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 June 30, 20212022

or


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

For the transition period from____________ to___________

Commission File Number: 000-12896

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

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

101 East Queen Street, Hampton, Virginia 23669
(Address of principal executive offices) (Zip Code)

(757) 728-1200
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

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

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

5,244,6355,014,236 shares of common stock ($5.00 par value) outstanding as of August 9, 20211, 2022



OLD POINT FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
 
PART I - FINANCIAL INFORMATION
 
 
Page
   
Item 1.1
   
 1
   
 2
   
 3
   
 4
   
 65
   
 76
   
Item 2.29
   
Item 3.4247
   
Item 4.4247
   
 PART II - OTHER INFORMATION 
   
Item 1.4247
   
Item 1A.4347
   
Item 2.4348
   
Item 3.4348
   
Item 4.4348
   
Item 5.4348
   
Item 6.4449
   
 4450
 
GLOSSARY OF DEFINED TERMS

2020 Annual Report on2021 Form 10-K
Annual Report on Form 10-K for the year ended December 31, 20202021
ALLL
Allowance for Loan and Lease Losses
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bank
The Old Point National Bank of Phoebus
The CARES Act
The Coronavirus Aid, Relief, and Economic Security Act
CET1
Common Equity Tier 1
Citizens
Citizens National Bank
Company
Old Point Financial Corporation and its subsidiaries
CBB
Community Bankers Bank
CBLR
Community Bank Leverage Ratio Framework
COVID-19
Novel cornovirus disease 2019
EGRRCPA
Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS
earnings per share
ESPP
Employee Stock Purchase Plan
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
Federal Reserve
Board of Governors of the Federal Reserve System
FRB
Federal Reserve Bank
GAAP
Generally Accepted Accounting Principles
Incentive Stock Plan
Old Point Financial Corporation 2016 Incentive Stock Plan
NIM
Net Interest Margin
Notes
The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031
OAEM
Other Assets Especially Mentioned
OREO
Other Real Estate Owned
PPP
Paycheck Protection Program
PPPLF
Paycheck Protection Program Liquidity Facility
SEC
Securities and Exchange Commission
SBA
Small Business Administration
SOFR
Secured overnight financing rate
TDR
Troubled Debt Restructuring
Trust
Old Point Trust & Financial Services N.A.

PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets

 June 30, December 31,  June 30,  December 31, 
(dollars in thousands, except share data) 2021
 2020
  2022
  2021
 
 (unaudited)    (unaudited)    
Assets           
           
Cash and due from banks 
$
21,118
 
$
21,799
  
$
18,913
  
$
13,424
 
Interest-bearing due from banks 
134,377
 
98,633
   
67,216
   
164,073
 
Federal funds sold  
3
  
5
   
687
   
10,425
 
Cash and cash equivalents 
155,498
 
120,437
   
86,816
   
187,922
 
Securities available-for-sale, at fair value 
213,211
 
186,409
   
239,356
   
234,321
 
Restricted securities, at cost 
1,033
 
1,367
   
1,389
   
1,034
 
Loans held for sale 
2,284
 
14,413
   
1,325
   
3,287
 
Loans, net 
823,200
 
826,759
   
904,376
   
833,661
 
Premises and equipment, net 
32,419
 
33,613
   
31,377
   
32,134
 
Premises and equipment, held for sale 
871
 
0
   
1,216
   
871
 
Bank-owned life insurance 
28,817
 
28,386
   
28,566
   
28,168
 
Goodwill 
1,650
 
1,650
   
1,650
   
1,650
 
Core deposit intangible, net 
297
 
319
   
253
   
275
 
Other assets 
15,531
 
12,838
   
18,560
   
14,832
 
Total assets 
$
1,274,811
 
$
1,226,191
  
$
1,314,884
  
$
1,338,155
 
             
Liabilities & Stockholders’ Equity             
             
Deposits:             
Noninterest-bearing deposits 
$
398,908
 
$
360,602
  
$
434,249
  
$
421,531
 
Savings deposits 
555,744
 
512,936
   
580,039
   
586,450
 
Time deposits 
179,365
 
193,698
   
158,706
   
169,118
 
Total deposits 
1,134,017
 
1,067,236
   
1,172,994
   
1,177,099
 
Overnight repurchase agreements 
12,239
 
6,619
   
4,384
   
4,536
 
Federal Reserve Bank borrowings 
3,313
 
28,550
   
0
   
480
 
Other borrowings 
0
 
1,350
 
Long term borrowings  
29,472
   
29,407
 
Accrued expenses and other liabilities  
5,314
  
5,291
   
6,884
   
5,815
 
Total liabilities 
1,154,883
 
1,109,046
   
1,213,734
   
1,217,337
 
             
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
 
Common stock, $5 par value, 10,000,000 shares authorized; 5,064,236 and 5,239,707 shares outstanding (includes 46,092 and 38,435 of nonvested restricted stock, respectively)
  
25,091
   
26,006
 
Additional paid-in capital 
21,372
 
21,245
   
17,643
   
21,458
 
Retained earnings 
69,457
 
65,859
   
74,266
   
71,679
 
Accumulated other comprehensive income, net 
3,071
 
4,069
 
Accumulated other comprehensive (loss) income, net  
(15,850
)
  
1,675
 
Total stockholders’ equity  
119,928
  
117,145
   
101,150
   
120,818
 
Total liabilities and stockholders’ equity 
$
1,274,811
 
$
1,226,191
  
$
1,314,884
  
$
1,338,155
 

See Notes to Consolidated Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(unaudited, dollars in thousands, except per share data) 2021
  2020
  2021
  2020
  2022
  2021
  2022
  2021
 
Interest and Dividend Income:                        
Loans, including fees 
$
8,814
  
$
8,924
  
$
18,768
  
$
17,751
  
$
9,483
  
$
8,814
  
$
18,667
  
$
18,768
 
Due from banks  
52
   
32
   
95
   
183
   
208
   
52
   
281
   
95
 
Federal funds sold  
0
   
0
   
0
   
12
   
6
   
0
   
7
   
0
 
Securities:                                
Taxable  
791
   
712
   
1,561
   
1,576
   
1,123
   
791
   
2,112
   
1,561
 
Tax-exempt  
191
   
137
   
372
   
223
   
251
   
191
   
460
   
372
 
Dividends and interest on all other securities  
11
   
43
   
41
   
89
   
14
   
11
   
28
   
41
 
Total interest and dividend income  
9,859
   
9,848
   
20,837
   
19,834
   
11,085
   
9,859
   
21,555
   
20,837
 
                                
Interest Expense:                                
Checking and savings deposits  
235
   
298
   
450
   
638
   
148
   
235
   
324
   
450
 
Time deposits  
511
   
883
   
1,095
   
1,855
   
320
   
511
   
681
   
1,095
 
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
  
7
   
15
   
30
   
37
   
1
   
7
   
2
   
30
 
Federal Home Loan Bank advances  
0
   
179
   
0
   
413
 
Long term borrowings
  295
   0
   590
   0
 
Total interest expense  
753
   
1,375
   
1,575
   
2,943
   
764
   
753
   
1,597
   
1,575
 
Net interest income  
9,106
   
8,473
   
19,262
   
16,891
   
10,321
   
9,106
   
19,958
   
19,262
 
Provision for loan losses  
0
   
300
   
150
   
600
   
570
   
0
   
671
   
150
 
Net interest income after provision for loan losses  
9,106
   
8,173
   
19,112
   
16,291
   
9,751
   
9,106
   
19,287
   
19,112
 
                                
Noninterest Income:                                
Fiduciary and asset management fees  
1,051
   
909
   
2,078
   
1,926
   
1,061
   
1,051
   
2,133
   
2,078
 
Service charges on deposit accounts  
700
   
615
   
1,388
   
1,510
   
761
   
657
   
1,483
   
1,306
 
Other service charges, commissions and fees  
1,120
   
980
   
2,068
   
1,923
   
1,143
   
1,163
   
2,196
   
2,150
 
Bank-owned life insurance income  
204
   
192
   
430
   
423
   
195
   
204
   
426
   
430
 
Mortgage banking income  
381
   
223
   
1,569
   
380
   
113
   
381
   
333
   
1,569
 
Gain on sale of available-for-sale securities, net  
0
   
184
   
0
   
184
 
Gain on sale of fixed assets  
0
   
818
   
0
   
818
 
Other operating income  
82
   
37
   
139
   
72
   
227
   
82
   
444
   
139
 
Total noninterest income  
3,538
   
3,958
   
7,672
   
7,236
   
3,500
   
3,538
   
7,015
   
7,672
 
                                
Noninterest Expense:                                
Salaries and employee benefits  
6,227
   
5,464
   
12,454
   
11,458
   
6,611
   
6,227
   
13,033
   
12,454
 
Occupancy and equipment  
1,123
   
1,188
   
2,325
   
2,454
   
1,143
   
1,123
   
2,304
   
2,325
 
Data processing  
1,197
   
804
   
2,240
   
1,623
   
1,151
   
1,197
   
2,241
   
2,240
 
Customer development  
69
   
71
   
147
   
185
   
69
   
69
   
162
   
147
 
Professional services  
620
   
590
   
1,165
   
1,065
   
638
   
620
   
1,268
   
1,165
 
Employee professional development  
192
   
93
   
333
   
313
   
275
   
192
   
539
   
333
 
Other taxes  
171
   
158
   
422
   
308
   
212
   
171
   
425
   
422
 
ATM and other losses  
17
   
60
   
156
   
158
   
100
   
17
   
114
   
156
 
Other operating expenses  
919
   
776
   
1,851
   
1,670
   
891
   
919
   
1,717
   
1,851
 
Total noninterest expense  
10,535
   
9,204
   
21,093
   
19,234
   
11,090
   
10,535
   
21,803
   
21,093
 
Income before income taxes  
2,109
   
2,927
   
5,691
   
4,293
   
2,161
   
2,109
   
4,499
   
5,691
 
Income tax expense  
267
   
433
   
837
   
549
   
269
   
267
   
576
   
837
 
Net income 
$
1,842
  
$
2,494
  
$
4,854
  
$
3,744
  
$
1,892
  
$
1,842
  
$
3,923
  
$
4,854
 
                                
Basic Earnings per Share:                                
Weighted average shares outstanding  
5,237,479
   
5,220,137
   
5,231,026
   
5,210,139
   
5,086,957
   
5,237,479
   
5,136,380
   
5,231,026
 
Net income per share of common stock 
$
0.35
  
$
0.48
  
$
0.93
  
$
0.72
  
$
0.37
  
$
0.35
  
$
0.76
  
$
0.93
 
                                
Diluted Earnings per Share:                                
Weighted average shares outstanding  
5,237,479
   
5,220,262
   
5,231,026
   
5,210,573
   
5,087,038
   
5,237,479
   
5,136,459
   
5,231,026
 
Net income per share of common stock 
$
0.35
  
$
0.48
  
$
0.93
  
$
0.72
  
$
0.37
  
$
0.35
  
$
0.76
  
$
0.93
 

See Notes to Consolidated Financial Statements.

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

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited, dollars in thousands) 2021  2020  2021  2020 2022
 2021
 2022
 2021
 
                    
Net income 
$
1,842
  
$
2,494
  
$
4,854
  
$
3,744
  
$
1,892
  
$
1,842
  
$
3,923
  
$
4,854
 
Other comprehensive income (loss), net of tax                                
Net unrealized gain (loss) on available-for-sale securities  
696
   
4,021
   
(998
)
  
3,576
   
(6,392
)
  
696
   
(17,525
)
  
(998
)
Reclassification for gain included in net income  
0
   
(145
)
  
0
   
(145
)
Other comprehensive income (loss), net of tax  
696
   
3,876
   
(998
)
  
3,431
   
(6,392
)
  
696
   
(17,525
)
  
(998
)
Comprehensive income 
$
2,538
  
$
6,370
  
$
3,856
  
$
7,175
 
Comprehensive (loss) income 
$
(4,500
)
 
$
2,538
  
$
(13,602
)
 
$
3,856
 

See Notes to Consolidated Financial Statements.

3


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  
Shares of
Common
Stock
  
Common
Stock
  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
THREE MONTHS ENDED JUNE 30, 2021                  
THREE MONTHS ENDED JUNE 30, 2022                  
                                    
Balance at March 31, 2020  5,195,719  $25,979  $21,324  $68,245  $2,375  $117,923 
Balance at March 31, 2022  5,087,910  $25,439  $19,082  $73,036  $(9,458) $108,099 
Net income  -   0   0   1,842   0   1,842   -   0   0   1,892   0   1,892 
Other comprehensive income, net of tax  -   0   0   0   696   696   -   0   0   0   (6,392)  (6,392)
Employee Stock Purchase Plan share issuance  1,292   6   22   0   0   28   1,334   7   25   0   0   32 
Common stock purchased  (76,100)  (380)  (1,542)  0   0   (1,922)
Restricted stock vested  8,521   43   (43)  0   0   0   5,000   25   (25)  0   0   0 
Stock-based compensation expense  -   0   69   0   0   69   -   0   103   0   0   103 
Cash dividends ($0.12 per share)  -   0   0   (630)  0   (630)
Cash dividends ($0.13 per share)  -   0   0   (662)  0   (662)
                                                
Balance at end of period  5,205,532  $26,028  $21,372  $69,457  $3,071  $119,928   5,018,144  $25,091  $17,643  $74,266  $(15,850) $101,150 
                                                
THREE MONTHS ENDED JUNE 30, 2020                        
THREE MONTHS ENDED JUNE 30, 2021                        
                                                
Balance at March 31, 2019  5,188,221  $25,941  $21,026  $63,601  $(524) $110,044 
Balance at March 31, 2021  5,195,719  $25,979  $21,324  $68,245  $2,375  $117,923 
Net income  -   0   0   2,494   0   2,494   -   0   0   1,842   0   1,842 
Other comprehensive loss, net of tax  -   0   0   0   3,876   3,876   -   0   0   0   696   696 
Employee Stock Purchase Plan share issuance  1,735   9   16   0   0   25   1,292   6   22   0   0   28 
Restricted stock vested  1,261   6   (6)  0   0   0   8,521   43   (43)  0   0   0 
Stock-based compensation expense  -   0   57   0   0   57   -   0   69   0   0   69 
Cash dividends ($0.12 per share)  -   0   0   (627)  0   (627)  -   0   0   (630)  0   (630)
                                                
Balance at end of period  5,191,217  $25,956  $21,093  $65,468  $3,352  $115,869   5,205,532  $26,028  $21,372  $69,457  $3,071  $119,928 

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
  
Shares of
Common
Stock
  
Common
Stock
  
Additional
Paid-in
Capital
  Retained Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total
 
SIX MONTHS ENDED JUNE 30, 2022                  
                  
Balance at December 31, 2021  5,201,272  $26,006  $21,458  $71,679  $1,675  $120,818 
Net income  -   0   0   3,923   0   3,923 
Other comprehensive loss, net of tax  -   0   0   0   (17,525)  (17,525)
Employee Stock Purchase Plan share issuance  2,815   14   52   0   0   66 
Common stock purchased
  (199,095)  (995)  (3,975)  0   0   (4,970)
Restricted stock vested  13,152   66   (66)  0   0   0 
Stock-based compensation expense  -   0   174   0   0   174 
Cash dividends ($0.26 per share)  -   0   0   (1,336)  0   (1,336)
                        
Balance at end of period  5,018,144  $25,091  $17,643  $74,266  $(15,850) $101,150 
                        
SIX MONTHS ENDED JUNE 30, 2021                                          
                                          
Balance at December 31, 2020  5,194,443  $25,972  $21,245  $65,859  $4,069  $117,145   5,194,443  $25,972  $21,245  $65,859  $4,069  $117,145 
Net income  -   0   0   4,854   0   4,854   -   0   0   4,854   0   4,854 
Other comprehensive loss, net of tax  -   0   0   0   (998)  (998)  -   0   0   0   (998)  (998)
Employee Stock Purchase Plan share issuance  2,568   13   40   0   0   53   2,568   13   40   0   0   53 
Restricted stock vested  8,521   43   (43)  0   0   0   8,521   43   (43)  0   0   0 
Stock-based compensation expense  -   0   130   0   0   130   -   0   130   0   0   130 
Cash dividends ($0.24 per share)  -   0   0   (1,256)  0   (1,256)  -   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   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

 Six Months Ended June 30,  Six Months Ended June 30, 
(unaudited, dollars in thousands) 2021
  2020
  2022
  2021
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income 
$
4,854
  
$
3,744
  
$
3,923
  
$
4,854
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:     
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization  
1,052
   
1,070
   
1,013
   
1,052
 
Amortization of right of use lease asset  
185
   
179
   
159
   
185
 
Accretion related to acquisition, net  
(7
)
  
(40
)
  
(1
)
  
(7
)
Amortization of subordinated debt issuance costs
  65
   0
 
Provision for loan losses  
150
   
600
   
671
   
150
 
Net amortization of securities  
438
   
300
   
616
   
438
 
Decrease (increase) in loans held for sale, net  
12,129
   
(2,904
)
Decrease in loans held for sale, net  
1,962
   
12,129
 
Income from bank owned life insurance  
(430
)
  
(423
)
  
(426
)
  
(430
)
Stock compensation expense  
130
   
143
   
174
   
130
 
Deferred tax benefit  
(12
)
  
(1,030
)
(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
)
Deferred tax (benefit)  
0
   
(12
)
Decrease (increase) in other assets  
800
   
(2,602
)
Increase in accrued expenses and other liabilities  
1,069
   
23
 
Net cash provided by operating activities  
10,025
   
15,910
 
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of available-for-sale securities  
(49,310
)
  
(30,891
)
  
(41,537
)
  
