Old Point Financial (OPOF) 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

or

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

For the transition period from____________ to___________

Commission File Number: 000-12896

OLD POINT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

101 East Queen Street, Hampton, Virginia 23669

(Address of principal executive offices) (Zip Code)

(757) 728-1200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $5.00 par value	OPOF	The NASDAQ Stock Market LLC

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

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

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

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

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

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

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

4,996,728 shares of common stock ($5.00 par value) outstanding as of November 1, 2022

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	1
	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2022 and 2021	2
	Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three and nine months ended September 30, 2022 and 2021	3
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2022 and 2021	4
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
	Signatures	49

i

GLOSSARY OF DEFINED TERMS

2021 Form 10-K	Annual Report on Form 10-K for the year ended December 31, 2021
ALLL	Allowance for Loan and Lease Losses
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	The Old Point National Bank of Phoebus
CET1	Common Equity Tier 1
Company	Old Point Financial Corporation and its subsidiaries
CBB	Community Bankers Bank
CBLR	Community Bank Leverage Ratio Framework
COVID-19	Novel coronavirus disease 2019
EGRRCPA	Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS	earnings per share
ESPP	Employee Stock Purchase Plan
Exchange Act	Securities Exchange Act of 1934, as amended
FDIC	Federal Deposit Insurance Corporation
FHLB	Federal Home Loan Bank
FRB	Federal Reserve Bank
GAAP	Generally Accepted Accounting Principles
Incentive Stock Plan	Old Point Financial Corporation 2016 Incentive Stock Plan
IRLC	Interest Rate Lock Commitments
NIM	Net Interest Margin
Notes	The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031
OAEM	Other Assets Especially Mentioned
OREO	Other Real Estate Owned
PPP	Paycheck Protection Program
PPPLF	Paycheck Protection Program Liquidity Facility
ROE	Return on Average Equity
SEC	U.S. Securities and Exchange Commission
SOFR	Secured overnight financing rate
TDR	Troubled Debt Restructuring
Wealth Management	Old Point Trust & Financial Services N.A.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Old Point Financial Corporation and Subsidiaries

Consolidated Balance Sheets

	September 30,			December 31,
(dollars in thousands, except share data)	2022			2021
	(unaudited)
Assets
Cash and due from banks	$	16,104		$	13,424
Interest-bearing due from banks		34,376			164,073
Federal funds sold		4,063			10,425
Cash and cash equivalents		54,543			187,922
Securities available-for-sale, at fair value		227,540			234,321
Restricted securities, at cost		1,389			1,034
Loans held for sale		774			3,287
Loans, net		945,132			833,661
Premises and equipment, net		31,208			32,134
Premises and equipment, held for sale		1,216			871
Bank-owned life insurance		31,293			28,168
Goodwill		1,650			1,650
Core deposit intangible, net		242			275
Other assets		22,019			14,832
Total assets	$	1,317,006		$	1,338,155
Liabilities & Stockholders’ Equity
Deposits:
Noninterest-bearing deposits	$	437,247		$	421,531
Savings deposits		592,239			586,450
Time deposits		152,822			169,118
Total deposits		1,182,308			1,177,099
Overnight repurchase agreements		3,981			4,536
Federal Reserve Bank borrowings		-			480
Long term borrowings		29,505			29,407
Accrued expenses and other liabilities		7,700			5,815
Total liabilities		1,223,494			1,217,337
Stockholders’ equity:
Common stock, $5 par value, 10,000,000 shares authorized; 4,996,728 and 5,239,707 shares outstanding (includes 46,092 and 38,435 of nonvested restricted stock, respectively)		24,753			26,006
Additional paid-in capital		16,450			21,458
Retained earnings		76,156			71,679
Accumulated other comprehensive (loss) income, net		(23,847	)		1,675
Total stockholders’ equity		93,512			120,818
Total liabilities and stockholders’ equity	$	1,317,006		$	1,338,155

See Notes to Consolidated Financial Statements.

1

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Income

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(unaudited, dollars in thousands, except share and per share data)	2022		2021		2022		2021
Interest and Dividend Income:
Loans, including fees	$	10,506	$	9,692	$	29,173	$	28,460
Due from banks		252		68		533		163
Federal funds sold		11		-		18		-
Securities:
Taxable		1,297		853		3,409		2,414
Tax-exempt		272		186		732		558
Dividends and interest on all other securities		30		16		58		57
Total interest and dividend income		12,368		10,815		33,923		31,652
Interest Expense:
Checking and savings deposits		147		243		471		693
Time deposits		312		441		993		1,536
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		43		3		45		33
Long term borrowings		295		252		885		252
Total interest expense		797		939		2,394		2,514
Net interest income		11,571		9,876		31,529		29,138
Provision for loan losses		402		360		1,073		510
Net interest income after provision for loan losses		11,169		9,516		30,456		28,628
Noninterest Income:
Fiduciary and asset management fees		953		1,032		3,086		3,110
Service charges on deposit accounts		795		691		2,278		1,997
Other service charges, commissions and fees		1,143		1,125		3,339		3,275
Bank-owned life insurance income		227		195		653		625
Mortgage banking income		86		460		419		2,029
Other operating income		161		103		605		242
Total noninterest income		3,365		3,606		10,380		11,278
Noninterest Expense:
Salaries and employee benefits		6,821		6,558		19,854		19,012
Occupancy and equipment		1,184		1,185		3,488		3,510
Data processing		1,206		1,187		3,447		3,427
Customer development		136		78		298		225
Professional services		647		625		1,915		1,790
Employee professional development		230		154		769		487
Other taxes		212		186		637		608
ATM and other losses		112		68		226		224
Other operating expenses		1,017		887		2,734		2,738
Total noninterest expense		11,565		10,928		33,368		32,021
Income before income taxes		2,969		2,194		7,468		7,885
Income tax expense		427		286		1,003		1,123
Net income	$	2,542	$	1,908	$	6,465	$	6,762
Basic Earnings per Share:
Weighted average shares outstanding		5,015,712		5,245,042		5,095,716		5,235,749
Net income per share of common stock	$	0.51	$	0.36	$	1.27	$	1.29
Diluted Earnings per Share:
Weighted average shares outstanding		5,015,712		5,245,172		5,095,768		5,235,793
Net income per share of common stock	$	0.51	$	0.36	$	1.27	$	1.29

See Notes to Consolidated Financial Statements.

2

Old Point Financial Corporation

Consolidated Statements of Comprehensive (Loss) Income

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(unaudited, dollars in thousands)	2022			2021			2022			2021
Net income	$	2,542		$	1,908		$	6,465		$	6,762
Other comprehensive loss, net of tax
Net unrealized loss on available-for-sale securities		(7,997	)		(497	)		(25,522	)		(1,495	)
Other comprehensive loss, net of tax		(7,997	)		(497	)		(25,522	)		(1,495	)
Comprehensive (loss) income	$	(5,455	)	$	1,411		$	(19,057	)	$	5,267

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)													Accumulated
	Shares of						Additional						Other
	Common			Common			Paid-in			Retained			Comprehensive
	Stock			Stock			Capital			Earnings			Income (Loss)			Total
THREE MONTHS ENDED SEPTEMBER 30, 2022
Balance at June 30, 2022		5,018,144		$	25,091		$	17,643		$	74,266		$	(15,850	)	$	101,150
Net income		-			-			-			2,542			-			2,542
Other comprehensive loss, net of tax		-			-			-			-			(7,997	)		(7,997	)
Employee Stock Purchase Plan share issuance		1,492			7			26			-			-			33
Common stock purchased		(69,000	)		(345	)		(1,340	)		-			-			(1,685	)
Restricted stock vested		-			-			-			-			-			-
Stock-based compensation expense		-			-			121			-			-			121
Cash dividends ($0.13 per share)		-			-			-			(652	)		-			(652	)
Balance at end of period		4,950,636		$	24,753		$	16,450		$	76,156		$	(23,847	)	$	93,512
THREE MONTHS ENDED SEPTEMBER 30, 2021
Balance at June 30, 2021		5,205,532		$	26,028		$	21,372		$	69,457		$	3,071		$	119,928
Net income		-			-			-			1,908			-			1,908
Other comprehensive loss, net of tax		-			-			-			-			(497	)		(497	)
Employee Stock Purchase Plan share issuance		1,207			6			20			-			-			26
Restricted stock vested		-			-			-			-			-			-
Stock-based compensation expense		-			-			84			-			-			84
Cash dividends ($0.13 per share)		-			-			-			(682	)		-			(682	)
Balance at end of period		5,206,739		$	26,034		$	21,476		$	70,683		$	2,574		$	120,767

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in thousands, except share and per share data)													Accumulated
	Shares of						Additional						Other
	Common			Common			Paid-in			Retained			Comprehensive
	Stock			Stock			Capital			Earnings			Income (Loss)			Total
NINE MONTHS ENDED SEPTEMBER 30, 2022
Balance at December 31, 2021		5,201,272		$	26,006		$	21,458		$	71,679		$	1,675		$	120,818
Net income		-			-			-			6,465			-			6,465
Other comprehensive loss, net of tax		-			-			-			-			(25,522	)		(25,522	)
Employee Stock Purchase Plan share issuance		4,307			21			78			-			-			99
Common stock purchased		(268,095	)		(1,340	)		(5,315	)		-			-			(6,655	)
Restricted stock vested		13,152			66			(66	)		-			-			-
Stock-based compensation expense		-			-			295			-			-			295
Cash dividends ($0.39 per share)		-			-			-			(1,988	)		-			(1,988	)
Balance at end of period		4,950,636		$	24,753		$	16,450		$	76,156		$	(23,847	)	$	93,512
NINE MONTHS ENDED SEPTEMBER 30, 2021
Balance at December 31, 2020		5,194,443		$	25,972		$	21,245		$	65,859		$	4,069		$	117,145
Net income		-			-			-			6,762			-			6,762
Other comprehensive loss, net of tax		-			-			-			-			(1,495	)		(1,495	)
Employee Stock Purchase Plan share issuance		3,775			19			60			-			-			79
Restricted stock vested		8,521			43			(43	)		-			-			-
Stock-based compensation expense		-			-			214			-			-			214
Cash dividends ($0.37 per share)		-			-			-			(1,938	)		-			(1,938	)
Balance at end of period		5,206,739		$	26,034		$	21,476		$	70,683		$	2,574		$	120,767

See Notes to Consolidated Financial Statements.

