69 
Cash dividends ($0.12 per share)  -   0   0   (630)  0   (630)
                         
Balance at end of period  5,205,532  $26,028  $21,372  $69,457  $3,071  $119,928 
                         
THREE MONTHS ENDED JUNE 30, 2020                        
                         
Balance at March 31, 2019  5,188,221  $25,941  $21,026  $63,601  $(524) $110,044 
Net income  -   0   0   2,494   0   2,494 
Other comprehensive loss, net of tax  -   0   0   0   3,876   3,876 
Employee Stock Purchase Plan share issuance  1,735   9   16   0   0   25 
Restricted stock vested  1,261   6   (6)  0   0   0 
Stock-based compensation expense  -   0   57   0   0   57 
Cash dividends ($0.12 per share)  -   0   0   (627)  0   (627)
                         
Balance at end of period  5,191,217  $25,956  $21,093  $65,468  $3,352  $115,869 

-
4 -


Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
 (unaudited, dollars in thousands, except share and per share data) Shares of Common Stock  Common Stock
  Additional Paid-in Capital
  Retained Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total
 
SIX MONTHS ENDED JUNE 30, 2021                  
                   
Balance at December 31, 2020  5,194,443  $25,972  $21,245  $65,859  $4,069  $117,145 
Net income  -   0   0   4,854   0   4,854 
Other comprehensive loss, net of tax  -   0   0   0   (998)  (998)
Employee Stock Purchase Plan share issuance  2,568   13   40   0   0   53 
Restricted stock vested  8,521   43   (43)  0   0   0 
Stock-based compensation expense  -   0   130   0   0   130 
Cash dividends ($0.24 per share)  -   0   0   (1,256)  0   (1,256)
                         
Balance at end of period  5,205,532  $26,028  $21,372  $69,457  $3,071  $119,928 
                         
SIX MONTHS ENDED JUNE 30, 2020                        
                         
Balance at December 31, 2019  5,180,105  $25,901  $20,959  $62,975  $(79) $109,756 
Net income  -   0   0   3,744   0   3,744 
Other comprehensive income, net of tax  -   0   0   0   3,431   3,431 
Employee Stock Purchase Plan share issuance  2,593   13   33   0   0   46 
Restricted stock vested  8,519   42   (42)  0   0   0 
Stock-based compensation expense  -   0   143   0   0   143 
Cash dividends ($0.24 per share)  -   0   0   (1,251)  0   (1,251)
                         
Balance at end of period  5,191,217  $25,956  $21,093  $65,468  $3,352  $115,869 

See Notes to Consolidated Financial Statements.

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows


 Nine Months Ended September 30,  Six Months Ended June 30, 
 2017  2016 
 (unaudited, dollars in thousands) 
(unaudited, dollars in thousands) 2021
  2020
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income $2,860  $2,902  
$
4,854
  
$
3,744
 
Adjustments to reconcile net income to net cash provided by operating activities:        
Adjustments to reconcile net income to net cash (used in) provided by operating activities:Adjustments to reconcile net income to net cash (used in) provided by operating activities:     
Depreciation and amortization  2,081   2,034   
1,052
   
1,070
 
Amortization of right of use lease asset  
185
   
179
 
Accretion related to acquisition, net  
(7
)
  
(40
)
Provision for loan losses  2,925   1,300   
150
   
600
 
Net gain on sale of available-for-sale securities  (89)  (522)
Net amortization of securities  1,727   1,595   
438
   
300
 
(Increase) in loans held for sale  (981)  - 
Net (gain) loss on disposal of premises and equipment  4   (3)
Net (gain) loss on write-down/sale of other real estate owned  (18)  153 
Decrease (increase) in loans held for sale, net  
12,129
   
(2,904
)
Income from bank owned life insurance  (595)  (647)  
(430
)
  
(423
)
Stock compensation expense  9   -   
130
   
143
 
Deferred tax benefit  (171)  (256)  
(12
)
  
(1,030
)
Increase in other assets  (552)  (942)
Increase (decrease) in other liabilities  (244)  363 
Net cash provided by operating activities  6,956   5,977 
(Decrease) in other assets  
(2,602
)
  
(201
)
Increase (decrease) in accrued expenses and other liabilities  
23
   
(1,012
)
Net cash provided by (used in) operating activities  
15,910
   
(576
)
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of available-for-sale securities  (25,220)  (104,082)  
(49,310
)
  
(30,891
)
Proceeds from redemption (cash used in purchases) of restricted securities, net  (1,920)  196 
Proceeds from redemption (purchase) of restricted securities, net  
334
   
(226
)
Proceeds from maturities and calls of available-for-sale securities  46,625   42,330   
8,280
   
5,316
 
Proceeds from sales of available-for-sale securities  7,030   106,761   
3,130
   
9,385
 
Paydowns on available-for-sale securities  7,484   8,734   
9,397
   
5,831
 
(Purchases) paydowns of consumer installment loans, net  (7,275)  - 
Net increase in all other loans (including repayments on student loans)  (92,058)  (26,703)
Proceeds from sales of other real estate owned  1,084   1,625 
Payments for improvements to other real estate owned  -   (52)
Net decrease (increase) in loans held for investment  
3,438
   
(109,499
)
Purchases of premises and equipment  (510)  (710)  
(760
)
  
(662
)
Net cash provided by (used in) investing activities  (64,760)  28,099 
Proceeds from sale of premises and equipment
  31   1,297 
Net cash used in investing activities  
(25,460
)
  
(119,449
)
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Increase (decrease) in noninterest-bearing deposits  (5,199)  10,930 
Increase in noninterest-bearing deposits
  
38,306
   
81,165
 
Increase in savings deposits  202   3,818   
42,808
   
60,359
 
Increase in time deposits  2,940   3,278 
Increase (decrease) in federal funds purchased and repurchase agreements, net  5,181   (7,711)
Decrease in time deposits  
(14,333
)
  
(19,100
)
Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net  
4,270
   
(3,780
)
Increase in Federal Home Loan Bank advances  120,000   55,000   
0
   
25,000
 
Repayment of Federal Home Loan Bank advances  (75,000)  (60,000)  
0
   
(20,000
)
Proceeds from exercise of stock options and ESPP issuance  1,039   - 
Repurchase and retirement of common stock  (132)  - 
Increase in Federal Reserve Bank borrowings
  0   37,515 
Repayment of Federal Reserve Bank borrowings  
(25,237
)
  
(175
)
Proceeds from ESPP issuance  
53
   
46
 
Cash dividends paid on common stock  (1,646)  (1,488)  
(1,256
)
  
(1,251
)
Net cash provided by financing activities  47,385   3,827   
44,611
   
159,779
 
                
Net increase (decrease) in cash and cash equivalents  (10,419)  37,903 
Net increase in cash and cash equivalents
  
35,061
   
39,754
 
Cash and cash equivalents at beginning of period  25,854   36,990   
120,437
   
89,865
 
Cash and cash equivalents at end of period $15,435  $74,893  
$
155,498
  
$
129,619
 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash payments for:                
Interest $2,029  $1,948  
$
1,693
  
$
3,059
 
Income tax $750  $- 
                
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS                
Unrealized gain on securities available-for-sale $2,305  $2,844 
Former bank property transferred from fixed assets to foreclosed properties $-  $127 
Unrealized (loss) gain on securities available-for-sale 
$
3,887
  
$
4,343
 
Loans transferred to other real estate owned 
$
0
  
$
254
 
Former bank property transferred from fixed assets to held for sale assets 
$
902
  
$
0
 
Right of use lease asset and liability 
$
1,277
  
$
789
 


See Notes to Consolidated Financial Statements.
- 5 -6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. GeneralAccounting Policies


The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (NASDAQ: OPOF) (the Company) and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at SeptemberJune 30, 20172021 and December 31, 2016,2020, the statements of income, and comprehensive income, and changes in stockholders’ equity for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, and the statements of changes in stockholders' equity and cash flows for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.


These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). Also included are the accounts of Old Point Mortgage, LLC (OPM) which became a wholly-owned subsidiary of the Bank in the second quarter of 2017. All significant intercompany balances and transactions have been eliminated in consolidation.


NATURE OF OPERATIONS

Old Point Financial Corporation is a holding company that conducts substantially all of its operations through two2 subsidiaries, the Bank and Trust. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of SeptemberJune 30, 2017,2021, the Bank had 1816 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 its subsidiary, OPM. Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Trust offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.

SUBSEQUENT EVENTS

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

On March 27, 2020, the CARES Act was enacted, which included provisions that, among other things, (i) established the PPP to provide loans guaranteed by the SBA to businesses affected by the pandemic, (ii) provided certain forms of economic stimulus, including direct payments to certain U.S. households, enhanced unemployment benefits, certain income tax benefits intended to assist businesses in surviving the economic crisis, and delayed the required implementation of certain new accounting standards for some entities, and (iii) provided limited regulatory relief to banking institutions. The federal banking agencies have eased certain bank capital requirements and reporting requirements in response to the pandemic, and have encouraged banking institutions to work prudently with ASC 855-10, "Subsequent Events,"borrowers affected by the pandemic by offering loan modifications that can improve borrowers’ capacity to service debt, increase the potential for financially stressed residential borrowers to keep their homes, and facilitate financial institutions’ ability to collect on their loans. The Federal Reserve also established the PPPLF to provide funding to eligible financial institutions to facilitate lending under the PPP. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, expanded on some of the benefits made available under the CARES Act, including the PPP program, and provided further economic stimulus. On March 11, 2021, President Biden signed into law the American Rescue Plan which provided a further $1.9 trillion of pandemic relief.

The Company’s business, financial condition and results of operations generally rely upon the ability of its borrowers to repay their loans, the value of collateral underlying secured loans, and the demand for loans and other products and services offered, which are highly dependent on the business environment in the Company’s primary markets. As of June 30,2021, the Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two typeshad loan modifications of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date$54 thousand down from approximately $7.4 million as of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.December 31,2020.

On October 27, 2017, the Company and the Bank entered into a definitive Agreement and Plan of Reorganization with Citizens National Bank (OTC Pink: CNBV) (Citizens National) pursuant to which the Company will acquire Citizens National in a stock and cash transaction for total consideration valued at approximately $7.9 million (the Pending Acquisition), based on a volume-weighted average price of $31.48 for Old Point common stock for the three trading days ended October 27, 2017. Upon the closing of the Pending Acquisition, Citizens National will merge into the Bank with the Bank as the surviving entity. The Pending Acquisition  has been unanimously approved by the boards of directors of the Company, the Bank and Citizens National. The Pending Acquisition  is expected to be completed in first quarter of 2018, subject to the approval of Citizens National shareholders as well as customary regulatory approvals and other closing conditions.
- 6 -

7



RECENT ACCOUNTING PRONOUNCEMENTS

During February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements. As the Company owns the majority of its buildings, management does not anticipate that the ASU will have a material impact.

DuringIn June 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2016-13, "Financial Instruments—“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments."  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendmentsFASB has issued multiple updates to ASU No. 2016-13 as codified in thisTopic 326, including ASU are effectiveNo. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11, ASU No. 2020-02, and ASU No. 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) filersand all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2022.  The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and has formed a committee to oversee the adoption of the new standard. The ALLL model currently in use by the Company already provides it with the ability to archive prior period information and contains loan balance and charge-off information beginning with September 30, 2011. The committeestandard, has reviewed the data included in each monthly archive file and has added fields to enhance its data analysis capabilities under the new standard.

During August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied usingengaged a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

During January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this ASU clarify the definition of a business with the objective of adding guidancethird party to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation, guidancehas performed data fit gap and loss driver analyses, intends to run parallel models beginning in Topic 805, there are three elements of a business—inputs, processes,2022, and outputs. While an integrated set of assets and activities (collectively referredis continuing to as a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements. The Company's pending merger with Citizens National Bank will be accounted for under the acquisition accounting guidance.
- 7 -


During January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU No. 201708, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 31020), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessingevaluate the impact that ASU 201708No. 2016-13 will have on its consolidated financial statements.

During May 2017,

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

Other accounting standards that have been adopted by the Company or issued by the FASB issued ASU 201709, "Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statementsor other standards-setting bodies have not yet been issued. The Company isor are not currently assessing the impact that ASU 2017‐08 will have on its consolidated financial statements.

During August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."  The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes.  Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update.   The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018.  Early adoption is permitted, including adoption in any interim period.  The Company does not expect the adoption of ASU 2017-12expected to have a material impacteffect on its consolidatedthe Company’s financial statements.position, results of operations or cash flows.

- 8 -




Note 2. Securities




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


  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
  (in thousands) 
September 30, 2017            
Obligations of  U.S. Government agencies $9,574  $11  $(92) $9,493 
Obligations of state and political subdivisions  67,815   771   (152)  68,434 
Mortgage-backed securities  78,436   -   (1,120)  77,316 
Money market investments  1,169   -   -   1,169 
Corporate bonds and other securities  7,349   166   (5)  7,510 
Other marketable equity securities  100   90   -   190 
Total $164,443  $1,038  $(1,369) $164,112 
                 
December 31, 2016                
U.S. Treasury securities $20,000  $-  $-  $20,000 
Obligations of  U.S. Government agencies  9,361   -   (166)  9,195 
Obligations of state and political subdivisions  78,645   358   (1,016)  77,987 
Mortgage-backed securities  85,649   18   (1,973)  83,694 
Money market investments  647   -   -   647 
Corporate bonds and other securities  7,598   92   (12)  7,678 
Other marketable equity securities  100   64   -   164 
Total $202,000  $532  $(3,167) $199,365 


  June 30, 2021
 
  (Dollars in thousands) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Fair
Value
 
U.S. Treasury securities 
$
9,052
  
$
0
  
$
(62
)
 
$
8,990
 
Obligations of U.S. Government agencies  
38,636
   
226
   
(45
)
  
38,817
 
Obligations of state and political subdivisions  
51,224
   
2,224
   
(176
)
  
53,272
 
Mortgage-backed securities  
83,475
   
1,943
   
(393
)
  
85,025
 
Money market investments  
3,893
   
0
   
0
   
3,893
 
Corporate bonds and other securities  
23,043
   
219
   
(48
)
  
23,214
 
  
$
209,323
  
$
4,612
  
$
(724
)
 
$
213,211
 


  December 31, 2020
 
  (Dollars in thousands) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Fair
Value
 
U.S. Treasury securities 
$
6,980
  
$
63
  
$
0
  
$
7,043
 
Obligations of U.S. Government agencies  
36,858
   
35
   
(197
)
  
36,696
 
Obligations of state and political subdivisions  
43,517
   
2,478
   
0
   
45,995
 
Mortgage-backed securities  
70,866
   
2,759
   
(124
)
  
73,501
 
Money market investments  
4,743
   
0
   
0
   
4,743
 
Corporate bonds and other securities  
18,295
   
158
   
(22
)
  
18,431
 
  
$
181,259
  
$
5,493
  
$
(343
)
 
$
186,409
 



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



The Company has not recorded impairment charges through income on securities for the three or ninesix months ended SeptemberJune 30, 20172021 or the year ended December 31, 2016.2020.




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


  June 30, 2021
 
 
(Dollars in thousands)
 
Amortized
Cost
  
Fair
Value
 
Due in one year or less $300  $302 
Due after one year through five years  9,929   10,073 
Due after five through ten years  56,897   58,317 
Due after ten years  138,304   140,626 
Other securities, restricted  3,893   3,893 
  $209,323  $213,211 



The following table summarizes the net realized gains and losses on the sale of investment securities duringduing the periods indicated:

 Three Months Ended Nine Months Ended 
 September 30, September 30, 
 2017 2016 2017 2016 
Securities Available-for-sale        
Realized gains on sales of securities $2  $24  $89  $578 
Realized losses on sales of securities  -   (17)  -   (56)
Net realized gain $2  $7  $89  $522 
- 9 -


   
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2021  2020  2021  2020 
Securities Available-for-sale            
Realized gains on sales of securities 
$
0
  
$
185
  
$
0
  
$
185
 
Realized losses on sales of securities  
0
   
(1
)
  
0
   
(1
)
Net realized gain 
$
0
  
$
184
  
$
0
  
$
184
 





The following table shows the number of securities with unrealized losses, andtables show the gross unrealized losses and fair value of the Company'sCompany’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of SeptemberJune 30, 20172021 and December 31, 2016,2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:

September 30, 2017 
 Less Than Twelve Months More Than Twelve Months  Total 
September 30, 2017
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
  
Gross
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
 (dollars in thousands) 
Securities Available-for-Sale              
Obligations of U.S. Government agencies $10  $4,393  $82  $3,120  $92  $7,513   11 
Obligations of state and political subdivisions  80   5,006   72   6,898   152   11,904   15 
Mortgage-backed securities  257   32,054   863   45,262   1,120   77,316   24 
Corporate bonds  1   1,299   4   295   5   1,594   10 
Total securities available-for-sale $348  $42,752  $1,021  $55,575  $1,369  $98,327   60 

December 31, 2016 
 Less Than Twelve Months More Than Twelve Months Total 
December 31, 2016
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
 (dollars in thousands) 
Securities Available-for-Sale              
Obligations of U.S. Government agencies $166  $9,195  $-  $-  $166  $9,195   6 
Obligations of state and political subdivisions  1,016   38,020   -   -   1,016   38,020   56 
Mortgage-backed securities  1,973   80,680   -   -   1,973   80,680   23 
Corporate bonds  11   1,787   1   100   12   1,887   13 
Total securities available-for-sale $3,166  $129,682  $1  $100  $3,167  $129,782   98 



  June 30, 2021 
  Less than 12 months  12 months or more  Total 
  (Dollars in thousands) 
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
 
U.S. Treasury securities 
$
62
  
$
8,990
  
$
0
  
$
0
  
$
62
  
$
8,990
 
Obligations of U.S. Government agencies  
10
   
3,908
   
35
   
5,674
   
45
   
9,582
 
Obligations of state and political subdivisions  
176
   
10,181
   
0
   
0
   
176
   
10,181
 
Mortgage-backed securities  
334
   
17,669
   
59
   
4,481
   
393
   
22,150
 
Corporate bonds and other securities  
48
   
7,202
   
0
   
0
   
48
   
7,202
 
Total securities available-for-sale 
$
630
  
$
47,950
  
$
94
  
$
10,155
  
$
724
  
$
58,105
 


  December 31, 2020 
  Less than 12 months  12 months or more  Total 
  (Dollars in thousands) 
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
 
Obligations of U.S. Government agencies 
$
8
  
$
2,810
  
$
189
  
$
17,191
  
$
197
  
$
20,001
 
Mortgage-backed securities  
118
   
14,291
   
6
   
1,285
   
124
   
15,576
 
Corporate bonds and other securities  
22
   
5,977
   
0
   
0
   
22
   
5,977
 
Total securities available-for-sale 
$
148
  
$
23,078
  
$
195
  
$
18,476
  
$
343
  
$
41,554
 



The number of investments in an unrealized loss position as of June 30, 2021 and December 31, 2020 were 37 and 29, respectively. Certain investments within the Company'sCompany’s portfolio had unrealized losses for more than twelve months at SeptemberJune 30, 20172021 and December 31, 2016,2020, as shown in the tables above. The unrealized losses were caused by increaseschanges in market interest rates.rates and not a result of credit deterioration. Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at SeptemberJune 30, 20172021 or December 31, 2016.2020.




Restricted Securities

The restricted security category is comprised of stock in the Federal Home Loan Bank of Atlanta (FHLB) and, the Federal Reserve Bank (FRB), and Community Bankers’ Bank (CBB). These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB, FRB, and FRBCBB stock isare 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.

-
10 -



Note 3. Loans and the Allowance for Loan Losses



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


  September 30, 2017  December 31, 2016 
  (in thousands) 
Mortgage loans on real estate:      
Residential 1-4 family $100,746  $94,827 
Commercial  281,628   285,429 
Construction  23,715   23,116 
Second mortgages  17,557   17,128 
Equity lines of credit  54,029   51,024 
Total mortgage loans on real estate  477,675   471,524 
Commercial and industrial loans  60,003   54,434 
Consumer automobile loans  94,041   10,407 
Other consumer loans  56,386   48,500 
Other  12,891   19,017 
Total loans, net of deferred fees (1)  700,996   603,882 
Less: Allowance for loan losses  (8,951)  (8,245)
Loans, net of allowance and deferred fees and costs (1) $692,045  $595,637 

(dollars in thousands) June 30, 2021  December 31, 2020 
Mortgage loans on real estate:      
Residential 1-4 family 
$
117,887
  
$
122,800
 
Commercial - owner occupied  
171,881
   
153,955
 
Commercial - non-owner occupied  
165,460
   
162,896
 
Multifamily  
20,880
   
22,812
 
Construction  
50,814
   
43,732
 
Second mortgages  
9,707
   
11,178
 
Equity lines of credit  
51,238
   
50,746
 
Total mortgage loans on real estate  
587,867
   
568,119
 
Commercial and industrial loans  
119,911
   
141,746
 
Consumer automobile loans  
79,544
   
80,390
 
Other consumer loans  
36,990
   
37,978
 
Other (1)
  
8,361
   
8,067
 
Total loans, net of deferred fees  
832,673
   
836,300
 
Less:  Allowance for loan losses  
9,473
   
9,541
 
Loans, net of allowance and deferred fees (2)
 
$
823,200
  
$
826,759
 
(1) Net deferred loan fees totaled $874

(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 $254 thousand and $271 thousand at June 30, 2021 and December 31, 2020, respectively.
(2)
Net deferred loan fees totaled $2.4 million and $2.1 million at June 30, 2021 and December 31, 2020, respectively.

Acquired Loans
The outstanding principal balance and $522 thousand at Septemberthe carrying amount of total acquired loans included in the consolidated balance sheets as of June 30, 20172021 and December 31, 2016, respectively.2020 are as follows:


Overdrawn deposit accounts are reclassified
(dollars in thousands) June 30, 2021  December 31, 2020 
Outstanding principal balance $6,500  $8,671 
Carrying amount  6,460   8,602 



The Company did 0t have any outstanding principal balance or related carrying amount of purchased credit-impaired loans as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $728 thousand and $536 thousand at Septemberof June 30, 20172021 and December 31, 2016, respectively.2020. The following table presents changes in the accretable yield on purchased credit-impaired loans, for which the Company applies FASB ASC 310-30, at June 30, 2021 and 2020:



(dollars in thousands) June 30, 2021  June 30, 2020 
Balance at January 1 $0  $72 
Accretion  0   (19
)
Balance at end of period $0  $53 



CREDIT QUALITY INFORMATION


The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company'sCompany’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'sCompany’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.
Pass: Loans are of acceptable risk.
  • 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.
  • - 11 -
    Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.
    Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.
    Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.
    Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.