(49,310
)
Proceeds from redemption (purchase) of restricted securities, net  
334
   
(226
)
Proceeds from (purchase) redemption of restricted securities, net  
(355
)
  
334
 
Proceeds from maturities and calls of available-for-sale securities  
8,280
   
5,316
   
1,200
   
8,280
 
Proceeds from sales of available-for-sale securities  
3,130
   
9,385
   
3,200
   
3,130
 
Paydowns on available-for-sale securities  
9,397
   
5,831
   
9,302
   
9,397
 
Net decrease (increase) in loans held for investment  
3,438
   
(109,499
)
Net (increase) decrease in loans held for investment  
(71,363
)
  
3,438
 
Purchases of premises and equipment  
(760
)
  
(662
)
  
(601
)
  
(760
)
Proceeds from sale of premises and equipment
  31   1,297   0   31 
Net cash used in investing activities  
(25,460
)
  
(119,449
)
  
(100,154
)
  
(25,460
)
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Increase in noninterest-bearing deposits
  
38,306
   
81,165
   
12,718
   
38,306
 
Increase in savings deposits  
42,808
   
60,359
 
(Decrease) increase in savings deposits  
(6,411
)
  
42,808
 
Decrease in time deposits  
(14,333
)
  
(19,100
)
  
(10,412
)
  
(14,333
)
Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net  
4,270
   
(3,780
)
Increase in Federal Home Loan Bank advances  
0
   
25,000
 
Repayment of Federal Home Loan Bank advances  
0
   
(20,000
)
Increase in Federal Reserve Bank borrowings
  0   37,515 
(Decrease) increase in federal funds purchased, repurchase agreements and other borrowings, net  
(152
)
  
4,270
 
Repayment of Federal Reserve Bank borrowings  
(25,237
)
  
(175
)
  
(480
)
  
(25,237
)
Proceeds from ESPP issuance  
53
   
46
   
66
   
53
 
Repurchase of common stock
  (4,970)  0 
Cash dividends paid on common stock  
(1,256
)
  
(1,251
)
  
(1,336
)
  
(1,256
)
Net cash provided by financing activities  
44,611
   
159,779
 
Net cash (used in) provided by financing activities  
(10,977
)
  
44,611
 
                
Net increase in cash and cash equivalents
  
35,061
   
39,754
 
Net (decrease) increase in cash and cash equivalents  
(101,106
)
  
35,061
 
Cash and cash equivalents at beginning of period  
120,437
   
89,865
   
187,922
   
120,437
 
Cash and cash equivalents at end of period 
$
155,498
  
$
129,619
  
$
86,816
  
$
155,498
 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash payments for:                
Interest 
$
1,693
  
$
3,059
  
$
1,583
  
$
1,693
 
                
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS                
Unrealized (loss) gain on securities available-for-sale 
$
3,887
  
$
4,343
  
$
(22,185
)
 
$
3,887
 
Loans transferred to other real estate owned 
$
0
  
$
254
 
Former bank property transferred from fixed assets to held for sale assets 
$
902
  
$
0
  
$
345
  
$
902
 
Right of use lease asset and liability 
$
1,277
  
$
789
  
$
0
  
$
1,277
 

See Notes to Consolidated Financial Statements.

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

THE COMPANY
Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through 2 wholly-owned subsidiaries, the Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). As of June 30, 2022, the Bank had 14 branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Trust offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the Bank, and Trust. All significant intercompany balances and transactions have been eliminated in consolidation.

BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (NASDAQ: OPOF) (the Company)the Company and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at June 30, 20212022 and December 31, 2020,2021, the statements of income, comprehensive (loss) income, and changes in stockholders’ equity for the three and six months ended June 30, 20212022 and 2020,2021, and the statements of cash flows for the six months ended June 30, 20212022 and 2020.2021. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on2021 Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

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

NATURE OF OPERATIONS
Old Point Financial Corporation is a holding company that conducts substantially all of its operations through 2 subsidiaries, the Bank and Trust. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of June 30, 2021, the Bank had 16 branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Trust offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.

COVID-19ESTIMATES
The COVID-19 pandemic has caused aIn preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant disruptionchange in economic activity worldwide, including in market areas served by the Company. Estimates fornear term relate to the determination of the allowance for loan losses at June 30, 2021 include probable and estimable losses related to the pandemic. While there have been signalsevaluation 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 provisiongoodwill 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.impairment.

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

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 had loan modifications of $54 thousand down from approximately $7.4 million as of December 31,2020.

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

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

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU No. 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU No. 2016-13) that introduced the current expected credit losses (CECL) model. The amendments eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs. An entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU No. 2016-13, ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU No. 2016-13, the effective dates for ASU No. 2022-02 are the same as the effective dates in ASU No. 2016-13. Early adoption is permitted if an entity has adopted ASU No. 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU No. 2016-132022-02 will have on its consolidated financial statements.

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

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


Note 2. Securities



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


 June 30, 2021
  June 30, 2022
 
(Dollars in thousands) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Fair
Value
 
U.S. Treasury securities 
$
9,052
  
$
0
  
$
(62
)
 
$
8,990
  
$
19,184
  
$
0
  
$
(1,633
)
 
$
17,551
 
Obligations of U.S. Government agencies  
38,636
   
226
   
(45
)
  
38,817
   
36,536
   
0
   
(1,151
)
  
35,385
 
Obligations of state and political subdivisions  
51,224
   
2,224
   
(176
)
  
53,272
   
78,384
   
42
   
(9,553
)
  
68,873
 
Mortgage-backed securities  
83,475
   
1,943
   
(393
)
  
85,025
   
93,961
   
23
   
(6,681
)
  
87,303
 
Money market investments  
3,893
   
0
   
0
   
3,893
   
1,614
   
0
   
0
   
1,614
 
Corporate bonds and other securities  
23,043
   
219
   
(48
)
  
23,214
   
29,741
   
17
   
(1,128
)
  
28,630
 
 
$
209,323
  
$
4,612
  
$
(724
)
 
$
213,211
  
$
259,420
  
$
82
  
$
(20,146
)
 
$
239,356
 


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



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

8


The Company has not recorded impairment charges through income on securities for the six months ended June 30, 2021 or 2020.

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


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


 June 30, 2021
  June 30, 2022
 
(Dollars in thousands)
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year or less $300  $302  $0  $0 
Due after one year through five years  9,929   10,073   16,290   15,761 
Due after five through ten years  56,897   58,317   81,006   75,206 
Due after ten years  138,304   140,626   160,510   146,775 
Other securities, restricted  3,893   3,893   1,614   1,614 
 $209,323  $213,211  $259,420  $239,356 


7


The following table summarizes the net realizedCompany did 0t realize any gains andor losses on the sale of investment securities duingduring the periods indicated:
six months ended June 30, 2022 and 2021, respectively.

   
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 tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarilytemporarily impaired as of June 30, 20212022 and December 31, 2020,2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:


 June 30, 2021  June 30, 2022
 
 Less than 12 months  12 months or more  Total  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
  
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
  
$
1,633
  
$
17,551
  
$
0
  
$
0
  
$
1,633
  
$
17,551
 
Obligations of U.S. Government agencies  
10
   
3,908
   
35
   
5,674
   
45
   
9,582
   
870
   
27,351
   
281
   
8,034
   
1,151
   
35,385
 
Obligations of state and political subdivisions  
176
   
10,181
   
0
   
0
   
176
   
10,181
   
8,785
   
61,930
   
768
   
3,465
   
9,553
   
65,395
 
Mortgage-backed securities  
334
   
17,669
   
59
   
4,481
   
393
   
22,150
   
4,082
   
65,392
   
2,599
   
18,633
   
6,681
   
84,025
 
Corporate bonds and other securities  
48
   
7,202
   
0
   
0
   
48
   
7,202
   
1,128
   
23,122
   
0
   
0
   
1,128
   
23,122
 
Total securities available-for-sale 
$
630
  
$
47,950
  
$
94
  
$
10,155
  
$
724
  
$
58,105
  
$
16,498
  
$
195,346
  
$
3,648
  
$
30,132
  
$
20,146
  
$
225,478
 


 December 31, 2020   December 31, 2021 
 Less than 12 months  12 months or more  Total  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
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
 
U.S. Treasury securities $
148  $
14,904  $0  $
0  $
148  $
14,904 
Obligations of U.S. Government agencies 
$
8
  
$
2,810
  
$
189
  
$
17,191
  
$
197
  
$
20,001
  

131
  

19,181
  

37
  

5,042
  

168
  

24,223
 
Obligations of state and policitcal subdivisions  277   20,673   0   0   277   20,673 
Mortgage-backed securities  
118
   
14,291
   
6
   
1,285
   
124
   
15,576
   
608
   
35,882
   
193
   
6,450
   
801
   
42,332
 
Corporate bonds and other securities  
22
   
5,977
   
0
   
0
   
22
   
5,977
   
117
   
9,833
   
0
   
0
   
117
   
9,833
 
Total securities available-for-sale 
$
148
  
$
23,078
  
$
195
  
$
18,476
  
$
343
  
$
41,554
  
$
1,281
  
$
100,473
  
$
230
  
$
11,492
  
$
1,511
  
$
111,965
 



The number of investments in an unrealized loss position as of June 30, 20212022 and December 31, 20202021 were 37162 and 29,72, respectively. Certain investments within the Company’s portfolio had unrealized losses for more than twelve months at June 30, 20212022 and December 31, 2020,2021, as shown in the tables above. The unrealized losses were caused by changesprimary cause of the temporary impairments in the Company’s investment security portfolio was increases in market interest rates. The Company concluded that no other-than-temporary impairment existed in its securities portfolio at June 30, 2022, and 0 other-than-temporary impairment loss has been recognized in net income during the first six months of 2022, based primarily on the following: (i) changes in fair value were caused primarily by fluctuations in interest rates, and not a result of(ii) there were no securities with unrealized losses that were significant relative to their carrying amounts, (iii) securities with unrealized losses had generally high credit deterioration. Becausequality, (iv) the Company does not intendintends to sell thehold these investments until recovery of its investment and management believes it is unlikelymore-likely-than-not that the Company will not be required to sell thethese investments before a recovery of their amortized cost basis, which may be maturity, the Company does not consider the investmentsits investment, and (v) issuers have continued to be other-than-temporarily impaired at June 30, 2021 or December 31, 2020.make timely payments of principal and interest.



Restricted SecuritiesStock

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

108


Note 3. Loans and the Allowance for Loan Losses


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

(dollars in thousands) June 30, 2021  December 31, 2020  June 30, 2022  December 31, 2021 
Mortgage loans on real estate:            
Residential 1-4 family 
$
117,887
  
$
122,800
  
$
164,257
  
$
130,776
 
Commercial - owner occupied  
171,881
   
153,955
   
199,121
   
198,413
 
Commercial - non-owner occupied  
165,460
   
162,896
   
200,318
   
184,190
 
Multifamily  
20,880
   
22,812
   
25,051
   
19,050
 
Construction  
50,814
   
43,732
   
64,789
   
58,440
 
Second mortgages  
9,707
   
11,178
   
8,207
   
7,877
 
Equity lines of credit  
51,238
   
50,746
   
52,664
   
48,665
 
Total mortgage loans on real estate  
587,867
   
568,119
   
714,407
   
647,411
 
Commercial and industrial loans  
119,911
   
141,746
   
63,163
   
68,690
 
Consumer automobile loans  
79,544
   
80,390
   
104,462
   
85,023
 
Other consumer loans  
36,990
   
37,978
   
24,094
   
33,418
 
Other (1)
  
8,361
   
8,067
   
8,146
   
8,984
 
Total loans, net of deferred fees  
832,673
   
836,300
   
914,272
   
843,526
 
Less: Allowance for loan losses  
9,473
   
9,541
   
9,896
   
9,865
 
Loans, net of allowance and deferred fees (2)
 
$
823,200
  
$
826,759
  
$
904,376
  
$
833,661
 

(1)
Overdrawn accounts are reclassified as loans and included in the Other category in the table above.  Overdrawn deposit accounts, excluding internal use accounts, totaled $254$337 thousand and $271$304 thousand at June 30, 20212022 and December 31, 2020,2021, respectively.
(2)
Net deferred loan fees totaled $2.4 million$761 thousand and $2.1$1.3 million at June 30, 20212022 and December 31, 2020,2021, respectively.

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

(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 of June 30, 2021 and December 31, 2020. The following table presents changes in the accretable yield on purchased credit-impaired loans, for which the Company applies FASB ASC 310-30, at 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’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.



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

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


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

Credit Quality Information 
As of June 30, 2022
 
(dollars in thousands) Pass  OAEM  Substandard  Doubtful  Total 
Mortgage loans on real estate:               
Residential 1-4 family 
$
164,096
  
$
0
  
$
161
  
$
0
  
$
164,257
 
Commercial - owner occupied  
195,462
   
1,548
   
2,111
   
0
   
199,121
 
Commercial - non-owner occupied  
199,506
   
263
   
549
   
0
   
200,318
 
Multifamily  
25,051
   
0
   
0
   
0
   
25,051
 
Construction  
63,437
   
354
   
998
   
0
   
64,789
 
Second mortgages  
8,207
   
0
   
0
   
0
   
8,207
 
Equity lines of credit  
52,664
   
0
   
0
   
0
   
52,664
 
Total mortgage loans on real estate 
$
708,423
  
$
2,165
  
$
3,819
  
$
0
  
$
714,407
 
Commercial and industrial loans  
62,908
   
0
   
255
   
0
   
63,163
 
Consumer automobile loans  
104,444
   
0
   
18
   
0
   
104,462
 
Other consumer loans  
24,094
   
0
   
0
   
0
   
24,094
 
Other  
8,146
   
0
   
0
   
0
   
8,146
 
Total 
$
908,015
  
$
2,165
  
$
4,092
  
$
0
  
$
914,272
 

Credit Quality InformationCredit Quality Information Credit Quality Information 
As of June 30, 2021 
As of December 31, 2021
As of December 31, 2021
 
(dollars in thousands) Pass  OAEM  Substandard  Doubtful  Total  Pass OAEM Substandard Doubtful Total 
Mortgage loans on real estate:                          
Residential 1-4 family $117,714  $0  $173  $0  $117,887  
$
130,584
 
$
-
 
$
192
 
$
0
 
$
130,776
 
Commercial - owner occupied  168,615   2,422   844   0   171,881  
195,512
 
788
 
2,113
 
0
 
198,413
 
Commercial - non-owner occupied  164,549   726   185   0   165,460  
183,093
 
434
 
663
 
0
 
184,190
 
Multifamily  20,880   0   0   0   20,880  
19,050
 
0
 
0
 
0
 
19,050
 
Construction  49,574   1,110   130   0   50,814  
57,224
 
218
 
998
 
0
 
58,440
 
Second mortgages  9,707   0   0   0   9,707  
7,877
 
0
 
0
 
0
 
7,877
 
Equity lines of credit  51,238   0   0   0   51,238   
48,665
  
0
  
0
  
0
  
48,665
 
Total mortgage loans on real estate $582,277  $4,258  $1,332  $0  $587,867  
$
642,005
 
$
1,440
 
$
3,966
 
$
0
 
$
647,411
 
Commercial and industrial loans  119,607   304   0   0   119,911  
68,261
 
0
 
429
 
0
 
68,690
 
Consumer automobile loans  79,263   0   281   0   79,544  
85,002
 
0
 
21
 
0
 
85,023
 
Other consumer loans  36,990   0   0   0   36,990  
33,418
 
0
 
0
 
0
 
33,418
 
Other  8,361   0   0   0   8,361  
8,984
 
0
 
0
 
0
 
8,984
 
Total $826,498  $4,562  $1,613  $0  $832,673  
$
837,670
 
$
1,440
 
$
4,416
 
$
0
 
$
843,526
 


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

 

As of June 30, 2022 and December 31, 2021, the Company did 0t have any loans internally classified as Doubtful or Loss.



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.


1110

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 

Age Analysis of Past Due Loans as of June 30, 2022 
(dollars in thousands) 
30 - 59
Days Past
Due
  
60 - 89
Days Past
Due
  
90 or More
Days Past
Due and
still
Accruing
  
Nonaccrual
(2)
  
Total
Current
Loans (1)
  Total
Loans
 
Mortgage loans on real estate:                  
Residential 1-4 family $0  $234  $0  $161  $163,862  $164,257 
Commercial - owner occupied  0   0   0   2,111   197,010   199,121 
Commercial - non-owner occupied  263   0   0   549   199,506   200,318 
Multifamily  0   0   0   0   25,051   25,051 
Construction  293   0   0   998   63,498   64,789 
Second mortgages  0   0   22   0   8,185   8,207 
Equity lines of credit  15   12   0   0   52,637   52,664 
Total mortgage loans on real estate $571  $246  $22  $3,819  $709,749  $714,407 
Commercial and industrial loans  35   0   0   255   62,873   63,163 
Consumer automobile loans  1,109   100   400   0   102,853   104,462 
Other consumer loans  314   200   143   0   23,437   24,094 
Other  38   1   0   0   8,107   8,146 
Total $2,067  $547  $565  $4,074  $907,019  $914,272 


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


In the table above, the past due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.0 million$143 thousand at June 30, 2021. 
2022. 