4

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
(unaudited, dollars in thousands)	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,465		$	6,762
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,550			1,559
Amortization of right of use lease asset		240			266
Accretion related to acquisition, net		10			(5	)
Amortization of subordinated debt issuance costs		98			27
Provision for loan losses		1,073			510
Net amortization of securities		923			709
Decrease in loans held for sale, net		2,513			8,673
Income from bank owned life insurance		(653	)		(625	)
Stock compensation expense		295			214
Deferred tax (benefit)		-			(12	)
Increase in other assets		(287	)		(560	)
Increase in accrued expenses and other liabilities		1,557			94
Net cash provided by operating activities		13,784			17,612
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(47,543	)		(55,698	)
(Purchase of) proceeds from redemption of restricted securities, net		(355	)		333
Proceeds from maturities and calls of available-for-sale securities		3,950			8,779
Proceeds from sales of available-for-sale securities		3,950			4,330
Paydowns on available-for-sale securities		13,195			13,957
Net increase in loans held for investment		(112,521	)		(4,180	)
Purchases of bank-owned life insurance		(2,500	)		-
Purchases of premises and equipment		(969	)		(1,130	)
Proceeds from sale of premises and equipment		-			31
Net cash used in investing activities		(142,793	)		(33,578	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits		15,716			32,384
Increase in savings deposits		5,789			71,664
Decrease in time deposits		(16,296	)		(20,578	)
Decrease in federal funds purchased, repurchase agreements and other borrowings, net		(555	)		(3,473	)
Repayment of Federal Reserve Bank borrowings		(480	)		(27,652	)
Increase in long term borrowings		-			29,347
Proceeds from ESPP issuance		99			79
Repurchase of common stock		(6,655	)		-
Cash dividends paid on common stock		(1,988	)		(1,938	)
Net cash (used in) provided by financing activities		(4,370	)		79,833
Net (decrease) increase in cash and cash equivalents		(133,379	)		63,867
Cash and cash equivalents at beginning of period		187,922			120,437
Cash and cash equivalents at end of period	$	54,543		$	184,304
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,609		$	2,442
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized (loss) gain on securities available-for-sale	$	(32,307	)	$	(1,892	)
Former bank property transferred from fixed assets to held for sale assets	$	345		$	902
Right of use lease asset and liability	$	327		$	-

See Notes to Consolidated Financial Statements.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

THE COMPANY

Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through two wholly-owned subsidiaries, the Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Wealth Management). As of September 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. Wealth Management 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 Wealth Management. All significant intercompany balances and transactions have been eliminated in consolidation.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at September 30, 2022 and December 31, 2021, the statements of income, comprehensive (loss) income, and changes in stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the statements of cash flows for the nine months ended September 30, 2022 and 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 2021 Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (FASB) issued 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.  The 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 cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption. The Company has established a committee to oversee the adoption of ASC 326. The Company has engaged a vendor to assist in 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 to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326, and is continuing to develop 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, charge-offs and recoveries of loans, and certain loan modifications. The Company has not yet determined an estimate of the effect of these changes, which will be determined based on the facts and circumstances at the time of adoption. 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.

6

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. 2022-02 will have on its consolidated financial statements.

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:

	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	23,092	$	-	$	(2,447	)	$	20,645
Obligations of U.S. Government agencies		34,885		-		(1,077	)		33,808
Obligations of state and political subdivisions		78,226		-		(13,752	)		64,474
Mortgage-backed securities		91,567		26		(10,670	)		80,923
Money market investments		1,965		-		-			1,965
Corporate bonds and other securities		27,991		-		(2,266	)		25,725
	$	257,726	$	26	$	(30,212	)	$	227,540

	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	15,052	$	-	$	(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		-		-			2,413
Corporate bonds and other securities		23,441		261		(117	)		23,585
	$	232,200	$	3,632	$	(1,511	)	$	234,321

7

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

	September 30, 2022
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	200	$	193
Due after one year through five years		19,953		18,938
Due after five through ten years		85,547		75,346
Due after ten years		150,062		131,098
Other securities, restricted		1,964		1,965
	$	257,726	$	227,540

The Company did not realize any gains or losses on the sale of investment securities during the nine months ended September 30, 2022 and 2021, respectively.

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are deemed to be temporarily impaired as of September 30, 2022 and December 31, 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:

	September 30, 2022
	Less than 12 months				12 months or more				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(Dollars in thousands)	Losses		Value		Losses		Value		Losses		Value
U.S. Treasury securities	$	1,151	$	12,898	$	1,296	$	7,747	$	2,447	$	20,645
Obligations of U.S. Government agencies		596		22,316		481		11,492		1,077		33,808
Obligations of state and political subdivisions		10,427		53,589		3,325		10,040		13,752		63,629
Mortgage-backed securities		5,508		54,188		5,162		25,730		10,670		79,918
Corporate bonds and other securities		1,522		16,719		744		7,005		2,266		23,724
Total securities available-for-sale	$	19,204	$	159,710	$	11,008	$	62,014	$	30,212	$	221,724

	December 31, 2021
	Less than 12 months				12 months or more				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(Dollars in thousands)	Losses		Value		Losses		Value		Losses		Value
U.S. Treasury securities	$	148	$	14,904	$	-	$	-	$	148	$	14,904
Obligations of U.S. Government agencies		131		19,181		37		5,042		168		24,223
Obligations of state and political subdivisions		277		20,673		-		-		277		20,673
Mortgage-backed securities		608		35,882		193		6,450		801		42,332
Corporate bonds and other securities		117		9,833		-		-		117		9,833
Total securities available-for-sale	$	1,281	$	100,473	$	230	$	11,492	$	1,511	$	111,965

The number of investments in an unrealized loss position as of September 30, 2022 and December 31, 2021 were 171 and 72, respectively. Certain investments within the Company’s portfolio had unrealized losses for more than twelve months at September 30, 2022 and December 31, 2021, as shown in the tables above. The primary 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 September 30, 2022, and no other-than-temporary impairment loss has been recognized in net income during the first nine months of 2022, based primarily on the following: (i) changes in fair value were caused primarily by fluctuations in interest rates, (ii) securities with unrealized losses had generally high credit quality, (iii) the Company intends to hold these investments until recovery of its investment and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and (iv) issuers have continued to make timely payments of principal and interest.

Restricted Stock

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.

8

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)	September 30, 2022		December 31, 2021
Mortgage loans on real estate:
Residential 1-4 family	$	169,247	$	130,776
Commercial - owner occupied		207,131		198,413
Commercial - non-owner occupied		202,702		184,190
Multifamily		25,192		19,050
Construction		68,005		58,440
Second mortgages		8,718		7,877
Equity lines of credit		53,228		48,665
Total mortgage loans on real estate		734,223		647,411
Commercial and industrial loans		66,724		68,690
Consumer automobile loans		127,961		85,023
Other consumer loans		23,216		33,418
Other (1)		2,941		8,984
Total loans, net of deferred fees		955,065		843,526
Less:  Allowance for loan losses		9,933		9,865
Loans, net of allowance and deferred fees (2)	$	945,132	$	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 $323 thousand and $304 thousand at September 30, 2022 and December 31, 2021, respectively.

(2) Net deferred loan fees totaled $936 thousand and $1.3 million at September 30, 2022 and December 31, 2021, respectively.

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.

9

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

Credit Quality Information
As of September 30, 2022
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	169,090	$	-	$	157	$	-	$	169,247
Commercial - owner occupied		204,730		290		2,111		-		207,131
Commercial - non-owner occupied		202,153		-		549		-		202,702
Multifamily		25,192		-		-		-		25,192
Construction		66,847		-		1,158		-		68,005
Second mortgages		8,718		-		-		-		8,718
Equity lines of credit		53,228		-		-		-		53,228
Total mortgage loans on real estate	$	729,958	$	290	$	3,975	$	-	$	734,223
Commercial and industrial loans		66,324		-		400		-		66,724
Consumer automobile loans		127,944		-		17		-		127,961
Other consumer loans		23,216		-		-		-		23,216
Other		2,941		-		-		-		2,941
Total	$	950,383	$	290	$	4,392	$	-	$	955,065

Credit Quality Information
As of December 31, 2021
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	130,584	$	-	$	192	$	-	$	130,776
Commercial - owner occupied		195,512		788		2,113		-		198,413
Commercial - non-owner occupied		183,093		434		663		-		184,190
Multifamily		19,050		-		-		-		19,050
Construction		57,224		218		998		-		58,440
Second mortgages		7,877		-		-		-		7,877
Equity lines of credit		48,665		-		-		-		48,665
Total mortgage loans on real estate	$	642,005	$	1,440	$	3,966	$	-	$	647,411
Commercial and industrial loans		68,261		-		429		-		68,690
Consumer automobile loans		85,002		-		21		-		85,023
Other consumer loans		33,418		-		-		-		33,418
Other		8,984		-		-		-		8,984
Total	$	837,670	$	1,440	$	4,416	$	-	$	843,526

As of September 30, 2022 and December 31, 2021, the Company did not 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.