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

    Credit Quality Information 
    As of September 30, 2017 
    (in thousands) 
      Pass  OAEM  Substandard  Doubtful  Total 
    Mortgage loans on real estate:               
    Residential 1-4 family $98,829  $-  $1,917  $-  $100,746 
    Commercial  256,898   11,696   13,034   -   281,628 
    Construction  22,920   74   721   -   23,715 
    Second mortgages  16,952   446   159   -   17,557 
    Equity lines of credit  53,686   -   343   -   54,029 
    Total mortgage loans on real estate  449,285   12,216   16,174   -   477,675 
    Commercial and industrial loans  58,192   1,037   774   -   60,003 
    Consumer automobile loans  93,984   -   57   -   94,041 
    Other consumer loans  56,336   -   50   -   56,386 
    Other  12,891   -   -   -   12,891 
    Total $670,688  $13,253  $17,055  $-  $700,996 

    Credit Quality Information 
    As of December 31, 2016 
    (in thousands) 
      Pass  OAEM  Substandard  Doubtful  Total 
    Mortgage loans on real estate:               
    Residential 1-4 family $92,458  $1,138  $1,231  $-  $94,827 
    Commercial  260,948   10,014   14,467   -   285,429 
    Construction  22,219   162   735   -   23,116 
    Second mortgages  16,445   475   208   -   17,128 
    Equity lines of credit  50,387   500   137   -   51,024 
    Total mortgage loans on real estate  442,457   12,289   16,778   -   471,524 
    Commercial and industrial loans  49,979   2,278   2,177   -   54,434 
    Consumer automobile loans  10,407   -   -   -   10,407 
    Other consumer loans  48,334   -   166   -   48,500 
    Other  19,017   -   -   -   19,017 
    Total $570,194  $14,567  $19,121  $-  $603,882 
    - 12 -




    Credit Quality Information 
    As of June 30, 2021 
    (dollars in thousands) Pass  OAEM  Substandard  Doubtful  Total 
    Mortgage loans on real estate:               
    Residential 1-4 family $117,714  $0  $173  $0  $117,887 
    Commercial - owner occupied  168,615   2,422   844   0   171,881 
    Commercial - non-owner occupied  164,549   726   185   0   165,460 
    Multifamily  20,880   0   0   0   20,880 
    Construction  49,574   1,110   130   0   50,814 
    Second mortgages  9,707   0   0   0   9,707 
    Equity lines of credit  51,238   0   0   0   51,238 
    Total mortgage loans on real estate $582,277  $4,258  $1,332  $0  $587,867 
    Commercial and industrial loans  119,607   304   0   0   119,911 
    Consumer automobile loans  79,263   0   281   0   79,544 
    Other consumer loans  36,990   0   0   0   36,990 
    Other  8,361   0   0   0   8,361 
    Total $826,498  $4,562  $1,613  $0  $832,673 


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


    AGE ANALYSIS OF PAST DUE LOANS BY CLASS


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

    Age Analysis of Past Due Loans as of September 30, 2017 
      
    30 - 59
    Days Past
    Due
      
    60 - 89
    Days Past
    Due
      
    90 or More
    Days Past
    Due
      
    Total Past
    Due
      
    Total
    Current
    Loans (1)
      
    Total
    Loans
      
    Recorded
    Investment
    > 90 Days
    Past Due
    and
    Accruing
     
      (in thousands) 
    Mortgage loans on real estate:                     
    Residential 1-4 family $869  $-  $621  $1,490  $99,256  $100,746  $52 
    Commercial  169   984   3,530   4,683   276,945   281,628   974 
    Construction  204   -   -   204   23,511   23,715   - 
    Second mortgages  79   -   -   79   17,478   17,557   - 
    Equity lines of credit  49   -   53   102   53,927   54,029   - 
    Total mortgage loans on real estate  1,370   984   4,204   6,558   471,117   477,675   1,026 
    Commercial loans  853   154   1,226   2,233   57,770   60,003   473 
    Consumer automobile loans  266   44   16   326   93,715   94,041   16 
    Other consumer loans  1,541   585   2,466   4,592   51,794   56,386   2,466 
    Other  91   8   2   101   12,790   12,891   2 
    Total $4,121  $1,775  $7,914  $13,810  $687,186  $700,996  $3,983 


    (1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
    Age Analysis of Past Due Loans as of June 30, 2021 
    (dollars in thousands) 
    30 - 59
    Days Past
    Due
      
    60 - 89
    Days
    Past Due
      
    90 or More
    Days Past
    Due and
    still
    Accruing
      PCI  
    Nonaccrual
    (2)
      
    Total
    Current
    Loans (1)
      Total
    Loans
     
    Mortgage loans on real estate:                     
    Residential 1-4 family $0  $14  $0  $0  $245  $117,628  $117,887 
    Commercial - owner occupied  0   0   58   0   843   170,980   171,881 
    Commercial - non-owner occupied  0   0   0   0   185   165,275   165,460 
    Multifamily  0   0   0   0   0   20,880   20,880 
    Construction  65   0   0   0   130   50,619   50,814 
    Second mortgages  0   0   0   0   0   9,707   9,707 
    Equity lines of credit  0   0   0   0   0   51,238   51,238 
    Total mortgage loans on real estate $65  $14  $58  $0  $1,403  $586,327  $587,867 
    Commercial and industrial loans  0   0   0   0   0   119,911   119,911 
    Consumer automobile loans  591   132   306   0   0   78,515   79,544 
    Other consumer loans  539   201   626   0   0   35,624   36,990 
    Other  16   2   3   0   0   8,340   8,361 
    Total $1,211  $349  $993  $0  $1,403  $828,717  $832,673 


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


    In the table above, the other consumer loans category includespast due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.1$1.0 million at SeptemberJune 30, 2017.2021. 

    Age Analysis of Past Due Loans as of December 31, 2016 
      
    30 - 59
    Days Past
    Due
      
    60 - 89
    Days Past
    Due
      
    90 or More
    Days Past
    Due
      
    Total Past
    Due
      
    Total
    Current
    Loans (1)
      
    Total
    Loans
      
    Recorded
    Investment
    > 90 Days
    Past Due
    and
    Accruing
     
      (in thousands) 
    Mortgage loans on real estate:                     
    Residential 1-4 family $564  $-  $496  $1,060  $93,767  $94,827  $218 
    Commercial  2,280   1,625   227   4,132   281,297   285,429   - 
    Construction  162   -   -   162   22,954   23,116   - 
    Second mortgages  -   200   188   388   16,740   17,128   58 
    Equity lines of credit  394   9   86   489   50,535   51,024   - 
    Total mortgage loans on real estate  3,400   1,834   997   6,231   465,293   471,524   276 
    Commercial loans  5   -   86   91   54,343   54,434   - 
    Consumer automobile loans  -   11   -   11   10,396   10,407   - 
    Other consumer loans  1,876   702   2,684   5,262   43,238   48,500   2,603 
    Other  41   12   5   58   18,959   19,017   5 
    Total $5,322  $2,559  $3,772  $11,653  $592,229  $603,882  $2,884 

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


    Age Analysis of Past Due Loans as of December 31, 2020 
    (dollars in thousands) 
    30 - 59
    Days Past
    Due
      
    60 - 89
    Days Past
    Due
      
    90 or More
    Days Past
    Due and
    still
    Accruing
      PCI  
    Nonaccrual
    (2)
      
    Total
    Current
    Loans (1)
      Total
    Loans
     
    Mortgage loans on real estate:                     
    Residential 1-4 family $478  $164  $0  $0  $311  $121,847  $122,800 
    Commercial - owner occupied  0   0   0   0   903   153,052   153,955 
    Commercial - non-owner occupied  0   0   0   0   0   162,896   162,896 
    Multifamily  0   0   0   0   0   22,812   22,812 
    Construction  0   88   0   0   0   43,644   43,732 
    Second mortgages  41   0   0   0   0   11,137   11,178 
    Equity lines of credit  0   0   0   0   0   50,746   50,746 
    Total mortgage loans on real estate $519  $252  $0  $0  $1,214  $566,134  $568,119 
    Commercial and industrial loans  753   0   0   0   0   140,993   141,746 
    Consumer automobile loans  1,159   190   196   0   0   78,845   80,390 
    Other consumer loans  1,120   555   548   0   0   35,755   37,978 
    Other  24   3   0   0   0   8,040   8,067 
    Total $3,575  $1,000  $744  $0  $1,214  $829,767  $836,300 

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


    In the table above, the other consumer loans category includespast due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.8$1.2 million at December 31, 2016.2020.

    - 13 -12


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


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

    NONACCRUAL LOANS

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


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


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


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


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


    Nonaccrual Loans by Class 
      September 30, 2017  December 31, 2016 
      (in thousands) 
    Mortgage loans on real estate      
    Residential 1-4 family $568  $598 
    Commercial  8,012   6,033 
    Construction  518   - 
    Second mortgages  -   129 
    Equity lines of credit  343   87 
    Total mortgage loans on real estate  9,441   6,847 
    Commercial loans  771   231 
    Other consumer loans  -   81 
    Total $10,212  $7,159 

    Nonaccrual Loans by Class

    (dollars in thousands) June 30, 2021  December 31, 2020 
    Mortgage loans on real estate:      
    Residential 1-4 family $245  $311 
    Commercial - owner occupied  843   903 
    Commercial - non-owner occupied  185   0 
    Construction  130   0 
    Total mortgage loans on real estate $1,403  $1,214 
    Total $1,403  $1,214 

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


    Nine Months Ended September 30, Six Months Ended June 30, 
    2017  2016 
    (in thousands) 
    (dollars in thousand)2021 2020 
    Interest income that would have been recorded under original loan terms $311  $232  $61  $118 
    Actual interest income recorded for the period  179   182   0   8 
    Reduction in interest income on nonaccrual loans $132  $50  $61  $110 




    - 14 -13


    TROUBLED DEBT RESTRUCTURINGS

    The Company'sCompany’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR),TDR, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company'sCompany’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.


    When the Company modifies a loan, management evaluates any possible impairment as stated in the impaired loan section below.


    The following tables present TDRs during the periods indicated, by class of loan. There were no troubled debt restructurings0 new TDRs in the threesix months ended SeptemberJune 30, 2017.2021 and 2020.

    Troubled Debt Restructurings by Class    
    For the Three Months Ended September 30, 2016    
      Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  
    Current Investment on
    September 30, 2016
     
      (dollars in thousands) 
    Mortgage loans on real estate:            
    Residential 1-4 family  4  $1,002  $1,002  $1,002 
    Commercial  1   150   150   150 
    Second mortgages  1   53   53   53 
    Equity lines of credit  1   93   93   93 
    Total mortgage loans on real estate  7   1,298   1,298   1,298 
    Other consumer loans  2   8   8   8 
    Total  9  $1,306  $1,306  $1,306 

    Troubled Debt Restructurings by Class 
    For the Nine Months Ended September 30, 2017 
      Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  
    Current Investment on
    September 30, 2017
     
      (dollars in thousands) 
    Mortgage loans on real estate:            
    Residential 1-4 family  1  $142  $142  $141 
    Commercial  2   3,663   3,663   3,653 
    Total  3  $3,805  $3,805  $3,794 

    Troubled Debt Restructurings by Class 
    For the Nine Months Ended September 30, 2016 
      Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  Current Investment on September 30, 2016 
      (dollars in thousands) 
    Mortgage loans on real estate:            
    Residential 1-4 family  4  $1,002  $1,002  $1 
    Commercial  1   150   150   0 
    Second mortgages  1   53   53   0 
    Equity lines of credit  1   93   93   0 
    Total mortgage loans on real estate  7   1,298   1,298   1 
    Commercial loans  1   152   152   0 
    Other consumer loans  2   8   8   0 
    Commercial loans  10  $1,458  $1,458  $1 
    - 15 -



    Of the loans restructured in the first nine months of 2017 one was given a below-market rate for debt with similar risk characteristicsAt June 30, 2021 and two were granted terms that the Company would not otherwise extend to borrowers with similar risk characteristics. Two of the loans restructured in the first nine months ended September 30, 2016 were given below-market rates for debt with similar risk characteristics, and eight of the loans, which were part of a single borrowing relationship, were given terms not otherwise offered to borrowers with similar risk characteristics. At September 30, 2017 and December 31, 2016,2020, the Company had no0 outstanding commitments to disburse additional funds on any TDR. At December 31, 2016, theThe Company had $10 thousand in0 loans secured by residential 1 - 4 family real estate that were in the process of foreclosure. There were loans totaling $142 thousand secured by residential 1 - 4 family real estate in the process of foreclosure at SeptemberJune 30, 2017.2021 and 2020.


    In the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, there were no0 defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.


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


    IMPAIRED LOANS

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


    When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by partial charge-offs and payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if these partial charge-offs did not occur and as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.
    - 16 -




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

    Impaired Loans by Class 
     As of September 30, 2017 
    For the nine months ended
    September 30, 2017
     
       Recorded Investment       
     
    Unpaid
    Principal
    Balance
     
    Without
    Valuation
    Allowance
     
    With
    Valuation
    Allowance
     
    Associated
    Allowance
     
    Average
    Recorded
    Investment
     
    Interest
    Income
    Recognized
     
     (in thousands) 
    Mortgage loans on real estate:            
    Residential 1-4 family $2,449  $1,980  $390  $75  $2,429  $74 
    Commercial  12,430   10,758   436   87   13,447   435 
    Construction  93   -   93   18   269   4 
    Second mortgages  359   201   137   15   461   12 
    Equity lines of credit  344   53   290   61   250   - 
    Total mortgage loans on real estate $15,675  $12,992  $1,346  $256  $16,856  $525 
    Commercial loans  1,017   163   608   183   1,513   21 
    Other consumer loans  -   -   -   -   54   - 
    Total $16,692  $13,155  $1,954  $439  $18,423  $546 

    Impaired Loans by Class 
      As of December 31, 2016 
    For the Year Ended
    December 31, 2016
     
        Recorded Investment       
      
    Unpaid
    Principal
    Balance
     
    Without
    Valuation
    Allowance
     
    With
    Valuation
    Allowance
     
    Associated
    Allowance
     
    Average
    Recorded
    Investment
     
    Interest
    Income
    Recognized
     
      (in thousands) 
    Mortgage loans on real estate:             
    Residential 1-4 family $2,496  $1,835  $622  $75  $2,741  $119 
    Commercial  16,193   11,095   4,274   415   11,885   727 
    Construction  619   528   96   22   496   43 
    Second mortgages  526   309   141   17   511   25 
    Equity lines of credit  87   86   -   -   46   3 
    Total mortgage loans on real estate $19,921  $13,853  $5,133  $529  $15,679  $917 
    Commercial loans  1,077   -   989   271   827   74 
    Other consumer loans  81   81   -   -   68   1 
    Total $21,079  $13,934  $6,122  $800  $16,574  $992 


    MONITORING OF LOANS AND EFFECT OF MONITORING FOR THE ALLOWANCE FOR LOAN LOSSESImpaired Loans by Class


       As of June 30, 2021  
    For the Six Months Ended
    June 30, 2021
     
    (Dollars in thousands) 
    Unpaid Principal
    Balance
      
    Without
    Valuation
    Allowance
      
    With Valuation
    Allowance
      
    Associated
    Allowance
      
    Average
    Recorded
    Investment
      
    Interest Income
    Recognized
     
    Mortgage loans on real estate:                  
    Residential 1-4 family $412  $72  $311  $36  $387  $0 
    Commercial  2,931   1,098   432   12   1,500   1 
    Construction  212   130   81   0   212   2 
    Second mortgages  131   0   129   3   130   3 
    Total mortgage loans on real estate  3,686   1,300   953   51   2,229   6 
    Commercial and industrial loans  4   3   0   0   4   0 
    Other consumer loans  12   11   0   0   11   0 
    Total $3,702  $1,314  $953  $51  $2,244  $6 
    Loan officers are responsible for continual portfolio analysis and prompt identification and reporting of problem loans, which includes assigning a risk grade to each applicable loan at its origination and revising such grade as the situation dictates. Loan officers maintain frequent contact with borrowers, which should enable the loan officer to identify potential problems before other personnel. In addition, meetings with loan officers and upper management are held to discuss problem loans and review risk grades. Nonetheless, in order to avoid over-reliance upon loan officers for problem loan identification, the Company's loan review system provides for review of loans and risk grades by individuals who are independent of the loan approval process. Risk grades and historical loss rates (determined by migration analysis) by risk grades are used as a component of the calculation of the allowance for loan losses.
    - 17 -

    Impaired Loans by Class


          
       As of December 31, 2020  
    For the Year Ended
    December 31, 2020
     
    (Dollars in thousands) 
    Unpaid Principal
    Balance
      
    Without
    Valuation
    Allowance
      
    With Valuation
    Allowance
      
    Associated
    Allowance
      
    Average
    Recorded
    Investment
      
    Interest Income
    Recognized
     
    Mortgage loans on real estate:                  
    Residential 1-4 family $474  $366  $87  $1  $458  $10 
    Commercial  3,490   1,306   121   1   2,559   46 
    Construction  83   0   83   0   84   5 
    Second mortgages  133   0   133   9   134   5 
    Total mortgage loans on real estate  4,180   1,672   424   11   3,235   66 
    Commercial and industrial loans  6   6   0   0   7   0 
    Other consumer loans  14   14   0   0   15   1 
    Total $4,200  $1,692  $424  $11  $3,257  $67 

    ALLOWANCE FOR LOAN LOSSES

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


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


    Each portfolio segment has risk characteristics as follows:
    Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.
    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.
  • 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.
    Real estate-construction: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
    Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.
    Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
    Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.

    Each segment of the portfolio is pooled by risk grade or by days past due. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At June 30, 2021 and December 31, 2016 management2020 management used four twelve-quarter8 12-quarter migration periods; at September 30, 2017 management used eight twelve-quarter migration periods. See "Changes in Allowance Methodology" section later in this note.


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


    15

    Index
    Based on credit risk assessments and management'smanagement’s analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions (including uncertainties associated with the COVID-19 pandemic), trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.


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

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

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

    ALLOWANCE FOR LOAN LOSSES BY SEGMENT

    The total allowance reflects management'smanagement’s estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $9.0$9.5 million adequate to cover probable loan losses inherent in the loan portfolio at SeptemberJune 30, 2017.2021.
    - 18 -



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

    ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS 
    (in thousands) 
    For the Nine Months Ended
    September 30, 2017
     Commercial  
    Real Estate -
    Construction
      
    Real Estate -
    Mortgage (1)
      
    Consumer (2)
      Other  Total 
    Allowance for Loan Losses:                  
    Balance at the beginning of period $1,493  $846  $5,267  $455  $184  $8,245 
    Charge-offs  (629)  -   (1,473)  (228)  (136)  (2,466)
    Recoveries  32   104   40   33   38   247 
    Provision for loan losses  679   (332)  1,573   909   96   2,925 
    Ending balance $1,575  $618  $5,407  $1,169  $182  $8,951 
    Ending balance individually evaluated for impairment $183  $18  $238  $-  $-  $439 
    Ending balance collectively evaluated for impairment  1,392   600   5,169   1,169   182   8,512 
    Ending balance $1,575  $618  $5,407  $1,169  $182  $8,951 
    Loan Balances:                        
    Ending balance individually evaluated for impairment $771  $93  $14,245  $-  $-  $15,109 
    Ending balance collectively evaluated for impairment  59,232   23,622   439,715   150,427   12,891   685,887 
    Ending balance $60,003  $23,715  $453,960  $150,427  $12,891  $700,996 


    For the Year Ended
    December 31, 2016
     Commercial  
    Real Estate -
    Construction
      
    Real Estate -
    Mortgage (1)
      Consumer  Other  Total 
    Allowance for Loan Losses:                  
    Balance at the beginning of period $633  $985  $5,628  $279  $213  $7,738 
    Charge-offs  (915)  -   (504)  (204)  (147)  (1,770)
    Recoveries  79   3   197   28   40   347 
    Provision for loan losses  1,696   (142)  (54)  352   78   1,930 
    Ending balance $1,493  $846  $5,267  $455  $184  $8,245 
    Ending balance individually evaluated for impairment $271  $22  $507  $-  $-  $800 
    Ending balance collectively evaluated for impairment  1,222   824   4,760   455   184   7,445 
    Ending balance $1,493  $846  $5,267  $455  $184  $8,245 
    Loan Balances:                        
    Ending balance individually evaluated for impairment $989  $624  $18,362  $81  $-  $20,056 
    Ending balance collectively evaluated for impairment  53,445   22,492   430,046   58,826   19,017   583,826 
    Ending balance $54,434  $23,116  $448,408  $58,907  $19,017  $603,882 

    (1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
    (2) The consumer segment includes consumer automobile loans.
    - 19 -ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

    For the Six Months ended June 30, 2021 
    (Dollars in thousands) 
    Commercial
    and Industrial
      Real Estate Construction  
    Real Estate -
    Mortgage (1)
      
    Real Estate -
    Commercial
      
    Consumer (2)
      Other  Unallocated  Total 
    Allowance for loan losses:                        
    Balance, beginning $650  $339  $2,560  $4,434  $1,302  $123  $133  $9,541 
    Charge-offs  (4
    )
      0   (1
    )
      0   (434
    )
      (186)  0   (625)
    Recoveries  21   0   56   1   250   79   0   407 
    Provision for loan losses  54   77   (150
    )
      (39
    )
      170   148   (110)  150 
    Ending Balance $721  $416  $2,465  $4,396  $1,288  $164  $23  $9,473 
                                     
    Individually evaluated for impairment $0  $0  $39  $12  $0  $0  $0  $51 
    Collectively evaluated for impairment  721   416   2,426   4,384   1,288   164   23   9,422 
    Purchased credit-impaired loans  0   0   0   0   0   0       0 
                                     
    Ending Balance $721  $416  $2,465  $4,396  $1,288  $164  $23  $9,473 
                                     
    Loans Balances:                                
    Individually evaluated for impairment  3   211   512   1,530   11   0   0   2,267 
    Collectively evaluated for impairment  119,908   50,603   199,200   335,811   116,523   8,361   0   830,406 
    Purchased credit-impaired loans  0   0   0   0   0   0       0 
    Ending Balance $119,911  $50,814  $199,712  $337,341  $116,534  $8,361  $0  $832,673 

    (1)
    The real estate-mortgage segment includes residential 1 – 4 family, second mortgages and equity lines of credit.
    (2)
    The consumer segment includes consumer automobile loans.