Age Analysis of Past Due Loans as of December 31, 2020 
Age Analysis of Past Due Loans as of December 31, 2021Age Analysis of Past Due Loans as of December 31, 2021 
(dollars in thousands) 
30 - 59
Days Past
Due
  
60 - 89
Days Past
Due
  
90 or More
Days Past
Due and
still
Accruing
  PCI  
Nonaccrual
(2)
  
Total
Current
Loans (1)
  Total
Loans
  
30 - 59
Days Past
Due
  
60 - 89
Days Past
Due
  
90 or More
Days Past
Due and
still
Accruing
  
Nonaccrual
(2)
  
Total
Current
Loans (1)
  Total
Loans
 
Mortgage loans on real estate:                                       
Residential 1-4 family $478  $164  $0  $0  $311  $121,847  $122,800  $120  $0  $0  $191  $130,465  $130,776 
Commercial - owner occupied  0   0   0   0   903   153,052   153,955   0   0   0   0   198,413   198,413 
Commercial - non-owner occupied  0   0   0   0   0   162,896   162,896   0   0   0   113   184,077   184,190 
Multifamily  0   0   0   0   0   22,812   22,812   0   0   0   0   19,050   19,050 
Construction  0   88   0   0   0   43,644   43,732   0   0   0   0   58,440   58,440 
Second mortgages  41   0   0   0   0   11,137   11,178   24   0   0   0   7,853   7,877 
Equity lines of credit  0   0   0   0   0   50,746   50,746   51   0   0   0   48,614   48,665 
Total mortgage loans on real estate $519  $252  $0  $0  $1,214  $566,134  $568,119  $195  $0  $0  $304  $646,912  $647,411 
Commercial and industrial loans  753   0   0   0   0   140,993   141,746   37   0   169   174   68,310   68,690 
Consumer automobile loans  1,159   190   196   0   0   78,845   80,390   814   118   296   0   83,795   85,023 
Other consumer loans  1,120   555   548   0   0   35,755   37,978   1,284   439   550   0   31,145   33,418 
Other  24   3   0   0   0   8,040   8,067   31   3   10   0   8,940   8,984 
Total $3,575  $1,000  $744  $0  $1,214  $829,767  $836,300  $2,361  $560  $1,025  $478  $839,102  $843,526 

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


In the table above, the past due totals include small business and student loans with principal and interest amounts that are 97 - 98%100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.2$1.4 million at December 31, 2020.2021.

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

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

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

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

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

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

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

Nonaccrual Loans by Class

(dollars in thousands) June 30, 2021  December 31, 2020  June 30, 2022  December 31, 2021 
Mortgage loans on real estate:            
Residential 1-4 family $245  $311  $161  $191 
Commercial - owner occupied  843   903   2,111   0 
Commercial - non-owner occupied  185   0   549   113 
Construction  130   0 
Construction and land development  998   0 
Total mortgage loans on real estate $1,403  $1,214  
3,819  
304 
Commercial and industrial loans 255  174 
Total $1,403  $1,214  $4,074  $478 

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

Six Months Ended June 30, Six Months Ended June 30, 
(dollars in thousand)2021 2020 
(dollars in thousands)
2022

 
2021

 
Interest income that would have been recorded under original loan terms $61  $118  $132  $61 
Actual interest income recorded for the period  0   8   4   0 
Reduction in interest income on nonaccrual loans $61  $110  $128  $61 




1312

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

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

There were 0 new TDRs in the six months ended June 30, 20212022 and 2020.2021.

At June 30, 20212022 and 2020,2021, the Company had 0 outstanding commitments to disburse additional funds on any TDR. The Company had 0 loans secured by residential 1 - 4 family real estate in the process of foreclosure at June 30, 20212022 and 2020.2021.

In the three and six months ended June 30, 20212022 and 2020,2021, there were 0 defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

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

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

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

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

Impaired Loans by Class

   As of 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 

Impaired Loans by Class
 
   As of June 30, 2022  
For the Six Months Ended
June 30, 2022
 
(Dollars in thousands) 
Unpaid Principal
Balance
  
Without
Valuation
Allowance
  
With Valuation
Allowance
  
Associated
Allowance
  
Average
Recorded
Investment
  
Interest Income
Recognized
 
Mortgage loans on real estate:                  
Residential 1-4 family $296  $47  $243  $26  $293  $4 
Commercial  4,580   4,417   100   1   4,570   0 
Construction  1,077   1,076   0   0   1,076   0 
Second mortgages  0   0   0   0   0   0 
Total mortgage loans on real estate  5,953   5,540   343   27   5,939   4 
Commercial and industrial loans  255   255   0   0   255   1 
Other consumer loans  5   3   0   0   4   0 
Total $6,213  $5,798  $343  $27  $6,198  $5 

1413

Impaired Loans by Class


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

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

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

Each portfolio segment has risk characteristics as follows:

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

Each segment of the portfolio is pooled by risk grade or by days past due. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At June 30, 20212022 and December 31, 20202021 management used 8 12-quarter migration periods.

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

1514

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

Given the timing of the outbreak in the United States of the COVID-19 pandemic combined with government stimulus actions for both individuals and small businesses, management does not believe that the Company’s performance in relation to credit quality during 2020 or the first 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, increases in market interest rates, and potential effects on credit quality, which may includeresult in additional increases in the provision for loan losses.

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

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

ALLOWANCE FOR LOAN LOSSES BY SEGMENT
The total allowance reflects management’s estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $9.5$9.9 million adequate to cover estimable and probable loan losses inherent in the loan portfolio at June 30, 2021.2022.

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

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

For the Six Months ended June 30, 2021 
ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS 
For the six months ended June 30, 2022For the six months ended June 30, 2022 
(Dollars in thousands) 
Commercial
and Industrial
  Real Estate Construction  
Real Estate -
Mortgage (1)
  
Real Estate -
Commercial
  
Consumer (2)
  Other  Unallocated  Total  
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  $683  $459  $2,390  $4,787  $1,362  $184  $0  $9,865 
Charge-offs  (4
)
  0   (1
)
  0   (434
)
  (186)  0   (625)  (296
)
  0   (3
)
  0   (622
)
  (190)  0   (1,111)
Recoveries  21   0   56   1   250   79   0   407   127   0   40   0   219   85   0   471 
Provision for loan losses  54   77   (150
)
  (39
)
  170   148   (110)  150   82   20   249
  (351
)
  523   148   0  671 
Ending Balance $721  $416  $2,465  $4,396  $1,288  $164  $23  $9,473  $596  $479  $2,676  $4,436  $1,482  $227  $0  $9,896 
                                                                
Individually evaluated for impairment $0  $0  $39  $12  $0  $0  $0  $51  $0  $0  $26  $1  $0  $0  $0  $27 
Collectively evaluated for impairment  721   416   2,426   4,384   1,288   164   23   9,422   596   479   2,650   4,435   1,482   227   0   9,869 
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  $596  $479  $2,676  $4,436  $1,482  $227  $0  $9,896 
                                                                
Loans Balances:                                                                
Individually evaluated for impairment  3   211   512   1,530   11   0   0   2,267   255   1,076   290   4,517   3   0   0   6,141 
Collectively evaluated for impairment  119,908   50,603   199,200   335,811   116,523   8,361   0   830,406   62,908   63,713   249,889   394,922   128,553   8,146   0   908,131 
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  $63,163  $64,789  $250,179  $399,439  $128,556  $8,146  $0  $914,272 

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

For the Year ended December 31, 2020 
For the Year ended December 31, 2021For the Year ended December 31, 2021 
(Dollars in thousands) 
Commercial
and Industrial
  Real Estate Construction  
Real Estate -
Mortgage (1)
  
Real Estate -
Commercial
  
Consumer (2)
  Other  Unallocated  Total  
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  $650  $339  $2,560  $4,434  $1,302  $123  $133  $9,541 
Charge-offs  (25
)
  0   (149
)
  (654
)
  (822
)
  (355
)
  0   (2,005
)
  (27
)
  0   (14
)
  0   (800
)
  (278
)
  0   (1,119
)
Recoveries  47   10   69   317   377   66   0   886   41   0   76   44   390   98   0   649 
Provision for loan losses  (616
)
  71   135   1,108   53   116   133   1,000   19   120   (232)  309   470   241   (133)  794 
Ending Balance $650  $339  $2,560  $4,434  $1,302  $123  $133  $9,541  $683  $459  $2,390  $4,787  $1,362  $184  $0  $9,865 
                                                                
Individually evaluated for impairment $0  $0  $10  $1  $0  $0  $0  $11  $87  $0  $33  $8  $0  $0  $0  $128 
Collectively evaluated for impairment  650   339   2,550   4,433   1,302   123   133   9,530   596   459   2,357   4,779   1,362   184   0   9,737 
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  $683  $459  $2,390  $4,787  $1,362  $184  $0  $9,865 
                                                                
Loans Balances:                                                                
Individually evaluated for impairment  6   83   586   1,427   14   0   0   2,116   174   79   450   591   7   0   0   1,301 
Collectively evaluated for impairment  141,740   43,649   206,950   315,424   118,354   8,067   0   834,184   68,516   58,361   205,918   382,012   118,434   8,984   0   842,225 
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  $68,690  $58,440  $206,368  $382,603  $118,441  $8,984  $0  $843,526 

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

Note 4. Leases

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

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

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

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

(dollars in thousands) June 30, 2022 
Lease liabilities
 
$
878
 
Right-of-use assets
 
$
853
 
Weighted average remaining lease term
 3.14 years 
Weighted average discount rate
  
1.73
%

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended June 30,  Six Months Ended June 30, 
Lease cost (in thousands)
 2021
  2020
  2021
  2020
  2022
  2021
  2022
  2021
 
Operating lease cost $81  $91  $185  $179  $82  $81  $164  $185 
Total lease cost $81  $91  $185  $179  $82  $81  $164  $185 
                                
Cash paid for amounts included in the measurement of lease liabilities $84  $93  $187  $177  $85  $84  $169  $187
 
17


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

Lease payments due (in thousands)
 
As of
June 30, 2021
  
As of
June 30, 2022
 
Six months ending December 31, 2021
 
$
165
 
Twelve months ending December 31, 2022
  
339
 
Six months ending December 31, 2022
 
$
170
 
Twelve months ending December 31, 2023
  
248
   
248
 
Twelve months ending December 31, 2024
  
240
   
240
 
Twelve months ending December 31, 2025
  
193
 
Thereafter
  
309
   
70
 
Total undiscounted cash flows
 
$
1,301
  
$
921
 
Discount
  
(102
)
  
(43
)
Lease liabilities
 
$
1,199
  
$
878
 

Note 5. Low-Income Housing Tax Credits

The Company was invested in 4 separate housing equity funds at both June 30, 20212022 and December 31, 2020.2021. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia; develop and implement strategies to maintain projects as low-income housing; deliver Federal Low Income Housing Credits to investors; allocate tax losses and other possible tax benefits to investors; and preserve and protect project assets.

The investments in these funds were recorded as other assets on the consolidated balance sheets and were $2.2$1.8 million and $2.3$1.9 million at June 30, 20212022 and December 31, 2020,2021, respectively. The expected terms of these investments and the related tax benefits run through 2033. Total projected tax credits to be received for 2021 are $361 thousand, which is based on the most recent quarterly estimates received from the funds. There were 0 additional capital calls expected for the funds at June 30, 2021.  Additional capital calls expected for the funds totaled $18 thousand at December 31, 2020 and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.2022.

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

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2021  2020  2021  2020 
(dollars in thousands)
 2022  2021  2022  2021 
Tax credits and other benefits                        
Amortization of operating losses 
$
51
  
$
46
  
$
100
  
$
91
  
$
51
  
$
51
  
$
102
  
$
100
 
Tax benefit of operating losses*  
11
   
10
   
21
   
19
   
11
   
11
   
21
   
21
 
Tax credits  
89
   
106
   
183
   
209
   
89
   
89
   
178
   
183
 
Total tax benefits 
$
100
  
$
116
  
$
204
  
$
228
  
$
100
  
$
100
  
$
199
  
$
204
 

*
Computed using a 21% tax rate.

Note 6. Borrowings

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

The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At June 30, 20212022 and December 31, 2020,2021, the remaining credit available from these lines totaled $105.0 million and $100.0$115.0 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $375.1$395.3 million and $374.7$391.3 as of June 30, 20212022 and December 31, 2020,2021, respectively.

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

(dollar in thousands) June 30, 2021  December 31, 2020 
(dollars in thousands) June 30, 2022  December 31, 2021 
Overnight repurchase agreements 
$
12,239
  $6,619  
$
4,384
  $4,536 
Total short-term borrowings 
$
12,239
  
$
6,619
  
$
4,384
  
$
4,536
 
                
Maximum month-end outstanding balance 
$
12,239
  
$
9,080
  
$
4,384
  
$
12,239
 
Average outstanding balance during the period 
$
7,634
  
$
21,092
  
$
4,075
  
$
7,293
 
Average interest rate (year-to-date)  
0.10
%
  0.19%  
0.08
%
  0.10%
Average interest rate at end of period  
0.10
%
  
0.10
%
  
0.06
%
  
0.10
%

LONG-TERM BORROWINGS
At June 30, 20212022 the Company had fully repaid the borrowings under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF) of $3.3 million.  These PPPLF. At December 31,2021 the Company had $480 thousand outstanding in long-term borrowings are fully collateralized by PPP loans and will mature in concert withunder 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.PPPLF.

On July 14, 2021, the Company completed the issuance of $29.4 million, net of issuance costs, or $30.0 million in aggregate principal amount of subordinated notes (the Notes) due in 2031 in a private placement transaction.  The Company also obtainedNotes bear interest at a loan maturing on April 1, 2023 from a correspondent bank duringfixed rate of 3.5% for five years and at the second quarter of 2018 to provide partial funding for the Citizens National Bank (Citizens) acquisition. The terms of the loan included a LIBOR based interest rate that adjusts monthly andthree-month SOFR plus 286 basis points, resetting quarterly, principal curtailments. At December 31, 2020, the outstanding balance was $1.4 million, and the then-current interest rate was 2.61%. The Company elected to pay the loan in full during the first quarter of 2021.thereafter.

Note 7. Commitments and Contingencies

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

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

The following financial instruments whose contract amounts represent credit risk were outstanding at June 30, 20212022 and December 31, 2020:2021:

 June 30, December 31,  June 30, December 31, 
(dollars in thousands) 2021
 2020
  2022
 2021
 
Commitments to extend credit:
          
Home equity lines of credit
 
$
70,163
 
$
66,999
  
$
83,676
 
$
71,751
 
Commercial real estate, construction and development loans committed but not funded
 
44,929
 
20,258
  
51,093
 
42,683
 
Other lines of credit (principally commercial)
 
67,726
 
64,329
  
56,664
 
52,695
 
Total
 
$
182,818
 
$
151,586
  
$
191,433
 
$
167,129
 
          
Letters of credit
 
$
4,796
 
$
4,841
  
$
257
 
$
3,617
 

Note 8. Share-Based Compensation

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

The 2016 Incentive Stock Plan (the Incentive Stock Plan) permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of June 30, 20212022 only restricted stock has been granted under the Incentive Stock Plan.

Restricted stock activity for the six months ended June 30, 20212022 is summarized below:

 Shares  
Weighted Average
Grant Date
Fair Value
  Shares  
Weighted Average
Grant Date
Fair Value
 
Nonvested, January 1, 2021
  
29,576
  
$
18.46
 
Nonvested, January 1, 2022
  
38,435
  
$
20.49
 
Issued
  
18,048
   
22.35
   
20,809
   
25.65
 
Vested
  
(8,521
)
  
17.50
   
(13,152
)
  
21.93
 
Forfeited
  
0
   
0
   
0
   
0
 
Nonvested, June 30, 2021
  
39,103
  
$
20.46
 
Nonvested, June 30, 2022
  
46,092
  
$
22.41
 

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.771.91 years.

The fair value of restricted stock granted during the six months ended June 30, 2022 and 2021 and 2020 was $403$534 thousand and $298$403 thousand, respectively.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $663 thousand as of June 30, 2022 and $527 thousand as of June 30, 2021 and $373 thousand as of June 30, 2020.2021.

Stock-based compensation expense was $69$103 thousand and $57$69 thousand for the three months ended June 30, 20212022 and 2020,2021, respectively, and $130$174 thousand and $143$130 thousand for the six months ended June 30, 20212022 and 2020,2021, 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 20202021 and for the first six months of 2021.2022.

2,568 shares were purchasedTotal stock purchases under the ESPP amounted to 2,815 shares during the six months ended June 30, 2021.2022. At June 30, 2021,2022, the Company had 229,883224,728 remaining shares reserved for issuance under the ESPP.

Note 9. Stockholders’ Equity and Earnings per Share

STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive Income (Loss)
The following table presents information onThere were 0 amounts reclassified out of accumulated other comprehensive income (loss), by category, during the three or six month periods indicated:ended June 30, 2022 or 2021, respectively.