10

Age Analysis of Past Due Loans as of September 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	$	109	$	425	$	-	$	157	$	168,556	$	169,247
Commercial - owner occupied		-		536		-		2,111		204,484		207,131
Commercial - non-owner occupied		-		-		-		549		202,153		202,702
Multifamily		-		-		-		-		25,192		25,192
Construction		-		87		-		1,158		66,760		68,005
Second mortgages		-		-		-		-		8,718		8,718
Equity lines of credit		60		-		-		-		53,168		53,228
Total mortgage loans on real estate	$	169	$	1,048	$	-	$	3,975	$	729,031	$	734,223
Commercial and industrial loans		7		-		35		400		66,282		66,724
Consumer automobile loans		1,174		152		250		-		126,385		127,961
Other consumer loans		309		173		45		-		22,689		23,216
Other		18		15		-		-		2,908		2,941
Total	$	1,677	$	1,388	$	330	$	4,375	$	947,295	$	955,065

(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.

There were no past due loans guaranteed by the federal government as of September 30, 2022.

Age 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		Nonaccrual (2)		Total Current Loans (1)		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	120	$	-	$	-	$	191	$	130,465	$	130,776
Commercial - owner occupied		-		-		-		-		198,413		198,413
Commercial - non-owner occupied		-		-		-		113		184,077		184,190
Multifamily		-		-		-		-		19,050		19,050
Construction		-		-		-		-		58,440		58,440
Second mortgages		24		-		-		-		7,853		7,877
Equity lines of credit		51		-		-		-		48,614		48,665
Total mortgage loans on real estate	$	195	$	-	$	-	$	304	$	646,912	$	647,411
Commercial and industrial loans		37		-		169		174		68,310		68,690
Consumer automobile loans		814		118		296		-		83,795		85,023
Other consumer loans		1,284		439		550		-		31,145		33,418
Other		31		3		10		-		8,940		8,984
Total	$	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 - 100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.4 million at December 31, 2021.

11

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)	September 30, 2022		December 31, 2021
Mortgage loans on real estate:
Residential 1-4 family	$	157	$	191
Commercial - owner occupied		2,111		-
Commercial - non-owner occupied		549		113
Construction and land development		1,158		-
Total mortgage loans on real estate		3,975		304
Commercial and industrial loans		400		174
Total	$	4,375	$	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:

	Nine Months Ended September 30,
(dollars in thousands)	2022			2021
Interest income that would have been recorded under original loan terms		$	92		$	8
Actual interest income recorded for the period			11			2
Reduction in interest income on nonaccrual loans		$	81		$	6

TROUBLED DEBT RESTRUCTURINGS

The Company’s loan portfolio may include certain loans 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 discussed further below under Impaired Loans.

12

There were no new TDRs in the nine months ended September 30, 2022 and 2021.

At September 30, 2022 and 2021, the Company had no outstanding commitments to disburse additional funds on any TDR. The Company had no loans secured by residential 1 - 4 family real estate in the process of foreclosure at September 30, 2022 and 2021.

In the three and nine months ended September 30, 2022 and 2021, there were no defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

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

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 the 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 cash 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 with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class
									For the Nine Months Ended
	As of September 30, 2022								September 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	$	290	$	45	$	239	$	35	$	288	$	5
Commercial		4,469		3,687		617		7		4,344		-
Construction		1,236		998		236		55		1,235		3
Second mortgages		-		-		-		-		-		-
Total mortgage loans on real estate		5,995		4,730		1,092		97		5,867		8
Commercial and industrial loans		399		400		-		-		399		5
Other consumer loans		3		2		-		-		2		-
Total	$	6,397	$	5,132	$	1,092	$	97	$	6,268	$	13

13

Impaired Loans by Class
									For the Year Ended
	As of December 31, 2021								December 31, 2021
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	353	$	25	$	300	$	30	$	328	$	7
Commercial		610		178		413		8		601		1
Construction		80		79		-		-		80		4
Second mortgages		127		-		125		3		126		5
Total mortgage loans on real estate		1,170		282		838		41		1,135		17
Commercial and industrial loans		188		-		174		87		181		17
Other consumer loans		9		7		-		-		8		-
Total	$	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 September 30, 2022 and December 31, 2021 management used eight twelve-quarter migration periods.

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

14

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.

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 result in additional increases in the provision for loan losses.

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 $9.9 million adequate to cover estimable and probable loan losses inherent in the loan portfolio at September 30, 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 nine months ended September 30, 2022
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage (1)			Real Estate - Commercial			Consumer (2)			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459	$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(297	)		-		(25	)		-			(1,095	)		(281	)		-		(1,698	)
Recoveries		131			-		52			22			389			99			-		693
Provision for loan losses		107			70		190			(464	)		982			188			-		1,073
Ending Balance	$	624		$	529	$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933
Individually evaluated for impairment	$	-		$	55	$	35		$	7		$	-		$	-		$	-	$	97
Collectively evaluated for impairment		624			474		2,572			4,338			1,638			190			-		9,836
Ending Balance	$	624		$	529	$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933
Loans Balances:
Individually evaluated for impairment		400			1,234		284			4,304			2			-			-		6,224
Collectively evaluated for impairment		66,324			66,771		256,101			405,529			151,175			2,941			-		948,841
Ending Balance	$	66,724		$	68,005	$	256,385		$	409,833		$	151,177		$	2,941		$	-	$	955,065

(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, 2021
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage (1)			Real Estate - Commercial		Consumer (2)			Other			Unallocated			Total
Allowance for loan losses:
Balance, beginning	$	650		$	339	$	2,560		$	4,434	$	1,302		$	123		$	133		$	9,541
Charge-offs		(27	)		-		(14	)		-		(800	)		(278	)		-			(1,119	)
Recoveries		41			-		76			44		390			98			-			649
Provision for loan losses		19			120		(232	)		309		470			241			(133	)		794
Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	-		$	9,865
Individually evaluated for impairment	$	87		$	-	$	33		$	8	$	-		$	-		$	-		$	128
Collectively evaluated for impairment		596			459		2,357			4,779		1,362			184			-			9,737
Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	-		$	9,865
Loans Balances:
Individually evaluated for impairment		174			79		450			591		7			-			-			1,301
Collectively evaluated for impairment		68,516			58,361		205,918			382,012		118,434			8,984			-			842,225
Ending Balance	$	68,690		$	58,440	$	206,368		$	382,603	$	118,441		$	8,984		$	-		$	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.

15

Note 4. Leases

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

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

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

(dollars in thousands)	September 30, 2022
Lease liabilities	$	1,124
Right-of-use assets	$	1,093
Weighted average remaining lease term	3.35 years
Weighted average discount rate		2.04	%

	Three Months Ended September 30,				Nine Months Ended September 30,
Lease cost (in thousands)	2022		2021		2022		2021
Operating lease cost	$	87	$	81	$	251	$	266
Total lease cost	$	87	$	81	$	251	$	266
Cash paid for amounts included in the measurement of lease liabilities	$	85	$	82	$	254	$	269

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

	As of
Lease payments due (in thousands)	September 30, 2022
Three months ending December 31, 2022	$	91
Twelve months ending December 31, 2023		315
Twelve months ending December 31, 2024		310
Twelve months ending December 31, 2025		265
Thereafter		214
Total undiscounted cash flows	$	1,195
Discount		(71	)
Lease liabilities	$	1,124

Note 5. Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both September 30, 2022 and December 31, 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 $1.7 million and $1.9 million at September 30, 2022 and December 31, 2021, respectively. The expected terms of these investments and the related tax benefits run through 2033. There were no additional capital calls expected for the funds at September 30, 2022.

16

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Tax credits and other benefits
Amortization of operating losses	$	51	$	51	$	153	$	151
Tax benefit of operating losses*		11		11		32		32
Tax credits		89		89		267		272
Total tax benefits	$	100	$	100	$	299	$	304

* 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 September 30, 2022 and December 31, 2021, the remaining credit available from these lines totaled $115.0 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $392.1 million and $391.3 as of September 30, 2022 and December 31, 2021, respectively.

SHORT-TERM BORROWINGS

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

(dollars in thousands)	September 30, 2022			December 31, 2021
Overnight repurchase agreements	$	3,981		$	4,536
Total short-term borrowings	$	3,981		$	4,536
Maximum month-end outstanding balance	$	24,134		$	12,239
Average outstanding balance during the period	$	7,088		$	7,293
Average interest rate (year-to-date)		0.84	%		0.10	%
Average interest rate at end of period		0.05	%		0.10	%

LONG-TERM BORROWINGS

At September 30, 2022 the Company had fully repaid the borrowings under the FRB’s PPPLF. At December 31, 2021 the Company had $480 thousand outstanding in long-term borrowings under the PPPLF.

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

Note 7. Commitments and Contingencies

CREDIT-RELATED FINANCIAL INSTRUMENTS

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

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

17

The following financial instruments whose contract amounts represent credit risk were outstanding at September 30, 2022 and December 31, 2021:

	September 30,		December 31,
(dollars in thousands)	2022		2021
Commitments to extend credit:
Home equity lines of credit	$	84,467	$	71,751
Commercial real estate, construction and development loans committed but not funded		71,303		42,683
Other lines of credit (principally commercial)		50,091		52,695
Total	$	205,861	$	167,129
Letters of credit	$	881	$	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 September 30, 2022 only restricted stock has been granted under the Incentive Stock Plan.