    16

    Index

    For the Year ended December 31, 2020 
    (Dollars in thousands) 
    Commercial
    and Industrial
      Real Estate Construction  
    Real Estate -
    Mortgage (1)
      
    Real Estate -
    Commercial
      
    Consumer (2)
      Other  Unallocated  Total 
    Allowance for loan losses:                        
    Balance, beginning $1,244  $258  $2,505  $3,663  $1,694  $296  $0  $9,660 
    Charge-offs  (25
    )
      0   (149
    )
      (654
    )
      (822
    )
      (355
    )
      0   (2,005
    )
    Recoveries  47   10   69   317   377   66   0   886 
    Provision for loan losses  (616
    )
      71   135   1,108   53   116   133   1,000 
    Ending Balance $650  $339  $2,560  $4,434  $1,302  $123  $133  $9,541 
                                     
    Individually evaluated for impairment $0  $0  $10  $1  $0  $0  $0  $11 
    Collectively evaluated for impairment  650   339   2,550   4,433   1,302   123   133   9,530 
    Purchased credit-impaired loans  0   0   0   0   0   0       0 
                                     
    Ending Balance $650  $339  $2,560  $4,434  $1,302  $123  $133  $9,541 
                                     
    Loans Balances:                                
    Individually evaluated for impairment  6   83   586   1,427   14   0   0   2,116 
    Collectively evaluated for impairment  141,740   43,649   206,950   315,424   118,354   8,067   0   834,184 
    Purchased credit-impaired loans  0   0   0   0   0   0       0 
    Ending Balance $141,746  $43,732  $207,536  $316,851  $118,368  $8,067  $0  $836,300 

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

    CHANGES IN ALLOWANCE METHODOLOGY


    Note 4. Leases
    Historical loss rates calculated

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

    Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the most appropriate length of time over which to analyze lossesremaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the loan portfolio. The Company can also calculate multiple migration periods, allowing management to assess the migration of loans based on more than one starting point.

    In the third quarter of 2017, management changed its migration approach for calculating the allowance to better match the lengthcommencement date of the current credit cycle. The number of migration periods was changed from fourlease.  Right-of-use assets represent the Company’s right to eight. Each migration period remains at twelve quarters,use the lengthunderlying asset for the lease term and are calculated as the sum of the migration period used bylease 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 prior periods. This change had the result of reducing the calculated provision from $3.4 million to $2.9 million, a difference of $447 thousand. The prior quarters' methodology was resulting in distortion between required allocations by segment and the underlying credit metrics for those segments. By increasing the number of migration periods from four to eight, the migration is better able to capture the performanceits calculation of the portfolio segment over a greater portionlease liabilities to the extent the options are reasonably assured of the credit cycle.being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.


    The following table representstables present information about the effect on the loan loss provision as a resultCompany’s leases:

    (dollars in thousands) June 30, 2021 
    Lease liabilities
     
    $
    1,199
     
    Right-of-use assets
     
    $
    1,179
     
    Weighted average remaining lease term
     4.06 years 
    Weighted average discount rate
      
    1.71
    %


      Three Months Ended June 30,  Six Months Ended June 30, 
    Lease cost (in thousands)
     2021
      2020
      2021
      2020
     
    Operating lease cost $81  $91  $185  $179 
    Total lease cost $81  $91  $185  $179 
                     
    Cash paid for amounts included in the measurement of lease liabilities $84  $93  $187  $177 
    A maturity analysis of this change in methodology. It compares the methodology results actually used for the threeoperating lease liabilities and nine months ended September 30, 2017 to that used in prior periods.

      Calculated Provision Based on Current Quarter Methodology  Calculated Provision Based on Prior Quarter Methodology  Difference 
      (in thousands) 
    Portfolio Segment:         
    Commercial $679  $970  (291)
    Real estate - construction  (332)  (815)  483 
    Real estate - mortgage  1,573   1,859   (286)
    Consumer loans  909   1,262   (353)
    Other  96   96   - 
    Total $2,925  $3,372  (447)

    The allowance for loan losses was 1.28% of total loans at September 30, 2017, compared to 1.37% at December 31, 2016. While the overall coveragereconciliation of the allowance for loan losses decreased from December 31, 2016 atundiscounted cash flows to the same time that both nonaccrual loans and total past dues  increased, the increases noted in nonaccrual and past due levels are not considered reflective of general trends in the portfolio. With respect to nonaccruals, the increaseoperating lease liabilities is a result of two loan relationships totaling $4.0 million that were placed on nonaccrual status in the first quarter of 2017 based on declines in the borrowers' performance and changes in the status of the loans' collateral. Both relationships were identified as impaired at December 31, 2016.  Management has charged off portions of these relationships and believes that the collateral on these loans will be sufficient to cover remaining balances for which it has no specific allocation. With respect to past dues, approximately $1 million of the increase is associated with matured loans that have since renewed, and another $500 thousand is guaranteed by the SBA. Lastly, both impaired loans and classified assets reflect decreased balances from December 31, 2016, respectively.follows:


    Lease payments due (in thousands)
     
    As of
    June 30, 2021
     
    Six months ending December 31, 2021
     
    $
    165
     
    Twelve months ending December 31, 2022
      
    339
     
    Twelve months ending December 31, 2023
      
    248
     
    Twelve months ending December 31, 2024
      
    240
     
    Thereafter
      
    309
     
    Total undiscounted cash flows
     
    $
    1,301
     
    Discount
      
    (102
    )
    Lease liabilities
     
    $
    1,199
     

    Note 4.5. Low-Income Housing Tax Credits


    The Company was invested in 4 separate housing equity funds at both SeptemberJune 30, 20172021 and December 31, 2016.2020. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia; develop and implement strategies to maintain projects as low-income housing; deliver Federal Low Income Housing Credits to investors; allocate tax losses and other possible tax benefits to investors; and preserve and protect project assets.
    - 20 -



    The investments in these funds were recorded as other assets on the consolidated balance sheets and were $3.6$2.2 million and $3.9$2.3 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. The expected terms of these investments and the related tax benefits run through 2033. Total projected tax credits to be received for 20172021 are $461$361 thousand, which is based on the most recent quarterly estimates received from the funds. There were 0 additional capital calls expected for the funds at June 30, 2021.  Additional capital calls expected for the funds totaled $1.1 million at September 30, 2017 and $2.5 million$18 thousand at December 31, 2016, respectively,2020 and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.


      
    Three Months Ended
    September 30,
      
    Nine Months Ended
    September 30,
     
    Affected Line Item on
    Consolidated Statements of Income
      2017  2016  2017  2016 
      (in thousands)  
    Tax credits and other tax benefits                 
    Amortization of operating losses $77  $73  $255  $220 ATM and other losses
    Tax benefit of operating losses*  26   25   87   75 Income tax expense
                               
    Tax credits  113   101   346   273 Income tax expense
                               
    Total tax benefits $139  $126  $433  $348  
                               
    * Computed using a 34% taxable rate                         

    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
    June 30,
      
    Six Months Ended
    June 30,
     
      2021  2020  2021  2020 
    Tax credits and other benefits            
    Amortization of operating losses 
    $
    51
      
    $
    46
      
    $
    100
      
    $
    91
     
    Tax benefit of operating losses*  
    11
       
    10
       
    21
       
    19
     
    Tax credits  
    89
       
    106
       
    183
       
    209
     
    Total tax benefits 
    $
    100
      
    $
    116
      
    $
    204
      
    $
    228
     

    *
    Computed using a 21% tax rate.

    Note 5.6. Borrowings

    Short-Term Borrowings

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


    The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At SeptemberJune 30, 20172021 and December 31, 20162020, the remaining credit available from these lines totaled $55.0 million.$105.0 million and $100.0 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $239.0$375.1 million and $270.0$374.7 as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.


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


     September 30, 2017  December 31, 2016 
     (in thousands) 
    Federal funds purchased $2,000  $- 
    (dollar in thousands) June 30, 2021  December 31, 2020 
    Overnight repurchase agreements  21,885   18,704  
    $
    12,239
      $6,619 
    FHLB advances  35,000   - 
    Total short-term borrowings $58,885  $18,704  
    $
    12,239
      
    $
    6,619
     
                    
    Maximum month-end outstanding balance $76,319  $68,864  
    $
    12,239
      
    $
    9,080
     
    Average outstanding balance during the period $49,131  $39,364  
    $
    7,634
      
    $
    21,092
     
    Average interest rate (year-to-date)  0.66%  0.59%  
    0.10
    %
      0.19%
    Average interest rate at end of period  0.86%  0.10%  
    0.10
    %
      
    0.10
    %


    Long-Term Borrowings
    19


    LONG-TERM BORROWINGS
    At June 30, 2021 the Company had borrowings under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF) of $3.3 million.  These borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of which will mature within 24 months of origination. NaN new advances are being made pursuant to the PPPLF as of the program’s expiration on July 30, 2021.

    The Company had one fixedalso obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens National Bank (Citizens) acquisition. The terms of the loan included a LIBOR based interest rate hybrid FHLB advance for $10.0 million classified as a long-term borrowing at September 30, 2017. The advance is scheduled to mature on February 28, 2019. There were no long-term borrowings atthat adjusts monthly and quarterly principal curtailments. At December 31, 2016.2020, the outstanding balance was $1.4 million, and the then-current interest rate was 2.61%. The Company elected to pay the loan in full during the first quarter of 2021.


    Note 6. Share-Based Compensation7. Commitments and Contingencies


    CREDIT-RELATED FINANCIAL INSTRUMENTS
    The Company has adopted an employee stock purchase planis 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 offers share-based compensation through its equity compensation plans. Share-based compensation arrangements include stock options, restrictedcommercial letters of credit. Such commitments involve, to varying degrees, elements of credit and unrestricted stock awards, restricted stock units, performance-based awards and stock appreciation rights. Accounting standards require all share-based paymentsinterest rate risk in excess of the amount recognized in the consolidated balance sheets.

    The Company’s exposure to employees to be valued using a fair value method oncredit loss is represented by the datecontractual amount of grant and to be expensed based on that fair value over the applicable vesting period.these commitments. The Company accountsfollows the same credit policies in making such commitments as it does for forfeitures during the vesting period as they occur.on-balance-sheet instruments.


    The Company's 1998 Stock Option Plan, pursuant to which stock options could be granted to key employees and non-employee directors, expired on March 9, 2008.  Stock options thatfollowing financial instruments whose contract amounts represent credit risk were outstanding on March 9, 2008 remained outstanding in accordance with their terms, but no new awards could be granted under the plan after March 9, 2008. Options to purchase 11,068 shares of common stock were outstanding under the Company's 1998 Stock Option Plan at SeptemberJune 30, 2017. The exercise price of each option equals the market price of the Company's common stock on the date of the grant2021 and each option's maximum term is ten years.December 31, 2020:

      June 30,  December 31, 
    (dollars in thousands) 2021
      2020
     
    Commitments to extend credit:
          
    Home equity lines of credit
     
    $
    70,163
      
    $
    66,999
     
    Commercial real estate, construction and development loans committed but not funded
      
    44,929
       
    20,258
     
    Other lines of credit (principally commercial)
      
    67,726
       
    64,329
     
    Total
     
    $
    182,818
      
    $
    151,586
     
             
    Letters of credit
     
    $
    4,796
      
    $
    4,841
     

    - 21 -



    Stock option activity for the nine months ended September 30, 2017 is summarized below:

      Shares  Weighted Average Exercise Price 
    Weighted Average Remaining Contractual Life
    (in years)
     
    Aggregate Intrinsic Value
    (in thousands)
     
    Options outstanding, January 1, 2017  60,605  $20.05     
    Granted  -   -     
    Exercised  (48,287)  20.05     
    Canceled or expired  (1,250)  20.05     
    Options outstanding, September 30, 2017  11,068  $20.05   0.04  $137 
    Options exercisable, September 30, 2017  11,068  $20.05   0.04  $137 

    The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. This amount changes based on changes in the fair value of the Company's common stock.

    During the nine months ended September 30, 2017, the Company received $968 thousand from the exercise of stock options. No options were exercised during the nine months ended September 30, 2016.

    No options were granted during the nine months ended September 30, 2017 or the nine months ended September 30, 2016. As of September 30, 2017, all outstanding stock options were fully vested and there was no unrecognized stock-based compensation expense.

    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. The Company did not award any equity compensation under the Incentive Stock Plan during 2016.

    Restricted stock activity for the nine months ended September 30, 2017 is summarized below:

      Shares  Weighted Average Grant  Date Fair Value 
    Nonvested, January 1, 2017  -  $- 
    Issued  2,245   33.60 
    Vested  -   - 
    Forfeited  -   - 
    Nonvested, September 30, 2017  2,245  $33.60 

    The weighted average period over which nonvested awards are expected to be recognized is 2.00 years.

    The fair value of restricted stock granted during the nine months ended September 30, 2017 was $75 thousand.

    The remaining unrecognized compensation expense for the shares granted during the nine months ended September 30, 2017 totaled $67 thousand as of September 30, 2017.

    Stock-based compensation expense was $9 thousand for the three and nine months ended September 30, 2017. There was no stock compensation expense in 2016.

    Under the Company's Employee Stock Purchase Plan (ESPP), substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company's common stock. Shares of stock are issued quarterly at a discount to the market price of the Company's stock on the day of purchase, which can range from 0-15% and was set at 5% for 2016 and for the first nine months of 2017.

    Total stock purchases under the ESPP amounted to 999 shares during 2016. 2,523 shares were purchased under the ESPP during the nine months ended September 30, 2017. At September 30, 2017, the Company had 246,478 remaining shares reserved for issuance under this plan.
    - 22 -



    Note 7. Pension Plan

    The Company provides pension benefits for eligible participants through a non-contributory defined benefit pension plan. The plan was frozen effective September 30, 2006; therefore, no additional participants will be added to the plan. The components of net periodic pension plan cost are as follows for the periods indicated:

    Three months ended September 30, 2017  2016 
      (in thousands) 
    Interest cost $67  $70 
    Expected return on plan assets  (94)  (98)
    Amortization of net loss  123   140 
    Net periodic pension plan cost $96  $112 

    Nine months ended September 30, 2017  2016 
      (in thousands) 
    Interest cost $201  $210 
    Expected return on plan assets  (282)  (294)
    Amortization of net loss  368   420 
    Net periodic pension plan cost $287  $336 

    On November 23, 2016, the Company's board of directors voted to terminate the pension plan, effective January 31, 2017. The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the plan by the end of the fourth quarter of 2017. Management estimates that the settlement of the plan will result in a nonrecurring pretax termination charge of $3.0 to $3.5 million, which will be recorded in the fourth quarter of 2017.

    Note 8. Stockholders'Share-Based Compensation

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

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

    Restricted stock activity for the six months ended June 30, 2021 is summarized below:

      Shares  
    Weighted Average
    Grant Date
    Fair Value
     
    Nonvested, January 1, 2021
      
    29,576
      
    $
    18.46
     
    Issued
      
    18,048
       
    22.35
     
    Vested
      
    (8,521
    )
      
    17.50
     
    Forfeited
      
    0
       
    0
     
    Nonvested, June 30, 2021
      
    39,103
      
    $
    20.46
     

    20

    Index
    The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.77 years.

    The fair value of restricted stock granted during the six months ended June 30, 2021 and 2020 was $403 thousand and $298 thousand, respectively.

    The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $527 thousand as of June 30, 2021 and $373 thousand as of June 30, 2020.

    Stock-based compensation expense was $69 thousand and $57 thousand for the three months ended June 30, 2021 and 2020, respectively, and $130 thousand and $143 thousand for the six months ended June 30, 2021 and 2020, respectively.

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

    2,568 shares were purchased under the ESPP during the six months ended June 30, 2021. At June 30, 2021, the Company had 229,883 remaining shares reserved for issuance under the ESPP.

    Note 9. Stockholders’ Equity and Earnings per Share

    STOCKHOLDERS'
    STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive LossIncome (Loss)

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


     
    Three Months Ended
    September 30,
     
    Nine Months Ended
    September 30,
     
    Affected Line Item on
    Consolidated Statements of Income
     2017 2016 2017 2016 
     (in thousands)  
    Available-for-sale securities             
    Realized gains on sales of securities $2  $7  $89  $522 Gain on sale of available-for-sale securities, net
    Tax effect  1   2   30   177 Income tax expense
      $1  $5  $59  $345  

      
    Three Months Ended
    June 30,
      
    Six Months Ended
    June 30,
     Affected Line Item on
    Consolidated Statement of Income
    (dollars in thousands) 2021
      2020
      2021
      2020
     
    Available-for-sale securities                 
    Realized gains on sales of securities $0  $184  $0  $184 Gain on sale of available-for-sale securities, net
    Tax effect  0   39   0   39 Income tax expense
      $0  $145  $0  $145  

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


    (dollars in thousands) 
    Unrealized Gains
    (Losses) on
    Available-for-Sale
    Securities
      
    Accumulated Other
    Comprehensive Income
     
     Unrealized Gains (Losses) on Available-for-Sale Securities  Defined Benefit Pension Plans  Accumulated Other Comprehensive Loss       
     (in thousands) 
             
    Nine Months Ended September 30, 2017         
    Six Months Ended June 30, 2021
          
    Balance at beginning of period (1,739) (2,469) (4,208) 
    $
    4,069
      
    $
    4,069
     
    Net change for the period  1,521   -   1,521 
    Net other comprehensive loss  
    (998
    )
      
    (998
    )
    Balance at end of period (218) (2,469) (2,687) 
    $
    3,071
      
    $
    3,071
     
                        
                
    Nine Months Ended September 30, 2016            
    Six Months Ended June 30, 2020
            
    Balance at beginning of period (576) (2,586) (3,162) 
    $
    (79
    )
     
    $
    (79
    )
    Net change for the period  1,877   -   1,877 
    Net other comprehensive income  
    3,431
       
    3,431
     
    Balance at end of period $1,301  (2,586) (1,285) 
    $
    3,352
      
    $
    3,352
     

    (dollars in thousands) 
    Unrealized Gains
    (Losses) on
    Available-for-Sale
    Securities
      
    Accumulated Other
    Comprehensive Income
     
           
    Three Months Ended June 30, 2021
          
    Balance at beginning of period 
    $
    2,375
      
    $
    2,375
     
    Net other comprehensive income  
    696
       
    696
     
    Balance at end of period 
    $
    3,071
      
    $
    3,071
     
             
    Three Months Ended June 30, 2020
            
    Balance at beginning of period 
    $
    (524
    )
     
    $
    (524
    )
    Net other comprehensive income  
    3,876
       
    3,876
     
    Balance at end of period 
    $
    3,352
      
    $
    3,352
     

    - 23 -21


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


     Three Months Ended June 30, 2021 
    (dollars in thousands) Pretax  Tax  Net-of-Tax 
    Unrealized gains on available-for-sale securities:
             
    Unrealized holding gains arising during the period 
    $
    881
      
    $
    185
      
    $
    696
     
                
    Total change in accumulated other comprehensive income, net 
    $
    881
      
    $
    185
      
    $
    696
     
    Nine Months Ended September 30, 2017             
    Pretax Tax Net-of-Tax  Three Months Ended June 30, 2020 
    (in thousands) 
          
    (dollars in thousands) Pretax  Tax  Net-of-Tax 
    Unrealized gains on available-for-sale securities:                     
    Unrealized holding gains arising during the period $2,394  $814  $1,580  
    $
    5,090
      
    $
    1,069
      
    $
    4,021
     
    Reclassification adjustment for gains recognized in income  (89)  (30)  (59)  
    (184
    )
      
    (39
    )
      
    (145
    )
                            
    Total change in accumulated other comprehensive loss, net $2,305  $784  $1,521 
    Total change in accumulated other comprehensive income, net 
    $
    4,906
      
    $
    1,030
      
    $
    3,876
     


     Six Months Ended June 30, 2021 
    (dollars in thousands) Pretax  Tax  Net-of-Tax 
    Unrealized losses on available-for-sale securities:         
    Unrealized holding losses arising during the period 
    $
    (1,263
    )
     
    $
    (265
    )
     
    $
    (998
    )
                
    Total change in accumulated other comprehensive income, net 
    $
    (1,263
    )
     
    $
    (265
    )
     
    $
    (998
    )
    Nine Months Ended September 30, 2016             
    Pretax Tax Net-of-Tax  Six Months Ended June 30, 2020 
    (in thousands) 
          
    (dollars in thousands) Pretax  Tax  Net-of-Tax 
    Unrealized gains on available-for-sale securities:                     
    Unrealized holding gains arising during the period $3,366  $1,144  $2,222  
    $
    4,527
      
    $
    951
      
    $
    3,576
     
    Reclassification adjustment for gains recognized in income  (522)  (177)  (345)  
    (184
    )
      
    (39
    )
      
    (145
    )
                            
    Total change in accumulated other comprehensive loss, net $2,844  $967  $1,877 
    Total change in accumulated other comprehensive income, net 
    $
    4,343
      
    $
    912
      
    $
    3,431
     


    EARNINGS PER COMMON SHARE

    Basic earnings per shareEPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per shareEPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares attributable to outstandingthe employee stock options.purchase plan.
    - 24 -



    The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:


    (dollars in thousands except per share data) 
    Net Income Available to
    Common Shareholders
    (Numerator)
      
    Weighted Average
    Common Shares
    (Denominator)
      Per Share
     Amount
     
    Three Months Ended June 30, 2021
             
    Net income, basic 
    $
    1,842
     
    5,237
     
    $
    0.35
     
    Diluted $1,842 5,237 $0.35 
     Net Income Available to Common Shareholders (Numerator)  Weighted Average Common Shares (Denominator)  Per Share Amount             
    Three Months Ended June 30, 2020
                
    Net income, basic 
    $
    2,494
     
    5,220
     
    $
    0.48
     
    Diluted $2,494 5,220 $0.48 
     (in thousands except per share data)             
    Three Months Ended September 30, 2017         
    Six Months Ended June 30, 2021
                
    Net income, basic $757   4,994  $0.15  
    $
    4,854
     
    5,231
     
    $
    0.93
     
    Potentially dilutive common shares - stock options  -   10   - 
    Diluted $4,854 5,231 $0.93 
                
    Six Months Ended June 30, 2020
                
    Net income, basic 
    $
    3,744
     
    5,210
     
    $
    0.72
     
    Potentially dilutive common shares - employee stock purchase program  -   -   -  -
     1
     -
     
    Diluted $757   5,004  $0.15  $3,744  5,211 $0.72 
                
    Three Months Ended September 30, 2016            
    Net income, basic $1,329   4,959  $0.27 
    Potentially dilutive common shares - stock options  -   -   - 
    Potentially dilutive common shares - employee stock purchase program  -   -   - 
    Diluted $1,329   4,959  $0.27 
                
    Nine Months Ended September 30, 2017            
    Net income, basic $2,860   4,985  $0.57 
    Potentially dilutive common shares - stock options  -   12   - 
    Potentially dilutive common shares - employee stock purchase program  -   -   - 
    Diluted $2,860   4,997  $0.57 
                
    Nine Months Ended September 30, 2016            
    Net income, basic $2,902   4,959  $0.59 
    Potentially dilutive common shares - stock options  -   -   - 
    Potentially dilutive common shares - employee stock purchase program  -   -   - 
    Diluted $2,902   4,959  $0.59 


    The Company had no0 antidilutive shares outstanding in the third quarter or first nine months of 2017. The Company did not include an average of 69 thousand potential common shares attributable to outstanding stock options in the diluted earnings per share calculation for both the three and ninesix months ended SeptemberJune 30, 2016. Non-vested2021 and 2020, respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.

    Note 9. 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 2010-06 and FASB ASU 2011-04, 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 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.
    - 25 -


    The fair value guidance provides a consistent definition of fair value, which focuses on exit price 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. For assets other than securities and for all liabilities, fair value is determined using the Company's asset/liability modeling software. The software uses current yields, anticipated yield changes, and estimated duration of assets and liabilities to calculate fair value.