  
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  
18

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

(dollars in thousands) 
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
  
Accumulated Other
Comprehensive Income
  
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
  
Accumulated Other
Comprehensive (Loss)
Income
 
      
Six Months Ended June 30, 2021
      
Three Months Ended June 30, 2022
      
Balance at beginning of period 
$
4,069
  
$
4,069
  
$
(9,458
)
 
$
(9,458
)
Net other comprehensive loss  
(998
)
  
(998
)
  
(6,392
)
  
(6,392
)
Balance at end of period 
$
3,071
  
$
3,071
  
$
(15,850
)
 
$
(15,850
)
                
Six Months Ended June 30, 2020
        
Three Months Ended June 30, 2021
        
Balance at beginning of period 
$
(79
)
 
$
(79
)
 
$
2,375
  
$
2,375
 
Net other comprehensive income  
3,431
   
3,431
   
696
   
696
 
Balance at end of period 
$
3,352
  
$
3,352
  
$
3,071
  
$
3,071
 

(dollars in thousands) 
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
  
Accumulated Other
Comprehensive Income
  
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
  
Accumulated Other
Comprehensive (Loss)
Income
 
      
Three Months Ended June 30, 2021
      
Six Months Ended June 30, 2022
      
Balance at beginning of period 
$
2,375
  
$
2,375
  
$
1,675
  
$
1,675
 
Net other comprehensive income  
696
   
696
 
Net other comprehensive loss  
(17,525
)
  
(17,525
)
Balance at end of period 
$
3,071
  
$
3,071
  
$
(15,850
)
 
$
(15,850
)
                
Three Months Ended June 30, 2020
        
Six Months Ended June 30, 2021
        
Balance at beginning of period 
$
(524
)
 
$
(524
)
 
$
4,069
  
$
4,069
 
Net other comprehensive income  
3,876
   
3,876
 
Net other comprehensive loss
  
(998
)
  
(998
)
Balance at end of period 
$
3,352
  
$
3,352
  
$
3,071
  
$
3,071
 

21

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

 Three Months Ended June 30, 2021  Three Months Ended June 30, 2022 
(dollars in thousands) Pretax  Tax  Net-of-Tax  Pretax  Tax  Net-of-Tax 
Unrealized gains on available-for-sale securities:
         
Unrealized holding gains arising during the period 
$
881
  
$
185
  
$
696
 
Unrealized losses on available-for-sale securities:
         
Unrealized holding losses arising during the period 
$
(8,090
)
 
$
(1,698
)
 
$
(6,392
)
                        
Total change in accumulated other comprehensive income, net 
$
881
  
$
185
  
$
696
  
$
(8,090
)
 
$
(1,698
)
 
$
(6,392
)
                        
 Three Months Ended June 30, 2020  Three Months Ended June 30, 2021 
(dollars in thousands) Pretax  Tax  Net-of-Tax  Pretax  Tax  Net-of-Tax 
Unrealized gains on available-for-sale securities:
                        
Unrealized holding gains arising during the period 
$
5,090
  
$
1,069
  
$
4,021
  
$
881
  
$
185
  
$
696
 
Reclassification adjustment for gains recognized in income  
(184
)
  
(39
)
  
(145
)
                        
Total change in accumulated other comprehensive income, net 
$
4,906
  
$
1,030
  
$
3,876
  
$
881
  
$
185
  
$
696
 

  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
)
             
  Six Months Ended June 30, 2020 
(dollars in thousands) Pretax  Tax  Net-of-Tax 
Unrealized gains on available-for-sale securities:            
Unrealized holding gains arising during the period 
$
4,527
  
$
951
  
$
3,576
 
Reclassification adjustment for gains recognized in income  
(184
)
  
(39
)
  
(145
)
             
Total change in accumulated other comprehensive income, net 
$
4,343
  
$
912
  
$
3,431
 
19

  Six Months Ended June 30, 2022 
(dollars in thousands) Pretax  Tax  Net-of-Tax 
Unrealized losses on available-for-sale securities:         
Unrealized holding losses arising during the period 
$
(22,183
)
 
$
(4,658
)
 
$
(17,525
)
             
Total change in accumulated other comprehensive income, net 
$
(22,183
)
 
$
(4,658
)
 
$
(17,525
)
             
  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
)

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

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 20212022 and 2020:2021:

(dollars in thousands except per share data) 
Net Income Available to
Common Shareholders
(Numerator)
  
Weighted Average
Common Shares
(Denominator)
  Per Share
 Amount
  
Net Income Available to
Common Shareholders
(Numerator)
  
Weighted Average
Common Shares
(Denominator)
  Per Share
 Amount
 
Three Months Ended June 30, 2022
         
Net income, basic 
$
1,892
 
5,087
 
$
0.37
 
Potentially dilutive common shares - employee stock purchase program
 -
 0
 -
 
Diluted $1,892 5,087 $0.37 
            
Three Months Ended June 30, 2021
                     
Net income, basic 
$
1,842
 
5,237
 
$
0.35
  
$
1,842
 
5,237
 
$
0.35
 
Potentially dilutive common shares - employee stock purchase program
 -
 0
 -
 
Diluted $1,842 5,237 $0.35  $1,842 5,237 $0.35 
                        
Three Months Ended June 30, 2020
            
Six Months Ended June 30, 2022
            
Net income, basic 
$
2,494
 
5,220
 
$
0.48
  
$
3,923
 
5,136
 
$
0.76
 
Potentially dilutive common shares - employee stock purchase program
 -
 0
 -
 
Diluted $2,494 5,220 $0.48  $3,923 5,136 $0.76 
                        
Six Months Ended June 30, 2021
                        
Net income, basic 
$
4,854
 
5,231
 
$
0.93
  
$
4,854
 
5,231
 
$
0.93
 
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
 -
  -
 0
 -
 
Diluted $3,744  5,211 $0.72  $4,854 5,231 $0.93 

22

The Company had 0 antidilutive shares outstanding in the three and six months ended June 30, 20212022 and 2020,2021, respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.

The Company has a share repurchase program (the Repurchase Program) which was authorized by the Board of Directors in October 2021 to repurchase up to 10% of the Company’s issued and outstanding common stock through November 30,2022. During the first six months of 2022, 199,095 shares, for an aggregate purchase price of $5.0 million, were repurchased by the Company under the Repurchase Plan, and of these shares, approximately 76,100 shares, for an aggreagate purchase price of $1.9 million, were repurchased by the Company during the second quarter of 2022.


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

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

2321

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     Fair Value Measurements at June 30, 2022 Using 
(dollars in thousands) Balance  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Balance  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
            
Available-for-sale securities                        
U.S. Treasury securities 
$
8,990
  
$
0
  
$
8,990
  
$
0
  
$
17,551
  
$
0
  
$
17,551
  
$
0
 
Obligations of U.S. Government agencies 
38,817
  
0
  
38,817
  
0
   
35,385
   
0
   
35,385
   
0
 
Obligations of state and political subdivisions 
53,272
  
0
  
53,272
  
0
   
68,873
   
0
   
68,873
   
0
 
Mortgage-backed securities 
85,025
  
0
  
85,025
  
0
   
87,303
   
0
   
87,303
   
0
 
Money market investments 
3,893
  
0
  
3,893
  
0
   
1,614
   
0
   
1,614
   
0
 
Corporate bonds and other securities 
23,214
  
0
  
23,214
  
0
   
28,630
   
0
   
28,630
   
0
 
Total available-for-sale securities 
$
213,211
  
$
0
  
$
213,211
  
$
0
   
239,356
   
0
   
239,356
   
0
 
Derivatives
                
Interest rate lock
  21   0   21   0 
Interest rate swap on loans
  735   0   735   0 
Total assets
 $240,112  $0  $240,112  $0 
                
Liabilities:
                
Derivatives
                
Interest rate swap on loans
  735   0   735   0 
Total liabilities
 $735  $0  $735  $0 

   Fair Value Measurements at December 31, 2020 Using     Fair Value Measurements at December 31, 2021 Using 
(dollars in thousands) Balance  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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
  
$
14,904
  
$
0
  
$
14,904
  
$
0
 
Obligations of U.S. Government agencies 
36,696
  
0
  
36,696
  
0
   
38,558
   
0
   
38,558
   
0
 
Obligations of state and political subdivisions 
45,995
  
0
  
45,995
  
0
   
65,803
   
0
   
65,803
   
0
 
Mortgage-backed securities 
73,501
  
0
  
73,501
  
0
   
89,058
   
0
   
89,058
   
0
 
Money market investments 
4,743
  
0
  
4,743
  
0
   
2,413
   
0
   
2,413
   
0
 
Corporate bonds and other securities 
18,431
  
0
  
18,431
  
0
   
23,585
   
0
   
23,585
   
0
 
Total available-for-sale securities 
$
186,409
  
$
0
  
$
186,409
  
$
0
  
$
234,321
  
$
0
  
$
234,321
  
$
0
 
Derivatives
                
Interest rate lock
  43   0   43   0 
Interest rate swap on loans
  181   0   181   0 
Total assets
 $234,545  $0  $234,545  $0 
                
Liabilities:                
Derivatives                
Interest rate swap on loans  181   0   181   0 
Total assets $181  $0  $181  $0 

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

Impaired loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amountsthe scheduled payments of principal and interest 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 inon the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate rather than at a market rate. These loans are not carried inon the consolidated balance sheets at fair value and, as such, are not included in the tables below.

   Carrying Value at June 30, 2021    Carrying Value at June 30, 2022 
(dollars in thousands) Fair Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Fair Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Loans                        
Loans held for sale
 
$
2,284
  
$
0
  
$
2,284
  
$
0
  
$
1,325
  
$
0
  
$
1,325
  
$
0
 


   Carrying Value at December 31, 2020    Carrying Value at December 31, 2021 
(dollars in thousands) Fair Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Fair Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans
            
Mortgage loans on real estate:
                
Commercial loans
 $
87  $
0  $
0  $
87 
Total
 $
87  $
0  $
0  $
87 
            
Loans                        
Loans held for sale
 
$
14,413
  
$
0
  
$
14,413
  
$
0
  
$
3,287
  
$
0
  
$
3,287
  
$
0
 

The Company did not have anyfollowing tables display the quantitative information about Level 3 Fair Value Measurements at June 30, 2021 or December 31, 2020.as of the dates indicated.


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

2524

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    Fair Value Measurements at June 30, 2022 Using 
(dollars in thousands) Carrying Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Carrying Value  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets                        
Cash and cash equivalents 
$
155,498
 
$
155,498
 
$
0
 
$
0
  
$
86,816
 
$
86,816
 
$
0
 
$
0
 
Securities available-for-sale 
213,211
  
0
 
213,211
  
0
  
239,356
  
0
 
239,356
  
0
 
Restricted securities 
1,033
  
0
 
1,033
  
0
  
1,389
  
0
 
1,389
  
0
 
Loans held for sale 
2,284
  
0
 
2,284
  
0
  
1,325
  
0
 
1,325
  
0
 
Loans, net of allowances for loan losses 
823,200
  
0
 
0
  
825,967
  
904,376
  
0
 
0
  
897,827
 
Derivatives
           
Interest rate lock
 21  0 21  0 
Interest rate swap on loans
 735  0 735  0 
Bank owned life insurance 
28,817
  
0
 
28,817
  
0
  
28,566
  
0
 
28,566
  
0
 
Accrued interest receivable 
2,404
  
0
 
2,404
  
0
  
3,505
  
0
 
3,505
  
0
 
                        
Liabilities                        
Deposits 
$
1,134,017
 
$
0
 
$
1,136,627
 
$
0
  
$
1,172,994
 
$
0
 
$
1,174,165
 
$
0
 
Overnight repurchase agreements 
12,239
  
0
 
12,239
  
0
  
4,384
  
0
 
4,384
  
0
 
Federal Reserve Bank borrowings 
3,313
  
0
 
3,313
  
0
 
Long term borrowings
 29,472
  0
 27,124
  0
 
Derivatives
           
Interest rate swap on loans
 735  0 735  0 
Accrued interest payable 
266
  
0
 
266
  
0
  
642
  
0
 
642
  
0
 

   Fair Value Measurements at December 31, 2020 Using    Fair Value Measurements at December 31, 2021 Using 
(dollars in thousands) Carrying Value  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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
  
$
187,922
 
$
187,922
 
$
0
 
$
0
 
Securities available-for-sale 
186,409
  
0
 
186,409
  
0
  
234,321
  
0
 
234,321
  
0
 
Restricted securities 
1,367
  
0
 
1,367
  
0
  
1,034
  
0
 
1,034
  
0
 
Loans held for sale 
14,413
  
0
 
14,413
  
0
  
3,287
  
0
 
3,287
  
0
 
Loans, net of allowances for loan losses 
826,759
  
0
 
0
  
826,083
  
833,661
  
0
 
0
  
834,693
 
Derivatives
           
Interest rate lock
 43  0 43  0 
Interest rate swap on loans
 181  0 181  0 
Bank owned life insurance 
28,386
  
0
 
28,386
  
0
  
28,168
  
0
 
28,168
  
0
 
Accrued interest receivable 
3,613
  
0
 
3,613
  
0
  
3,339
  
0
 
3,339
  
0
 
                        
Liabilities                        
Deposits 
$
1,067,236
 
$
0
 
$
1,070,236
 
$
0
  
$
1,177,099
 
$
0
 
$
1,179,631
 
$
0
 
Overnight repurchase agreements 
6,619
  
0
 
6,619
  
0
  
4,536
  
-
 
4,536
  
0
 
Federal Reserve Bank borrowings 
28,550
  
0
 
28,550
  
0
  
480
  
0
 
480
  
0
 
Other borrowings 
1,350
  
0
 
1,350
  
0
 
Long term borrowings
 29,407  0 29,657  0 
Derivatives
           
Interest rate swap on loans
 181  0 181  0 
Accrued interest payable 
384
  
0
 
384
  
0
  
693
  
0
 
693
  
0
 


Note 11. Segment Reporting

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

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

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and six months ended June 30, 20212022 and 20202021 follows:

 Three Months Ended June 30, 2021  Three Months Ended June 30, 2022 
(dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
Revenues                              
Interest and dividend income 
$
9,853
  
$
6
  
$
2,029
  
$
(2,029
)
 
$
9,859
  
$
11,068
  
$
17
  
$
800
  
$
(800
)
 
$
11,085
 
Income from fiduciary activities  
0
   
1,051
   
0
   
0
   
1,051
   
0
   
1,061
   
0
   
0
   
1,061
 
Other income  
2,219
   
283
   
50
   
(65
)
  
2,487
   
2,130
   
325
   
50
   
(66
)
  
2,439
 
Total operating income  
12,072
   
1,340
   
2,079
   
(2,094
)
  
13,397
   
13,198
   
1,403
   
850
   
(866
)
  
14,585
 
                                        
Expenses                                        
Interest expense  
752
   
0
   
1
   
0
   
753
   
469
   
0
   
295
   
0
   
764
 
Provision for loan losses  
0
   
0
   
0
   
0
   
0
   
570
   
0
   
0
   
0
   
570
 
Salaries and employee benefits  
5,299
   
764
   
164
   
0
   
6,227
   
5,542
   
893
   
176
   
0
   
6,611
 
Other expenses  
3,999
   
252
   
122
   
(65
)
  
4,308
��  
4,062
   
285
   
198
   
(66
)
  
4,479
 
Total operating expenses  
10,050
   
1,016
   
287
   
(65
)
  
11,288
   
10,643
   
1,178
   
669
   
(66
)
  
12,424
 
                                        
Income before taxes  
2,022
   
324
   
1,792
   
(2,029
)
  
2,109
   
2,555
   
225
   
181
   
(800
)
  
2,161
 
                                        
Income tax expense (benefit)  
248
   
69
   
(50
)
  
-
   
267
   
352
   
47
   
(130
)
  
0
   
269
 
                                        
Net income 
$
1,774
  
$
255
  
$
1,842
  
$
(2,029
)
 
$
1,842
  
$
2,203
  
$
178
  
$
311
  
$
(800
)
 
$
1,892
 
                                        
Capital expenditures 
$
598
  
$
36
  
$
0
  
$
0
  
$
634
  
$
404
  
$
0
  
$
0
  
$
0
  
$
404
 
                                        
Total assets 
$
1,267,532
  
$
7,213
  
$
120,000
  
$
(119,934
)
 
$
1,274,811
  
$
1,306,972
  
$
7,283
  
$
131,174
  
$
(130,545
)
 
$
1,314,884
 

  Three Months Ended June 30, 2020 
(dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated 
Revenues               
Interest and dividend income 
$
9,837
  
$
11
  
$
2,679
  
$
(2,679
)
 
$
9,848
 
Income from fiduciary activities  
0
   
909
   
0
   
0
   
909
 
Other income  
2,816
   
249
   
50
   
(66
)
  
3,049
 
Total operating income  
12,653
   
1,169
   
2,729
   
(2,745
)
  
13,806
 
                     
Expenses                    
Interest expense  
1,361
   
0
   
14
   
0
   
1,375
 
Provision for loan losses  
300
   
0
   
0
   
0
   
300
 
Salaries and employee benefits  
4,571
   
741
   
152
   
0
   
5,464
 
Other expenses  
3,452
   
236
   
118
   
(66
)
  
3,740
 
Total operating expenses  
9,684
   
977
   
284
   
(66
)
  
10,879
 
                     
Income before taxes  
2,969
   
192
   
2,445
   
(2,679
)
  
2,927
 
                     
Income tax expense (benefit)  
441
   
41
   
(49
)
  
0
   
433
 
                     
Net income 
$
2,528
  
$
151
  
$
2,494
  
$
(2,679
)
 
$
2,494
 
                     
Capital expenditures 
$
288
  
$
6
  
$
0
  
$
0
  
$
294
 
                     
Total assets 
$
1,214,546
  
$
7,008
  
$
117,558
  
$
(117,867
)
 
$
1,221,245
 
  Three Months Ended June 30, 2021 
(dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated 
Revenues               
Interest and dividend income 
$
9,853
  
$
6
  
$
2,029
  
$
(2,029
)
 
$
9,859
 
Income from fiduciary activities  
0
   
1,051
   
0
   
0
   
1,051
 
Other income  
2,219
   
283
   
50
   
(65
)
  
2,487
 
Total operating income  
12,072
   
1,340
   
2,079
   
(2,094
)
  
13,397
 
                     
Expenses                    
Interest expense  
752
   
0
   
1
   
0
   
753
 
Provision for loan losses  
0
   
0
   
0
   
0
   
0
 
Salaries and employee benefits  
5,299
   
764
   
164
   
0
   
6,227
 
Other expenses  
3,999
   
252
   
122
   
(65
)
  
4,308
 
Total operating expenses  
10,050
   
1,016
   
287
   
(65
)
  
11,288
 
                     
Income before taxes  
2,022
   
324
   
1,792
   
(2,029
)
  
2,109
 
                     
Income tax expense (benefit)  
248
   
69
   
(50
)
  