Restricted stock activity for the nine months ended September 30, 2022 is summarized below:

				Weighted Average
				Grant Date
	Shares			Fair Value
Nonvested, January 1, 2022		38,435		$	20.49
Issued		20,809			25.65
Vested		(13,152	)		21.93
Forfeited		-			-
Nonvested, September 30, 2022		46,092		$	22.41

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.41 years.

The fair value of restricted stock granted during the nine months ended September 30, 2022 and 2021 was $534 thousand and $403 thousand, respectively.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $591 thousand as of September 30, 2022 and $411 thousand as of September 30, 2021.

Stock-based compensation expense was $121 thousand and $84 thousand for the three months ended September 30, 2022 and 2021, respectively, and $295 thousand and $214 thousand for the nine months ended September 30, 2022 and 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 2021 and for the first nine months of 2022.

Total stock purchases under the ESPP amounted to 4,307 shares during the nine months ended September 30, 2022. At September 30, 2022, the Company had 223,236 remaining shares reserved for issuance under the ESPP.

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Note 9. Stockholders’ Equity and Earnings per Share

STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive Income (Loss)

There were no amounts reclassified out of accumulated other comprehensive income (loss), by category, during the three or nine month periods ended September 30, 2022 or 2021, respectively.

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

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive (Loss) Income
Three Months Ended September 30, 2022
Balance at beginning of period	$	(15,850	)	$	(15,850	)
Net other comprehensive loss		(7,997	)		(7,997	)
Balance at end of period	$	(23,847	)	$	(23,847	)
Three Months Ended September 30, 2021
Balance at beginning of period	$	3,071		$	3,071
Net other comprehensive loss		(497	)		(497	)
Balance at end of period	$	2,574		$	2,574

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive (Loss) Income
Nine Months Ended September 30, 2022
Balance at beginning of period	$	1,675		$	1,675
Net other comprehensive loss		(25,522	)		(25,522	)
Balance at end of period	$	(23,847	)	$	(23,847	)
Nine Months Ended September 30, 2021
Balance at beginning of period	$	4,069		$	4,069
Net other comprehensive loss		(1,495	)		(1,495	)
Balance at end of period	$	2,574		$	2,574

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

	Three Months Ended September 30, 2022
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(10,124	)	$	(2,127	)	$	(7,997	)
Total change in accumulated other comprehensive income, net	$	(10,124	)	$	(2,127	)	$	(7,997	)
	Three Months Ended September 30, 2021
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(629	)	$	(132	)	$	(497	)
Total change in accumulated other comprehensive income, net	$	(629	)	$	(132	)	$	(497	)

19

	Nine Months Ended September 30, 2022
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(32,307	)	$	(6,785	)	$	(25,522	)
Total change in accumulated other comprehensive income, net	$	(32,307	)	$	(6,785	)	$	(25,522	)
	Nine Months Ended September 30, 2021
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(1,892	)	$	(397	)	$	(1,495	)
Total change in accumulated other comprehensive income, net	$	(1,892	)	$	(397	)	$	(1,495	)

EARNINGS PER COMMON SHARE

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares attributable to the ESPP.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2022 and 2021:

(dollars in thousands except per share data)	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share  Amount
Three Months Ended September 30, 2022
Net income, basic	$	2,542		5,016	$	0.51
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	2,542		5,016	$	0.51
Three Months Ended September 30, 2021
Net income, basic	$	1,908		5,245	$	0.36
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	1,908		5,245	$	0.36
Nine Months Ended September 30, 2022
Net income, basic	$	6,465		5,096	$	1.27
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	6,465		5,096	$	1.27
Nine Months Ended September 30, 2021
Net income, basic	$	6,762		5,236	$	1.29
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	6,762		5,236	$	1.29

The Company had no antidilutive shares outstanding in the three and nine months ended September 30, 2022 and 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 nine months of 2022, 268,095 shares, for an aggregate purchase price of $6.7 million, were repurchased by the Company under the Repurchase Plan, and of these shares, approximately 69,000 shares, for an aggregate purchase price of $1.7 million, were repurchased by the Company during the third 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.

20

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.

21

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

			Fair Value Measurements at September 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)
Assets:
Available-for-sale securities
U.S. Treasury securities	$	20,645	$	-	$	20,645	$	-
Obligations of  U.S. Government agencies		33,808		-		33,808		-
Obligations of state and political subdivisions		64,474		-		64,474		-
Mortgage-backed securities		80,923		-		80,923		-
Money market investments		1,965		-		1,965		-
Corporate bonds and other securities		25,725		-		25,725		-
Total available-for-sale securities		227,540		-		227,540		-
Derivatives
Interest rate lock		15		-		15		-
Interest rate swap on loans		1,585		-		1,585		-
Total assets	$	229,140	$	-	$	229,140	$	-
Liabilities:
Derivatives
Interest rate swap on loans		1,585		-		1,585		-
Total liabilities	$	1,585	$	-	$	1,585	$	-

			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)
Available-for-sale securities
U.S. Treasury securities	$	14,904	$	-	$	14,904	$	-
Obligations of  U.S. Government agencies		38,558		-		38,558		-
Obligations of state and political subdivisions		65,803		-		65,803		-
Mortgage-backed securities		89,058		-		89,058		-
Money market investments		2,413		-		2,413		-
Corporate bonds and other securities		23,585		-		23,585		-
Total available-for-sale securities	$	234,321	$	-	$	234,321	$	-
Derivatives
Interest rate lock		43		-		43		-
Interest rate swap on loans		181		-		181		-
Total assets	$	234,545	$	-	$	234,545	$	-
Liabilities:
Derivatives
Interest rate swap on loans		181		-		181		-
Total liabilities	$	181	$	-	$	181	$	-

22

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 the 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 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.

23

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

			Carrying Value at September 30, 2022
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Mortgage loans on real estate:
Construction	$	110	$	-	$	-	$	110
Total	$	110	$	-	$	-	$	110
Loans
Loans held for sale	$	774	$	-	$	774	$	-

			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)
Impaired loans
Mortgage loans on real estate:
Commercial loans	$	87	$	-	$	-	$	87
Total	$	87	$	-	$	-	$	87
Loans
Loans held for sale	$	3,287	$	-	$	3,287	$	-

The following tables display the quantitative information about Level 3 Fair Value Measurements as of the dates indicated.

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at September 30, 2022		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Construction	$	110	Market comparables	Selling costs		3.00% -8.00% (7.25	%)

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

24

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

			Fair Value Measurements at September 30, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	54,543	$	54,543	$	-	$	-
Securities available-for-sale		227,540		-		227,540		-
Restricted securities		1,389		-		1,389		-
Loans held for sale		774		-		774		-
Loans, net of allowances for loan losses		945,132		-		-		925,965
Derivatives
Interest rate lock		15		-		15		-
Interest rate swap on loans		1,585		-		1,585		-
Bank owned life insurance		31,293		-		31,293		-
Accrued interest receivable		3,773		-		3,773		-
Liabilities
Deposits	$	1,182,308	$	-	$	1,182,220	$	-
Overnight repurchase agreements		3,981		-		3,981		-
Long term borrowings		29,505		-		25,240		-
Derivatives
Interest rate swap on loans		1,585		-		1,585		-
Accrued interest payable		380		-		380		-

			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)
Assets
Cash and cash equivalents	$	187,922	$	187,922	$	-	$	-
Securities available-for-sale		234,321		-		234,321		-
Restricted securities		1,034		-		1,034		-
Loans held for sale		3,287		-		3,287		-
Loans, net of allowances for loan losses		833,661		-		-		834,693
Derivatives
Interest rate lock		43		-		43		-
Interest rate swap on loans		181		-		181		-
Bank owned life insurance		28,168		-		28,168		-
Accrued interest receivable		3,339		-		3,339		-
Liabilities
Deposits	$	1,177,099	$	-	$	1,179,631	$	-
Overnight repurchase agreements		4,536		-		4,536		-
Federal Reserve Bank borrowings		480		-		480		-
Long term borrowings		29,407		-		29,657		-
Derivatives
Interest rate swap on loans		181		-		181		-
Accrued interest payable		693		-		693		-

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Note 11. Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: the Bank, the Wealth Management, and the Company (for purposes of this Note, the Parent). Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Wealth Management’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly interest and dividends received from the Bank and Wealth Management. The Company has no other segments. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended September 30, 2022 and 2021 follows:

	Three Months Ended September 30, 2022
(dollars in thousands)	Bank		Wealth Management		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	12,347	$	21	$	2,968		$	(2,968	)	$	12,368
Income from fiduciary activities		-		953		-			-			953
Other income		2,085		342		50			(65	)		2,412
Total operating income		14,432		1,316		3,018			(3,033	)		15,733
Expenses
Interest expense		502		-		295			-			797
Provision for loan losses		402		-		-			-			402
Salaries and employee benefits		5,733		902		186			-			6,821
Other expenses		4,413		288		108			(65	)		4,744
Total operating expenses		11,050		1,190		589			(65	)		12,764
Income before taxes		3,382		126		2,429			(2,968	)		2,969
Income tax expense (benefit)		514		27		(114	)		-			427
Net income	$	2,868	$	99	$	2,543		$	(2,968	)	$	2,542
Capital expenditures	$	355	$	13	$	-		$	-		$	368
Total assets	$	1,308,759	$	7,163	$	123,327		$	(122,243	)	$	1,317,006