    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.
    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 and equity securities with readily determinable fair values that are classified as "available-for-sale" are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company's available-for-sale securities are considered to be Level 2 securities.
    - 26 -


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

       Fair Value Measurements at September 30, 2017 Using 
     Balance 
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
     
    Significant Other Observable Inputs
    (Level 2)
     
    Significant Unobservable Inputs
    (Level 3)
     
     (in thousands) 
    Available-for-sale securities        
    Obligations of  U.S. Government agencies $9,493  $-  $9,493  $- 
    Obligations of state and political subdivisions  68,434   -   68,434   - 
    Mortgage-backed securities  77,316   -   77,316   - 
    Money market investments  1,169   -   1,169   - 
    Corporate bonds  7,510   -   7,510   - 
    Other marketable equity securities  190   -   190   - 
    Total available-for-sale securities $164,112  $-  $164,112  $- 

         Fair Value Measurements at December 31, 2016 Using 
      Balance  
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
      
    Significant Other
    Observable Inputs
    (Level 2)
      
    Significant Unobservable Inputs
    (Level 3)
     
      (in thousands) 
    Available-for-sale securities            
    U.S. Treasury securities $20,000  $-  $20,000  $- 
    Obligations of  U.S. Government agencies  9,195   -   9,195   - 
    Obligations of state and political subdivisions  77,987   -   77,987   - 
    Mortgage-backed securities  83,694   -   83,694   - 
    Money market investments  647   -   647   - 
    Corporate bonds  7,678   -   7,678   - 
    Other marketable equity securities  164   -   164   - 
    Total available-for-sale securities $199,365  $-  $199,365  $- 

    ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

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

    Impaired loans
    A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts when due from the borrower in accordance with the contractual terms of the loan. The measurement of fair value and loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan's expected future cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable, with the vast majority of the collateral in real estate.

    The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal. Evaluations utilize many of the same techniques as appraisals, and are typically performed by independent appraisers. Once received, appraisals and evaluations are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on management's best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are considered Level 3.
    - 27 -


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

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

    Loans Held For Sale
    Loans held for sale are carried at 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 recorded within the mortgage segment and are reported on a separate line item on the Company's Consolidated Statements of Income.
    - 28 -



    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 table below.

         Carrying Value at September 30, 2017 Using 
      Fair Value  
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
      
    Significant Other Observable Inputs
    (Level 2)
      
    Significant Unobservable Inputs
    (Level 3)
     
      (in thousands) 
    Impaired loans            
    Mortgage loans on real estate:            
    Residential 1-4 family $316  $-  $-  $316 
    Commercial  349   -   -   349 
    Construction  74   -   -   74 
    Equity lines of credit  229   -   -   229 
    Total mortgage loans on real estate $968  $-  $-  $968 
                     
    Loans                
    Loans held for sale $981  $-  $981  $0 

         Carrying Value at December 31, 2016 Using 
      Fair Value  
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
      
    Significant Other Observable Inputs
    (Level 2)
      
    Significant Unobservable Inputs
    (Level 3)
     
      (in thousands) 
    Impaired loans            
    Mortgage loans on real estate:            
    Residential 1-4 family $400  $-  $-  $400 
    Commercial  1,483   -   -   1,483 
    Construction  74   -   -   74 
    Total mortgage loans on real estate $1,957  $-  $-  $1,957 
    Commercial loans  718   -   -   718 
    Total $2,675  $-  $-  $2,675 
                     
    Other real estate owned                
    Construction $940  $-  $-  $940 
    - 29 -


    The following table displays quantitative information about Level 3 Fair Value Measurements as of the dates indicated:

    Quantitative Information About Level 3 Fair Value Measurements 
      
    Fair Value at
    September 30, 2017
    (dollars in thousands)
     Valuation TechniquesUnobservable Input Range (Weighted Average) 
    Impaired loans        
    Residential 1-4 family real estate $316 Market comparablesSelling costs  0.00% - 7.25% (3.36%)
            Liquidation discount  0.00% - 4.00% (3.12%)
    Commercial real estate $349 Market comparablesSelling costs  7.25%
            Liquidation discount  4.00%
    Construction $74 Market comparablesSelling costs  7.25%
            Liquidation discount  4.00%
    Equity lines of credit $229 Market comparablesSelling costs  6.07%
            Liquidation discount  4.00%
               

    Quantitative Information About Level 3 Fair Value Measurements 
      
    Fair Value at
    December 31, 2016
    (dollars in thousands)
     Valuation TechniquesUnobservable Input Range (Weighted Average) 
    Impaired loans        
    Residential 1-4 family real estate $400 Market comparablesSelling costs  7.25%
            Liquidation discount  4.00%
    Commercial real estate $1,483 Market comparablesSelling costs  7.25%
            Liquidation discount  4.00%
    Construction $74 Market comparablesSelling costs  7.25%
            Liquidation discount  4.00%
    Commercial loans $718 Market comparablesSelling costs  0.00%
            Liquidation discount  0.00% - 38.58% (32.40%)
               
    Other real estate owned          
    Construction $940 Market comparablesSelling costs  7.25%
            Liquidation discount  0.00%

    ASC 825, "Financial Instruments," requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company's assets.

    The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

    CASH AND CASH EQUIVALENTS
    The carrying amounts of cash and short-term instruments, including interest-bearing due from banks, approximate fair values.

    RESTRICTED SECURITIES
    The restricted security category is comprised of FHLB and FRB stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and they lack a market. When the FHLB or FRB repurchases stock, they repurchase at the stock's book value. Therefore, the carrying amounts of restricted securities approximate fair value.

    LOANS RECEIVABLE
    The fair value of a loan is based on its interest rate in relation to its risk profile, in comparison to what an investor could earn on a different investment with a similar risk profile. Variations in risk tolerance between lenders, and thus in risk pricing, can result in the same loan being priced differently at different institutions. A bank's experience with the type of lending (such as commercial real estate) can also impact its assessment of the riskiness of a loan. A comprehensive picture of competitors' rates in relation to borrower risk profiles is not available. Instead, the Company uses a model which estimates market value based on the loan's interest rate (regardless of its risk level) and rates for debt of similar maturities where market data is available. Since the rate and risk profile are the primary factors in determining the fair value of a loan, both of which are unobservable in the market, the Company classifies loans as Level 3 in the fair value hierarchy. Fair values for non-performing loans are estimated as described above.
    - 30 -

    BANK-OWNED LIFE INSURANCE
    Bank-owned life insurance represents insurance policies on certain current and former officers of the Company. The cash value of the policies is estimated using information provided by the insurance carrier. The insurance carrier uses actuarial data to estimate the value of each policy, based on the age and health of the insured relative to other individuals about whom the carrier has information. Health information can be broken down into quantitative, observable inputs, such as smoking habits, blood pressure, and weight, which, along with the insured's age, can be compared to observable data the insurance carrier has available. The carrier can then estimate the cash value of each policy. Since the cash value represents the amount of cash the Company would receive when the policies are paid, the cash value closely approximates the fair value of the policies. Accordingly, bank-owned life insurance is classified as Level 2.

    DEPOSITS
    The fair value of demand deposits, savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Information about the rates paid by other institutions for deposits of similar terms is readily available, and rates are mainly influenced by the term of the deposit itself. As a result, fair value calculations are based on observable inputs, and are classified as Level 2.

    OVERNIGHT REPURCHASE AGREEMENTS
    The carrying amounts of federal funds purchased, overnight repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Since the contractual terms of these borrowings provide all information necessary to calculate the amounts that will be due at maturity, these liabilities are classified as Level 2.

    FEDERAL HOME LOAN BANK ADVANCES
    The fair values of the Company's long-term borrowings are estimated based on the current cost to repay the debt in full, discounted to current values and including any prepayment penalties that may apply. As the contractual terms of the borrowing provide all the necessary inputs for this calculation, long-term borrowings are classified as Level 2.

    ACCRUED INTEREST
    The calculation of accrued interest is based on readily observable information, such as the rate and term of the underlying asset or liability. Since these amounts are expected to be realized quickly (generally within 30 to 90 days), the carrying value approximates fair value and is classified as Level 2.

    COMMITMENTS TO EXTEND CREDIT AND IRREVOCABLE LETTERS OF CREDIT
    The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2017 and December 31, 2016, the fair value of fees charged for loan commitments and irrevocable letters of credit was immaterial.
    - 31 -


    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, 2017 Using 
      Carrying Value  
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
      
    Significant Other Observable Inputs
    (Level 2)
      
    Significant Unobservable Inputs
    (Level 3)
     
      (in thousands) 
    Assets            
    Cash and cash equivalents $15,435  $15,435  $-  $- 
    Securities available-for-sale  164,112   -   164,112   - 
    Restricted securities  2,890   -   2,890   - 
    Loans held for sale  981   -   981   - 
    Loans, net of allowances for loan losses  692,045   -   -   691,615 
    Bank-owned life insurance  25,802   -   25,802   - 
    Accrued interest receivable  2,987   -   2,987   - 
                     
    Liabilities                
    Deposits $782,445  $-  $782,315  $- 
    Federal funds purchased  2,000   -   2,000   - 
    Overnight repurchase agreements  21,885   -   21,885   - 
    Federal Home Loan Bank advances  45,000   -   44,959   - 
    Accrued interest payable  297   -   297   - 

         Fair Value Measurements at December 31, 2016 Using 
      Carrying Value  
    Quoted Prices in Active Markets for Identical Assets
    (Level 1)
      
    Significant Other Observable Inputs
    (Level 2)
      
    Significant Unobservable Inputs
    (Level 3)
     
      (in thousands) 
    Assets            
    Cash and cash equivalents $25,854  $25,854  $-  $- 
    Securities available-for-sale  199,365   -   199,365   - 
    Restricted securities  970   -   970   - 
    Loans, net of allowances for loan losses  595,637   -   -   594,190 
    Bank-owned life insurance  25,206   -   25,206   - 
    Accrued interest receivable  3,189   -   3,189   - 
                     
    Liabilities                
    Deposits $784,502  $-  $783,450  $- 
    Overnight repurchase agreements  18,704   -   18,704   - 
    Accrued interest payable  228   -   228   - 

    Note 10. Fair Value Measurements

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

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

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

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


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

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

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

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

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

    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 June 30, 2021 Using 
    (dollars in thousands) Balance  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Available-for-sale securities            
    U.S. Treasury securities 
    $
    8,990
      
    $
    0
      
    $
    8,990
      
    $
    0
     
    Obligations of  U.S. Government agencies  
    38,817
       
    0
       
    38,817
       
    0
     
    Obligations of state and political subdivisions  
    53,272
       
    0
       
    53,272
       
    0
     
    Mortgage-backed securities  
    85,025
       
    0
       
    85,025
       
    0
     
    Money market investments  
    3,893
       
    0
       
    3,893
       
    0
     
    Corporate bonds and other securities  
    23,214
       
    0
       
    23,214
       
    0
     
    Total available-for-sale securities 
    $
    213,211
      
    $
    0
      
    $
    213,211
      
    $
    0
     

         Fair Value Measurements at December 31, 2020 Using 
    (dollars in thousands) Balance  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Available-for-sale securities            
    U.S. Treasury securities 
    $
    7,043
      
    $
    0
      
    $
    7,043
      
    $
    0
     
    Obligations of  U.S. Government agencies  
    36,696
       
    0
       
    36,696
       
    0
     
    Obligations of state and political subdivisions  
    45,995
       
    0
       
    45,995
       
    0
     
    Mortgage-backed securities  
    73,501
       
    0
       
    73,501
       
    0
     
    Money market investments  
    4,743
       
    0
       
    4,743
       
    0
     
    Corporate bonds and other securities  
    18,431
       
    0
       
    18,431
       
    0
     
    Total available-for-sale securities 
    $
    186,409
      
    $
    0
      
    $
    186,409
      
    $
    0
     

    ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
    Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

    Impaired loans
    A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts when due from the borrower in accordance with the contractual terms of the loan agreement. The measurement of fair value and loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable, with the vast majority of the collateral in real estate.

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

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

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

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

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

         Carrying Value at June 30, 2021 
    (dollars in thousands) Fair Value  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Loans            
    Loans held for sale
     
    $
    2,284
      
    $
    0
      
    $
    2,284
      
    $
    0
     


         Carrying Value at December 31, 2020 
    (dollars in thousands) Fair Value  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Loans            
    Loans held for sale
     
    $
    14,413
      
    $
    0
      
    $
    14,413
      
    $
    0
     

    The Company did not have any Level 3 Fair Value Measurements at June 30, 2021 or December 31, 2020.

    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 June 30, 2021 Using 
    (dollars in thousands) Carrying Value  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Assets            
    Cash and cash equivalents 
    $
    155,498
      
    $
    155,498
      
    $
    0
      
    $
    0
     
    Securities available-for-sale  
    213,211
       
    0
       
    213,211
       
    0
     
    Restricted securities  
    1,033
       
    0
       
    1,033
       
    0
     
    Loans held for sale  
    2,284
       
    0
       
    2,284
       
    0
     
    Loans, net of allowances for loan losses  
    823,200
       
    0
       
    0
       
    825,967
     
    Bank owned life insurance  
    28,817
       
    0
       
    28,817
       
    0
     
    Accrued interest receivable  
    2,404
       
    0
       
    2,404
       
    0
     
                     
    Liabilities                
    Deposits 
    $
    1,134,017
      
    $
    0
      
    $
    1,136,627
      
    $
    0
     
    Overnight repurchase agreements  
    12,239
       
    0
       
    12,239
       
    0
     
    Federal Reserve Bank borrowings  
    3,313
       
    0
       
    3,313
       
    0
     
    Accrued interest payable  
    266
       
    0
       
    266
       
    0
     

         Fair Value Measurements at December 31, 2020 Using 
    (dollars in thousands) Carrying Value  
    Quoted Prices
    in Active
    Markets for
    Identical
    Assets
    (Level 1)
      
    Significant
    Other
    Observable
    Inputs
    (Level 2)
      
    Significant
    Unobservable
    Inputs
    (Level 3)
     
    Assets            
    Cash and cash equivalents 
    $
    120,437
      
    $
    120,437
      
    $
    0
      
    $
    0
     
    Securities available-for-sale  
    186,409
       
    0
       
    186,409
       
    0
     
    Restricted securities  
    1,367
       
    0
       
    1,367
       
    0
     
    Loans held for sale  
    14,413
       
    0
       
    14,413
       
    0
     
    Loans, net of allowances for loan losses  
    826,759
       
    0
       
    0
       
    826,083
     
    Bank owned life insurance  
    28,386
       
    0
       
    28,386
       
    0
     
    Accrued interest receivable  
    3,613
       
    0
       
    3,613
       
    0
     
                     
    Liabilities                
    Deposits 
    $
    1,067,236
      
    $
    0
      
    $
    1,070,236
      
    $
    0
     
    Overnight repurchase agreements  
    6,619
       
    0
       
    6,619
       
    0
     
    Federal Reserve Bank borrowings  
    28,550
       
    0
       
    28,550
       
    0
     
    Other borrowings  
    1,350
       
    0
       
    1,350
       
    0
     
    Accrued interest payable  
    384
       
    0
       
    384
       
    0
     

    Note 11. Segment Reporting


    The Company operates in a decentralized fashion in three3 principal business segments: The Old Point National Bank of Phoebus (the Bank), Old Point Trust & Financial Services, N. A.N.A. (Trust), and the Company as a separate segment (for purposes of this Note, the Parent). Revenues from the Bank'sBank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust'sTrust’s operating revenues consist principally of income from fiduciary activities.and asset management fees. The Parent'sParent’s revenues are mainly fees and dividends received from the Bank and Trust companies. The Company has no other segments.


    The Company'sCompany’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.

    - 32 -
    26


    Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 follows:


     Three Months Ended September 30, 2017  Three Months Ended June 30, 2021 
     Bank  Trust  Parent  Eliminations  Consolidated 
     (in thousands) 
    (dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated 
    Revenues                              
    Interest and dividend income $8,550  $18  $898  $(898) $8,568  
    $
    9,853
      
    $
    6
      
    $
    2,029
      
    $
    (2,029
    )
     
    $
    9,859
     
    Income from fiduciary activities  -   903   -   -   903   
    0
       
    1,051
       
    0
       
    0
       
    1,051
     
    Other income  2,275   198   50   (65)  2,458   
    2,219
       
    283
       
    50
       
    (65
    )
      
    2,487
     
    Total operating income  10,825   1,119   948   (963)  11,929   
    12,072
       
    1,340
       
    2,079
       
    (2,094
    )
      
    13,397
     
                                            
    Expenses                                        
    Interest expense  837   -   -   -   837   
    752
       
    0
       
    1
       
    0
       
    753
     
    Provision for loan losses  1,275   -   -   -   1,275   
    0
       
    0
       
    0
       
    0
       
    0
     
    Salaries and employee benefits  4,343   657   104   -   5,104   
    5,299
       
    764
       
    164
       
    0
       
    6,227
     
    Other expenses  3,664   253   160   (65)  4,012   
    3,999
       
    252
       
    122
       
    (65
    )
      
    4,308
    ��
    Total operating expenses  10,119   910   264   (65)  11,228   
    10,050
       
    1,016
       
    287
       
    (65
    )
      
    11,288
     
                                            
    Income before taxes  706   209   684   (898)  701   
    2,022
       
    324
       
    1,792
       
    (2,029
    )
      
    2,109
     
                                            
    Income tax expense (benefit)  (55)  72   (73)  -   (56)  
    248
       
    69
       
    (50
    )
      
    -
       
    267
     
                                            
    Net income $761  $137  $757  $(898) $757  
    $
    1,774
      
    $
    255
      
    $
    1,842
      
    $
    (2,029
    )
     
    $
    1,842
     
                                            
    Capital expenditures $60  $6  $-  $-  $66  
    $
    598
      
    $
    36
      
    $
    0
      
    $
    0
      
    $
    634
     
                                            
    Total assets $948,377  $6,141  $97,645  $(97,666) $954,497  
    $
    1,267,532
      
    $
    7,213
      
    $
    120,000
      
    $
    (119,934
    )
     
    $
    1,274,811
     


     Three Months Ended September 30, 2016  Three Months Ended June 30, 2020 
     Bank  Trust  Parent  Eliminations  Consolidated 
     (in thousands) 
    (dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated 
    Revenues                              
    Interest and dividend income $7,420  $16  $1,572  $(1,572) $7,436  
    $
    9,837
      
    $
    11
      
    $
    2,679
      
    $
    (2,679
    )
     
    $
    9,848
     
    Income from fiduciary activities  -   858   -   -   858   
    0
       
    909
       
    0
       
    0
       
    909
     
    Other income  2,277   207   50   (65)  2,469   
    2,816
       
    249
       
    50
       
    (66
    )
      
    3,049
     
    Total operating income  9,697   1,081   1,622   (1,637)  10,763   
    12,653
       
    1,169
       
    2,729
       
    (2,745
    )
      
    13,806
     
                                            
    Expenses                                        
    Interest expense  633   -   -   -   633   
    1,361
       
    0
       
    14
       
    0
       
    1,375
     
    Recovery of loan losses  (100)  -   -   -   (100)
    Provision for loan losses  
    300
       
    0
       
    0
       
    0
       
    300
     
    Salaries and employee benefits  4,296   665   102   -   5,063   
    4,571
       
    741
       
    152
       
    0
       
    5,464
     
    Other expenses  3,114   262   315   (65)  3,626   
    3,452
       
    236
       
    118
       
    (66
    )
      
    3,740
     
    Total operating expenses  7,943   927   417   (65)  9,222   
    9,684
       
    977
       
    284
       
    (66
    )
      
    10,879
     
                                            
    Income before taxes  1,754   154   1,205   (1,572)  1,541   
    2,969
       
    192
       
    2,445
       
    (2,679
    )
      
    2,927
     
                                            
    Income tax expense (benefit)  284   53   (125)  -   212   
    441
       
    41
       
    (49
    )
      
    0
       
    433
     
                                            
    Net income $1,470  $101  $1,330  $(1,572) $1,329  
    $
    2,528
      
    $
    151
      
    $
    2,494
      
    $
    (2,679
    )
     
    $
    2,494
     
                                            
    Capital expenditures $234  $-  $-  $-  $234  
    $
    288
      
    $
    6
      
    $
    0
      
    $
    0
      
    $
    294
     
                                            
    Total assets $900,160  $5,814  $96,467  $(96,685) $905,756  
    $
    1,214,546
      
    $
    7,008
      
    $
    117,558
      
    $
    (117,867
    )
     
    $
    1,221,245
     


    - 33 -27

      Six Months Ended June 30, 2021 
    (dollars in thousands) Bank  Trust  Unconsolidated Parent  Eliminations  Consolidated 
    Revenues               
    Interest and dividend income 
    $
    20,826
      
    $
    11
      
    $
    5,177
      
    $
    (5,177
    )
     
    $
    20,837
     
    Income from fiduciary activities  
    0
       
    2,078
       
    0
       
    0
       
    2,078
     
    Other income  
    5,085
       
    539
       
    100
       
    (130
    )
      
    5,594
     
    Total operating income  
    25,911
       
    2,628
       
    5,277
       
    (5,307
    )
      
    28,509
     
                         
    Expenses                    
    Interest expense  
    1,570
       
    0
       
    5
       
    0
       
    1,575
     
    Provision for loan losses  
    150
       
    0
       
    0
       
    0
       
    150
     
    Salaries and employee benefits  
    10,619
       
    1,507
       
    328
       
    0
       
    12,454
     
    Other expenses  
    8,062
       
    531
       
    176
       
    (130
    )
      
    8,639
     
    Total operating expenses  
    20,401
       
    2,038
       
    509
       
    (130
    )
      
    22,818
     
                         
    Income before taxes  
    5,510
       
    590
       
    4,768
       
    (5,177
    )
      
    5,691
     
                         
    Income tax expense (benefit)  
    798
       
    125
       
    (86
    )
      
    0
       
    837
     
                         
    Net income 
    $
    4,712
      
    $
    465
      
    $
    4,854
      
    $
    (5,177
    )
     
    $
    4,854
     
                         
    Capital expenditures 
    $
    719
      
    $
    41
      
    $
    0
      
    $
    0
      
    $
    760
     
                         
    Total assets 
    $
    1,267,532
      
    $
    7,213
      
    $
    120,000
      
    $
    (119,934
    )
     
    $
    1,274,811
     

      Six Months Ended June 30, 2020 
    (dollars in thousands) Bank  Trust  Unconsolidated Parent  Eliminations  Consolidated 
    Revenues               
    Interest and dividend income 
    $
    19,800
      
    $
    34
      
    $
    4,118
      
    $
    (4,118
    )
     
    $
    19,834
     
    Income from fiduciary activities  
    0
       
    1,926
       
    0
       
    0
       
    1,926
     
    Other income  
    4,806
       
    535
       
    100
       
    (131
    )
      
    5,310
     
    Total operating income  
    24,606
       
    2,495
       
    4,218
       
    (4,249
    )
      