0
   
267
 
                     
Net income 
$
1,774
  
$
255
  
$
1,842
  
$
(2,029
)
 
$
1,842
 
                     
Capital expenditures 
$
598
  
$
36
  
$
0
  
$
0
  
$
634
 
                     
Total assets 
$
1,267,532
  
$
7,213
  
$
120,000
  
$
(119,934
)
 
$
1,274,811
 

  Six Months Ended June 30, 2022 
(dollars in thousands) Bank  Trust  Parent  Eliminations  Consolidated 
Revenues               
Interest and dividend income 
$
21,524
  
$
31
  
$
1,650
  
$
(1,650
)
 
$
21,555
 
Income from fiduciary activities  
0
   
2,133
   
0
   
0
   
2,133
 
Other income  
4,309
   
604
   
100
   
(131
)
  
4,882
 
Total operating income  
25,833
   
2,768
   
1,750
   
(1,781
)
  
28,570
 
                     
Expenses                    
Interest expense  
1,007
   
0
   
590
   
0
   
1,597
 
Provision for loan losses  
671
   
0
   
0
   
0
   
671
 
Salaries and employee benefits  
10,971
   
1,741
   
321
   
0
   
13,033
 
Other expenses  
7,950
   
579
   
372
   
(131
)
  
8,770
 
Total operating expenses  
20,599
   
2,320
   
1,283
   
(131
)
  
24,071
 
                     
Income before taxes  
5,234
   
448
   
467
   
(1,650
)
  
4,499
 
                     
Income tax expense (benefit)  
729
   
95
   
(248
)
  
0
   
576
 
                     
Net income 
$
4,505
  
$
353
  
$
715
  
$
(1,650
)
 
$
3,923
 
                     
Capital expenditures 
$
601
  
$
0
  
$
0
  
$
0
  
$
601
 
                     
Total assets 
$
1,306,972
  
$
7,283
  
$
131,174
  
$
(130,545
)
 
$
1,314,884
 

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  Six Months Ended June 30, 2021 
(dollars in thousands) Bank  Trust  Unconsolidated Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
Revenues                              
Interest and dividend income 
$
19,800
  
$
34
  
$
4,118
  
$
(4,118
)
 
$
19,834
  
$
20,826
  
$
11
  
$
5,177
  
$
(5,177
)
 
$
20,837
 
Income from fiduciary activities  
0
   
1,926
   
0
   
0
   
1,926
   
0
   
2,078
   
0
   
0
   
2,078
 
Other income  
4,806
   
535
   
100
   
(131
)
  
5,310
   
5,085
   
539
   
100
   
(130
)
  
5,594
 
Total operating income  
24,606
   
2,495
   
4,218
   
(4,249
)
  
27,070
   
25,911
   
2,628
   
5,277
   
(5,307
)
  
28,509
 
                                        
Expenses                                        
Interest expense  
2,909
   
0
   
34
   
0
   
2,943
   
1,570
   
0
   
5
   
0
   
1,575
 
Provision for loan losses  
600
   
0
   
0
   
0
   
600
   
150
   
0
   
0
   
0
   
150
 
Salaries and employee benefits  
9,559
   
1,555
   
344
   
0
   
11,458
   
10,619
   
1,507
   
328
   
0
   
12,454
 
Other expenses  
7,134
   
578
   
195
   
(131
)
  
7,776
   
8,062
   
531
   
176
   
(130
)
  
8,639
 
Total operating expenses  
20,202
   
2,133
   
573
   
(131
)
  
22,777
   
20,401
   
2,038
   
509
   
(130
)
  
22,818
 
                                        
Income before taxes  
4,404
   
362
   
3,645
   
(4,118
)
  
4,293
   
5,510
   
590
   
4,768
   
(5,177
)
  
5,691
 
                                        
Income tax expense (benefit)  
570
   
78
   
(99
)
  
0
   
549
   
798
   
125
   
(86
)
  
0
   
837
 
                                        
Net income 
$
3,834
  
$
284
  
$
3,744
  
$
(4,118
)
 
$
3,744
  
$
4,712
  
$
465
  
$
4,854
  
$
(5,177
)
 
$
4,854
 
                                        
Capital expenditures 
$
656
  
$
6
  
$
0
  
$
0
  
$
662
  
$
719
  
$
41
  
$
0
  
$
0
  
$
760
 
                                        
Total assets 
$
1,214,546
  
$
7,008
  
$
117,558
  
$
(117,867
)
 
$
1,221,245
  
$
1,267,532
  
$
7,213
  
$
120,000
  
$
(119,934
)
 
$
1,274,811
 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 20202021 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.

Note 12. Subsequent Events



On July 14, 2021, the Company 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 proceeds will be used for general corporate purposes.


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

Management’sThe following discussion supplements and analysis is presented to aidprovides information about the reader in understanding and evaluatingmajor components of the financial condition and results of operations, financial condition, liquidity and capital resources of Old Point Financial Corporation and its subsidiaries (collectively, the Company).Company. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s 2020 Annual Report on2021 Form 10-K10-K. In addition to current and management’shistorical information, the following discussion and analysis forcontains forward-looking statements within the year ended December 31, 2020. Highlighted inmeaning of the discussion are material changes from prior reporting periodsPrivate Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on future business, financial condition or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” at the end of this Item 2. “Management’s Discussion and certain identifiable trends affecting the Company.Analysis of Financial Condition and Results of Operations.” Results of operations for the three and six months ended June 30, 20212022 and 20202021 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

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

Net income for the three months ended June 30, 2022 was $1.9 million ($0.37 per diluted share) compared to $1.8 million ($0.35 per diluted share) for the three months ended June 30, 2021.  For the six months ended June 30, 2022 and 2021, net income was $3.9 million, or beliefs regarding future$0.76 per diluted common share, and $4.9 million, or $0.93 per diluted common share, respectively.  Total assets of $1.3 billion as of June 30, 2022 decreased by $23.3 million from December 31, 2021.

Key factors affecting comparisons of consolidated net income for the three and six months ended June 30, 2022 are as follows. Comparisons are to the three and six months ended June 30, 2021 unless otherwise stated.

Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), increased $138.6 million, or 18.0%, from June 30, 2021;
Average earning assets of $1.2 billion for the three and six months ended June 30, 2022 increased $54.1 million, or 4.6%, and $74.8 million, or 6.4%, compared to the prior year comparative periods, respectively;
Interest income increased $1.2 million, or 12.4%, and $718 thousand, or 3.5%, respectively. The Company recognized net PPP origination fees of $213 thousand in the second quarter of 2022 compared to $449 thousand in the second quarter of 2021. For the first six months of 2022, net PPP origination fees recognized were $621 thousand compared to $2.0 million for the comparative 2021 period;
Interest expense increased $11 thousand, or 1.5%, and $22 thousand, or 1.4%, compared to the prior year comparative periods, due primarily to an increase in long term borrowings partially offset by lower rates and shifts in funding to lower cost deposits;
Net Interest Margin (NIM) was 3.36% and 3.10% for second quarter of 2022 and 2021, respectively. For the six months ended June 30, 2022, NIM was 3.25% compared to 3.33% for the comparative 2021 period;
Fiduciary and asset management fees increased $10 thousand and $55 thousand respectively. Service charges on deposit accounts increased $104 thousand, or 15.8%, and $177 thousand, or 13.6%, respectively; and
Mortgage banking income decreased $268 thousand, or 70.3%, and $1.2 million, or 78.8%, due to declines in mortgage industry volume and rising interest rates.

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

Capital Management and Dividends
Total equity was $101.2 million at June 30, 2022, compared to $120.8 million at December 31, 2021. Total equity decreased $19.7 million at June 30, 2022 compared to December 31, 2021, due primarily to unrealized losses in the market value of securities available for sale, which are recognized as defineda component of accumulated other comprehensive (loss) income, and the repurchase of shares under the Company’s Repurchase Program, partially offset by federalnet income. The Company’s securities lawsavailable for sale are fixed income debt securities, and may include, buttheir decline in market value during the first six months of 2022 was a result of increases in market interest rates. The Company expects to recover its investments in debt securities through scheduled payments of principal and interest and unrealized losses are not limited to: statements regarding expected future operations and financial performance;to affect the Company’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations, certain items that management does not expect to have an ongoing impact on consolidated net income, future dividend payments, net interest margin compression and items affecting net interest margin, strategic business initiatives and the anticipated effects thereof, lending under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA), asset quality, adequacy of allowances for loan losses and the level of future chargeoffs, liquidity andearnings or regulatory capital levels, the Company’s assessment of and ability to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the Bank and its customers and employees, perpetrated by third-party cybercriminals, the effect of future market and industry trends and the effects of future interest rate levels and fluctuations. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in:

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

For the levelsecond quarter of net charge-offs on loans2022 the Company declared dividends of $0.13 per share, an increase of 8.3% over dividends of $0.12 per share declared in the second quarter of 2021. For the six months ended June 30, 2022, dividends declared were $0.26 per share compared to $0.24 per share for the six months ended June 30, 2021. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the adequacyresulting dividend payout ratio in light of our allowancechanges in economic conditions, current and future capital requirements, and expected earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for loanthe Bank are calculated based on regulatory guidance related to the measurement of capital and lease lossesrisk-weighted assets.
performance
The Company has a Repurchase Program which was authorized by the Board of Directors in October 2021 to repurchase up to 10% of the Company’s dealer lending programissued and outstanding common stock through November 30, 2022. During the second quarter and first six months of 2022, 76,100 shares, for an aggregate purchase price of $1.9 million, and 199,095 shares, for an aggregate purchase price of $5.0 million, respectively, were repurchased by the Company under the Repurchase Program.
deposit flows
At June 30, 2022, the strengthbook value per share of the Company’s counterparties
competition from both bankscommon stock was $19.97, and non-banks
demandtangible book value per share (non-GAAP) was $19.60, compared to $23.06 and $22.69, respectively, at December 31, 2021. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial services in the Company’s market area
implementation of new technologies
the Company’s ability to develop and maintain secure and reliable electronic systems
any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or  their service providers
reliance on third parties for key services
cyber threats, attacks or events
the use of inaccurate assumptions in management’s modeling systems
technological risks and developments
the commercial and residential real estate markets
the demand in the secondary residential mortgage loan markets
expansion of the Company’s product offerings
accounting principles, policies and guidelines and elections made by the Company thereunder

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

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 filedaccordance with the Securities and Exchange Commission (SEC). This reference to the Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings. The information available on the Company’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.

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

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

On March 11, 2020, the World Health Organization  declared COVID-19 a pandemic. The outbreak of COVID-19 has caused a significant disruption in economic activity worldwide, and has had a significant impact on business and customers in our market areas and on our results of operations, which the Company expects may continue. 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 vaccine against COVID-19; vaccination rates; potential re-tightening of policies that had previously allowed businesses to open; and any further government stimulus efforts, including the nature, timing and extent of such stimulus. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently not yet estimable and the Company believes that it will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. The Company’s results of operations may be impacted by elevated loans losses, net interest margin compression, falling demand for loans, and potential impairments of securities available for sale and goodwill. The Company currently expects to manage through the negative impacts of the COVID-19 pandemic by maintaining sufficient liquidity and capital levels.

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. GAAP.

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

Allowance for Loan Losses
The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Accordingly,Loan losses are charged against the allowance when it is believed the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in the Company’s judgment, will be adequate to absorb probable and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, management considers a range of possible assumptions and outcomes related to the various factors identified above. Under alternative assumptions that we considered in developing our estimate of an allowance that will be adequate to absorb probable and estimable losses inherent in the loan portfolio at June 30, 2022, our estimate of the allowance varied between $8 million and $10 million.

For further information concerning accounting policies, are discussed inrefer to Note 11. Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q,Item 8. “Financial Statements and are discussed in further detail inSupplementary Data” of the Company’s 2020 Annual Report on2021 Form 10-K.

Executive Overview
For the three months ended June 30, 2021 net income was $1.8 million, or $0.35 earnings per diluted common share. This compares to net incomeResults of $2.5 million, or $0.48 earnings per diluted common share, for the second quarter of 2020. The decrease was principally attributable to decreased noninterest income and increased noninterest expense partially offset by increased net interest income and decreased provision for loan losses.

For the six 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 income, decreased provision for loan losses, and increased noninterest income partially offset by increased noninterest expense.

Highlights of the quarter are as follows:

Total assets were $1.3 billion at June 30, 2021, growing $48.6 million or 4.0% from December 31, 2020.

Deposits grew $66.8 million to $1.1 billion at June 30, 2021 from December 31, 2020.

Non-performing assets (NPAs) increased slightly to $2.4 million at June 30, 2021 compared to $2.0 million at December 31, 2020, but decreased significantly from $7.0 million as of June 30, 2020. NPAs as a percentage of total assets was 0.19% at June 30, 2021, which compared to 0.16% at December 31, 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.
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.Operations

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

ForNet interest income for the second quarter of 2021, net interest income2022 was $9.1$10.3 million, an increase of $633 thousand$1.2 million, or 7.5%13.3%, from the second quarter of 2020.2021. The increase from the prior-year comparative quarter was due primarily to growth in higher yielding loans and investments funded by lower yielding cash, and higher average yields on higher earning asset balances, due to the impacteffect of significant growth in average earning asset balances at lower average earning yields partially offset by higher averagerising market 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 10.5%.  The average tax-equivalent yield on earning assets for the second quarter of 2021 decreased by 36 basis points compared to the same period of 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 repayment of higher-cost long-term borrowings during 2020.

rates. For the six months ended June 30, 20212022 and 2020,2021, net interest income was $20.0 million and $19.3 million, and $16.9 million, respectively. The increase from the prior-year comparative period was impacted by higher average earning assets at lower average earning yields, driven primarily by accelerated recognition of net deferred fees related to PPP forgiveness at a lower volume during 2022, partially offset by higher average-interest bearing liabilities at lower average rates.

The NIM was 3.36% for the quarter ended June 30, 2022 as compared to 3.10% for the second quarter of 2021. Net interest income, on a fully tax-equivalent basis (non-GAAP), was $19.4$10.4 million for the six monthssecond quarter of 2022, an increase of $1.2 million from the 2021 comparative quarter. On a fully tax-equivalent basis (non-GAAP), NIM was 3.38% and 3.12%, for the quarters ended June 30, 2022 and 2021, respectively.

Average loans increased $45.0 million, or 5.4%, and $36.8 million, or 4.4%, for the second quarter and first six months of 2022 compared to $17.0 million for theprior year comparative periods, respectively. The increase in average loans outstanding in 2022 compared to 2021 was due primarily to growth in the commercial real estate, automobile, and consumer real estate segments of the loan portfolio. Average loan yields were higher in the second quarter of 2022 compared to the same period of 2021 due primarily to the effects of rising interest rates on the Company’s variable-rate loans and recently originated loans. For the first six months ended June 30, 2020, an increase of $2.4 million, or 14.2%. The increase was driven by2022, average loan yields were lower compared to the growth in average earning assets and thesame period of 2021 due primarily to 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. Acceleratedaccelerated recognition of deferred fees and costs related to PPP forgiveness also positively impacted netpartially offset by the effects of rising interest income for the 2021 period. Average earning assets for the six months ended June 30, 2021 increased $149.5 million, or 14.7%, compared torates during 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 decrease from 3.19% for the second quarter of 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 loan 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.2022. Loan fees and costs related to PPP loans are deferred at time of loan origination, are amortized into interest income over the remaining term of the loans and are accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $2.0 million$213 thousand were recognized in the second quarter of 2022 compared to $449 thousand in the prior year quarter. Net PPP fees recognized for the first six months of 2021.2022 were $621 thousand, down from $2.0 million for the comparative 2021 period. As of June 30, 2021, unamortized2022, unrecognized net deferred PPP fees were $1.8 million. $82 thousand. Subordinated debt interest expense also impacted the NIM for the second quarter and first six months of 2022. During the first six months of 2022, market interest rates increased, and the Company was asset sensitive at June 30, 2022 and believes the balance sheet is well positioned for a rising interest rate environment; however, the extent to which rising interest rates will ultimately affect the Company’s NIM is uncertain. For more information about these FTE financial measures, please see “Non-GAAP-“Non-GAAP Financial Measures” below.High levels

Average securities available for sale increased $44.7 million and $47.2 million for the second quarter and first six months of 2022, compared to 2021, due primarily to higher purchases of securities in order to utilize excess liquidity investedrather than holding in lower-yielding cash reserves. The average yield on the securities portfolio on a fully tax-equivalent basis increased 28 basis points for second quarter of 2022, compared to the second quarter of 2021, and 14 basis points for the first six months of 2022 compared to 2021.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at lower yielding short-term levelsthe Federal Reserve Bank, decreased $39.9 million for the second quarter of 2022 and $13.5 million for the first six months of 2022, compared to the same periods in 2021 due primarily to deployment of excess  liquidity in loans held for investment and securities available for sale. The average yield on interest-bearing deposits in other banks increased 61 basis points for the lowsecond quarter of 2022, and increased 32 basis points for the first six months of 2022 compared to the same periods in 2021 due to rising interest rates during 2022. The Federal Reserve Bank increased the interest rate environment also continueon excess cash reserve balances from 0.10 percent at December 31, 2020 to impact0.15 percent by the NIM.end of 2021 and to 1.65 percent by the end of the second quarter of 2022.