	Three Months Ended September 30, 2021
(dollars in thousands)	Bank		Wealth Management		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	10,809	$	6	$	2,281		$	(2,281	)	$	10,815
Income from fiduciary activities		-		1,032		-			-			1,032
Other income		2,341		249		50			(66	)		2,574
Total operating income		13,150		1,287		2,331			(2,347	)		14,421
Expenses
Interest expense		688		-		251			-			939
Provision for loan losses		360		-		-			-			360
Salaries and employee benefits		5,644		746		168			-			6,558
Other expenses		4,077		257		102			(66	)		4,370
Total operating expenses		10,769		1,003		521			(66	)		12,227
Income before taxes		2,381		284		1,810			(2,281	)		2,194
Income tax expense (benefit)		325		59		(98	)		-			286
Net income	$	2,056	$	225	$	1,908		$	(2,281	)	$	1,908
Capital expenditures	$	370	$	-	$	-		$	-		$	370
Total assets	$	1,304,291	$	7,222	$	150,442		$	(150,329	)	$	1,311,626

26

	Nine Months Ended September 30, 2022
(dollars in thousands)	Bank		Wealth Management		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	33,871	$	52	$	7,826		$	(7,826	)	$	33,923
Income from fiduciary activities		-		3,086		-			-			3,086
Other income		6,394		946		150			(196	)		7,294
Total operating income		40,265		4,084		7,976			(8,022	)		44,303
Expenses
Interest expense		1,509		-		885			-			2,394
Provision for loan losses		1,073		-		-			-			1,073
Salaries and employee benefits		16,704		2,643		507			-			19,854
Other expenses		12,363		867		480			(196	)		13,514
Total operating expenses		31,649		3,510		1,872			(196	)		36,835
Income before taxes		8,616		574		6,104			(7,826	)		7,468
Income tax expense (benefit)		1,243		122		(362	)		-			1,003
Net income	$	7,373	$	452	$	6,466		$	(7,826	)	$	6,465
Capital expenditures	$	956	$	13	$	-		$	-		$	969
Total assets	$	1,308,759	$	7,163	$	123,327		$	(122,243	)	$	1,317,006

	Nine Months Ended September 30, 2021
(dollars in thousands)	Bank		Wealth Management		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	31,635	$	17	$	7,458		$	(7,458	)	$	31,652
Income from fiduciary activities		-		3,110		-			-			3,110
Other income		7,426		788		150			(196	)		8,168
Total operating income		39,061		3,915		7,608			(7,654	)		42,930
Expenses
Interest expense		2,258		-		256			-			2,514
Provision for loan losses		510		-		-			-			510
Salaries and employee benefits		16,263		2,253		496			-			19,012
Other expenses		12,139		788		278			(196	)		13,009
Total operating expenses		31,170		3,041		1,030			(196	)		35,045
Income before taxes		7,891		874		6,578			(7,458	)		7,885
Income tax expense (benefit)		1,123		184		(184	)		-			1,123
Net income	$	6,768	$	690	$	6,762		$	(7,458	)	$	6,762
Capital expenditures	$	1,089	$	41	$	-		$	-		$	1,130
Total assets	$	1,304,291	$	7,222	$	150,442		$	(150,329	)	$	1,311,626

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 2021 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.

27

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

The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the 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 2021 Form 10-K. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on future business, financial condition or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” at the end of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

Overview

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

Net income for the three months ended September 30, 2022 was $2.5 million ($0.51 per diluted share) compared to $1.9 million ($0.36 per diluted share) for the three months ended September 30, 2021.  For the nine months ended September 30, 2022 and 2021, net income was $6.5 million, or $1.27 per diluted common share, and $6.8 million, or $1.29 per diluted common share, respectively.  Total assets of $1.3 billion as of September 30, 2022 decreased by $21.1 million from December 31, 2021.

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

• Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), increased $150.6 million, or 18.7%, from September 30, 2021;

• NIM on a fully tax-equivalent basis (FTE) (non-GAAP) was 3.78% and 3.26% for the third quarter of 2022 and 2021, respectively. For the nine months ended September 30, 2022, NIM (FTE) was 3.44% compared to 3.32% for the comparative 2021 period;

• ROE increased to 9.9% for the third quarter of 2022, compared to 6.2% for the prior year quarter;

• Net interest income increased $1.7 million, or 17.2%, and $2.4 million, or 8.2%, respectively compared to the prior year comparative periods. The Company recognized net PPP origination fees of $77 thousand in the third quarter of 2022 compared to $713 thousand in the third quarter of 2021. For the first nine months of 2022, net PPP origination fees recognized were $698 thousand compared to $2.7 million for the comparative 2021 period; and

• Mortgage banking income decreased $374 thousand, or 81.3%, and $1.6 million, or 79.4%, due to declines in volume of mortgage originations attributable to changes in mortgage market conditions.

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

Capital Management and Dividends

Total equity was $93.5 million at September 30, 2022, compared to $120.8 million at December 31, 2021. Total equity decreased $27.3 million at September 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 a component of accumulated other comprehensive (loss) income, and the repurchase of shares under the Company’s Repurchase Program, partially offset by net income. The Company’s securities available for sale are fixed income debt securities, and their decline in market value during the first nine 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 expected to affect the earnings or regulatory capital of the Company or its subsidiaries.

For the third quarter of 2022 and 2021, respectively, the Company declared dividends of $0.13 per share. For the nine months ended September 30, 2022, dividends declared were $0.39 per share compared to $0.37 per share for the nine months ended September 30, 2021. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements, and expected future earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for the Bank are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

28

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 issued and outstanding common stock through November 30, 2022. During the third quarter and first nine months of 2022, 69,000 shares, for an aggregate purchase price of $1.7 million, and 268,095 shares, for an aggregate purchase price of $6.7 million, respectively, were repurchased by the Company under the Repurchase Program.

At September 30, 2022, the book value per share of the Company’s common stock was $18.71, and tangible book value per share (non-GAAP) was $18.34, 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 measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Critical Accounting Estimates

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

Allowance for Loan Losses

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. 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 September 30, 2022, our estimate of the allowance varied between $9 million and $11 million.

For further information concerning accounting policies, refer to Note 1. Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of the Company’s 2021 Form 10-K.

Results of Operations

Net Interest Income

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

Net interest income for the third quarter of 2022 was $11.6 million, an increase of $1.7 million, or 17.2%, from the third quarter of 2021. The increase from the prior-year comparative quarter was due primarily to deployment of lower yielding cash to fund growth in higher yielding loans and investments, and higher average yields on higher earning asset balances due to the effect of rising market interest rates. For the nine months ended September 30, 2022 and 2021, net interest income was $31.5 million and $29.1 million, respectively. The increase from the prior-year comparative period was due to higher average earning assets at higher average earning yields, despite the lower volume during 2022 of accelerated recognition of net deferred fees related to PPP forgiveness, combined with higher average interest-bearing liabilities at lower average rates.

Net interest income, on a fully tax-equivalent basis (non-GAAP), was $11.7 million for the third quarter of 2022, an increase of $1.7 million from the 2021 comparative quarter. On a fully tax-equivalent basis (non-GAAP), NIM was 3.78% and 3.26%, for the quarters ended, and 3.44% and 3.32% for the nine months ended September 30, 2022 and 2021, respectively.

29

Average loans increased $99.7 million, or 11.9%, and $58.0 million, or 7.0%, for the third quarter and first nine months of 2022 compared to the prior 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 lower in the third quarter and first nine months of 2022 compared to the same periods of 2021, respectively, due primarily to lower accelerated recognition of deferred fees and costs related to PPP forgiveness partially offset by the effects of rising interest rates during 2022. Loan fees and costs related to PPP loans were deferred at time of loan origination, amortized into interest income over the remaining term of the loans and are accelerated upon forgiveness or repayment of the PPP loans. Loan fees and costs related to PPP loans were deferred at time of loan origination, amortized into interest income over the remaining term of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $77 thousand were recognized in the third quarter of 2022 compared to $713 thousand in the prior year quarter. Net PPP fees recognized for the first nine months of 2022 were $698 thousand, down from $2.7 million for the comparative 2021 period. As of September 30, 2022, unrecognized net PPP fees were $5 thousand. Year-over-year NIM was also impacted by subordinated debt interest expense related to the timing of issuance in 2021. During the first nine months of 2022, market interest rates increased, and the Company was asset sensitive at September 30, 2022 and believes the balance sheet is positively 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 Financial Measures” below.

Average securities available for sale increased $20.8 million and $38.3 million for the third quarter and first nine months of 2022, compared to 2021, due primarily to higher purchases of securities in order to utilize excess liquidity rather than holding in lower-yielding cash reserves. The average yield on the securities portfolio on a fully tax-equivalent basis increased 75 basis points for third quarter of 2022, compared to the third quarter of 2021, and 35 basis points for the first nine months of 2022 compared to 2021.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $108.4 million for the third quarter of 2022 and $45.5 million for the first nine 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 203 basis points for the third quarter of 2022 and increased 58 basis points for the first nine 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 on excess cash reserve balances from 0.10 percent at December 31, 2020 to 0.15 percent by the end of 2021 and to 3.15 percent by the end of the third quarter of 2022.