    27,070
     
                         
    Expenses                    
    Interest expense  
    2,909
       
    0
       
    34
       
    0
       
    2,943
     
    Provision for loan losses  
    600
       
    0
       
    0
       
    0
       
    600
     
    Salaries and employee benefits  
    9,559
       
    1,555
       
    344
       
    0
       
    11,458
     
    Other expenses  
    7,134
       
    578
       
    195
       
    (131
    )
      
    7,776
     
    Total operating expenses  
    20,202
       
    2,133
       
    573
       
    (131
    )
      
    22,777
     
                         
    Income before taxes  
    4,404
       
    362
       
    3,645
       
    (4,118
    )
      
    4,293
     
                         
    Income tax expense (benefit)  
    570
       
    78
       
    (99
    )
      
    0
       
    549
     
                         
    Net income 
    $
    3,834
      
    $
    284
      
    $
    3,744
      
    $
    (4,118
    )
     
    $
    3,744
     
                         
    Capital expenditures 
    $
    656
      
    $
    6
      
    $
    0
      
    $
    0
      
    $
    662
     
                         
    Total assets 
    $
    1,214,546
      
    $
    7,008
      
    $
    117,558
      
    $
    (117,867
    )
     
    $
    1,221,245
     


      Nine Months Ended September 30, 2017 
      Bank  Trust  Parent  Eliminations  Consolidated 
      (in thousands) 
    Revenues               
    Interest and dividend income $24,300  $52  $3,251  $(3,249) $24,354 
    Income from fiduciary activities  -   2,820   -   -   2,820 
    Other income  7,133   708   150   (196)  7,795 
    Total operating income  31,433   3,580   3,401   (3,445)  34,969 
                         
    Expenses                    
    Interest expense  2,097   -   -   1   2,098 
    Provision for loan losses  2,925   -   -   -   2,925 
    Salaries and employee benefits  13,252   2,068   330   -   15,650 
    Other expenses  10,460   766   412   (196)  11,442 
    Total operating expenses  28,734   2,834   742   (195)  32,115 
                         
    Income before taxes  2,699   746   2,659   (3,250)  2,854 
                         
    Income tax expense (benefit)  (60)  255   (201)  -   (6)
                         
    Net income $2,759  $491  $2,860  $(3,250) $2,860 
                         
    Capital expenditures $504  $6  $-  $-  $510 
                         
    Total assets $948,377  $6,141  $97,645  $(97,666) $954,497 

      Nine Months Ended September 30, 2016 
      Bank  Trust  Parent  Eliminations  Consolidated 
      (in thousands) 
    Revenues               
    Interest and dividend income $22,191  $45  $3,443  $(3,443) $22,236 
    Income from fiduciary activities  -   2,636   -   -   2,636 
    Other income  6,954   734   150   (196)  7,642 
    Total operating income  29,145   3,415   3,593   (3,639)  32,514 
                         
    Expenses                    
    Interest expense  1,934   -   -   -   1,934 
    Provision for loan losses  1,300   -   -   -   1,300 
    Salaries and employee benefits  12,782   2,022   303   -   15,107 
    Other expenses  9,913   774   667   (196)  11,158 
    Total operating expenses  25,929   2,796   970   (196)  29,499 
                         
    Income before taxes  3,216   619   2,623   (3,443)  3,015 
                         
    Income tax expense (benefit)  181   211   (279)  -   113 
                         
    Net income $3,035  $408  $2,902  $(3,443) $2,902 
                         
    Capital expenditures $706  $4  $-  $-  $710 
                         
    Total assets $900,160  $5,814  $96,467  $(96,685) $905,756 

    The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.

    Both

    Note 12. Subsequent Events



    On July 14, 2021, the ParentCompany completed the issuance of $30.0 million in aggregate principal amount of subordinated notes (the Notes) due in 2031 in a private placement transaction.  The subordinated notes will initially 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.  The notes were structured to qualify as Tier 2 capital for regulatory purposes, and the Trust companies maintain deposit accounts with the Bank, on terms substantially similar to those available to other customers. These transactions are eliminated to reach consolidated totals.proceeds will be used for general corporate purposes.

    Note 11. Commitments and Contingencies

    There have been no material changes in the Company's commitments and contingencies from those disclosed in the Company's 2016 annual report on Form 10-K.
    - 34 -




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


    Management'sManagement’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company'sCompany’s 2020 Annual Report on Form 10-K and management'smanagement’s discussion and analysis for the year ended December 31, 2016.2020. Highlighted in the discussion are material changes from prior reporting periods and anycertain identifiable trends affecting the Company. Results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 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.


    Caution AboutCautionary Statement Regarding Forward-Looking Statements
    In addition to historical information, certainThis report contains statements in this report which use language such as "believes," "expects," "plans," "may," "will," "should," "projects," "contemplates," "anticipates," "forecasts," "intends" and similar expressions, may identify forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements are based onconcerning the Company’s expectations, plans, objectives or beliefs of the Company's management, as well as estimates and assumptions made by, and information currently available to, management. These statements are inherently uncertain, and there can be no assurance that the underlying estimates or assumptions will prove to be accurate. Actual results could differ materially from historical results or those anticipated by such statements. Forward-looking statements in this report include, without limitation: statements regarding the Pending Acquisition of Citizens National; future financial performance and profitability; performance of the investmentother statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and loan portfolios, including performance of the consumer auto loan portfolio and the purchased student loan portfolio and expected trends in the quality of the loan portfolio; the effects of diversifying the loan portfolio; strategic business and growth initiatives; management's efforts to reposition the balance sheet; deposit growth; levels and sources of liquidity; the securities portfolio; use of proceeds from the sale of securities; future levels of charge-offs or net recoveries; the impact of increases in NPAs on future earnings; write-downs and expected sales of other real estate owned; income taxes; expected timing of and expense in connection with the anticipated termination of the pension plan; monetary policy actions of the Federal Open Market Committee; and changes in interest rates.

    Factors that could have a material adverse effect on the operations and future prospects of the Companymay include, but are not limited to: statements regarding expected future operations and financial performance; the possibility that anyCompany’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations, certain items that management does not expect to have an ongoing impact on consolidated net income, future dividend payments, net interest margin compression and items affecting net interest margin, strategic business initiatives and the anticipated benefitseffects thereof, lending under the Paycheck Protection Program (PPP) of the Pending AcquisitionSmall Business Administration (SBA), asset quality, adequacy of Citizens National will not be realized or will not be realized within the expected time period; Citizens National may not be integrated into the Company successfully or such integration may be more difficult, time-consuming, or costly than expected; expected revenue synergies and cost savings from the Pending Acquisition may not be fully realized or realized within the expected timeframe; revenues following the Pending Acquisition may be lower than expected; customer and employee relationships and business operations may be disrupted by the Pending Acquisition; or obtaining required regulatory approvalsallowances for loan losses and the approvallevel of Citizens National shareholders or completingfuture chargeoffs, liquidity and capital levels, the Pending Acquisition may be more difficult, time-consuming, or costly than expected. OtherCompany’s assessment of and ability to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the Bank and its customers and employees, perpetrated by third-party cybercriminals, the effect of future market and industry trends and the effects of future interest rate levels and fluctuations. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company include,including, but are not limited to, changes in:

    interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds and yields; increases or volatility in mortgage interest rates
    general business conditions, as well as conditions within the financial markets
    general economic and business conditions, including unemployment levels; demand for loan products; the performancelevels and slowdowns in economic growth, and particularly related to further and sustained economic impacts of the Company's dealer lending program; COVID-19 pandemic
    the effectiveness of the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein
    potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act, as subsequently amended
    the Company’s branch realignment initiatives
    the Company’s technology, efficiency, and other strategic initiatives
    the legislative/regulatory climate; climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
    monetary and fiscal policies of the U.S. government,Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve BoardSystem (the Federal Reserve), and anythe effect of these policies on interest rates and business in our markets
    future levels of government defense spending particularly in the Company’s service area
    the impact of potential changes associated within the new administration; political landscape and related policy changes, including monetary, regulatory and trade policies
    the US. Government’s guarantee of repayment of student or small business loans purchased by the Company
    the value of securities held in the Company’s investment portfolios
    demand for loan products and the impact of changes in demand on loan growth
    the quality or composition of the loan or securities portfolios; portfolios and the value of the collateral securing those loans
    changes in the volume and mix of interest-earning assets and interest-bearing liabilities; liabilities
    the effects of management'smanagement’s investment strategy and strategy to manage the net interest margin; the U.S. government's guarantee of repayment of student loans purchased by the Company; margin

    the level of net charge-offs on loans; loans and the adequacy of our allowance for loan and lease losses
    performance of the Company’s dealer lending program
    deposit flows; competition; flows
    the strength of the Company’s counterparties
    competition from both banks and non-banks
    demand for financial services in the Company'sCompany’s market area; area
    implementation of new technologies; technologies
    the Company'sCompany’s ability to develop and maintain secure and reliable electronic systems; systems
    any interruption or breach of security in the Company'sCompany’s information systems or those of the Company's third partyCompany’s third-party vendors or  othertheir service providers; providers
    reliance on third parties for key services; services
    cyber threats, attacks or events
    the use of inaccurate assumptions in management'smanagement’s modeling systems; systems
    technological risks and developments
    the commercial and residential real estate market; markets
    the demand in the secondary residential mortgage loan markets
    expansion of the Company’s product offerings
    accounting principles, policies and guidelines;guidelines and other factors detailed inelections made by the Company's publicly filed documents, including its Annual Report on Form 10-K for the year ended December 31, 2016. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of date of the report.Company thereunder


    These risks and uncertainties, in addition to the risks and uncertainties identified in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K, the Company’s Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K should be considered in evaluating the forward-looking statements contained herein,herein. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and readersare based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which it is made.made, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.
    - 35 -



    Available Information
    The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings. The information available on the Company'sCompany’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The public may read and copy any documents the Company files with or furnishes to the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company'sCompany’s SEC filings can also be obtained on the SEC'sSEC’s website on the Internet at www.sec.gov.www.sec.gov.


    About Old Point Financial Corporation
    The Company is the parent company of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County.Richmond regions. The Bank currently has 1816 branch officesoffices.  The Bank also has a loan production office in Richmond and is the parent company of Old Point Mortgage, LLC (OPM), which providesa mortgage loan origination services.office in Charlotte, NC.  Trust is a wealth management services provider.


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

    On October 30, 2017,March 11, 2020, the Company announced that itWorld Health Organization  declared COVID-19 a pandemic. The outbreak of COVID-19 has caused a significant disruption in economic activity worldwide, and has had entered into a definitive merger agreement with Citizens National  (OTC Pink: CNBV)  pursuant tosignificant impact on business and customers in our market areas and on our results of operations, which the Company will acquire Citizens Nationalexpects may continue. Substantial uncertainty remains about critical factors that may affect the economy and employment, including a rising trend in new cases of COVID-19 in the U.S.; and the emergence of new COVID-19 variants; the efficacy of a stockvaccine against COVID-19; vaccination rates; potential re-tightening of policies that had previously allowed businesses to open; and cash transaction for total consideration valued at approximately $7.9 million, based on a volume-weighted average priceany further government stimulus efforts, including the nature, timing and extent of $31.48 for Old Point common stock for the three trading days ended October 27, 2017. Upon the closingsuch stimulus. The ultimate extent of the Pending Acquisition, Citizens Nationalimpact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently not yet estimable and the Company believes that it will merge intodepend on various developments and other factors, including, among others, the Bank. The Pending Acquisition has been unanimously approved byduration and scope of the Boards of Directors of both institutions. The Pending Acquisition is expected to be completed in first quarter 2018, subject to the approval of Citizens National shareholderspandemic, as well as customarygovernmental, regulatory approvals and other closing conditions.private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. The Company’s results of operations may be impacted by elevated loans losses, net interest margin compression, falling demand for loans, and potential impairments of securities available for sale and goodwill. The Company currently expects to manage through the negative impacts of the COVID-19 pandemic by maintaining sufficient liquidity and capital levels.


    The Company actively assisted both customers and non-customers in obtaining loans through the PPP administered by the SBA. Additionally, the Company has worked with customers affected by COVID-19 through payment deferrals and tracked all payment accommodations to customers to identify and quantify any impact they might have on the Company.  As of June 30, 2021, the Company had loan modifications on $54 thousand down from approximately $7.4 million as of December 31, 2020. Continued uncertainty regarding the duration and scope of the pandemic and related effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses and resulting provision for loan losses.

    Critical Accounting Policies and Estimates
    AsThe accounting and reporting policies of September 30, 2017, there have been no significantthe 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 with regard toin 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 disclosed inwith the Company's 2016 annual report on Form 10-K. Audit Committee of the Board of Directors.

    The critical accounting policy that required management's most difficult, subjective or complex judgments continues to beand reporting policies include the Company'sCompany’s accounting for the allowance for loan losses. The Company'sAccordingly, the Company’s significant accounting policies for calculating the allowance for loan losses are discussed in this Item 2 and in Note 31 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K.


    Executive Overview
    InFor the third quarter of 2017, net income was $757 thousand and decreased $572 thousand when compared to the third quarter of 2016. This decrease in quarterlythree months ended June 30, 2021 net income was $1.8 million, or $0.35 earnings per diluted common share. This compares to net income of $2.5 million, or $0.48 earnings per diluted common share, for the net effectsecond quarter of higher2020. The decrease was principally attributable to decreased noninterest income and increased noninterest expense partially offset by increased net interest income particularly onand decreased provision for loan losses.

    For the loan portfolio; highersix months ended June 30, 2021 and 2020, net income was $4.9 million, or $0.93 earnings per diluted common share, and $3.7 million, or $0.72 earnings per diluted common share, respectively.  The increase was primarily attributable to increased net interest expense due to an increase in borrowings; an increasedincome, decreased provision for loan losses, as a result of increases in loans and nonperforming assets; higherincreased noninterest income; and higherincome partially offset by increased noninterest expense, driven primarily by increases in loan expenses.expense.

    Net income for the first nine months of 2017 was $2.9 million, or $0.57 per diluted share, compared to net income of $2.9 million, or $0.59 per diluted share, for the first nine months of 2016. The decrease in year-to-date net income was driven primarily by the same factors that impacted quarterly net income. Noninterest income was also positively impacted by the Old Point Mortgage acquisition in the second quarter of 2017, while noninterest expense was affected by increases in salaries and employee benefits, in addition to higher loan expenses as in the quarterly period.


    Highlights of the quarter are as follows:
    • The Company entered into a definitive merger agreement to acquire Citizens National in the Pending Acquisition, which is expected to close in the first quarter of 2018, subject to customary closing conditions, including regulatory and Citizens National shareholder approval.
    • Total loans held for investment grew $97.1assets were $1.3 billion at June 30, 2021, growing $48.6 million or 16.08%4.0% from December 31, 2016.  Average loans held for investment increased $102.72020.

      Deposits grew $66.8 million or 17.38% from the same quarter in the prior year.
    • Deposits decreased $2.1 million or 0.26%to $1.1 billion at June 30, 2021 from December 31, 2016.  Average deposits increased $24.6 million, or 3.28%, from the same quarter in the prior year.2020.
    • The net interest margin improved to 3.68%, from 3.66% for the third quarter of 2016.
    • Return on average assets was 0.32% in the third quarter of 2017, compared to 0.59% in the third quarter of 2016.
    • Non-performing assets (NPAs) were $14.2increased slightly to $2.4 million at SeptemberJune 30, 2017, up from $11.12021 compared to $2.0 million at December 31, 2016. Non-accrual loans were $10.22020, but decreased significantly from $7.0 million as of June 30, 2020. NPAs as a percentage of total assets was 0.19% at SeptemberJune 30, 2017, up from $7.2 million2021, which compared to 0.16% at December 31, 2016.
    2020 and 0.57% at June 30, 2020.
     
    Quarterly average earning assets grew $111.6 million, or 10.5%, to $1.2 billion as of June 30, 2021 compared to $1.1 billion as of June 30, 2020.
    - 36 -

    Book value per share at June 30, 2021 increased 1.3% over March 31, 2021 and 3.0% from June 30, 2020.

    Net interest income was $9.1 million for the second quarter of 2021, compared to $10.2 million for the prior quarter, and increasing from $8.5 million for the second quarter of 2020.

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


    For the nine months ended September 30, 2017,second quarter of 2021, net interest income was $22.3$9.1 million,, an increase of $2.0$633 thousand or 7.5% from the second quarter of 2020. The increase was primarily due to the impact of significant growth in average earning asset balances at lower average earning yields partially offset by higher average interest bearing liabilities balances at lower average interest bearing costs. The compression on yield and cost was primarily due to the reduction of the federal funds target rate in the first quarter of 2020 by the Federal Reserve to a range of 0.00% to 0.25% in response to the COVID-19 pandemic, but is also impacted by PPP loan originations (which bear interest at a rate of 1%) and higher levels of liquidity.  Average earning assets increased year-over-year by $111.6 million, or 9.62%10.5%.  The average tax-equivalent yield on earning assets for the second quarter of 2021 decreased by 36 basis points compared to the prior yearsame period primarily dueof 2020. Average interest bearing liabilities increased $17.6 million, or 2.4%, and the average rate on interest-bearing liabilities for the quarter ended June 30, 2021 was 0.40%, down from 0.75% for the same period of 2020, benefiting from the lower rate environment and reduced interest expense related to increased interest and fees on loans associated with loan growth. repayment of higher-cost long-term borrowings during 2020.

    For the third quarter of 2017,six months ended June 30, 2021 and 2020, net interest income was $7.7$19.3 million an increase of $928 thousand or 13.64% from the third quarter of 2016. The increases in net interest income were driven by higher earning asset balances.

    and $16.9 million, respectively. Net interest income, on a fully tax-equivalent basis, was $23.0$19.4 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared to $21.0$17.0 million for the ninesix months ended SeptemberJune 30, 2016,2020, an increase of 9.55%$2.4 million, or 14.2%. For the third quarter of 2017, tax-equivalent net interest incomeThe increase was $8.0 million, an increase of 13.29% from the third quarter of 2016.

    Year-to-Date Review
    Unless otherwise noted, all comparisons in this section are between the nine months ended September 30, 2017 and the nine months ended September 30, 2016.

    Average loans held for investment increased $76.0 million, with this increase in average balances offsetting a 14-basis-point decline in loan yields to increase interest income on loansdriven by $1.9 million. Average investment securities increased $3.1 million while the tax-equivalent yield on the portfolio increased 15 basis points; on a combined basis, the higher balances and higher yields on securities added $252 thousand to tax-equivalent interest income. During the second half of 2016 and the first half of 2017, management closely monitored the investment portfolio and was able to strategically buy and sell securities to improve the yield on the portfolio.

    Average earning assets increased $73.3 million, offsetting a marginal decline in the average yield of 1 basis point. In addition to the growth in average earning assets and the lower cost of funds from the first half of 2020, tempered by the impacts of lower yields on earning assets and increases in average interest bearing liabilities. Accelerated recognition of deferred fees and costs related to PPP forgiveness also positively impacted net interest income alsofor the 2021 period. Average earning assets for the six months ended June 30, 2021 increased $149.5 million, or 14.7%, compared to the first six months of 2020, primarily due to growth in loans (including PPP loans) and investment securities, funded by deposit growth. Average interest bearing liabilities increased $35.9 million, or 5.0%, for the six months ended June 30, 2021 compared to the comparative 2020 period. The average tax-equivalent yield and average interest bearing cost decreased by 31 basis points and 41 basis points, respectively, for the first six months of 2021 compared to the first six months of 2020.

    The NIM for the second quarter of 2021 was 3.10%, a change indecrease from 3.19% for the mixsecond quarter of earning assets as average loans grew faster than average investment securities.2020.  On a fully tax-equivalent basis, (FTE), NIM decreased  to 3.12% for the second quarter of 2021, down from 3.21% for the prior year quarter.  For the first six months of 2021 and 2020, NIM was 3.33% and 3.35%, respectively, and NIM (FTE) was 3.36% and 3.36%, respectively.  Average total nonearning assets decreased $18.6 millionloan yields were lower for the second quarter of 2021 compared to the same period of 2020 by 8 basis points, but higher by 4 basis points for the six month ended June 20, 2021 over the same period of 2020.  The lower interest rate environment resulted in lower average yields on new loan originations, including PPP loans which earn at a fixed 1%, and repricing within the existing loan portfolio. Loan fees and costs related to PPP loans are deferred at time period, withof loan origination, are amortized into interest income over the Company utilizing its excess liquidity to fund a portionremaining term of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $2.0 million were recognized in the first six months of 2021. As of June 30, 2021, unamortized net deferred PPP fees were $1.8 million. For more information about these FTE financial measures, please see “Non-GAAP- Financial Measures” below. High levels of liquidity invested at lower yielding short-term levels in the low interest rate environment also continue to impact the NIM.

    Average money market, savings and interest-bearing demand deposits increased $107.4 million and $107.2 million for the second quarter and first six months of 2021, respectively, and average time deposits decreased $28.5 million and $30.2 million for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift from time deposits as a result of lower interest rates. Average noninterest-bearing demand deposits increased $74.8 million for the second quarter of 2021 and increased $94.8 million for the first six months of 2021, compared to the same periods in 2020. The average total assets. Withcost of interest-bearing deposits decreased 32 basis points for the second quarter of 2021 and decreased 34 basis points for the first six months of 2021, compared to the same periods in 2020, due primarily to lower rates on deposits and a higher percent of the Company's average assetsshift in loans--the highest yielding category on the Company's balance sheet--tax-equivalentcomposition from time deposits. While changes in rates take effect immediately for interest income increased $2.2 million.

    The growthchecking, money market and savings accounts, changes in the average balance sheet was funded primarily through increases in deposits, with average deposits growing $42.7 million. Low-cost deposits in particular grew $46.2 million, with higher-cost time deposits decreasing $3.5 million. While the cost of time deposits increased 3 basis points, the shiftlag changes in the deposit mix toward less costly sources of funding limited the impactpricing based on the costrepricing of total time deposits at maturity.

    Average borrowings decreased $61.4 million for the second quarter of 2021 and savings deposits to an overall increasedecreased $41.1 million for the first six months of only 1 basis point. This change in the deposit mix also helped reduce the effect of deposit growth on interest expense, with interest expense on deposits increasing $102 thousand, or 5.87% as2021, compared to the 9.46% increasesame periods in tax-equivalent interest income. Management expects that the Company's solid base of low-cost deposits will continue to beneficially impact the net interest margin in 2017.

    Growth in the average balance sheet was also supported by additional FHLB advances, with average FHLB advances increasing $13.5 million. The growth in balances was mitigated by a decline in the average rate on these advances,2020 due primarily due to the payoffrepayment of an FHLB advancelong-term borrowings in February 2016. As can be seen in the following table, this paid off advance bore a rate significantly higher than other available funding sources in the current rate environment.2020. The totalaverage cost of interest-bearing liabilities increased 1borrowings decreased 82 basis pointpoints during the second quarter of 2021 and 118 basis points during the first six months of 2021, compared to 0.47%.