Average money market, savings and interest-bearing demand deposits increased $107.4$39.0 million and $107.2$53.0 million for the second quarter and first six months of 2021,2022, respectively, and average time deposits decreased $28.5$22.0 million and $30.2$22.7 million for the second quarter and first six months of 2021,2022, respectively, compared to the same periods in 2020,2021, due to growth in consumer and business deposits primarily as a result of new accounts and trailing 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$23.1 million for the second quarter of 20212022 and increased $94.8$34.5 million for the first six months of 2021,2022, compared to the same periods in 2020.of 2021. The average cost of interest-bearing deposits decreased 3215 basis points for the second quarter of 20212022 and decreased 3416 basis points for the first six months of 2021,2022, compared to the same periods in 2020,2021, due primarily to lower rates on deposits and a shift in composition from time deposits. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.

Average borrowings decreased $61.4increased $18.9 million and $13.3 million for the second quarter of 2021 and decreased $41.1 million for the first six months of 2021,2022 compared to the same periods in 20202021 due primarily to the repayment of PPPLF borrowings during 2021 offset by long-term borrowings in 2020. The average cost of borrowings decreased 82 basis points during the second quarter of 2021 and 118 basis points during the first six months of 2021, compared to the same periods in 2020 due primarily to the repayment of higher-cost long-term borrowings during 2020. However, the Company’s borrowings and related interest expense will be impacted beginning during the third quarter of 2021 due to the issuance of subordinated notes by the Company during July 2021. For more information, see “Capital Resources.”The average cost of borrowings increased during 2022 compared to 2021 due primarily to the issuance of subordinated notes by the Company during July 2021.

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

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

  For the quarters ended June 30, 
  2022  2021 
  (dollars in thousands)    
Average
Balance
      
Interest
Income/
Expense
       
Yield/
Rate**
       
Average
Balance
      
Interest
Income/
Expense
       
Yield/
Rate**
   
ASSETS                  
Loans* 
$
876,575
  
$
9,495
   
4.34
%
 
$
831,563
  
$
8,826
   
4.26
%
Investment securities:                        
Taxable  
196,880
   
1,123
   
2.29
%
  
162,859
   
791
   
1.95
%
Tax-exempt*  
43,471
   
318
   
2.93
%
  
32,822
   
242
   
2.96
%
Total investment securities  
240,351
   
1,441
   
2.40
%
  
195,681
   
1,033
   
2.12
%
Interest-bearing due from banks  
111,091
   
208
   
0.75
%
  
150,995
   
52
   
0.14
%
Federal funds sold  
3,923
   
6
   
0.61
%
  
4
   
-
   
0.02
%
Other investments  
1,389
   
14
   
4.20
%
  
1,033
   
11
   
4.19
%
Total earning assets  
1,233,329
  
$
11,164
   
3.63
%
  
1,179,276
  
$
9,922
   
3.37
%
Allowance for loan losses  
(9,578
)
          
(9,619
)
        
Other non-earning assets  
97,156
           
106,058
         
Total assets 
$
1,320,907
          
$
1,275,715
         
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                     
Time and savings deposits:                        
Interest-bearing transaction accounts 
$
72,125
  
$
3
   
0.01
%
 
$
70,532
  
$
3
   
0.02
%
Money market deposit accounts  
393,014
   
135
   
0.14
%
  
372,691
   
220
   
0.24
%
Savings accounts  
131,062
   
10
   
0.03
%
  
113,963
   
12
   
0.04
%
Time deposits  
161,939
   
320
   
0.79
%
  
183,936
   
511
   
1.11
%
Total time and savings deposits  
758,140
   
468
   
0.25
%
  
741,122
   
746
   
0.40
%
Federal funds purchased, repurchase agreements and other borrowings
  
3,926
   
1
   
0.07
%
  
14,505
   
7
   
0.21
%
Long term borrowings  
29,453
   
295
   
3.96
%
  
-
   
-
   
0.00
%
Total interest-bearing liabilities  
791,519
   
764
   
0.39
%
  
755,627
   
753
   
0.40
%
Demand deposits  
417,400
           
394,337
         
Other liabilities  
6,077
           
6,131
         
Stockholders’ equity  
105,911
           
119,620
         
Total liabilities and stockholders’ equity 
$
1,320,907
          
$
1,275,715
         
Net interest margin     
$
10,400
   
3.38
%
     
$
9,169
   
3.12
%
                                                                
*
Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $79 thousand and $63 thousand for June 30, 2022 and 2021, respectively.
**
Annualized
TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

  For the six months ended June 30, 
  2022  2021 
  (dollars in thousands)    
Average
Balance
      
Interest
Income/
Expense
       
Yield/
Rate**
       
Average
Balance
      
Interest
Income/
Expense
       
Yield/
Rate**
   
ASSETS                  
Loans* 
$
870,271
  
$
18,690
   
4.33
%
 
$
833,446
  
$
18,791
   
4.55
%
Investment securities:                        
Taxable  
199,396
   
2,112
   
2.14
%
  
161,196
   
1,561
   
1.95
%
Tax-exempt*  
40,257
   
582
   
2.92
%
  
31,268
   
471
   
3.04
%
Total investment securities  
239,653
   
2,694
   
2.27
%
  
192,464
   
2,032
   
2.13
%
Interest-bearing due from banks  
124,272
   
281
   
0.46
%
  
137,744
   
95
   
0.14
%
Federal funds sold  
4,181
   
7
   
0.33
%
  
4
   
-
   
0.03
%
Other investments  
1,266
   
28
   
4.51
%
  
1,176
   
41
   
6.96
%
Total earning assets  
1,239,643
  
$
21,700
   
3.53
%
  
1,164,834
  
$
20,959
   
3.63
%
Allowance for loan losses  
(9,782
)
          
(9,633
)
        
Other nonearning assets  
95,485
           
101,615
         
Total assets 
$
1,325,346
          
$
1,256,816
         
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                     
Time and savings deposits:                        
Interest-bearing transaction accounts 
$
73,619
  
$
5
   
0.01
%
 
$
69,153
  
$
6
   
0.02
%
Money market deposit accounts  
391,201
   
299
   
0.15
%
  
360,180
   
422
   
0.24
%
Savings accounts  
128,673
   
20
   
0.03
%
  
111,128
   
22
   
0.04
%
Time deposits  
164,882
   
681
   
0.83
%
  
187,597
   
1,095
   
1.18
%
Total time and savings deposits  
758,375
   
1,005
   
0.27
%
  
728,058
   
1,545
   
0.43
%
Federal funds purchased, repurchase agreements and other borrowings
  
4,256
   
2
   
0.08
%
  
20,347
   
30
   
0.30
%
Long term borrowings  
29,436
   
590
   
4.04
%
  
-
   
-
   
0.00
%
Total interest-bearing liabilities  
792,067
   
1,597
   
0.41
%
  
748,405
   
1,575
   
0.42
%
Demand deposits  
415,749
           
381,278
         
Other liabilities  
5,725
           
8,008
         
Stockholders’ equity  
111,805
           
119,125
         
Total liabilities and stockholders’ equity 
$
1,325,346
          
$
1,256,816
         
Net interest margin     
$
20,103
   
3.27
%
     
$
19,384
   
3.36
%

*
Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $145 thousand and $122 thousand, respectively.
**
Annualized 

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

TABLE 2: VOLUME AND RATE ANALYSIS*

  Three months ended June 30, 2022 from 2021 
  Increase (Decrease) 
  Due to Changes in:    
(dollars in thousands) Volume  Rate  Total 
EARNING ASSETS         
Loans* 
$
479
  
$
190
  
$
669
 
Investment securities:            
Taxable  
166
   
166
   
332
 
Tax-exempt*  
79
   
(3
)
  
76
 
Total investment securities  
245
   
163
   
408
 
             
Federal funds sold  
-
   
6
   
6
 
Other investments**  
(10
)
  
169
   
159
 
Total earning assets  
714
   
528
   
1,242
 
             
INTEREST-BEARING LIABILITIES            
Interest-bearing transaction accounts  
-
   
-
   
-
 
Money market deposit accounts  
12
   
(97
)
  
(85
)
Savings accounts  
2
   
(4
)
  
(2
)
Time deposits  
(61
)
  
(130
)
  
(191
)
Total time and savings deposits  
(47
)
  
(231
)
  
(278
)
Federal funds purchased, repurchase            
agreements and other borrowings  
(6
)
  
-

  
(6
)
Long term borrowings  
-
   
295
   
295
 
Total interest-bearing liabilities  
(53
)
  
64
   
11
 
             
Change in net interest income 
$
767
  
$
464
  
$
1,231
 
* Computed on a fully tax-equivalent basis using a 21% rate.
** Other investments include interest-bearing balances due from banks.

  Six Months Ended June 30, 2022 from 2021 
  Increase (Decrease) 
  Due to Changes in:    
(dollars in thousands) Volume  Rate  Total 
EARNING ASSETS         
Loans* 
$
831
  
$
(932
)
 
$
(101
)
Investment securities:            
Taxable  
369
   
182
   
551
 
Tax-exempt*  
136
   
(25
)
  
111
 
Total investment securities  
505
   
157
   
662
 
             
Federal funds sold  
-
   
7
   
7
 
Other investments**  
(6
)
  
179
   
173
 
Total earning assets  
1,330
   
(589
)
  
741
 
             
INTEREST-BEARING LIABILITIES            
Interest-bearing transaction accounts  
-
   
(1
)
  
(1
)
Money market deposit accounts  
38
   
(161
)
  
(123
)
Savings accounts  
3
   
(5
)
  
(2
)
Time deposits  
(133
)
  
(281
)
  
(414
)
Total time and savings deposits  
(92
)
  
(448
)
  
(540
)
Federal funds purchased, repurchase            
agreements and other borrowings  
(24
)
  
(4
)
  
(28
)
Long term borrowings  
-
   
590
   
590
 
Total interest-bearing liabilities  
(116
)
  
138

  
22
 
             
Change in net interest income 
$
1,446
  
$
(727
)
 
$
719
 
* Computed on a fully tax-equivalent basis using a 21% rate.
** Other investments include interest-bearing balances due from banks.

The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, inflationary pressures, the timing and extent of any economic recovery, and the extent or continuing impact of government stimulus measures, which are inherently uncertain, and (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment;environment. During the first six months of 2022, market interest rates increased and (3) the recognition of net deferred fees on PPP loans, which is subjectCompany was asset sensitive at June 30, 2022; however, the Company can give no assurance as to the timingultimate impact of repaymentrising interest rates or forgiveness.

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

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
%

*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
the NIM.

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

For the three months ended June 30, 2022, the Company recognized a provision for loan losses of $570 thousand. 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.losses.  The provision for loan losses was $671 thousand for the first six months of 2022, compared to $150 thousand for the first six months of 2021. The increase in provision expense during the second quarter of 2022 was driven primarily by increases in net loans held for investment. Charged-off loans totaled $1.1 million and $635 thousand in the first six months of 2022 and 2021, comparedrespectively. Recoveries amounted to $600$471 thousand inand $407 thousand for the first six months of 2020.

The allowance for loan and lease losses (ALLL) was $9.5 million atended June 30, 20212022 and December 31, 2020,2021, 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. QuarterlyCompany’s annualized net charge offs as a percentage ofloans charged off to average loans outstanding waswere 0.09% for the second quarter of 2022 and 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 overall credit quality of the loan portfolio, however the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration. Low levels of NPAs and year-over-year quantitative historical loss rates continue to demonstrate improvement, resulting in a 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.respectively.

The Company has madestate of the local economy can have a significant impact on the level of loan modifications undercharge-offs. If the CARES Act, enactedeconomy begins to contract, nonperforming assets could increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on March 27, 2020,borrowers. Increased nonperforming assets would increase charge-offs and subsequently amended byreduce earnings due to larger contributions to 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 had 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 a future period.loss provision.

Noninterest Income
Noninterest income was $3.5 million and $7.7 million , respectively, infor the three and six months ended June 30, 2021,2022, a decrease of $420$38 thousand or 10.6%1.1%, from the second quarter of 2020 and an increase of $436 thousand from the six months ended June 30, 2020. Increases in2021. Although fiduciary and asset management fees, other service charges commissionson deposit accounts, and fees, andother operating income increased compared to the prior year quarter, these increases were offset primarily by lower 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 resultedresulting in a decline inessentially flat noninterest income for the second quarter of 20212022 when compared to the prior year quarter. Year over year, fiduciaryNoninterest income for the six months ended June 30, 2022 decreased $657 thousand to $7.0 million compared to the six months ended June 30, 2021, driven primarily by the decrease in mortgage banking income. The decrease in mortgage banking income for the second quarter and asset management feesfirst six months of 2022 compared to the respective 2021 periods was due to declines in volume of mortgage originations attributable to changes in mortgage market conditions.

The Company continues to focus on diversifying noninterest income through efforts to expand Trust, insurance, and mortgage banking activities, and a continued focus on business checking 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 2020, noninterest income increased quarter-over-quarter and year-over-year.corporate services.

Noninterest Expense
Noninterest expense was $10.6$11.1 million for the second quarter of 2021,2022, an increase of $1.3$555 thousand, or 5.3%, compared to $10.5 million or 14.5%, fromfor the second quarter of 2020.2021. The increase over the prior year quarter was primarily driven by increased salary and benefit expense, employee professional development related to recruiting, and ATM and other losses, partially offset by decreased data processing and other operating expenses.  For the six months ended June 30, 2021,2022, 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 $763$710 thousand, or 14.0%, when comparing the second quarters of 2021 and 2020 and $996 thousand, or 8.7%, when comparing3.4% over the six months ended June 30, 2021, primarily due to the same periodincreases in 2020.salary and benefits and employee professional development partially offset by decreases in other operating expense. The increase in salariessalary and employee benefits is primarily attributable to (i) increased commission expense related to higher mortgagewas driven by lower deferred 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 originationreductions in commissions and are being amortized to interest income over the remaining lives of the loans, which may be 24 or 60 months at origination.  These costs are amortized against the related loan fees received for the origination of the PPP loans.  Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans.  The Company 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 has fully implemented a new loan origination system and a new online appointment scheduling solution. In addition, the Company remains on track to implement a deposit origination platform and a new online account opening solution, and complete the ATM upgrade project in the third quarter of 2021. The Company plans to complete upgrades to critical infrastructure software related to imaging and to implement a new data analytics solution and teller system during the fourth quarter of 2021. These initiatives have driven an increase of $393 thousand from the quarter ended June 30, 2020 to the quarter 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 equipmenttemporary staff expense. The Company expectsis actively assessing major vendor contracts and relationships as part of our efforts to continue its bank-wide technology initiative implementations into 2022.

Increase in other tax expenses was driven by resolution of certain tax credits related to bank franchise tax of $94 thousandreduce noninterest expense levels and increases in otherimprove operating expense is primarily related to increased FDIC assessments and loan processing expense due to increased volume levels.efficiency.

The Company’s income tax expense decreased $166increased $2 thousand for the second quarter and increased $288decreased $261 thousand for the first six months of 20212022 when compared to the same periods in 20202021 primarily due to changes in the levels of netpre-tax income and lower federal incomethe mix of effective tax credits for investment in certain housing projects.exempt income. The effective federal income tax rates for the three and six months ended June 30, 2021 was 12.7%2022 were 12.4% and 14.7%12.8%, respectively, and the effective tax rates for the three and six months ended June 30, 2020 was2021 were 12.7% and 14.7% and 12.8%, respectively.

Balance Sheet Review
Unless otherwise noted, all comparisons in this section are between balances at December 31, 2020 andAt June 30, 2021.

Total2022, the Company had total assets of $1.3 billion, a decrease of $23.3 million compared to assets as of June 30, 2021 increased by $48.6 million from December 31, 2020. 2021.

Net loans held for investment decreased $3.6increased $70.7 million or 0.4%8.5%, from $833.7 million at December 31, 20202021 to $823.2$904.4 million at June 30, 2021. The change in net loans2022. Loans held for investment, was primarily attributed to a decline of $25.7excluding PPP (non-GAAP), grew 10.5%, or $86.5 million, in the PPPdriven by loan segment due to forgiveness of $74.0 million of PPP loans, which was partially offset by new PPP originations of $48.3 million.  Loan growth in the following segments: commercial real estate andof $16.7 million, construction, land deployment,development, and other land loan segments was $20.9loans of $6.3 million, on a combined basis for the same period. residential real estate of $44.0 million, and indirect automobile of $19.4 million. Cash and cash equivalents increased $35.1decreased $101.1 million or 29.1%.53.8% from December 31, 2021 to June 30, 2022, due primarily to deployment into higher earning asset classes. Securities available for sale, at fair value, increased $26.8$5.0 million or 2.2% over the same period primarily driven by liquidity deployment in the investment portfolio partially offset by decreases in market value.

Total deposits of $1.2 billion as of June 30, 2022 decreased $4.1 million, or 0.3% from December 31, 20202021. Noninterest-bearing deposits increased $12.7 million, or 3.0%, savings deposits decreased $6.4 million, or 1.1%, and time deposits decreased $10.4 million, or 6.2%. Liquidity continues to $213.2 millionbe impacted by record cumulative levels of consumer savings, government stimulus, and PPP loan related deposits.

The Company utilized the PPPLF initiated by the Federal Reserve Bank to partially fund PPP loan originations. PPPLF borrowings were fully repaid during the first quarter of 2022 compared to $480 thousand at December 31, 2021.  The Company also utilizes FHLB advances as a source of liquidity as needed. At June 30, 2022 and December 31, 2021, asthe Company had no FHLB advances.

Securities Portfolio

When comparing June 30, 2022 to December 31, 2021, securities available-for-sale increased $5.0 million, or 2.2%. The majority of the change was due primarily to purchases of U.S. Treasury securities, securities issued by state and political subdivisions, and corporate bonds and other securities to deploy additional liquidity provided by growth in deposit accounts continuesrather than holding in lower yielding cash reserves, partially offset by decreases in market value due to be deployed inrising market interest rates.