Average money market, savings and interest-bearing demand deposits increased $11.4 million and $39.0 million for the third quarter and first nine months of 2022, respectively, and average time deposits decreased $19.6 million and $21.6 million for the third quarter and first nine months of 2022, respectively, compared to the same periods in 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 in 2021 and early 2022. Average noninterest-bearing demand deposits increased $36.3 million for the third quarter of 2022 and $35.1 million for the first nine months of 2022, compared to the same periods of 2021. The average cost of interest-bearing deposits decreased 11 basis points for the third quarter of 2022 and 15 basis points for the first nine months of 2022, compared to the same periods in 2021, due primarily to lower rates on deposits and a shift in composition from time deposits. Higher levels of liquidity contributed to year-over-year reductions in the average cost of interest-bearing deposits. As the rising interest rate environment lengthens, average cost of funding will begin to increase. Changes in rates take effect immediately for interest checking, money market and savings accounts, while changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.

Average borrowings increased $5.01 million and $10.5 million for the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to the repayment of PPPLF borrowings during 2021 offset by long-term borrowings related to the issuance of subordinated notes by the Company during July 2021. 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.

30

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

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

	For the quarters ended September 30,
	2022								2021
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate**			Balance			Expense		Rate**
ASSETS
Loans*	$	938,110		$	10,516		4.45	%	$	838,376		$	9,704		4.59	%
Investment securities:
Taxable		190,728			1,297		2.70	%		183,759			853		1.84	%
Tax-exempt*		46,046			345		2.97	%		32,243			236		2.90	%
Total investment securities		236,774			1,642		2.75	%		216,002			1,089		2.00	%
Interest-bearing due from banks		45,250			252		2.21	%		153,671			68		0.18	%
Federal funds sold		2,201			11		2.05	%		1,958			-		0.07	%
Other investments		1,650			30		6.92	%		1,033			16		5.91	%
Total earning assets		1,223,985		$	12,451		4.04	%		1,211,040		$	10,877		3.56	%
Allowance for loan losses		(10,015	)							(9,486	)
Other non-earning assets		99,676								97,907
Total assets	$	1,313,646							$	1,299,461
LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	79,620		$	3		0.01	%	$	72,371		$	3		0.02	%
Money market deposit accounts		375,555			135		0.14	%		379,170			228		0.24	%
Savings accounts		123,604			9		0.03	%		115,862			12		0.04	%
Time deposits		155,989			312		0.79	%		175,541			441		1.00	%
Total time and savings deposits		734,768			459		0.25	%		742,944			684		0.36	%
Federal funds purchased, repurchase agreements and other borrowings		11,667			43		1.46	%		10,840			3		0.15	%
Long term borrowings		29,485			295		3.92	%		25,301			252		3.95	%
Total interest-bearing liabilities		775,920			797		0.41	%		779,085			939		0.48	%
Demand deposits		429,928								393,591
Other liabilities		5,500								5,007
Stockholders’ equity		102,298								121,778
Total liabilities and stockholders’ equity	$	1,313,646							$	1,299,461
Net interest margin				$	11,654		3.78	%				$	9,938		3.26	%

* Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $83 thousand and $62 thousand for September 30, 2022 and 2021, respectively.

** Annualized

31

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

	For the nine months ended September 30,
	2022								2021
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate**			Balance			Expense		Rate**
ASSETS
Loans*	$	893,133		$	29,206		4.37	%	$	835,107		$	28,495		4.56	%
Investment securities:
Taxable		196,475			3,409		2.32	%		168,800			2,414		1.91	%
Tax-exempt*		42,208			927		2.94	%		31,596			706		2.99	%
Total investment securities		238,683			4,336		2.43	%		200,396			3,120		2.08	%
Interest-bearing due from banks		97,642			533		0.73	%		143,112			163		0.15	%
Federal funds sold		3,514			18		0.70	%		662			-		0.07	%
Other investments		1,396			58		5.47	%		1,128			57		6.64	%
Total earning assets		1,234,368		$	34,151		3.70	%		1,180,405		$	31,835		3.61	%
Allowance for loan losses		(9,861	)							(9,584	)
Other nonearning assets		96,897								100,366
Total assets	$	1,321,404							$	1,271,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	75,641		$	8		0.01	%	$	70,238		$	10		0.02	%
Money market deposit accounts		385,929			433		0.15	%		366,580			649		0.24	%
Savings accounts		126,965			30		0.03	%		112,723			34		0.04	%
Time deposits		161,885			993		0.82	%		183,534			1,536		1.12	%
Total time and savings deposits		750,420			1,464		0.26	%		733,075			2,229		0.41	%
Federal funds purchased, repurchase agreements and other borrowings		6,753			45		0.88	%		17,143			33		0.26	%
Long term borrowings		29,453			885		4.02	%		8,526			252		3.95	%
Total interest-bearing liabilities		786,626			2,394		0.41	%		758,744			2,514		0.44	%
Demand deposits		420,527								385,427
Other liabilities		5,649								6,997
Stockholders’ equity		108,602								120,019
Total liabilities and stockholders’ equity	$	1,321,404							$	1,271,187
Net interest margin				$	31,757		3.44	%				$	29,321		3.32	%

* Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $228 thousand and $183 thousand for September 30, 2022 and 2021, 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.

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TABLE 2: VOLUME AND RATE ANALYSIS*

	Three months ended September 30, 2022 from 2021
	Increase (Decrease)
	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans*	$	1,154		$	(342	)	$	812
Investment securities:
Taxable		32			412			444
Tax-exempt*		101			8			109
Total investment securities		133			420			553
Federal funds sold		-			11			11
Other investments**		(42	)		240			198
Total earning assets		1,246			328			1,574
INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		-			-			-
Money market deposit accounts		(2	)		(91	)		(93	)
Savings accounts		1			(4	)		(3	)
Time deposits		(49	)		(80	)		(129	)
Total time and savings deposits		(50	)		(175	)		(225	)
Federal funds purchased, repurchase agreements and other borrowings		-			40			40
Long term borrowings		42			1			43
Total interest-bearing liabilities		(8	)		(134	)		(142	)
Change in net interest income	$	1,255		$	461		$	1,716

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

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

TABLE 2: VOLUME AND RATE ANALYSIS*

	Nine Months Ended September 30, 2022 from 2021
	Increase (Decrease)
	Due to Changes in:
(dollars in thousands)	Volume			Rate			Total
EARNING ASSETS
Loans*	$	1,980		$	(1,269	)	$	711
Investment securities:
Taxable		396			599			995
Tax-exempt*		237			(16	)		221
Total investment securities		634			582			1,216
Federal funds sold		-			18			18
Other investments**		(38	)		409			371
Total earning assets		2,576			(260	)		2,316
INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts		1			(3	)		(2	)
Money market deposit accounts		34			(250	)		(216	)
Savings accounts		4			(8	)		(4	)
Time deposits		(181	)		(362	)		(543	)
Total time and savings deposits		(143	)		(622	)		(765	)
Federal funds purchased, repurchase agreements and other borrowings		(20	)		32			12
Long term borrowings		619			14			633
Total interest-bearing liabilities		456			(576	)		(120	)
Change in net interest income	$	2,121		$	315		$	2,436

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

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

33

The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, inflationary pressures, the timing and extent of any economic recovery, which are inherently uncertain, 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. During the first nine months of 2022, market interest rates increased and the Company was asset sensitive at September 30, 2022; however, the Company can give no assurance as to the ultimate impact of rising interest rates or as to when or for how long the Company may experience an increase in the NIM.

Provision for Loan Losses

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 in 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 September 30, 2022, the Company recognized a provision for loan losses of $402 thousand compared to $360 thousand for the three months ended September 30, 2021.  The provision for loan losses was $1.1 million for the first nine months of 2022, compared to $510 thousand for the first nine months of 2021. The increase in provision expense during the third quarter of 2022 was driven primarily by increases in net loans held for investment, as well as an elevation in net charge-offs. Charged-off loans totaled $1.7 million and $905 thousand in the first nine months of 2022 and 2021, respectively. Recoveries amounted to $693 thousand and $538 thousand for the nine months ended September 30, 2022 and 2021, respectively. The Company’s annualized net loans charged off to average loans were 0.16% for the third quarter of 2022 compared to 0.07% for the third quarter of 2021. The increase in charge-offs during the third quarter of 2022 was primarily related to three consumer credits and there is an expectation of partial recovery during the fourth quarter.

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

Noninterest Income

Noninterest income was $3.4 million for the three months ended September 30, 2022, a decrease of $241 thousand or 6.7%, from third quarter of 2021. Although service charges on deposit accounts, other service charges, commissions and fees, bank-owned life insurance, and other operating income increased compared to the prior year quarter, these increases were offset by lower fiduciary and asset management fees and mortgage banking income. Noninterest income for the nine months ended September 30, 2022 decreased $898 thousand to $10.4 million compared to the nine months ended September 30, 2021, driven primarily by the decrease in mortgage banking income. The decrease in mortgage banking income for the third quarter and first nine 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 Wealth Management, insurance, and mortgage banking activities, and a continued focus on business checking and other corporate services.

Noninterest Expense

Noninterest expense was $11.6 million for the third quarter of 2022, an increase of $637 thousand, or 5.8%, compared to $10.9 million for the third quarter of 2021. The increase over the prior year quarter was primarily driven by increased salary and benefit expense, employee professional development related to recruiting, and other operating expense.  For the nine months ended September 30, 2022, noninterest expense increased $1.3 million, or 4.2% over the nine months ended September 30, 2021, primarily due to increases in salary and benefits and employee professional development related to recruiting. The increase in salary and benefits was primarily driven by lower deferred loan costs. The Company is in the final phase of assessing major vendor contracts and relationships as a key component of efforts to reduce noninterest expense levels while improving operational efficiency.