    The declinethe same periods in 2020 due primarily to the yield on average earning assets combined with the increase in the costrepayment of total interest-bearing liabilities would typically result in a decrease in the net interest margin.higher-cost long-term borrowings during 2020. However, the Company's earning assets grew 9.61% while interest-bearing liabilities grew 6.70%. As discussed above, the Company used excess liquidity previously held in cashCompany’s borrowings and due from banks to fund a portion of its balance sheet growth, which offset both the decline in the yield on earning assets and the increase in the cost of interest-bearing liabilities, leaving the netrelated interest margin unchanged at 3.67%.

    Management expects that the Company's loan yieldsexpense will continue to decline, due to intense competition for quality loans and rate reductions on loans currently held in the portfolio. Management also expects that the reduction in loan yields will likely continue throughout 2017, depending on monetary policy actions taken by the Federal Open Market Committee (FOMC). The FOMC raised the target range for the federal funds rate in March 2017 and June 2017, and management currently expects one additional increase in the remainder of the year. If the FOMC does continue to raise its target range, then management expects that the decline in loan yields will eventually slow as new loans are booked at current market rates. To partially offset the anticipated decline, management has placed an increased focus on managing the Company's mix of liabilities in order to increase low cost funds and reduce high cost funds where possible.
    - 37 -

    Third Quarter Review
    Unless otherwise noted, all comparisons in this section are betweenbe impacted beginning during the third quarter of 20172021 due to the issuance of subordinated notes by the Company during July 2021. For more information, see “Capital Resources.”

    The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, the timing and extent of any economic recovery, and the third quarterextent of 2016.

    Comparisons between the third quarters of 2017 and 2016government stimulus measures, which are substantially the same as those for the nine months ended September 30, 2017 and 2016, although the effects of the Company's initiatives surrounding loan growth tended to be more pronouncedinherently uncertain, (2) possible changes in the quarterly comparison. Average loans held for investment grew $102.7 million or 17.38%, offsetting a 10-basis-point decline incomposition of earning assets which may result from decreased loan yields for a net increase in tax-equivalent interest income of $983 thousand. The effects of the strategic investment purchases and sales in the second half of 2016 and the first half of 2017 are also evident in the quarterly comparison, with average total investment securities increasing $13.4 million while the yield increased 17 basis points. Average nonearning assets declined $44.3 million or 31.28%demand as loan growth absorbed excess liquidity previously held in noninterest-bearing accounts. As a result of the increase in securities yieldscurrent economic environment; and (3) the shift inrecognition of net deferred fees on PPP loans, which is subject to the Company's balance sheet to higher-yielding loans, the tax-equivalent yield on earning assets increased 7 basis points to 4.06% and tax-equivalent interest income increased $1.1 milliontiming of repayment or 14.86%.forgiveness.


    In addition to available liquidity, the increase in loans was funded by growth in low-cost deposits ($29.1 million) and by FHLB advances ($28.0 million). As market rates have increased, the rate on FHLB advances has also increased, with the cost increasing from 0.58% in the third quarter of 2016 to 1.27% in the third quarter of 2017. Although the Company's overall cost on time deposits is lower than the cost of FHLB advances, much of the balance in time deposits is from accounts opened in lower rate environments. The current market rates on time deposits in the Company's market area remain generally higher than the rates on short-term FHLB advances.
    32


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


    AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* 
      For the quarter ended September 30, 
      2017  2016 
         Interest        Interest    
      Average  Income/  Yield/  Average  Income/  Yield/ 
      Balance  Expense  Rate**  Balance  Expense  Rate** 
      (dollars in thousands) 
    ASSETS                  
    Loans held for investment* $693,693  $7,661   4.42% $590,964  $6,678   4.52%
    Loans held for sale  1,090   12   4.40%  0   0   0.00%
    Investment securities:                        
    Taxable  101,612   487   1.92%  88,462   357   1.61%
    Tax-exempt*  64,662   584   3.61%  64,389   563   3.50%
    Total investment securities  166,274   1,071   2.58%  152,851   920   2.41%
    Interest-bearing due from banks  1,093   4   1.46%  19,671   25   0.51%
    Federal funds sold  457   1   0.88%  1,596   2   0.50%
    Other investments  3,132   49   6.26%  1,935   35   7.24%
    Total earning assets  865,739  $8,798   4.06%  767,017  $7,660   3.99%
    Allowance for loan losses  (9,128)          (8,048)        
    Other non-earning assets  97,420           141,759         
    Total assets $954,031          $900,728         
                             
    LIABILITIES AND STOCKHOLDERS' EQUITY                        
    Time and savings deposits:                        
    Interest-bearing transaction accounts $27,705  $2   0.03% $27,404  $2   0.03%
    Money market deposit accounts  231,785   90   0.16%  213,597   44   0.08%
    Savings accounts  84,220   11   0.05%  78,997   10   0.05%
    Time deposits  207,491   560   1.08%  212,057   538   1.01%
    Total time and savings deposits  551,201   663   0.48%  532,055   594   0.45%
    Federal funds purchased, repurchase agreements and other borrowings  27,046   13   0.19%  26,506   6   0.09%
    Federal Home Loan Bank advances  50,707   161   1.27%  22,717   33   0.58%
    Total interest-bearing liabilities  628,954   837   0.53%  581,278   633   0.44%
    Demand deposits  222,429           217,020         
    Other liabilities  5,006           6,294         
    Stockholders' equity  97,642           96,136         
    Total liabilities and stockholders' equity $954,031          $900,728         
    Net interest margin     $7,961   3.68%     $7,027   3.66%
                             
    *Computed on a fully tax-equivalent basis using a 34% rate; the tax-equivalent adjustment to interest income was $230 thousand and $224 thousand for the three months ended September 30, 2017 and 2016, respectively. 
    **Annualized                 
    - 38 -AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

      For the quarter ended June 30, 
      2021  2020 
      (dollars in thousands)   
     
    Average
    Balance
          
    Interest
    Income/
    Expense
          
     
    Yield/
    Rate**
          
     
    Average
    Balance
          
    Interest
    Income/
    Expense
          
     
    Yield/
    Rate**
       
    ASSETS                  
    Loans* 
    $
    831,563
      
    $
    8,826
       
    4.26
    %
     
    $
    828,896
      
    $
    8,937
       
    4.34
    %
    Investment securities:                        
    Taxable  
    162,859
       
    791
       
    1.95
    %
      
    134,372
       
    712
       
    2.13
    %
    Tax-exempt*  
    32,822
       
    242
       
    2.96
    %
      
    18,853
       
    173
       
    3.69
    %
    Total investment securities  
    195,681
       
    1,033
       
    2.12
    %
      
    153,225
       
    885
       
    2.32
    %
    Interest-bearing due from banks  
    150,995
       
    52
       
    0.14
    %
      
    82,399
       
    32
       
    0.15
    %
    Federal funds sold  
    4
       
    -
       
    0.02
    %
      
    6
       
    0
       
    0.02
    %
    Other investments  
    1,033
       
    11
       
    4.19
    %
      
    3,153
       
    43
       
    5.56
    %
    Total earning assets  
    1,179,276
      
    $
    9,922
       
    3.37
    %
      
    1,067,679
      
    $
    9,897
       
    3.73
    %
    Allowance for loan losses  
    (9,619
    )
              
    (9,626
    )
            
    Other non-earning assets  
    106,058
               
    116,890
             
    Total assets 
    $
    1,275,715
              
    $
    1,174,943
             
                             
    LIABILITIES AND STOCKHOLDERS’ EQUITY                     
    Time and savings deposits:                        
    Interest-bearing transaction accounts 
    $
    70,532
      
    $
    3
       
    0.02
    %
     
    $
    56,465
      
    $
    3
       
    0.02
    %
    Money market deposit accounts  
    372,691
       
    220
       
    0.24
    %
      
    300,028
       
    283
       
    0.38
    %
    Savings accounts  
    113,963
       
    12
       
    0.04
    %
      
    93,307
       
    12
       
    0.05
    %
    Time deposits  
    183,936
       
    511
       
    1.11
    %
      
    212,386
       
    883
       
    1.67
    %
    Total time and savings deposits  
    741,122
       
    746
       
    0.40
    %
      
    662,186
       
    1,181
       
    0.72
    %
    Federal funds purchased, repurchase
    agreements and other borrowings
      
    14,505
       
    7
       
    0.21
    %
      
    33,859
       
    15
       
    0.18
    %
    Federal Home Loan Bank advances  
    -
       
    -
       
    0.00
    %
      
    42,000
       
    179
       
    1.71
    %
    Total interest-bearing liabilities  
    755,627
       
    753
       
    0.40
    %
      
    738,045
       
    1,375
       
    0.75
    %
    Demand deposits  
    394,337
               
    319,574
             
    Other liabilities  
    6,131
               
    3,982
             
    Stockholders’ equity  
    119,620
               
    113,342
             
    Total liabilities and stockholders’ equity 
    $
    1,275,715
              
    $
    1,174,943
             
    Net interest margin     
    $
    9,169
       
    3.12
    %
         
    $
    8,522
       
    3.21
    %

    *Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $63 thousand and $49 thousand for June 30, 2021 and 2020, respectively.
    **Annualized


    AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

      For the six months ended June 30, 
      2021  2020 
      (dollars in thousands)    
    Average
    Balance
          
    Interest
    Income/
    Expense
           
    Yield/
    Rate
           
    Average
    Balance
          
    Interest
    Income/
    Expense
           
    Yield/
    Rate
       
    ASSETS                  
    Loans* 
    $
    833,446
      
    $
    18,791
       
    4.55
    %
     
    $
    791,803
      
    $
    17,776
       
    4.51
    %
    Investment securities:                        
    Taxable  
    161,196
       
    1,561
       
    1.95
    %
      
    138,613
       
    1,576
       
    2.29
    %
    Tax-exempt*  
    31,268
       
    471
       
    3.04
    %
      
    15,038
       
    283
       
    3.78
    %
    Total investment securities  
    192,464
       
    2,032
       
    2.13
    %
      
    153,651
       
    1,859
       
    2.43
    %
    Interest-bearing due from banks  
    137,744
       
    95
       
    0.14
    %
      
    65,165
       
    183
       
    0.56
    %
    Federal funds sold  
    4
       
    0
       
    0.03
    %
      
    1,687
       
    12
       
    1.45
    %
    Other investments  
    1,176
       
    41
       
    6.96
    %
      
    3,072
       
    89
       
    5.85
    %
    Total earning assets  
    1,164,834
      
    $
    20,959
       
    3.63
    %
      
    1,015,378
      
    $
    19,919
       
    3.94
    %
    Allowance for loan losses  
    (9,633
    )
              
    (9,631
    )
            
    Other nonearning assets  
    101,615
               
    109,995
             
    Total assets 
    $
    1,256,816
              
    $
    1,115,742
             
                             
    LIABILITIES AND STOCKHOLDERS’ EQUITY                     
    Time and savings deposits:                        
    Interest-bearing transaction accounts 
    $
    69,153
      
    $
    6
       
    0.02
    %
     
    $
    52,844
      
    $
    6
       
    0.02
    %
    Money market deposit accounts  
    360,180
       
    422
       
    0.24
    %
      
    290,492
       
    600
       
    0.42
    %
    Savings accounts  
    111,128
       
    22
       
    0.04
    %
      
    89,956
       
    32
       
    0.07
    %
    Time deposits  
    187,597
       
    1,095
       
    1.18
    %
      
    217,756
       
    1,855
       
    1.71
    %
    Total time and savings deposits  
    728,058
       
    1,545
       
    0.43
    %
      
    651,048
       
    2,493
       
    0.77
    %
    Federal funds purchased, repurchase
    agreements and other borrowings
      
    20,347
       
    30
       
    0.30
    %
      
    21,227
       
    37
       
    0.35
    %
    Federal Home Loan Bank advances  
    -
       
    -
       
    0.00
    %
      
    40,242
       
    413
       
    2.06
    %
    Total interest-bearing liabilities  
    748,405
       
    1,575
       
    0.42
    %
      
    712,517
       
    2,943
       
    0.83
    %
    Demand deposits  
    381,278
               
    286,502
             
    Other liabilities  
    8,008
               
    4,037
             
    Stockholders’ equity  
    119,125
               
    112,686
             
    Total liabilities and stockholders’ equity 
    $
    1,256,816
              
    $
    1,115,742
             
    Net interest margin     
    $
    19,384
       
    3.36
    %
         
    $
    16,976
       
    3.36
    %

    AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* 
      For the nine months ended September 30, 
      2017  2016 
         Interest        Interest    
      Average  Income/  Yield/  Average  Income/  Yield/ 
      Balance  Expense  Rate**  Balance  Expense  Rate** 
      (dollars in thousands) 
    ASSETS                  
    Loans held for investment* $656,937  $21,607   4.39% $580,900  $19,717   4.53%
    Loans held for sale  373   20   7.15%  0   0   0.00%
    Investment securities:                        
    Taxable  104,059   1,474   1.89%  104,631   1,376   1.75%
    Tax-exempt*  69,274   1,867   3.59%  65,610   1,713   3.48%
    Total investment securities  173,333   3,341   2.57%  170,241   3,089   2.42%
    Interest-bearing due from banks  1,502   12   1.07%  7,867   30   0.51%
    Federal funds sold  1,096   6   0.73%  1,549   4   0.34%
    Other investments  2,075   98   6.30%  1,491   76   6.80%
    Total earning assets  835,316  $25,084   4.00%  762,048  $22,916   4.01%
    Allowance for loan losses  (8,851)          (7,893)        
    Other non-earning assets  102,726           120,346         
    Total assets $929,191          $874,501         
                             
    LIABILITIES AND STOCKHOLDERS' EQUITY                        
    Time and savings deposits:                        
    Interest-bearing transaction accounts $28,121  $7   0.03% $17,559  $7   0.05%
    Money market deposit accounts  234,446   202   0.11%  219,907   129   0.08%
    Savings accounts  82,160   31   0.05%  78,033   29   0.05%
    Time deposits  206,150   1,599   1.03%  209,654   1,572   1.00%
    Total time and savings deposits  550,877   1,839   0.45%  525,153   1,737   0.44%
    Federal funds purchased, repurchase agreements and other borrowings  24,684   26   0.14%  26,151   20   0.10%
    Federal Home Loan Bank advances  25,879   233   1.20%  12,372   177   1.91%
    Total interest-bearing liabilities  601,440   2,098   0.47%  563,676   1,934   0.46%
    Demand deposits  226,103           209,147         
    Other liabilities  5,477           6,507         
    Stockholders' equity  96,171           95,171         
    Total liabilities and stockholders' equity $929,191          $874,501         
    Net interest margin     $22,986   3.67%     $20,982   3.67%
                             
    *Computed on a fully tax-equivalent basis using a 34% rate; the tax-equivalent adjustment to interest income was $730 thousand and $680 thousand for the nine months ended September 30, 2017 and 2016, respectively. 
    **Annualized                 

    *Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income  by $122 thousand and $85 thousand for June 30, 2021 and 2020, respectively.
    **Annualized

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


    For the three months ended June 30, 2021, the Company did not recognize a provision for loan losses compared to a provision of $300 thousand for the second quarter of 2020. The provision for loan losses was $2.9 million$150 thousand in the first ninesix months of 2017,2021, compared to $1.3 million$600 thousand in the first ninesix months of 2016.2020.

    The allowance for loan and lease losses (ALLL) was $9.5 million at June 30, 2021 and December 31, 2020, respectively. The ALLL as a percentage of loans held for investment was 1.14% at June 30, 2021 and December 31, 2020, respectively. Excluding PPP loans, which are 100% guaranteed by the SBA, the ALLL as a percentage of loans held for investment was 1.23% at June 30, 2021 and 1.27% at December 31, 2020.  The decrease in ALLL as a percentage of loans held for investment, excluding PPP loans, was primarily attributable to an increase in loans held for investment combined with improving historical loss rates, partially offset by increased qualitative reserves. Quarterly annualized net charge offs as a percentage of average loans outstanding was 0.09% for the second quarter of 2021 compared to 0.13% in the second quarter of 2020.  For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.

    As of June 30, 2021, compared to December 31, 2020, there have not been significant changes in the three months ended Septemberoverall credit quality of the loan portfolio, however the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration. Low levels of NPAs and year-over-year quantitative historical loss rates continue to demonstrate improvement, resulting in a 9 basis point reduction in the historical loss rate as a percentage of loans evaluated collectively for impairment overall, but are being partially offset by a 6 basis point increase in qualitative factor components primarily related to economic uncertainty stemming from the COVID-19 pandemic. As the economic impact of the COVID-19 pandemic continues to evolve, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses.

    The Company has made loan modifications under the CARES Act, enacted on March 27, 2020, and subsequently amended by the Consolidated Appropriations Act 2021, which provided that certain loan modifications that were (1) related to COVID-19 and (2) for loans that were not more than 30 days past due as of December 31, 2019 are not required to be designated as TDRs.  At June 30, 2021, the Company added $1.3had loan modifications of $54 thousand down from $7.4 million as of December 31, 2020. The Company recognizes interest income as earned and management expects that the deferred interest owed on each such loan modification will be repaid by the borrower in 2017 and reversed $100 thousand from its provision for loan losses in 2016.a future period.
    - 39 -


    Approximately $1.1 million of the provision for loan losses in the nine months ended September 30, 2017 was due to growth in loans, which required the Company to set aside additional funds. The remainder of the increase was primarily due to the deteriorating condition of a long-standing borrowing relationship, which the Company charged down to the value of its collateral, less costs to sell, during the nine months ended September 30, 2017.

    Net loans charged off as a percent of total loans on an annualized basis were 0.42% for the first nine months of 2017, or $3.0 million, compared to 0.28%, or $1.3 million, in the first nine months of 2016. In the three months ended September 30, 2017 and 2016, Net loans charged off as a percent of total loans on an annualized basis were 0.59% and 0.04%, respectively.


    Noninterest Income
    Noninterest income was $3.4$3.5 million and $10.6$7.7 million , respectively, in the three and ninesix months ended SeptemberJune 30, 2017, an increase2021, a decrease of $34$420 thousand or 1.02%10.6% from the thirdsecond quarter of 20162020 and an increase of $337$436 thousand or 3.28% from the ninesix months ended SeptemberJune 30, 2016. The changes between 20162020. Increases in fiduciary and 2017 resulted primarily from (1) nonrecurring gains associated with the initial implementation in the first quarter of 2016 of a new strategy for the investment portfolio, resulting in increased activity within the investment portfolio that was not repeated in 2017, and (2) a nonrecurring gain associated with the acquisition in the second quarter of 2017 of the outstanding interest in Old Point Mortgage, LLC, which is now included in the Company's consolidated financial statements.
    Year-to-Date Review
    Unless otherwise noted, all comparisons in this section are between the nine months ended September 30, 2017 and 2016.

    Gains on sales of available-for-sale securities decreased $433 thousand. Whileasset management continued to monitor the investment portfolio and make changes congruent with its strategy for the investment portfolio, purchases and sales in the first nine months of 2017 were fewer than in the first nine months of 2016, with correspondingly smaller gains.

    As a result of the purchase of the outstanding ownership interest in OPM in the second quarter of 2017, the Bank became the sole member of OPM. In accordance with GAAP, the Company recorded income of $550 thousand related to the fair value of its previously-held equity interest in OPM, reflected as a gain on acquisition of Old Point Mortgage in the Consolidated Statements of Income.

    Income from mortgage banking activities increased $186 thousand. The Company's consolidated financial statements now include OPM, with its income reported in noninterest income as income from mortgage banking activities. In 2016, the Bank owned only 49% of OPM and accounted for its investment under the equity method. Under this method, the Bank recorded its proportionate share of OPM's net income (all income net of all expenses, including income tax). With the completion of the full acquisition of OPM, the Bank now receives 100% of OPM's operating results. The Bank's investment in OPM is also now accounted for on a consolidated basis, and as a result, OPM's gross revenues are reported in noninterest income and its expenses are reported in individual categories of noninterest expense, rather than as a net figure in noninterest income. The increase from a 49% to 100% ownership interest and the conversion from equity to consolidation accounting led to the significant increase in this category.

    Other significant changes in noninterest income were as follows:
    • Income from fiduciary activities (increased $184 thousand or 6.98%): This account is heavily impacted by the market value of assets under management, and improvements in the stock market during the fourth quarter of 2016 and first nine months of 2017 increased income in this category.
    • Service charges on deposit accounts (decreased $191 thousand or 6.29%): Lower overdraft fee income and lower service charges on both personal and business accounts were the primary reasons for the decline in this account. Increased regulation of overdraft fee income has reduced the Company's income in this category in prior years, a decline that continued in 2017.
    • Other service charges, commissions and fees, (increased $122 thousand or 4.04%): This account increased primarily due to increases in merchant processing fee income and debit card fee income.
    Third Quarter Review
    Unless otherwise noted, all comparisons in this section are between the third quarter of 2017 and the third quarter of 2016.

    Income from fiduciary activities increased $45 thousand or 5.24% and other service charges, commissions and fees, increased $82 thousand or 8.47%. Both changesand mortgage banking income were offset by the impact of non-recurring gains on available for sale securities and fixed assets that were recognized during the second quarter of 2020, which resulted in a decline in noninterest income for the reasons discussedsecond quarter of 2021 when compared to the prior year quarter. Year over year, fiduciary and asset management fees and other service charges, commission and fees increased while service charges on deposit accounts decreased primarily due to lower nonsufficient funds, or NSF, fees which historically trend downward during periods of economic uncertainty and lower service charges due to higher deposit balances.  Mortgage banking income increased primarily due to (i) higher volume resulting from the current interest rate environment, (ii) higher gains on sales of loans as a result of higher margins on loan originated for resale and (iii) expansion of the mortgage lending team.  Excluding non-recurring gains recognized in the "Year-to-Date Review" section above.2020, noninterest income increased quarter-over-quarter and year-over-year.
    - 40 -



    Noninterest Expense
    Noninterest expense was $10.6 million for the second quarter of 2021, an increase of $1.3 million, or 14.5%, from the second quarter of 2020. For the six months ended June 30, 2021, noninterest expense was $21.1 million, an increase of $1.9 million, or 9.7% over the comparative 2020 period. The quarter-over-quarter and year-over-year increases are primarily related to salaries and employee benefits, data processing, other taxes expense, and other operating expense, partially offset by decreases in occupancy and equipment.

    Total salaries and benefits costs increased $827$763 thousand, or 3.15%14.0%, when comparing the ninesecond quarters of 2021 and 2020 and $996 thousand, or 8.7%, when comparing the six months ended SeptemberJune 30, 20172021 to the same period in 2016 and increased $427 thousand or 4.91% when comparing the third quarters of 2017 and 2016.

    Year-to-Date Review
    Unless otherwise noted, all comparisons2020.  The increase in this section are between the nine months ended September 30, 2017 and 2016.