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

The following table sets forth a summary of the securities portfolio:

TABLE 3: SECURITIES PORTFOLIO

 (Dollars in thousands)  
June 30,
2022
    
December 31,
2021
  
U.S. Treasury securities 
$
17,551
  
$
14,904
 
Obligations of U.S. Government agencies  
35,385
   
38,558
 
Obligations of state and political subdivisions  
68,873
   
65,803
 
Mortgage-backed securities  
87,303
   
89,058
 
Money market investments  
1,614
   
2,413
 
Corporate bonds and other securities  
28,630
   
23,585
 
   
239,356
   
234,321
 
Restricted securities:        
Federal Home Loan Bank stock 
$
682
   
383
 
Federal Reserve Bank stock  
665
   
609
 
Community Bankers’ Bank stock  
42
   
42
 
   
1,389
   
1,034
 
Total Securities $240,745  $235,355 

For more information about the Company’s investment portfolio.

Total deposits increased $66.8 million, or 6.3%, to $1.1 billionsecurities available for sale, including information about securities in an unrealized loss position at June 30, 2021. Noninterest-bearing deposits increased $38.5 million, or 10.6%, savings deposits increased $42.8 million, or 8.3%,2022 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 borrowing2021, see Part I, Item 1, “Financial Statements” under the Paycheck Protection Program Liquidity Facility (PPPLF) initiated by the Federal Reserve to partially fund PPP loan originations, resultingheading Note 2, Securities in the Company borrowing $3.3 million as of June 30, 2021 as compared to $28.6 million at December 31, 2020.  PPPLF borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of which will mature within 24 months of origination.

Average assets for the first six months of 2021 increased $141.1 million, or 12.6%, compared to the first six months of 2020. Comparing the first six months of 2021 to the first six months of 2020, average loans increased $41.6 million, and average investment 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 24.7% in savings deposits, including interest-bearing transaction and money market accounts.  Average borrowings decreased $41.1 million.

Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of June 30, 2021, the Bank’s unpledged, available-for-sale securities totaled $143.2 million. The Company’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 Companythis Quarterly Report on Form 10-Q.

A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB and FRB. As of the end of the second quarter of 2021, the Company had $375.1 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the second quarter of 2021, the Company had $105.0 million available in federal funds lines to address any short-term borrowing needs.Loan Portfolio

As disclosed in the Company’s consolidated statementsThe following table shows a breakdown of cash flows, net cash providedtotal loans by operating activities was $15.9 million, net cash used in investing activities was $25.5 million, and net cash provided by financing activities was $44.6 million for the six months endedsegment at June 30, 2021. Combined, this contributed to a $35.1 million increase in cash2022 and cash equivalents for the six months ended June 30,December 31, 2021.

Management is not aware of any market or institutional trends, events or uncertainties, other than potential impacts from the COVID-19 pandemic, that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations.TABLE 4: LOAN PORTFOLIO

  June 30,  December 31, 
(Dollars in thousands) 2022  2021 
Commercial and industrial 
$
63,163
  
$
68,690
 
Real estate-construction  
64,789
   
58,440
 
Real estate-mortgage (1)  
250,179
   
206,368
 
Real estate-commercial  
399,439
   
382,603
 
Consumer  
128,556
   
118,441
 
Other  
8,146
   
8,984
 
Ending Balance 
$
914,272
  
$
843,526
 
         
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
 

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

As of June 30, 2022, the total loan portfolio increased by $70.7 million or 8.4% from December 31, 2021, primarily due to increases in real estate construction, real estate mortgage, real estate-commercial, and consumer which were offset by reductions in commercial and industrial due to a decline of $15.7 million in PPP loans outstanding. Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), grew 10.5%.

For more information about the Company’s management of liquid assets,loan portfolio at June 30, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the availability of borrowed funds,heading Note 3, Loans and the Company’s ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs.

Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally andAllowance for Loan Losses in the Company’s markets. Dependingthis Quarterly Report on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company’s operations.Form 10-Q.

Nonperforming Assets

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

Nonperforming assets increased by $3.1 million from $1.5 million at December 31, 2021 to $4.6 million at June 30, 2022. The majoritytotal at June 30, 2022 consisted of the$565 thousand in loans still accruing interest but past due 90 days or more and accruing interest$4.1 million in nonaccrual loans. All of the nonaccrual loans are classified as impaired, 93.7% of the nonaccrual loans at June 30, 20212022 were secured by real estate and 96.0% of the nonaccrual loans at June 30, 2022 was related to one large commercial relationship. Impaired loans are student loans with principal and interest amounts that are 97 - 98% guaranteed bya component of the federal government.allowance for loan losses. When a loan changes from “past“90 days past due 90 days or more andbut still accruing interest” status to “nonaccrual” status, the loan is normally reviewed for impairment. In most cases, if the loanIf impairment is considered impaired,identified, then the difference betweenCompany records a charge-off based on the value of the collateral andor the principal amount outstanding onpresent value of the loan is charged off.loan’s expected future cash flows, discounted at the loan’s effective interest rate. If the Company is waiting on an appraisal to determine the collateral’s value, or is in negotiations with the borrower or other parties that may affect the value of the collateral, management allocates funds to cover the deficiency to the allowance for loan losses to cover the anticipated deficiency, based on information available to management at thatthe time.

InThe recorded investment in impaired loans increased to $6.2 million as of June 30, 2022 from $1.3 million as of December 31, 2021 as detailed in Part I, Item 1, “Financial Statements” under the caseheading Note 3, Loans and the Allowance for Loan Losses in this Quarterly Report on Form 10-Q. The majority of these loans were collateralized.

The following table presents information concerning the aggregate amount of nonperforming assets, which includes nonaccrual loans, past due loans, TDRs the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower’s ability to repay the modified loan.and OREO:

The following table presents information on nonperforming assets, as of the dates indicated:TABLE 5: NONPERFORMING ASSETS

NONPERFORMING ASSETS
 (dollars in thousands) June 30,  December 31, 
 2022  2021 
Nonaccrual loans      
Commercial and industrial 
$
255
  
$
174
 
Real estate-construction  
998
   
-
 
Real estate-mortgage (1)  
161
   
191
 
Real estate-commercial  
2,660
   
113
 
Total nonaccrual loans $4,074  $478 
         
Loans past due 90 days or more and accruing interest        
Commercial and industrial 
$
-
  
$
169
 
Real estate-mortgage (1)  
22
   
-
 
Consumer loans (2)  
543
   
846
 
Other  
-
   
10
 
Total loans past due 90 days or more and accruing interest $565  $1,025 
         
Restructured loans        
Real estate-construction 
$
78
  
$
79
 
Real estate-mortgage (1)  
290
   
450
 
Real estate-commercial  
384
   
413
 
Total restructured loans $752  $942 
Less nonaccrual restructured loans (included above)  
161
   
191
 
Less restructured loans currently in compliance (3)  
591
   
751
 
Net nonperforming, accruing restructured loans 
$
-
  
$
-
 
Nonperforming loans $4,639  $1,503 
         
Total nonperforming assets $4,639  $1,503 
         
Interest income that would have been recorded under original loan terms on nonaccrual loans above 
$
132
  
$
11
 
         
Interest income recorded for the period on nonaccrual loans included above 
$
4
  
$
2
 
         
Total loans 
$
914,272
  
$
843,526
 
ALLL 
$
9,896
  
$
9,865
 
Nonaccrual loans to total loans  
0.45
%
  
0.06
%
ALLL to total loans  
1.08
%
  
1.17
%
ALLL to nonaccrual loans  
242.91
%
  
2063.81
%

 (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 and small business loans with principal and interest amounts that are 97 - 98%100% guaranteed by the federal government. The
past due principal portion of these guaranteed loans that is past due 90 days or more totaled $626$143 thousand at June 30, 20212022 and $547 million$711 thousand at December 31, 2020.2021. For additional information, refer to Note 3, Loans and Allowance for Loan Losses included in Part I, Item 1, “Financial Statements” of this report on Quarterly Report on Form 10-Q.
(3) As of June 30, 2021 and December 31, 2020, all of the Company’sAmounts listed represent restructured accruing loans were performingthat are in compliance with their modified terms.terms as of the date presented.

Nonperforming assetsAs shown in the table above, as of June 30, 2021 were $2.4 million, $438 thousand higher than nonperforming assets as of December 31, 2020. Nonaccrual loans increased $189 thousand when comparing the balances as of June 30, 20212022 compared to December 31, 2020.2021, the nonaccrual loan category increased by $3.6 million and the 90-days past due and still accruing interest category decreased by $460 thousand or 44.9%. The increase in nonaccrual loans during the first six months of 2022 was primarily driven by one creditwell-secured large commercial relationship which was downgraded during the fourth quarter of $130 thousand which has subsequently been resolved. See Note 32021 and became impaired and placed on nonaccrual status during the first quarter 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.2022.

The majority of the balance of nonaccrual loans at June 30, 2021 was2022 were related to one largeseven credit relationship of $843 thousand, representing 60.1% of the $1.4 million of nonaccrualrelationships. All loans at June 30, 2021. This relationship hasin these relationships have 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 balance.balances. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect.

Loans past due 90 days or more and accruing interest increased $249 thousand. As
38

A portion of June 30, 2021, $626 thousand of the $993 thousand of loans past due 90 days or more and still accruing interest at June 30, 2022 ($143 thousand) were government-guaranteed student loans on which the Company expects to experience minimal losses. Because theloans. The federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans,loans; as such, management does not expect even a significant increasesincrease in past due student loans to have a material effect on the Company.

Total restructured loans decreased by $99 thousand from December 31, 2020 to June 30, 2021 primarily due to pay-offs and paydowns. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

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

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

1.          Specific identification (regardless of risk rating)
2.          Pool–substandard
3.          Pool–other assets especially mentioned (OAEM) (rated just above substandard)
4.          Pool–pass loans (all other rated loans)

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

The majority of the Company’s 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 waitinghas not yet received a current appraisal on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral,loans being reviewed for impairment, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of June 30, 20212022 and December 31, 2020,2021, the impaired loan component of the allowance for loan losses was $51amounted to $27 thousand and $11$128 thousand, respectively. The decrease in the impaired loan component is due primarily to the charge-off of one credit relationship. The impaired loan component of the allowance for loan losses is reflected as a valuation allowance related to impaired loans in Note 3, Loans and the  Allowance for Loan Losses included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q.

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

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

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

Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan’s payments are current (including loans 1 – 29 days past due), or are 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company’s internally assigned risk grades: substandard, other assets especially mentioned (OAEM, rated(rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of Doubtfuldoubtful or Loss,loss, but as of June 30, 20212022 and December 31, 20202021, the Company had no loans in these categories.

The overall historical loss rate from December 31, 20202021 to June 30, 2021, decreased 92022, improved 7 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality combined with sustained levels of non-performing assets.quality. For the same period, the qualitative factor components increased 6decreased 3 basis pointspoint as a percentage of loans evaluated collectively for impairment overall. This increasedecrease was primarily due to segment adjustments for economic conditions and uncertaintya reduction related to the COVID-19 pandemic, andpartially offset by adjustments for change in volume for certain segments. While there have not been significant changes in overall credit quality of the loan portfolio from December 31, 20202021 to June 30, 2021, the2022, management will continue to monitor economic impactrecovery challenges at macro and micro levels, including levels of the COVID-19 pandemicinflation, expansion and the effectscontraction of pandemic-related government stimulus including PPP loans,efforts, supply chain disruption, and employment levels, which may be delaying signs of credit deterioration, potentially resulting indeterioration. If there are further challenges to the economic recovery, elevated levels of risk within the loan portfolio which may require additional increases in the allowance for loan losses.

On a combined basis, the historical loss and qualitative factor components amounted to $9.4$9.9 million as of June 30, 20212022 and $9.5$9.7 million atas of December 31, 2020.2021. Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to identify areas within the loan portfolio which may create elevated levels of risk should the economic environment created by theuncertainty related to COVID-19 pandemic or effects of federal government relief programs present indications of economic instability that is other than temporary in nature.

39Overall Change in Allowance

As a result of management’s analysis, the Company added, through the provision, $671 thousand to the ALLL for the six months ended June 30, 2022. The allowance for loan losses was 1.14%ALLL, as a percentage of totalperiod-end loans held for investment, onwas 1.08% and 1.17% at June 30, 20212022 and December 31, 2020.2021, respectively. The decrease in the ALLL as a percentage of loans held for investment at June 30, 2022 compared to the December 31, 2021 was primarily attributable to: (i) an increase in loans held for investment, excluding PPP loans (non-GAAP); partially offset by (ii) continued improvement in historical qualitative loss rates; and (iii) a reduction of qualitative factor adjustments related to the COVID-19 pandemic partially offset by certain segment qualitative factor adjustments for volume trends . Excluding PPP loans, the ALLL as a percentage of loans held for investment (non-GAAP) was 1.23%1.09% and 1.20% at June 30, 20212022 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.respectively. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below. AsManagement believes that the allowance has been appropriately funded for losses on existing loans, based on currently available information. Low levels of June 30, 2021,past dues and year-over-year quantitative historical loss rates continue to demonstrate improvement. The Company will continue to monitor the loan portfolio, levels of nonperforming assets, and the sustainability of improving asset quality trends experienced closely and make changes to the allowance for loan losses was 395.4%when necessary. As further challenges to economic conditions in our markets, including due to the impacts of nonperforminginflation, continue to evolve, elevated levels of risk within the loan portfolio may require additional increases in the ALLL.

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

TABLE 6: ALLOWANCE FOR LOAN LOSSES

For the Six Months ended June 30, 2022
(Dollars in thousands) 
Commercial
and Industrial
  
Real Estate
Construction
  
RealEstate - Mortgage (1)
  Real Estate- Commercial  Consumer  Other  Unallocated  Total 
Allowance for loan losses:                        
Balance, beginning 
$
683
  
$
459
  
$
2,390
  
$
4,787
  
$
1,362
  
$
184
  
$
-
  
$
9,865
 
Charge-offs  
(296
)
  
-
   
(3
)
  
-
   
(622
)
  
(190
)
  
-
   
(1,111
)
Recoveries  
127
   
-
   
40
   
-
   
219
   
85
   
-
   
471
 
Provision for loan losses  
82
   
20
   
249
   
(351
)
  
523
   
148
   
-
   
671
 
Ending Balance 
$
596
  
$
479
  
$
2,676
  
$
4,436
  
$
1,482
  
$
227
  
$
-
  
$
9,896
 
                                 
Average loans  
67,945
   
63,828
   
215,699
   
397,082
   
118,417
   
7,300
       
870,271
 
Ratio of net charge-offs to average loans  
0.25
%
  
0.00
%
  
-0.02
%
  
0.00
%
  
0.34
%
  
1.44
%
      
0.07
%

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  Other  Unallocated  Total 
Allowance for loan losses:                        
Balance, beginning 
$
650
  
$
339
  
$
2,560
  
$
4,434
  
$
1,302
  
$
123
  
$
133
  
$
9,541
 
Charge-offs  
(4
)
  
-
   
(1
)
  
-
   
(434
)
  
(186
)
  
-
   
(625
)
Recoveries  
21
   
-
   
56
   
1
   
250
   
79
   
-
   
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
 
                                 
Average loans  
127,499
   
43,930
   
211,041
   
326,638
   
116,516
   
7,822
       
833,446
 
Ratio of net charge-offs to average loans  
-0.01
%
  
0.00
%
  
-0.03
%
  
0.00
%
  
0.16
%
  
1.37
%
      
0.03
%

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

For the Three Months ended June 30, 2022
(Dollars in thousands) 
Commercial
and Industrial
  
Real Estate
Construction
  
Real Estate -
Mortgage (1)
  
Real Estate -
Commercial
  Consumer  Other  Unallocated  Total 
Allowance for loan losses:                        
Balance, beginning 
$
536
  
$
504
  
$
2,434
  
$
4,600
  
$
1,341
  
$
105
  
$
-
  
$
9,520
 
Charge-offs  
-
   
-
   
(3
)
  
-
   
(315
)
  
(93
)
  
-
   
(411
)
Recoveries  
50
   
-
   
10
   
-
   
103
   
54
   
-
   
217
 
Provision for loan losses  
10
   
(25
)
  
235
   
(164
)
  
353
   
161
   
-
   
570
 
Ending Balance 
$
596
  
$
479
  
$
2,676
  
$
4,436
  
$
1,482
  
$
227
  
$
-
  
$
9,896
 
                                 
Average loans  
59,691
   
60,545
   
229,493
   
398,298
   
121,200
   
7,348
       
876,575
 
Ratio of net charge-offs to average loans  
-0.08
%
  
0.00
%
  
0.00
%
  
0.00
%
  
0.17
%
  
0.53
%
      
0.02
%

For the Three Months ended June 30, 2021
(Dollars in thousands) 
Commercial
and Industrial
  Real Estate
Construction
  
Real Estate -
Mortgage (1)
  
Real Estate -
Commercial
  Consumer  Other  Unallocated  Total 
Allowance for loan losses:                        
Balance, beginning 
$
741
  
$
322
  
$
2,549
  
$
4,317
  
$
1,285
  
$
261
  
$
186
  
$
9,661
 
Charge-offs  
-
   
-
   
-
   
-
   
(237
)
  
(72
)
  
-
   
(309
)
Recoveries  
19
   
-
   
42
   
-
   
37
   
23
   
-
   
121
 
Provision for loan losses  
(39
)
  
94
   
(126
)
  
79
   
203
   
(48
)
  
(163
)
  
-
 
Ending Balance 
$
721
  
$
416
  
$
2,465
  
$
4,396
  
$
1,288
  
$
164
  
$
23
  
$
9,473
 
                                 
Average loans  
121,772
   
43,887
   
205,194
   
337,255
   
116,006
   
7,449
       
831,563
 
Ratio of net charge-offs to average loans  
-0.02
%
  
0.00
%
  
-0.02
%
  
0.00
%
  
0.17
%
  
0.66
%
      
0.02
%

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

The following table shows the amount of the allowance for loan losses allocated to 487.3%each category and the ratio of both nonperforming loans and nonperforming assetscorresponding outstanding loan balances as of December 31, 2020. Management believes it hasthe periods indicated. Although the allowance for loan losses is allocated into these categories, the entire allowance for loan losses is available to cover loan losses in any category.

TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

  June 30,  December 31, 
  2022  2021 
(Dollars in thousands) Amount  
Percent of
Loans to
Total
Loans
  Amount  
Percent of
Loans to
Total
Loans
 
Commercial and industrial 
$
596
   
6.91
%
 
$
683
   
8.14
%
Real estate-construction  
479
   
7.09
%
  
459
   
6.93
%
Real estate-mortgage (1)  
2,676
   
27.36
%
  
2,390
   
24.46
%
Real estate-commercial  
4,436
   
43.69
%
  
4,787
   
45.36
%
Consumer  
1,482
   
14.06
%
  
1,362
   
14.04
%
Other  
227
   
0.89
%
  
184
   
1.07
%
Ending Balance 
$
9,896
   
100.00
%
 
$
9,865
   
100.00
%
                 
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
 

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

During the first six months of 2022, deposits decreased $4.1 million to $1.2 billion at June 30, 2022, compared to December 31, 2021. Noninterest bearing deposits increased $12.8 million and savings deposits and time deposits decreased $6.4 million and $10.4 million, respectively, during the same period. This increase in noninterest bearing deposits was due in part to opening new deposit accounts and higher balances in existing deposit accounts. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.

Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired (or PCI) or purchased performing.
41

Purchased performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the purchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used. The adequacy of the remaining discount as compared to the reserve that would be required under the Company’s allowance for loan loss methodology is evaluated quarterly. Should the methodology reserve exceed the remaining discount, additional provision would be recognized.

Capital Resources
Total stockholders’ equity as of June 30, 20212022 was $119.9$101.2 million, an increase of $2.8down 16.3% from $120.8 million or 2.4% from $117.1 million aton December 31, 2020. 2021. The increasedecrease was related to unrealized losses in the resultmarket value of increased retained earnings partially offset by net unrealized loss on available-for-sale securities available for sale, which are recognized as a component of accumulated other comprehensive (loss) income on the consolidated balance sheets. The movement in the unrealized gain/loss positionand was driven by changesincreases in market interest rates, and shiftthe repurchase of 199,095 shares, for an aggregate purchase price of $5.0 million, during the first six months under the Company’s Repurchase Program, partially offset by retained earnings. These common stock repurchases under the Repurchase Program also contributed to modest declines in portfolio composition.the Company’s regulatory capital ratios from December 31, 2021 to June 30, 2022.

The maintenance of appropriate levelsassessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s and the Bank’s capital is a management priority and is monitored on a regular basis.regularly reviewed. The Company’s principal goals related to the maintenanceCompany targets regulatory capital levels that will assure an adequate level of capital are to provide adequate capital to support the Company’s risk profile consistent with the board approved risk appetite, provide financial flexibility to support futureanticipated asset growth and client needs, comply with relevant laws,to absorb potential losses. While the Company will continue to look for opportunities to invest capital in profitable growth, the Company will also consider investing capital in other transactions, such as share repurchases, that facilitate improving shareholder return, as measured by ROE and earnings per share.

The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supervisory guidance, and provide a competitive return to stockholders. Risk-basedsupplemental capital ratios, which include CET1 capital,(Tier 2). Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and Totala qualifying portion of the allowance for loan losses. In addition, the Bank has made the one-time irrevocable election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Capital Rules in order to eliminate volatility of regulatory capital that can result from fluctuations in accumulated other comprehensive (loss) income and the inclusion of accumulated other comprehensive (loss) income in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in accumulated other comprehensive (loss) income, including unrealized losses on securities available for sale, do not affect regulatory capital amounts
shown in the table below for the Bank 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 ReserveFRB to expand the applicability of its small bank holding company policy statement,Small Bank Holding Company Policy Statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the Federal ReserveFRB 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 longernot be subject to regulatory capital requirements.  For an overview of the Basel III Capital Rules and the EGRRCPA, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s 2020 Annual Report on2021 Form 10-K.

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

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

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

TABLE 8: REGULATORY CAPITAL

 
2021
Regulatory
Minimums
 
June 30, 2021
    
2022
Regulatory
Minimums
     June 30, 2022   
2021
Regulatory
Minimums
     December 31, 2021   
Common Equity Tier 1 Capital to Risk-Weighted Assets 
4.500
%
 
11.49
%
 
4.500
%
 
11.70
%
 
4.500
%
 
12.57
%
Tier 1 Capital to Risk-Weighted Assets 
6.000
%
 
11.49
%
 
6.000
%
 
11.70
%
 
6.000
%
 
12.57
%
Tier 1 Leverage to Average Assets 
4.000
%
 
8.52
%
 
4.000
%
 
9.27
%
 
4.000
%
 
9.09
%
Total Capital to Risk-Weighted Assets 
8.000
%
 
12.51
%
 
8.000
%
 
12.65
%
 
8.000
%
 
13.61
%
Capital Conservation Buffer 
2.500
%
 
4.51
%
 
2.500
%
 
4.65
%
 
2.500
%
 
5.61
%
Risk-Weighted Assets (in thousands)    
$
931,383
    
$
1,049,616
   
$
952,218
 

On July 14, 2021, the Company issued $30.0 million in aggregate principal amount of 3.50% fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction.  The Notes initially bear interest at a fixed rate of 3.50% for five years and at theconvert to three month SOFR plus 286 basis points, resetting quarterly, thereafter.  The Notes were structured to qualify as Tier 2 capital for regulatory purposes and the Company expects that the Notes will beare included in certainthe Company’s Tier 2 capital as of June 30, 2022 and December 31, 2021.

Effective October 19, 2021, the Company’s Board of Directors approved a Repurchase Program. The Company is authorized pursuant to this program to repurchase up to 10% of the Company’s regulatory capital ratiosissued and outstanding common stock through November 30, 2022. Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program, if any, will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares as a percentage of September 30, 2021tangible book value, general market and thereafter.

Book value per share was $22.87economic conditions, applicable legal requirements and other conditions, and there is no assurance that the Company will purchase any shares under the Repurchase Program. The Company repurchased 199,095 shares of the Company’s common stock at June 30, 2021 as compared to $22.19 at June 30, 2020. Cash dividends were $1.3an aggregate cost of $5.0 million or $0.24 per share inunder the Repurchase Program during the first six months of 2021 and 2020, respectively.2022.

Contractual ObligationsLiquidity
InLiquidity is the normal course of business there are various outstanding contractual obligationsability of the Company that will requireto 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, outflows.interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year.

A major source of the Company’s liquidity is its large, stable deposit base. In addition, theresecondary liquidity sources are commitmentsavailable through the use of borrowed funds if the need should arise, including secured advances from the FHLB 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 duringFRB. As of the end of the second quarter of 20182022, the Company had $395.3 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks.

Based on the Company’s management of liquid assets, the availability of borrowed funds, and the Company’s ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs. Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide partial fundingadditional liquidity for the Citizens acquisition. Company’s operations.

The Company electedfollowing table sets forth information relating to pay the loan in fullCompany’s sources of liquidity and the outstanding commitments for use of liquidity at June 30, 2022. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.

TABLE 9: LIQUIDITY SOURCES AND USES

  June 30, 2022 
(dollars in thousands) Total  In Use  Available 
Sources:         
Federal funds lines of credit 
$
115,000
  
$
-
  
$
115,000
 
Federal Home Loan Bank advances  
395,341
   
-
   
395,341
 
Federal funds sold & balances at the Federal Reserve          
65,264
 
Securities, available for sale and unpledged at fair value          
173,251
 
Total short-term funding sources         
$
748,856
 
             
Uses: (1)
            
Unfunded loan commitments and lending lines of credit          
72,794
 
Letters of credit          
77
 
Total potential short-term funding uses          
72,871
 
Liquidity coverage ratio          
1027.6
%
             
(1) Represents partial draw levels based on loan segment.
 

The Company’s operating activities provided $10.0 million of cash during the six months ended June 30, 2022, compared to $15.9 million provided during the comparative 2021 period.  The Company’s investing activities used $100.2 million of cash during the first quartersix months of 2022, compared to $25.5 million of cash used during the first six months of 2021. The Company’s financing activities used $11.0 million and provided $44.6 million of cash during the six months ended June 30, 2022 and 2021, respectively.

Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity or operations. The Company’s internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company’s primary external source of liquidity is advances from the FHLB.

In the ordinary course of business the Company has entered into contractual obligations and has made other commitments to make future payments. As of June 30, 2021,2022, there have been no material changes outside the ordinary course of business as disclosed in the Company’s contractual obligations disclosed in the Company’s 2020 Annual Report on2021 Form 10-K.

Off-Balance Sheet Arrangements
As of June 30, 2021,2022, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2020 Annual Report on2021 Form 10-K.

Non-GAAP Financial Measures
In reporting the results of the quarter ended June 30, 2021,2022, the Company has provided supplemental financial measures on a tax equivalent or an adjusted basis.basis to disclose tangible book value or loans held for investment, less PPP loans, and related measures.  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
%
TABLE 10: Non-GAAP FINACIAL MEASURES

 Three Months Ended June 30, Six Months Ended June 30, 
(dollar in thousands, except share and per share data) 2022 2021 2022 2021 
Fully Taxable Equivalent Net Interest Income         
Net interest income (GAAP) 
$
10,321
 
$
9,106
 
$
19,958
 
$
19,262
 
FTE adjustment 
79
 
63
 
145
 
122
 
Net interest income (FTE) (non-GAAP) 
$
10,400
 
$
9,169
 
$
20,103
 
$
19,384
 
Noninterest income (GAAP) 
3,500
 
3,538
 
7,015
 
7,672
 
Total revenue (FTE) (non-GAAP) 
$
13,900
 
$
12,707
 
$
27,118
 
$
27,056
 
Noninterest expense (GAAP) 
11,090
 
10,535
 
21,803
 
21,093
 
         
Average earning assets 
$
1,233,329
 
$
1,179,276
 
$
1,239,643
 
$
1,164,834
 
Net interest margin 
3.36
%
 
3.10
%
 
3.25
%
 
3.33
%
Net interest margin (FTE) (non-GAAP) 
3.38
%
 
3.12
%
 
3.27
%
 
3.36
%
         
Tangible Book Value Per Share June 30, 2022
 
December 31, 2021
 
June 30, 2021   
Total Stockholders Equity (GAAP) 
$
101,150
 
$
120,818
 
$
119,928
   
Less goodwill 
1,650
 
1,650
 
1,650
   
Less core deposit intangible  
253
  
275
  
297
    
Tangible Stockholders Equity (non-GAAP) 
$
99,247
 
$
118,893
 
$
117,981
   
         
Shares issued and outstanding 
5,064,236
 
5,239,707
 
5,244,635
   
         
Book value per share 
$
19.97
 
$
23.06
 
$
22.87
   
Tangible book value per share 
$
19.60
 
$
22.69
 
$
22.50
   
         
ALLL as a Percentage of Loans Held for Investment June 30, 2021 December 31, 2020  June 30, 2022
 
December 31, 2021
 
June 30, 2021   
Loans held for investment (net of deferred fees and costs) (GAAP) 
$
832,673
 
$
836,300
  
$
914,272
 
$
843,526
 
$
832,673
   
Less PPP originations 
6,306
 
85,983
  
3,301
 
19,008
 
60,306
   
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP) 
$
826,367
 
$
750,317
  
$
910,971
 
$
824,518
 
$
772,367
   
                 
ALLL 
$
9,473
 
$
9,541
  
$
9,896
 
$
9,865
 
$
9,473
   
                 
ALLL as a Percentage of Loans Held for Investment 
1.14
%
 
1.14
%
 
1.08
%
 
1.17
%
 
1.14
%
   
ALLL as a Percentage of Loans Held for Investment, net of PPP originations 
1.23
%
 
1.27
%
 
1.09
%
 
1.20
%
 
1.23
%
   

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of the Company’s management, as well as estimates and assumptions made by, and information currently available to, management. These statements are inherently uncertain, and there can be no assurance that the underlying beliefes, 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 Quarterly Report on Form 10-Q may include, without limitation: statements regarding expected future operations and financial performance; current and future interest rate levels and fluctuations and potential impacts on the Company’s net interest margin, future economic conditions, loan and securities portfolios, asset quality, the allowance for loan losses, and provision for loan losses; the Company’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations; certain items that management does not expect to have an ongoing impact on consolidated net income; changes to net interest margin and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof; asset quality; adequacy of allowances for loan losses and the level of future chargeoffs; liquidity and capital levels; and the effect of future market and industry trends. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in:

interest rates, such as increases or volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates, and the impacts on macroeconomic conditions, customer and client behavior, the Company’s funding costs, and the Company’s loan and securities portfolios
general business conditions, as well as conditions within the financial markets
general economic conditions, including unemployment levels, supply chain disruptions, higher inflation, and slowdowns in economic growth, and also including the economic impacts of the COVID-19 pandemic
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, and the effect of these policies on interest rates and business in our markets
the quality or composition of the loan portfolios and the value of the collateral securing those loans
the effectiveness of the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening or tightening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace and durability of economic recovery and the heightened impact that COVID-19 may have on many of the risks described herein
the Company’s branch realignment initiatives
the Company’s technology, efficiency, and other strategic initiatives
the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
future levels of government defense spending particularly in the Company’s service area
the impact of potential changes in the political landscape and related policy changes, including monetary, regulatory and trade policies
the U.S. Government’s guarantee of repayment of student or small business loans purchased by the Company
the value of securities held in the Company’s investment portfolios
demand for loan products and the impact of changes in demand on loan growth
changes in the volume and mix of interest-earning assets and interest-bearing liabilities
the effects of management’s investment strategy and strategy to manage the net interest margin
the level of net charge-offs on loans and the adequacy of our allowance for loan and lease losses
performance of the Company’s dealer lending program
deposit flows
the strength of the Company’s counterparties
competition from both banks and non-banks
demand for financial services in the Company’s market area
implementation of new technologies
the Company’s ability to develop and maintain secure and reliable electronic systems
any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or their service providers
reliance on third parties for key services
cyber threats, attacks or events
potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, financial crises, political crises, war and other geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine, or public health events, such as the COVID-19 pandemic, and of governmental and societal responses thereto
the use of inaccurate assumptions in management’s modeling systems
technological risks and developments
the commercial and residential real estate markets
the demand in the secondary residential mortgage loan markets
expansion of the Company’s product offerings
accounting principles, policies and guidelines and elections made by the Company thereunder

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Company’s 2021 Form 10-K should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements are not statements of historical fact.  Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not intend or assume any obligation to update, revise, or clarify any forward-looking statements that may be made from time to time or on behalf of the Company, whether as a result of new information, future events, or otherwise, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.Controls and Procedures.

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

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

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

Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s second quarter ended June 30, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings.

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

Item 1A.Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2020 Annual Report on2021 Form 10-K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon vesting of restricted stock awards to satisfy tax withholding requirements. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the six months ended June 30, 2021,2022, the Company did not repurchase any shares related to the equity compensation plan awards.

During the six months ended June 30,Effective October 19, 2021, the Company did not repurchase any shares pursuant toCompany’s Board of Directors approved the Company’s stock repurchase program.Repurchase Program. The Company is authorized pursuant to this program to repurchase during any given calendar year, up to an aggregate10% of 5 percentthe Company’s issued and outstanding common stock through November 30, 2022. Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the Repurchase Program will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares as a percentage of tangible book value, general market and economic conditions, applicable legal requirements and other conditions. There were 76,100 shares repurchased under the Repurchase Program during the second quarter of 2022.  As of June 30, 2022, the Company has made aggregate common stock repurchases of 205,695 shares for an aggregate cost of $5.1 million under the Repurchase Program.

The following table summarizes repurchases of the Company’s common stock outstanding as of January 1 of that calendar year.occurred during the three months ended June 30, 2022.

Period 
Total number of shares
repurchased
  
Average price paid per
share ($)
  
Total number of shares
purchased as part of
publicly announced plans
or programs
  
Maximum number (or
approximate dollar value)
of shares that may yet be
purchased under the
plans or programs
 
April 1, 2022 - April 30, 2022  
41,900
  
$
25.57
   
41,900
   
349,179
 
May 1, 2022 - May 31, 2022  
5,500
   
24.95
   
5,500
   
343,679
 
June 1, 2022 - June 30, 2022  
28,700
   
24.89
   
28,700
   
314,979
 
Total  
76,100
  
$
25.27
   
76,100
     

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

None.

Item 5.Other Information.

Information Required by Item 407(c)(3) of Regulation S-K:
The Company has made no changes to the process by which security holders may recommend nominees to its Board of Directors, which is discussed in the Company’s Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders.

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.None.

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Item 6.Exhibits.

Exhibit
No.
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)
Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009)
  
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016)
  
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016)
  
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
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101
The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended June 30, 2021,2022, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for June 30, 2021)2022), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)
  
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021,2022, 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
   
August 16, 202115, 2022/s/Robert F. Shuford, Jr. 
 Robert F. Shuford, Jr. 
 Chairman, President & Chief Executive Officer 
 (Principal Executive Officer) 
   
August 16, 202115, 2022/s/Elizabeth T. Beale 
 Elizabeth T. Beale 
 Chief Financial Officer & Senior Vice President/Finance 
 (Principal Financial & Accounting Officer) 


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