The Company’s income tax expense increased $141 thousand for the third quarter and decreased $120 thousand for the first nine months of 2022 when compared to the same periods in 2021 primarily due to changes in the levels of pre-tax income and the mix of effective tax-exempt income. The effective federal income tax rates for the three and nine months ended September 30, 2022 were 14.4% and 13.4%, respectively, and the effective tax rates for the three and nine months ended September 30, 2021 were 13.0% and 14.2%, respectively.

Balance Sheet Review

At September 30, 2022, the Company had total assets of $1.3 billion, a decrease of $21.1 million compared to assets as of December 31, 2021.

34

Net loans held for investment increased $111.5 million or 13.4%, from $833.7 million at December 31, 2021 to $945.1 million at September 30, 2022. Loans held for investment, excluding PPP (non-GAAP), grew 15.8%, or $129.9 million, driven by loan growth in the following segments: commercial real estate of $27.2 million, construction, land development, and other land loans of $9.7 million, residential real estate of $50.2 million, and indirect automobile of $42.9 million. Cash and cash equivalents decreased $133.4 million or 71.0% from December 31, 2021 to September 30, 2022, due to deployment into higher earning asset classes. Securities available for sale, at fair value, decreased $6.8 million or 2.9% over the same period primarily driven by decreases in market value offset by liquidity deployment in the investment portfolio.

Total deposits of $1.2 billion as of September 30, 2022 increased $5.2 million, or 0.4% from December 31, 2021. Noninterest-bearing deposits increased $15.7 million, or 3.7%, savings deposits increased $5.8 million, or 1.0%, and time deposits decreased $16.3 million, or 9.6%.

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 September 30, 2022 and December 31, 2021, the Company had no FHLB advances.

Securities Portfolio

When comparing September 30, 2022 to December 31, 2021, securities available-for-sale decreased $6.8 million, or 2.9%. The majority of the change was due primarily to decreases in market value due to rising market interest rates  offset by deployment of additional liquidity in purchases of U.S. Treasury securities, securities issued by state and political subdivisions, and corporate bonds and other securities rather than holding in lower yielding cash reserves.

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

	September 30,		December 31,
(Dollars in thousands)	2022		2021
U.S. Treasury securities	$	20,645	$	14,904
Obligations of U.S. Government agencies		33,808		38,558
Obligations of state and political subdivisions		64,474		65,803
Mortgage-backed securities		80,923		89,058
Money market investments		1,965		2,413
Corporate bonds and other securities		25,725		23,585
		227,540		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	$	228,929	$	235,355

For more information about the Company’s securities available for sale, including information about securities in an unrealized loss position at September 30, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the heading Note 2, Securities in this Quarterly Report on Form 10-Q.

35

Loan Portfolio

The following table shows a breakdown of total loans by segment at September 30, 2022 and December 31, 2021.

TABLE 4: LOAN PORTFOLIO

	September 30,		December 31,
(Dollars in thousands)	2022		2021
Commercial and industrial	$	66,724	$	68,690
Real estate-construction		68,005		58,440
Real estate-mortgage (1)		256,385		206,368
Real estate-commercial		409,833		382,603
Consumer		151,177		118,441
Other		2,941		8,984
Ending Balance	$	955,065	$	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 September 30, 2022, the total loan portfolio increased by $111.5 million or 13.2% from December 31, 2021, primarily due to increases in real estate construction, real estate mortgage, real estate-commercial, and consumer. A decline of $18.4 million in PPP loans outstanding impacted commercial and industrial. Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), grew 15.8%.

For more information about the Company’s loan portfolio at September 30, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Loan Losses in this Quarterly Report on Form 10-Q.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, and other real estate owned (OREO). Restructured loans are loans with terms that were modified in a troubled 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 Form 10-Q for more information.

Nonperforming assets increased by $3.2 million from $1.5 million at December 31, 2021 to $4.7 million at September 30, 2022. The total at September 30, 2022 consisted of $330 thousand in loans still accruing interest but past due 90 days or more and $4.4 million in nonaccrual loans. All of the nonaccrual loans are classified as impaired, 90.9% of the nonaccrual loans at September 30, 2022 were secured by real estate and 89.5% of the nonaccrual loans at September 30, 2022 was related to one large commercial relationship. Impaired loans are a component of the allowance for loan losses. When a loan changes from “90 days past due but still accruing interest” to “nonaccrual” status, the loan is normally reviewed for impairment. If impairment is identified, then the Company records a charge-off based on the value of the collateral or the present value of the 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, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time.

The recorded investment in impaired loans increased to $6.2 million as of September 30, 2022 from $1.3 million as of December 31, 2021 as detailed in Part I, Item 1, “Financial Statements” under the heading 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 and OREO:

36

TABLE 5: NONPERFORMING ASSETS

	September 30,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans
Commercial and industrial	$	400		$	174
Real estate-construction		1,158			-
Real estate-mortgage (1)		157			191
Real estate-commercial		2,660			113
Total nonaccrual loans	$	4,375		$	478
Loans past due 90 days or more and accruing interest
Commercial and industrial	$	35		$	169
Real estate-mortgage (1)		-			-
Consumer loans (2)		295			846
Other		-			10
Total loans past due 90 days or more and accruing interest	$	330		$	1,025
Restructured loans
Real estate-construction	$	76		$	79
Real estate-mortgage (1)		285			450
Real estate-commercial		371			413
Total restructured loans	$	732		$	942
Less nonaccrual restructured loans (included above)		157			191
Less restructured loans currently in compliance (3)		575			751
Net nonperforming, accruing restructured loans	$	-		$	-
Nonperforming loans	$	4,705		$	1,503
Total nonperforming assets	$	4,705		$	1,503
Interest income that would have been recorded under original loan terms on nonaccrual loans above	$	92		$	11
Interest income recorded for the period on nonaccrual loans included above	$	11		$	2
Total loans	$	955,065		$	843,526
ALLL	$	9,933		$	9,865
Nonaccrual loans to total loans		0.46	%		0.06	%
ALLL to total loans		1.04	%		1.17	%
ALLL to nonaccrual loans		227.04	%		2063.81	%

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

(2) Amounts listed include student loans and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. There was no past due principal portion of these guaranteed loans at September 30, 2022 and totaled $711 thousand at December 31, 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) Amounts listed represent restructured loans that are in compliance with their modified terms as of the date presented.

As shown in the table above, as of September 30, 2022 compared to December 31, 2021, the nonaccrual loan category increased by $3.9 million and the 90-days past due and still accruing interest category decreased by $695 thousand or 67.8%. The increase in nonaccrual loans during the first nine months of 2022 was driven primarily by one well-secured large commercial relationship which was downgraded during the fourth quarter of 2021 and became impaired and placed on nonaccrual status during the first quarter of 2022.

The nonaccrual loans at September 30, 2022 were related to nine credit relationships. All loans in these relationships have been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover outstanding principal 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.

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

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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 has not yet received a current appraisal on loans being reviewed for impairment, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of September 30, 2022 and December 31, 2021, the impaired loan component of the allowance for loan losses amounted to $97 thousand and $128 thousand, respectively. 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.

Historical loss is the final component of the allowance for loan losses. The calculation of the historical loss component is conducted on loans evaluated collectively for impairment 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 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), 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 (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of September 30, 2022 and December 31, 2021, the Company had no loans in these categories.

The overall historical loss rate from December 31, 2021 to September 30, 2022, improved 9 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality. For the same period, the qualitative factor components decreased 7 basis point as a percentage of loans evaluated collectively for impairment overall. This decrease was primarily due to a reduction related to the COVID-19 pandemic, partially 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, 2021 to September 30, 2022, management will continue to monitor economic recovery challenges at macro and micro levels, including levels of inflation, rising interest rates, supply chain disruption, and employment levels, which may be delaying signs of credit deterioration. If there are further challenges to the economic recovery, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses.

On a combined basis, the historical loss and qualitative factor components amounted to $9.8 million as of September 30, 2022 and $9.7 million as of December 31, 2021. Management is monitoring portfolio activity, such as levels of deferral and/or modifications, 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 present indications of instability that is other than temporary in nature.

38

Overall Change in Allowance

As a result of management’s analysis, the Company added, through the provision, $1.1 million to the ALLL for the nine months ended September 30, 2022. The ALLL, as a percentage of period-end loans held for investment, was 1.04% and 1.17% at September 30, 2022 and December 31, 2021, respectively. The decrease in the ALLL as a percentage of loans held for investment at September 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 1.04% and 1.20% at September 30, 2022 and December 31, 2021, respectively. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below. Management believes that the allowance has been appropriately funded for losses on existing loans, based on currently available information. Year-over-year quantitative historical loss rates continue to demonstrate improvement, past due levels remain low, and asset quality remains strong. 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 when necessary. As further challenges to economic conditions in our markets, including due to the impacts of inflation and rising interest rates, 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 increases 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 Nine Months ended September 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	$	683		$	459		$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(297	)		-			(25	)		-			(1,095	)		(281	)		-		(1,698	)
Recoveries		131			-			52			22			389			99			-		693
Provision for loan losses		107			70			190			(464	)		982			188			-		1,073
Ending Balance	$	624		$	529		$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933
Average loans		67,481			65,368			227,401			400,889			123,895			6,810					891,844
Ratio of net charge-offs to average loans		0.25	%		0.00	%		-0.01	%		-0.01	%		0.57	%		2.67	%				0.11	%

For the Nine Months ended September 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		(24	)		-			(1	)		-			(664	)		(216	)		-			(905	)
Recoveries		33			-			66			44			310			85			-			538
Provision for loan losses		47			152			(341	)		239			373			173			(133	)		510
Ending Balance	$	706		$	491		$	2,284		$	4,717		$	1,321		$	165		$	-		$	9,684
Average loans		120,965			48,011			201,145			333,756			116,835			7,674						828,386
Ratio of net charge-offs to average loans		-0.01	%		0.00	%		-0.03	%		-0.01	%		0.30	%		1.71	%					0.04	%