    Noninterest expense in 2016 was impacted by the Company's early payoff of an FHLB advance in the first quarter of that year, which required the Company to pay a fee of $391 thousand. The lack of such a fee in 2017, along with decreases in certain categories of noninterest expense, reduces the impact of increases in other categories of noninterest expense.
    • Salariessalaries and employee benefits (increased $543 thousandis primarily attributable to (i) increased commission expense related to higher mortgage loan origination volume in 2021; (ii) increased temporary employee expense; and (iii) lower levels of deferred costs related to PPP loan origination, partially offset by reduced salary expense related primarily to lower full time equivalent employee levels. The costs related to PPP loan originations were deferred at time of origination and are being amortized to interest income over the remaining lives of the loans, which may be 24 or 3.59%): In60 months at origination.  These costs are amortized against the second quarterrelated loan fees received for the origination of 2017,the PPP loans.  Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans.  The Company has benefited from the early retirement transitions to redeploy resources in highly skilled and experienced relationship officers as well as officers with experience in creating efficiencies through improvements in operations and technology.

      As part of the Company’s 2021 roadmap for implementing bank-wide technology and efficiency initiatives, the Company accrued for the compensation package provided to its retiring Chief Financial Officer.has fully implemented a new loan origination system and a new online appointment scheduling solution. In addition, the Company remains on track to this accrual,implement a deposit origination platform and a new online account opening solution, and complete the consolidation of OPM increased salary and commission expenses, as did the hiring of additional lending staff to support the Company's strategic plan.
    • Occupancy and equipment (increased $226 thousand or 5.48%): The Company continues to improve its disaster recovery plan, building on the more sophisticated disaster recovery plan initially begunATM upgrade project in the third quarter of 2015. New service contracts2021. The Company plans to complete upgrades to critical infrastructure software related to imaging and purchasesto implement a new data analytics solution and teller system during the fourth quarter of depreciable equipment both contributed2021. These initiatives have driven an increase of $393 thousand from the quarter ended June 30, 2020 to the increasequarter ended June 30, 2021 and are expected to continue to contribute to increased noninterest expenses during the implementation and transition timeframes as our operational structure pivoted from in-house to outsourced environments and shifted costs previously included in occupancy and equipment.
    • Legal and audit expenses (decreased $265 thousand or 30.49%): The inclusion in the 2016 proxy statement and the implementation of stockholder-approved proposals following the 2016 Annual Meeting of Stockholders increased legal and audit expense during 2016, while there were no equivalent expenses in 2017.
    • Other outside service fees (increased $236 thousand or 42.07%): Due to the large increase in the Bank's auto dealer loan portfolio, costs to process and service these loans also increased.
    • Employee professional development (increased $177 thousand or 37.34%):equipment expense. The Company incurred higher recruiting costs associated with an executive search.expects to continue its bank-wide technology initiative implementations into 2022.
    • Loan
      Increase in other tax expenses (increased $380 thousand or 368.93%): As with other outside service fees, the Bank's new dealer lending program increased the costwas driven by resolution of credit reports, which are included in this line item. Expensescertain tax credits related to problem credits were also higher as the Company worked to reduce nonperforming assets.
    • ATMbank franchise tax of $94 thousand and other losses (increased $134 thousand or 44.52%): Branch robberies and fraud losses increased this expense in the first half of 2017. The Company has implemented improvements to its fraud detection process and continues to monitor new frauds to determine if additional changes are necessary.
    • Loss (gain) on other real estate owned (decreased $171 thousand or 111.76%): In 2016 and 2017, the Company worked diligently to sell the properties heldincreases in other real estate owned, with the last two sales closing in the second quarter of 2017. Prioroperating expense is primarily related to 2017, both properties had already been written downincreased FDIC assessments and loan processing expense due to the anticipated sales price (less costs to sell); the Company recorded a small gain on the final sales in 2017, as compared to a loss in the first half of 2016.increased volume levels.

    The Company'sCompany’s income tax expense decreased $119$166 thousand for the second quarter and increased $288 thousand for first six months of 2021 when compared to the same periods in 2020 primarily due to both lower taxablechanges in the levels of net income and a lower effective tax rate. The Company's effective tax rate remains low due to its investments in tax-exempt securities and its receipt of federal income tax credits for its investment in certain housing projects. AsThe effective federal income tax rates for the Company's income before taxesthree and six months ended June 30, 2021 was lower in 2017 than in 2016 while12.7% and 14.7% and the amount of tax-exempt income and tax credits increased, the Company's effective tax raterates for the first ninethree and six months of 2017 is negative.
    ended June 30, 2020 was 14.7% and 12.8%, respectively.

    Third Quarter Review
    Unless otherwise noted, all comparisons in this section are between the third quarter of 2017 and the third quarter of 2016.

    The most significant changes in quarterly noninterest expense were in four line items: occupancy and equipment (increased $71 thousand or 5.17%); legal and audit expenses (decreased $156 thousand or 41.94%); other outside service fees (increased $92 thousand or 46.00%); and loan expenses (increased $256 thousand or 556.52%). All of these categories were affected by the same factors as discussed above for the year-to-date periods.

    Income tax expense for the quarter was down from the comparable period last year due to lower net income before taxes. As in the year-to-date periods discussed above, the Company's investments in tax-exempt securities and low-income housing projects have generally helped to keep its effective tax rate low, which management expects will continue.
    - 41 -




    Balance Sheet Review
    Unless otherwise noted, all comparisons in this section are between balances at December 31, 20162020 and SeptemberJune 30, 2017.2021.


    AssetsTotal assets of $1.3 billion as of SeptemberJune 30, 2017 were $954.52021 increased by $48.6 million an increase of $51.5from December 31, 2020. Net loans held for investment decreased $3.6 million, or 5.71%0.4%, withfrom December 31, 2020 to $823.2 million at June 30, 2021. The change in net loans held for investment growing $96.4 million. During the first half of 2017, loan growth was primarily fundedattributed to a decline of $25.7 million in the PPP loan segment due to forgiveness of $74.0 million of PPP loans, which was partially offset by increasesnew PPP originations of $48.3 million.  Loan growth in low-cost deposits. However, deposit balances declined during June of 2017the commercial real estate and did not show consistent growth again until September of 2017. As of September 30, 2017, total deposits were $2.1construction, land deployment, and other land loan segments was $20.9 million on a combined basis for the same period. Cash and cash equivalents increased $35.1 million, or 0.26% lower than29.1%. Securities available for sale, at fair value, increased $26.8 million from December 31, 2020 to $213.2 million at June 30, 2021, as additional liquidity provided by growth in deposit accounts continues to be deployed in the Company’s investment portfolio.

    Total deposits increased $66.8 million, or 6.3%, to $1.1 billion at June 30, 2021. Noninterest-bearing deposits increased $38.5 million, or 10.6%, savings deposits increased $42.8 million, or 8.3%, and time deposits decreased $14.3 million, or 7.4%. Growth in the Company’s deposits continues to be driven by government stimulus, PPP loan related deposits, and higher levels of consumer savings. Key strategies continue to be expanding the low cost deposit base and re-pricing to reduce interest expense and buffer NIM compression during this low rate environment. Total borrowings decreased $21.0 million from December 31, 2020 to June 30, 2021.  The primary driver of the decrease was repayment of borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) initiated by the Federal Reserve to partially fund PPP loan originations, resulting in the Company borrowing $3.3 million as of June 30, 2021 as compared to $28.6 million at December 31, 2016. Historically,2020.  PPPLF borrowings are fully collateralized by PPP loans and will mature in concert with the Company's deposit balances have shown similar seasonal variations in June and July, with balances growing again in the latter partunderlying collateral, all of the third quarter and in the fourth quarter. Management monitors available liquidity closely and adjusts deposit rates according to the Company's needs. To supplement its deposit base, the Company funded loan growth from the securities portfolio ($35.3 million) and additional FHLB advances ($45.0 million).

    The majority of the Company's loan growth was in the consumer loans category and was driven by indirect dealer lending. In September 2016, the Company re-opened its dealer lending department. The consumer auto loan portfolio grew $83.6 million in the first ninewhich will mature within 24 months of 2017, which contributed positively to interest income during 2017; management expects this trend will continue in the future. While there are risks inherent in any new loan program, the Company has hired knowledgeable staff and put in place programs and policies to mitigate those risks. Management is monitoring the allowance for loan losses carefully and will make changes as the portfolio ages.origination.


    Consumer loans were also increased by the purchase of $8.9 million in consumer installment loans. The Company maintains a dedicated reserve account funded by the seller of these consumer installment loans, with the balance in the reserve averaging 10 - 12% of the outstanding principal balance. Any loan losses in this portfolio are covered first by the reserve account; loans are charged against the allowance for loan losses only if the funds available in the reserve account are not sufficient.

    Average assets for the first ninesix months of 2017 were $929.22021 increased $141.1 million, or 12.6%, compared to $874.5 million for the first ninesix months of 2016, an increase of 6.25%.2020. Comparing the first ninesix months of 20172021 to the first ninesix months of 2016, 2020, average loan growth of $76.0loans increased $41.6 million, was funded by average deposit growth ($42.7 million), average FHLB advances ($13.5 million), and average available liquidity from cashinvestment securities increased $38.8 million. Total average deposits increased $171.8 million with year-over-year average balance increases of 33.1% in non-interest bearing deposits and due from banks ($20.5 million).24.7% in savings deposits, including interest-bearing transaction and money market accounts.  Average borrowings decreased $41.1 million.

    The Company's holdings of "Alt-A" type mortgage loans such as adjustable rate and nontraditional type loans were inconsequential, amounting to less than 1.00% of the Company's loan portfolio as of September 30, 2017.

    The Company does not have a formal program for subprime lending. The Company is required by law to comply with the requirements of the Community Reinvestment Act (the CRA), which imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income borrowers. In order to comply with the CRA and meet the credit needs of its local communities, the Company finds it necessary to make certain loans with subprime characteristics.

    For the purposes of this discussion, a "subprime loan" is defined as a loan to a borrower having a credit score of 660 or below. The majority of the Company's subprime loans are to customers in the Company's local market area. The following table details the Company's loans with subprime characteristics that were secured by 1-4 family first mortgages, 1-4 family open-end loans (i.e., equity lines of credit) and 1-4 family junior lien loans (e.g., second mortgages) for which the Company has recorded a credit score in its system.

    Loans Secured by 1 - 4 Family First Mortgages, 
    1 - 4 Family Open-end and 1 - 4 Family Junior Liens 
    As of September 30, 2017 
    (dollars in thousands) 
           
      
    Amount
      
    Percent
     
    Subprime $21,406   12.88%
    Non-subprime  144,829   87.12%
      $166,235   100.00%
             
    Total loans $700,996     
             
    Percentage of Real Estate-Secured Subprime Loans to Total Loans   3.05%
    - 42 -


    In addition to the subprime loans secured by real estate discussed above, as of September 30, 2017, the Company had an additional $14.2 million in subprime consumer loans that were not government guaranteed, were unsecured, or were secured by collateral other than real estate. Together with the subprime loans secured by real estate, the Company's total subprime loans as of September 30, 2017 were $35.6 million, amounting to 5.08% of the Company's total loans at September 30, 2017.

    Additionally, the Company has no investments secured by "Alt-A" type mortgage loans such as adjustable rate and nontraditional type mortgages or subprime loans.


    Liquidity
    Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. The Company'sCompany’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of SeptemberJune 30, 2017,2021, the Bank'sBank’s unpledged, available-for-sale securities totaled $93.2$143.2 million. The Company'sCompany’s primary external source of liquidity is advances from the FHLB. In addition, the Company had cash and cash equivalents of $155.5 million at June 30, 2021, including interest-bearing deposits in other banks of $134.4 million, that could provide additional liquidity to the Company


    A major source of the Company'sCompany’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.FHLB and FRB. As of the end of the thirdsecond quarter of 2017,2021, the Company had $141.0$375.1 million in FHLB borrowing availability based on loans and securities currently available for pledging, less advances currently outstanding.pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the thirdsecond quarter of 2017,2021, the Company had $55.0$105.0 million available in federal funds lines to address any short-term borrowing needs.


    As disclosed in the Company'sCompany’s consolidated statements of cash flows, net cash provided by operating activities was $7.0$15.9 million, net cash used in investing activities was $64.8$25.5 million, and net cash provided by financing activities was $47.4$44.6 million for the ninesix months ended SeptemberJune 30, 2017.2021. Combined, this contributed to a $10.4$35.1 million decreaseincrease in cash and cash equivalents for the ninesix months ended SeptemberJune 30, 2017.2021.


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


    Based on the Company'sCompany’s management of liquid assets, the availability of borrowed funds, and the Company'sCompany’s ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors'depositors’ requirements and to meet its customers'customers’ future borrowing needs.


    Notwithstanding the foregoing, the Company'sCompany’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company'sCompany’s markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company'sCompany’s operations.


    Nonperforming Assets
    Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. See Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for an explanation of the loan categories. OREO consists of real estate from foreclosuresa foreclosure on loan collateralcollateral. The Company had no OREO as of June 30, 2021 and one former Bank building.December 31, 2020.


    The majority of the loans past due 90 days or more and accruing interest at June 30, 2021 are  student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. When a loan changes from "past“past due 90 days or more and accruing interest"interest” status to "nonaccrual"“nonaccrual” status, the loan is reviewed for impairment. In most cases, if the loan is considered impaired, then the difference between the value of the collateral and the principal amount outstanding on the loan is charged off. If the Company is waiting on an appraisal to determine the collateral'scollateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, management allocates funds to the allowance for loan losses to cover the anticipated deficiency, based on information available to management at that time.


    In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower'sborrower’s ability to repay the modified loan.

    - 43 -
    37

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


    NONPERFORMING ASSETS 
      September 30,  December 31,  Increase 
      2017  2016  (Decrease) 
      (in thousands) 
    Nonaccrual loans         
    Commercial $771  $231  $540 
    Real estate-construction  518   -   518 
    Real estate-mortgage (1)  8,923   6,847   2,076 
    Consumer loans  -   81   (81)
    Total nonaccrual loans $10,212  $7,159  $3,053 
                 
    Loans past due 90 days or more and accruing interest             
    Commercial $473  $-  $473 
    Real estate-mortgage (1)  1,026   276   750 
    Consumer loans (2)  2,482   2,603   (121)
    Other  2   5   (3)
    Total loans past due 90 days or more and accruing interest $3,983  $2,884  $1,099 
                 
    Restructured loans             
    Commercial $100  $144  (44)
    Real estate-construction  93   96   (3)
    Real estate-mortgage (1)  13,586   11,616   1,970 
    Total restructured loans  $13,779  $11,856  $1,923 
    Less nonaccrual restructured loans (included above)  8,321   2,838   5,483 
    Less restructured loans currently in compliance (3)  5,458   9,018   (3,560)
    Net nonperforming, accruing restructured loans $-  $-  $- 
                 
    Nonperforming loans $14,195  $10,043  $4,152 
                 
    Other real estate owned            
    Construction, land development, and other land $-  $940  (940)
    Former bank building  -   127   (127)
    Total other real estate owned $-  $1,067  (1,067)
                 
    Total nonperforming assets $14,195  $11,110  $3,085 
                 
    (1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit. 
    (2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $4.1 million at September 30, 2017 and $4.8 million at December 31, 2016. 
    (3) As of September 30, 2017 and December 31, 2016, all of the Company's restructured accruing loans were performing in compliance with their modified terms. 

    NONPERFORMING ASSETS

     (dollars in thousands)  
    June 30,
    2021
        
    December 31,
    2020
        
    Increase
    (Decrease)
      
    Nonaccrual loans         
    Real estate-mortgage (1) 
    $
    245
      
    $
    311
      
    $
    (66
    )
    Real estate-commercial  
    1,028
       
    903
       
    125
     
    Construction  
    130
       
    -
       
    130
     
    Total nonaccrual loans $1,403  $1,214  $189 
                 
    Loans past due 90 days or more and accruing interest            
    Real estate-mortgage (1) 
    $
    58
      
    $
    -
      
    $
    58
     
    Consumer loans (2) 
    $
    935
      
    $
    744
      
    $
    191
     
    Total loans past due 90 days or more and accruing interest $993  $744  $249 
                 
    Restructured loans            
    Real estate-construction 
    $
    81
      
    $
    83
      
    $
    (2
    )
    Real estate-mortgage (1)  
    471
       
    492
       
    (21
    )
    Real estate-commercial  
    1,276
       
    1,352
       
    (76
    )
    Total restructured loans $1,828  $1,927  $(99)
    Less nonaccrual restructured loans (included above)  
    1,047
       
    1,120
       
    (73
    )
    Less restructured loans currently in compliance (3)  
    781
       
    807
       
    (26
    )
    Net nonperforming, accruing restructured loans 
    $
    -
      
    $
    -
      
    $
    -
     
    Nonperforming loans $2,396  $1,958  $438 
                 
    Total nonperforming assets $2,396  $1,958  $438 
    (1) The real estate-mortgage segment includes residential 1 – 4 family, second mortgages and equity lines of credit.
    (2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The
    portion of these guaranteed loans that is past due 90 days or more totaled $626 thousand at June 30, 2021 and $547 million at December 31, 2020.
    (3) As of June 30, 2021 and December 31, 2020, all of the Company’s restructured accruing loans were performing in compliance with their modified terms.

    Nonperforming assets as of SeptemberJune 30, 20172021 were $14.2$2.4 million, $3.1 million$438 thousand higher than nonperforming assets as of December 31, 2016.2020. Nonaccrual loans increased $3.1 million$189 thousand when comparing the balances as of SeptemberJune 30, 20172021 to December 31, 2016.2020. The increase was primarily driven by one credit relationship of $130 thousand which has subsequently been resolved. See Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for additional information about the change in nonaccrual loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regarding the cash flow, anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.
    - 44 -



    The majority of the balance of nonaccrual loans at SeptemberJune 30, 20172021 was related to a fewone large credit relationships. Ofrelationship of $843 thousand, representing 60.1% of the $10.2$1.4 million of nonaccrual loans at SeptemberJune 30, 2017, $7.7 million, or approximately 75.40%, was comprised of three credit relationships of $3.7 million, $2.3 million, and $1.8 million. All loans in these relationships have2021. This relationship has been analyzed to determine whether the cash flow of the borrower and the Company believes that the collateral pledged to secure the loans is sufficient to cover the outstanding principal balances.balance. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect.


    The majority of the loans that make up the nonaccrual balance have been written down to their net realizable value. If the Company is waiting on an appraisal to determine the collateral's value, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time. As shown in the table above, the majority of nonaccrual loans at September 30, 2017 and December 31, 2016 were collateralized by real estate.

    Loans past due 90 days or more and accruing interest increased $1.1 million.$249 thousand. As of SeptemberJune 30, 2017, $2.3 million2021, $626 thousand of the $4.0 million$993 thousand of loans past due 90 days or more and accruing interest were government-guaranteed student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company. Net of past due government-guaranteed student loans, loans past due 90 days or more and accruing interest increased $1.4 million primarily due to the maturity of a single real estate mortgage loan that was renewed in October; the majority of the remainder is guaranteed by the SBA.


    Total restructured loans increaseddecreased by $1.9 million$99 thousand from December 31, 20162020 to SeptemberJune 30, 20172021 primarily due to paydownspay-offs and charge-offs on restructured loans, partially offset by the restructuring of two additional loans.paydowns. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

    The Company's two remaining OREO properties were sold in the second quarter of 2017, and no additional properties were added.


    Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. This allows management to work with problem loan relationships to identify any payment shortfall and assist these borrowers to improve performance or correct the problems.


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


    The majority of the Company'sCompany’s TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company is waiting on an appraisal to determine the collateral'scollateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the impaired loan component of the allowance for loan losses was $439$51 thousand and $800$11 thousand, respectively.


    The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes in certain loans, changes in underwriting, changes in management and legal and regulatory changes. Forchanges, and as of June 30, 2021 and December 31, 2020 included factors related to the September 30, 2017 calculation, the qualitative factor that had the most significant impact on the allowance was the one impacted by changes in collateral-dependent loans, which increased the allowance.COVID-19 pandemic.


    Historical loss is the final component of the allowance for loan losses and is calculated based on the migration of loans from performing to charge-off over a period of time that management deems appropriate to provide a reasonable estimate of losses inherent in the loan portfolio. With the December 31, 2016 calculation, the historicalHistorical loss wasis based on foureight migration periods of twelve quarters each. Beginning with the September 30, 2017 calculation, management added four additional migration periods to its analysis to better reflect the risks inherent in the loan portfolio. This change is discussed in more detail below.
    - 45 -


    Both the historical loss and qualitative factor components of the allowance are applied to loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the call report applicable to the Bank. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan'sloan’s payments are current (including loans 1 – 29 days past due), or are 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company'sCompany’s internally assigned risk grades: substandard, other assets especially mentioned (OAEM, rated just above substandard), and pass (all other loans).

    During the nine months ended September 30, 2017, the Company saw a decrease of $1.3 million in loans rated OAEM and a decrease of $2.1 million in loans rated substandard, based on internally assigned risk grades. The Company may also assign loans to the risk grades of doubtfulDoubtful or loss,Loss, but as of SeptemberJune 30, 20172021 and December 31, 2016,2020 the Company had no loans in these categories.


    The overall historical loss rate from December 31, 2020 to June 30, 2021, decreased 9 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality combined with sustained levels of non-performing assets.  For the same period,  the qualitative factor components increased 6 basis points as a percentage of loans evaluated collectively for impairment overall.  This increase was primarily due to segment adjustments for economic conditions and uncertainty related to the COVID-19 pandemic and change in volume for certain segments. While there have not been significant changes in overall credit quality of the loan portfolio from December 31, 2020 to June 30, 2021, the economic impact of the COVID-19 pandemic and the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration, potentially resulting in elevated levels of risk within the loan portfolio which may require additional increases in the allowance for loan losses.

    On a combined basis, the historical loss and qualitative factor components amounted to $8.5 million and $7.4$9.4 million as of SeptemberJune 30, 20172021 and $9.5 million at December 31, 2016, respectively, with the increase primarily attributable2020.  Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to growth inidentify areas within the loan portfolio.portfolio which may create elevated levels of risk should the economic environment created by the COVID-19 pandemic or effects of federal government relief programs present indications of economic instability that is other than temporary in nature.


    The allowance for loan losses was 1.28%1.14% of total loans held for investment on SeptemberJune 30, 20172021 and 1.37% of total loans on December 31, 2016.2020. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.23% at June 30, 2021 and 1.27% at December 31, 2020. The decrease in the ALLL as a percentage of loans held for investment, excluding PPP loans, from December 31, 2020 to June 30, 2021 is primarily related to higher outstanding loan balances, excluding PPP, combined with decreasing historical loss rates partially offset by increased qualitative reserves. Loans held for investment excluding PPP loans is a non-GAAP financial measure. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below. As of SeptemberJune 30, 2017,2021, the allowance for loan losses was 63.06%395.4% of nonperforming loans and nonperforming assets, respectively; this compares to 487.3% of both nonperforming assetsloans and nonperforming loans, compared to 74.21% and 82.10%, respectively,assets as of December 31, 2016. The decrease in the allowance as a percent of total loans is primarily due to declines in loans rated OAEM and substandard, as well as charge-offs on certain loans for which the Company had a specific allocation. Although the allowance as a percent of nonperforming loans decreased between December 31, 2016 and September 30, 2017, management2020. Management believes it has provided an adequate reserve for nonperforming loans at September 30, 2017.

    Change in Migration Periods
    Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). Multiple migration periods can also be calculated, allowing the Company to assess the migration of loans based on more than one starting point. For example, the Company could run a migration analysis that begins on June 30, 2014 and follows2021.

    Acquired loans are recorded at their fair value at acquisition date without carryover of the performanceacquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans outstanding on that date through June 30, 2017, assessing changesis determined using market participant assumptions in risk ratings andestimating the amount and timing of any charge-offs to determine the historical loss rate. The Company could then run a second migration analysis that begins on September 30, 2014both principal and follows those loans through September 30, 2017 to calculate a second historical loss rate. These two loss rates would then be averaged to determine the overall loss rate applied to the loan portfolio.

    The length of a migration period can also be extended. Adding additional quarters to the migration analysis extends the period over which the loan could cease to perform, increasing the number of loans that default and thus also increasing the historical loss rates. While a longer migration period provides a more conservative estimate of expected future losses, extending the migration period too far can provide less accurate estimates if there have been changes in the economy or the Company's loan management processes.

    Increasing the number of migration periods, as opposed to lengthening the individual migration periods, provides the Company with an average loss rate that is less affected by unusual balances in the segments of the portfolio. Because migration analysis follows only those loans outstanding at the beginning of the migration period, a significant change in the balance of a loan pool during the migration period can produce results that are not indicative of the performance of the pool.

    For example, a migration period of twelve quarters (three years) may apply to a pool of loans that has a balance of $300 thousand at the beginning of the migration period. If a new loan of $150 thousand is added to the pool in the following quarter, and this loan is charged off ten quarters later, the migration analysis would show a loss rate of 50%, based on the original outstanding balance of $300 thousand and a charge-off of $150 thousand. In this example, the 50% loss rate calculated for the migration period would result from the unique timing and loan balance factors within the period and would not necessarily provide an appropriate reflection of the performance of the loans in the pool. By using multiple migration periods, such unusual situations have less of an impact on the calculated historical loss rate, providing a more accurate representation of the lossesinterest cash flows expected to be incurred.collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired (or PCI) or purchased performing.


    As partPurchased performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the quarterly calculation, management reviewsloan at acquisition date (premium or discount) is amortized or accreted into interest income over the lengthlife of the migration periods andloans. If the numberpurchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used. The adequacy of migration periods used. To better reflect the risks inherent inremaining discount as compared to the reserve that would be required under the Company’s allowance for loan portfolio, in the third quarter of 2017, the Company increased the number of migration periods from four to eight. As withloss methodology is evaluated quarterly. Should the methodology in prior quarters, each migration period covers twelve quarters, withreserve exceed the most recent migration period ending with the current quarter (in this case, September 30, 2017).remaining discount, additional provision would be recognized.


    Capital Resources
    Total stockholders'stockholders’ equity as of SeptemberJune 30, 20172021 was $97.6$119.9 million, an increase of $3.7$2.8 million or 3.88%2.4% from $94.0$117.1 million at December 31, 2016.2020. The increase was the result of increased retained earnings partially offset by net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income on the consolidated balance sheets. The movement in the unrealized gain/loss position was driven by changes in market rates and shift in portfolio composition.
    - 46 -

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


    In June 2013, the federal bank regulatory agencies adopted the Basel III Capital Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The EGRRCPA, enacted in May 2018, required action by the Federal Reserve to expand the applicability of its small bank holding company policy statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the Federal Reserve issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will no longer be subject to regulatory capital requirements. For purposesan overview of the Basel III FinalCapital Rules (i) common equityand the EGRRCPA, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s 2020 Annual Report on Form 10-K.

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

    In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 capital (CET1) consists principallyleverage ratio of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stock and trust preferred securities; and (iii) Tier 2 capital consists principally of qualifying subordinated debt and preferred stock,greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the allowanceCBLR 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 loan losses. Total Capital is Tier 1 plus Tier 2 capital. Each regulatory capital classification is subjectbanks to certain adjustments and limitations, as implemented bybegin using in their March 31, 2020, Call Report.  The Bank did not opt into the Basel III Final Rules. The Basel III Final Rules also implement a "countercyclical capital buffer," generally designed to absorb losses during periods of economic stress and to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. The Basel III Final Rules are discussed in detail in the Company's 2016 annual report on Form 10-K.CBLR framework.


    The following is a summary of the Company'sBank’s capital ratios at SeptemberJune 30, 2017.2021. As shown below, these ratios were all well above the recommended regulatory minimum levelslevels.

        
    2021
    Regulatory
    Minimums
      
    June 30, 2021
     
    Common Equity Tier 1 Capital to Risk-Weighted Assets  
    4.500
    %
      
    11.49
    %
    Tier 1 Capital to Risk-Weighted Assets  
    6.000
    %
      
    11.49
    %
    Tier 1 Leverage to Average Assets  
    4.000
    %
      
    8.52
    %
    Total Capital to Risk-Weighted Assets  
    8.000
    %
      
    12.51
    %
    Capital Conservation Buffer  
    2.500
    %
      
    4.51
    %
    Risk-Weighted Assets (in thousands)     
    $
    931,383
     

    On July 14, 2021, the Company issued $30.0 million in aggregate principal amount of 3.50% fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction.  The Notes initially bear interest at a fixed rate of 3.50% for five years and demonstrateat the three month SOFR plus 286 basis points, resetting quarterly, thereafter.  The Notes were structured to qualify as Tier 2 capital for regulatory purposes, and the Company expects that the Company'sNotes will be included in certain of the Company’s regulatory capital position remains strong.ratios as of September 30, 2021 and thereafter.

      
    2017
    Regulatory
    Minimums
      September 30, 2017 
    Common Equity Tier 1 Capital  4.500%  12.06%
    Tier 1 Capital  6.000%  12.06%
    Tier 1 Leverage  4.000%  10.47%
    Total Capital  8.000%  13.16%
    Capital Conservation Buffer  1.250%  5.16%


    Book value per share was $19.50$22.87 at SeptemberJune 30, 20172021 as compared to $19.45$22.19 at SeptemberJune 30, 2016.2020. Cash dividends were $1.6$1.3 million or $0.33$0.24 per share in the first ninesix months of 20172021 and $1.5 million or $0.30 per share in the first nine months of 2016.2020, respectively.


    Contractual Obligations
    In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require cash outflows.


    The Company obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The Company elected to pay the loan in full during the first quarter of 2021.

    As of SeptemberJune 30, 2017,2021, there have been no material changes outside the ordinary course of business in the Company'sCompany’s contractual obligations disclosed in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K.


    Off-Balance Sheet Arrangements
    As of SeptemberJune 30, 2017,2021, there were no material changes in the Company'sCompany’s off-balance sheet arrangements disclosed in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K.


    Non-GAAP Financial Measures
    In reporting the results of the quarter ended June 30, 2021, the Company has provided supplemental financial measures on a tax equivalent or an adjusted basis.  These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP.  In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.

      Three Months Ended June 30,  Six Months Ended June 30, 
    (dollar in thousands, except per share data) 2021  2020  2021  2020 
    Fully Taxable Equivalent Net Interest Income            
    Net interest income (GAAP) 
    $
    9,106
      
    $
    8,473
      
    $
    19,262
      
    $
    16,891
     
    FTE adjustment  
    63
       
    49
       
    122
       
    85
     
    Net interest income (FTE) (non-GAAP) 
    $
    9,169
      
    $
    8,522
      
    $
    19,384
      
    $
    16,976
     
    Noninterest income (GAAP)  
    3,538
       
    3,958
       
    7,672
       
    7,236
     
    Total revenue (FTE) (non-GAAP) 
    $
    12,707
      
    $
    12,480
      
    $
    27,056
      
    $
    24,212
     
    Noninterest expense (GAAP)  
    10,535
       
    9,204
       
    21,093
       
    19,234
     
                     
    Average earning assets 
    $
    1,179,276
      
    $
    1,067,679
      
    $
    1,164,834
      
    $
    1,015,378
     
    Net interest margin  
    3.10
    %
      
    3.19
    %
      
    3.33
    %
      
    3.35
    %
    Net interest margin (FTE) (non-GAAP)  
    3.12
    %
      
    3.21
    %
      
    3.36
    %
      
    3.36
    %
                     
    Efficiency ratio  
    83.32
    %
      
    74.04
    %
      
    78.31
    %
      
    79.72
    %
    Efficiency ratio (FTE) (non-GAAP)  
    82.91
    %
      
    73.75
    %
      
    77.96
    %
      
    79.44
    %

    ALLL as a Percentage of Loans Held for Investment June 30, 2021  December 31, 2020 
    Loans held for investment  (net of deferred fees and costs) (GAAP) 
    $
    832,673
      
    $
    836,300
     
    Less PPP originations  
    6,306
       
    85,983
     
    Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP) 
    $
    826,367
      
    $
    750,317
     
             
    ALLL 
    $
    9,473
      
    $
    9,541
     
             
    ALLL as a Percentage of Loans Held for Investment  
    1.14
    %
      
    1.14
    %
    ALLL as a Percentage of Loans Held for Investment, net of PPP originations  
    1.23
    %
      
    1.27
    %

    Item 3.Quantitative and Qualitative Disclosures About Market Risk.

    Not required.

    Item 3. Quantitative and Qualitative Disclosures About Market Risk.

    Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact the amount of interest income and expense the Company receives or pays on a significant portion of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short-term until maturity. Management is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk.

    Three complementary modeling techniques are utilized to measure and monitor the exposure to interest rate risk: static gap analysis, earnings simulation analysis, and economic value of equity (EVE) analysis. Static gap measures the aggregate dollar volume of rate-sensitive assets relative to rate-sensitive liabilities re-pricing over various time horizons. This metric does not effectively capture the re-pricing characteristics or embedded optionality of the Company's assets and liabilities, so it is not relied upon or addressed here. Earnings simulation measures the potential effect of changes in market interest rates on future net interest income. This analysis incorporates management's assumptions for product pricing and pre-payment expectations and is the Company's preferred tool to assess its interest rate sensitivity in the short- to medium-term. The simulation utilizes a "static" balance sheet approach, which assumes that management makes no changes to the composition of the balance sheet to mitigate the impact of interest rate changes. EVE modeling estimates the fair value of assets and liabilities in different interest rate environments using discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. This measure provides an indication of the future earnings capacity of the balance sheet, and the change in EVE over different rate scenarios is a measure of long-term interest rate risk. The Company places less emphasis on EVE results due to the inherent imprecision of cash flow estimations and the limited utility of a static balance sheet assumption over the long-term.
    - 47 -


    The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

    When the Company is liability sensitive, net interest income should improve if interest rates fall since liabilities will reprice faster than assets (depending on the optionality or prepayment speeds of the assets). Conversely, if interest rates rise, net interest income should decline. When the Company is asset sensitive, net interest income should improve if interest rates rise and fall if rates fall. The rate change model assumes that these changes will occur gradually over the course of a year.

    The table below shows the Company's interest rate sensitivity for the periods and rate scenarios presented (dollars in thousands):

      Change In Net Interest Income 
      As of September 30, 
      2017  2016 
    Change in interest Rates %   $   %    $ 
    +300 basis points  (0.29)%  (92)  1.06%  285 
    +200 basis points  (0.08)%  (26)  0.74%  198 
    +100 basis points  0.10%  30   0.46%  122 
    Unchanged  0.00%  0   0.00%  0 
    -50 basis points  (0.77)%  (242)  (0.46)%  (122)
    -100 basis points  (1.52)%  (478)  (0.64)%  (171)

    Item 4.
    Item 4.Controls and Procedures.


    Disclosure Controls and Procedures.Management evaluated, with the participation of the Company'sCompany’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) underof the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and the Chief
    Financial Officer have concluded that the Company'sCompany’s disclosure controls and procedures arewere effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that the Companyit files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company'sCompany’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.


    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). No changes in the Company's internal control over financial reporting occurred during the fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


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

    PART II - OTHER INFORMATION


    Item 1.Legal Proceedings.
    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.

    - 48 -
    42

    Item 1A.
    Item 1A.Risk Factors.


    The following risk factors should be consideredThere have been no material changes in addition to the risk factors faced by the Company from those disclosed in the Company's 2016 annual reportCompany’s 2020 Annual Report on Form 10-K:10-K.


    Combining the Company and Citizens National may be more difficult, costly or time-consuming than we expect.

    The success of the Pending Acquisition will depend, in part, on the Company's ability to realize the anticipated benefits and cost savings from integrating Citizens National into the Bank in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of Citizens National or the Bank or decreasing revenues due to loss of customers. However, to realize these anticipated benefits and cost savings, the Company must successfully combine the businesses of the Bank and Citizens National. If the Company is not able to achieve these objectives, the anticipated benefits and cost savings of the Pending Acquisition may not be realized fully, or at all, or may take longer to realize than expected.

    The Bank and Citizens National have operated, and, until the completion of the Pending Acquisition, will continue to operate, independently. The success of the Pending Acquisition and the future operating performance of the Company and the Bank will depend, in part, on the Company's ability to successfully integrate Citizens National into the Bank. The success of the Pending Acquisition will, in turn, depend on a number of factors, including the Company's ability to: (i) integrate the operations of Citizens National into the Bank; (ii) retain the deposits and customers of Citizens National and the Bank; (iii) control the incremental increase in noninterest expense arising from the Pending Acquisition in a manner that enables the combined bank to improve its overall operating efficiencies; and (iv) retain and integrate the appropriate personnel of Citizens National into the operations of the Bank. The integration of Citizens National and the Bank will require the dedication of the time and resources of the banks' management and may temporarily distract managements' attention from the day-to-day business of the banks. If the Bank is unable to successfully integrate Citizens National, the Bank may not be able to realize expected operating efficiencies and eliminate redundant costs.

    The integration process in the Pending Acquisition could result in the loss of key employees, the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the Pending Acquisition. As with any merger of financial institutions, there also may be disruptions that cause the Bank and Citizens National to lose customers or cause customers to withdraw their deposits from Citizens National or the Bank, or other unintended consequences that could have a material adverse effect on the Company's results of operations or financial condition after the Pending Acquisition. These integration matters could have an adverse effect on each of Citizens National, the Company and the Bank during this transition period and for an undetermined period after completion of the Pending Acquisition.

    Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the surviving company following the Pending Acquisition.

    Before the Pending Acquisition may be completed, the Company, the Bank and Citizens National must obtain approvals from the Federal Reserve, OCC and the Virginia State Corporation Commission. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party, and the competitive effects of the contemplated transactions. An adverse development in either party's regulatory standing or these factors could result in an inability to obtain approval or delay their receipt. The CRA also requires that the bank regulatory authorities, in deciding whether to approve the Pending Acquisition, assess the records of performance of the Bank and Citizens National in meeting the credit needs of the communities they serve, including low and moderate income neighborhoods. Each of the Bank and Citizens National currently maintains a CRA rating of "Satisfactory" from its primary federal regulator. As part of the review process under the CRA, it is not unusual for the bank regulatory authorities to receive protests and other adverse comments from community groups and others. Any such protests or adverse comments could prolong the period during which the Pending Acquisition are subject to review by the bank regulatory authorities.

    These regulators may impose conditions on the completion of the Pending Acquisition or require changes to the terms of the Pending Acquisition. Such conditions or changes could have the effect of delaying or preventing completion of the Pending Acquisition or imposing additional costs on or limiting the revenues of the surviving company following the Pending Acquisition, any of which might have an adverse effect on the surviving company following the Pending Acquisition.

    The Pending Acquisition may distract management of the Company, the Bank and Citizens National from their other responsibilities.

    The Pending Acquisition could cause the respective management groups of the Company, the Bank and Citizens National to focus their time and energies on matters related to the transaction that otherwise would be directed to their business and operations. Any such distraction on the part of the Company's, the Bank's, or Citizen National's management could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the Company, the Bank or Citizens National before the Pending Acquisition, or the business and earnings of the Company and the Bank after the Pending Acquisition.
    - 49 -


    Termination of the Agreement and Plan of Reorganization by and among the Company, the Bank and Citizens National, dated October 27, 2017 (the merger agreement) could negatively impact the Company or Citizens National.

    If the merger agreement is terminated, the Company's or Citizens National's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Pending Acquisition, without realizing any of the anticipated benefits of completing the Pending Acquisition. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market price reflects a market assumption that the Pending Acquisition will be completed. Furthermore, costs relating to the Pending Acquisition, such as legal, accounting and financial advisory fees, must be paid even if the Pending Acquisition is not completed. If the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by the Citizens National's board of directors, Citizens National may be required to pay the Company a termination fee of $375,000.

    The Company, the Bank and Citizens National will be subject to business uncertainties and contractual restrictions until the Pending Acquisition is completed.

    Uncertainty about the effect of the Pending Acquisition on employees and customers may have an adverse effect on the Company, the Bank and Citizens National. These uncertainties may impair the Company's and Citizens National's ability to attract, retain and motivate key personnel until the Pending Acquisition is completed, and could cause customers and others that deal with the Company, the Bank and Citizens National to seek to change existing business relationships with the Company, the Bank and Citizens National. Retention of certain employees by the Company, the Bank and Citizens National may be challenging until the Pending Acquisition is completed, as certain employees may experience uncertainty about their future roles with the Company, the Bank or Citizens National. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company, the Bank or Citizens National, the Bank's or Citizens National's business, or the business of the combined company following the Pending Acquisition, could be harmed. The loss of key employees could adversely affect the Bank's ability to successfully conduct its business in the markets in which Citizens National now operates, which could have an adverse effect on the Company's financial results and the value of its common stock. In addition, subject to certain exceptions, the Company, the Bank and Citizens National have each agreed to operate its business in the ordinary course prior to completion of the Pending Acquisition and refrain from taking certain specified actions until the Pending Acquisition occurs, which may prevent the Company, the Bank or Citizens National from pursuing attractive business opportunities that may arise prior to completion of the Pending Acquisition.

    If the Pending Acquisition is not completed, the Company and Citizens National will have incurred substantial expenses without realizing the expected benefits of the Pending Acquisition.

    Each of the Company and Citizens National has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing a joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the Pending Acquisition. If the Pending Acquisition is not completed, the Company and Citizens National would have to incur these expenses without realizing the expected benefits of the Pending Acquisition.

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


    Pursuant to the Company'sCompany’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'sCompany’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 threesix months ended SeptemberJune 30, 2017,2021, the Company repurchased 1,083did not repurchase any shares related to the exercise ofequity compensation plan awards.


    During the threesix months ended SeptemberJune 30, 2017,2021, the Company did not repurchase any shares pursuant to the Company's stock repurchase program.
    - 50 -


    The following table summarizes repurchases of the Company's common stock that occurred during the three months ended September 30, 2017 in connection with the exercise of stock options. 

    Period 
    Total Number of Shares Purchased (1)
      Average Price Paid Per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 
    July 1, 2017-July 31, 2017  0  $0   n/a   n/a 
    August 1, 2017-August 31, 2017  819   30.58   n/a   n/a 
    September 1, 2017-September 30, 2017  264   30.49   n/a   n/a 
                     
    Total  1,083  $30.56         

    (1) These shares were repurchased in connection with payment of the exercise price upon the exercise of stock options. Accordingly, these shares are not included in the calculation of the 248,063 shares that may yet be purchased under the Company'sCompany’s stock repurchase program. The Company is authorized to repurchase, during any given calendar year, up to an aggregate of 5 percent of the shares of the Company'sCompany’s common stock outstanding as of January 1 of that calendar year.


    Item 3.Defaults Upon Senior Securities.
    Item 3. Defaults Upon Senior Securities.


    None.


    Item 4.Mine Safety Disclosures.
    Item 4. Mine Safety Disclosures.


    None.


    Item 5.Other Information.

    Information Required by Item 5. Other Information.407(c)(3) of Regulation S-K:

    The Company has made no changes to the process by which security holders may recommend nominees to its boardBoard of directors,Directors, which is discussed in the Company'sCompany’s Proxy Statement for the Company's 2017Company’s 2021 Annual Meeting of Stockholders.

    - 51 -Amendment No. 1 to Settlement Agreement

    On August 12, 2021, the Company entered into Amendment No. 1 (the “Amendment”) to the Settlement Agreement, which was initially entered into as of March 16, 2016 (as amended, the “Settlement Agreement”), with Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC (collectively, the “PL Capital Group”), and Mr. William F. Keefe (“Mr. Keefe”).

    Among other things, the Amendment increases from 9.99% to 14.99% the proportionate ownership, control or beneficial ownership of the Company’s common stock that the PL Capital Group and Mr. Keefe may acquire, offer or agree to acquire, or acquire rights to acquire without the prior written consent of the Company’s Board of Directors.

    As amended, the Settlement Agreement may be terminated by either party, upon five (5) Business Days’ advance written notice, beginning on the day after the Company’s 2022 Annual Meeting of Stockholders, provided that the termination date may not occur during any time period between the notice deadline pursuant to the Company’s bylaws for nominating director candidates for election to the Company’s Board of Directors for an annual meeting of shareholders and the conclusion of such annual meeting.  In addition, certain obligations of the parties under the Settlement Agreement may terminate in certain circumstances in connection with a material breach of the Settlement Agreement.

    Capitalized terms under this Item 5, unless otherwise defined herein, have the meaning ascribed to them in the Settlement Agreement.

    See the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 16, 2016 for additional disclosure regarding the terms of the Settlement Agreement.

    The above summary is qualified in its entirety by reference to the full text of the Amendment, a copy of which is filed as Exhibit 10.14.1 to this Quarterly Report on Form 10-Q and incorporated herein by reference.

    43

    Item 6.Exhibits.
    Item 6. Exhibits.


    Exhibit
    No.
    Description
    2.1 
    Description
    Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)
       
     
       
     
       
     
    Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 16, 2021)
    Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 16, 2021)
    Amendment No. 1 to Settlement Agreement, dated August 12, 2021, among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe
       
    10.19 
    31.1
       
     
       
     
       
    101
     
    The following materials from Old Point Financial Corporation'sCorporation’s quarterly report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2021, formatted in Inline XBRL, (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited for SeptemberJune 30, 2017)2021), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders'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 June 30, 2021, formatted in Inline XBRL (included with Exhibit 101)




    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
       
    November 14, 2017August 16, 2021/s/Robert F. Shuford, Sr.Jr. 
     Robert F. Shuford, Sr.Jr. 
     Chairman, President & Chief Executive Officer 
     (Principal Executive Officer) 
       
    November 14, 2017August 16, 2021/s/Jeffrey W. FarrarElizabeth T. Beale 
     Jeffrey W. FarrarElizabeth T. Beale 
     Chief Financial Officer & Senior Vice President/Finance 
     (Principal Financial & Accounting Officer) 

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