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

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For the Three Months ended September 30, 2022

(Dollars in thousands)	Commercial and Industrial			Real Estate Construction			Real Estate - Mortgage (1)			Real Estate - Commercial			Consumer			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	596		$	479		$	2,676		$	4,436		$	1,482		$	227		$	-	$	9,896
Charge-offs		(1	)		-			(22	)		-			(473	)		(91	)		-		(587	)
Recoveries		4			-			12			22			170			14			-		222
Provision for loan losses		25			50			(59	)		(113	)		459			40			-		402
Ending Balance	$	624		$	529		$	2,607		$	4,345		$	1,638		$	190		$	-	$	9,933
Average loans		63,999			64,907			254,594			408,791			139,147			6,098					937,536
Ratio of net charge-offs to average loans		0.00	%		0.00	%		0.00	%		-0.01	%		0.22	%		1.26	%				0.04	%

For the Three Months ended September 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	$	721		$	416		$	2,465		$	4,396		$	1,288		$	164		$	23		$	9,473
Charge-offs		(20	)		-			-			-			(230	)		(30	)		-			(280	)
Recoveries		12			-			10			43			60			6			-			131
Provision for loan losses		(7	)		75			(191	)		278			203			25			(23	)		360
Ending Balance	$	706		$	491		$	2,284		$	4,717		$	1,321		$	165		$	-		$	9,684
Average loans		107,349			54,543			202,134			344,803			118,215			7,337						834,381
Ratio of net charge-offs to average loans		0.01	%		0.00	%		0.00	%		-0.01	%		0.14	%		0.33	%					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 each category and the ratio of corresponding outstanding loan balances as of the 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

	September 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	$	624		6.99	%	$	683		8.14	%
Real estate-construction		529		7.12	%		459		6.93	%
Real estate-mortgage (1)		2,607		26.84	%		2,390		24.46	%
Real estate-commercial		4,345		42.91	%		4,787		45.36	%
Consumer		1,638		15.83	%		1,362		14.04	%
Other		190		0.31	%		184		1.07	%
Ending Balance	$	9,933		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 by individuals and businesses located within the communities served.

During the first nine months of 2022, deposits increased $5.2 million to $1.2 billion at September 30, 2022, compared to December 31, 2021. Noninterest bearing and savings deposits increased $15.7 million and $5.8 million, respectively, and time deposits decreased $16.3 million 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.

Capital Resources

Total stockholders’ equity as of September 30, 2022 was $93.5 million, down 22.6% from $120.8 million on December 31, 2021. The decrease was related to unrealized losses in the market value of securities available for sale, which are recognized as a component of accumulated other comprehensive (loss) income and was driven by increases in market interest rates, and the repurchase of 268,095 shares, for an aggregate purchase price of $6.7 million, during the first nine 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 the Company’s regulatory capital ratios from December 31, 2021 to September 30, 2022.

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

The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for 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

In June 2013, the federal bank regulatory agencies adopted the Basel III Capital Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The EGRRCPA, enacted in May 2018, required action by the FRB to expand the applicability of its Small Bank Holding Company Policy Statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the FRB issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion.  The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will not 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 2021 Form 10-K.

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

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

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

TABLE 8: REGULATORY CAPITAL

	2022						2021
	Regulatory						Regulatory
	Minimums			September 30, 2022			Minimums			December 31, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		11.30	%		4.500	%		12.57	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		11.30	%		6.000	%		12.57	%
Tier 1 Leverage to Average Assets		4.000	%		9.45	%		4.000	%		9.09	%
Total Capital to Risk-Weighted Assets		8.000	%		12.21	%		8.000	%		13.61	%
Capital Conservation Buffer		2.500	%		4.21	%		2.500	%		5.61	%
Risk-Weighted Assets (in thousands)				$	1,105,732					$	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 convert to three month SOFR plus 286 basis points, resetting quarterly, thereafter.  The Notes were structured to qualify as Tier 2 capital for regulatory purposes and are included in the Company’s Tier 2 capital as of September 30, 2022 and December 31, 2021.

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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 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 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 tangible book value, general market and economic 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 268,095 shares of the Company’s common stock at an aggregate cost of $6.7 million under the Repurchase Program during the first nine months of 2022.

Liquidity

Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year.

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 third quarter of 2022, the Company had $392.1 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks.

Based on the Company’s management of liquid assets, the availability of borrowed funds, and the 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 additional liquidity for the Company’s operations.

The following table sets forth information relating to the Company’s sources of liquidity and the outstanding commitments for use of liquidity at September 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

	September 30, 2022
(dollars in thousands)	Total		In Use		Available
Sources:
Federal funds lines of credit	$	115,000	$	-	$	115,000
Federal Home Loan Bank advances		392,092		-		392,092
Federal funds sold & balances at the Federal Reserve						36,155
Securities, available for sale and unpledged at fair value						137,810
Total short-term funding sources					$	681,057
Uses: (1)
Unfunded loan commitments and lending lines of credit						80,487
Letters of credit						264
Total potential short-term funding uses						80,751
Liquidity coverage ratio						843.4	%

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

The Company’s operating activities provided $13.8 million of cash during the nine months ended September 30, 2022, compared to $17.6 million provided during the comparative 2021 period.  The Company’s investing activities used $142.8 million of cash during the first nine months of 2022, compared to $33.6 million of cash used during the first nine months of 2021. The Company’s financing activities used $4.4 million and provided $79.8 million of cash during the nine months ended September 30, 2022 and 2021, respectively.

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

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In the ordinary course of business the Company has entered into contractual obligations and has made other commitments to make future payments. As of September 30, 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 2021 Form 10-K.

Off-Balance Sheet Arrangements

As of September 30, 2022, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2021 Form 10-K.

Non-GAAP Financial Measures

In reporting the results of the quarter and nine months ended September 30, 2022, the Company has provided supplemental financial measures on a tax equivalent or an adjusted 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.

TABLE 10: Non-GAAP FINACIAL MEASURES

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollar in thousands, except share and per share data)	2022			2021			2022			2021
Fully Taxable Equivalent Net Interest Income
Net interest income (GAAP)	$	11,571		$	9,876		$	31,526		$	29,138
FTE adjustment		83			62			228			183
Net interest income (FTE) (non-GAAP)	$	11,654		$	9,938		$	31,754		$	29,321
Noninterest income (GAAP)		3,365			3,606			10,380			11,278
Total revenue (FTE) (non-GAAP)	$	15,019		$	13,544		$	42,134		$	40,599
Noninterest expense (GAAP)		11,565			10,928			33,368			32,021
Average earning assets	$	1,223,985		$	1,211,040		$	1,234,368		$	1,180,405
Net interest margin		3.75	%		3.24	%		3.42	%		3.30	%
Net interest margin (FTE) (non-GAAP)		3.78	%		3.26	%		3.44	%		3.32	%
Efficiency ratio		77.43	%		81.06	%		79.62	%		79.23	%
Efficiency ratio (FTE) (non-GAAP)		77.01	%		80.69	%		79.19	%		78.87	%

Tangible Book Value Per Share	September 30, 2022		December 31, 2021		September 30, 2021
Total Stockholders Equity (GAAP)	$	93,512	$	120,818	$	120,767
Less goodwill		1,650		1,650		1,650
Less core deposit intangible		242		275		286
Tangible Stockholders Equity (non-GAAP)	$	91,620	$	118,893	$	118,831
Shares issued and outstanding		4,996,728		5,239,707		5,245,842
Book value per share	$	18.71	$	23.06	$	23.02
Tangible book value per share	$	18.34	$	22.69	$	22.65

ALLL as a Percentage of Loans Held for Investment	September 30, 2022			December 31, 2021			September 30, 2021
Loans held for investment  (net of deferred fees and costs) (GAAP)	$	955,065		$	843,526		$	840,151
Less PPP originations		624			19,008			36,320
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP)	$	954,441		$	824,518		$	803,831
ALLL	$	9,933		$	9,865		$	9,684
ALLL as a Percentage of Loans Held for Investment		1.04	%		1.17	%		1.15	%
ALLL as a Percentage of Loans Held for Investment, net of PPP originations		1.04	%		1.20	%		1.20	%

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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 beliefs, estimates, or assumptions will prove to be accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those anticipated by such statements. 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 NIM, changes in economic conditions, performance of loan and securities portfolios, asset quality, and future levels of the allowance for loan losses and the provision for loan losses; management’s belief regarding liquidity and capital resources; 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 NIM and items affecting NIM; strategic business initiatives and the anticipated effects thereof; asset quality; adequacy of allowances for loan losses and the level of future charge offs; 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 areas

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

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

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

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

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

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

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

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

• the level of net charge-offs on loans and the adequacy of our ALLL

• 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

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• 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, on, among other things, the Company’s operations, liquidity and credit quality

• the use of inaccurate assumptions in management’s modeling systems

• technological risks and developments

• the commercial and residential real estate markets

• the demand in the secondary residential mortgage loan markets

• expansion of the Company’s product offerings

• effectiveness of expense reduction plans

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

These risks and uncertainties, and the factors discussed in more detail in Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 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 third quarter ended September 30, 2022 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.

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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 2021 Form 10-K, except as described below:

The Company and its subsidiaries, including the Bank, and its and their employees and customers have recently been and may in the future be the target of criminal cyberattacks; and we could be exposed to liability and remedial costs, and our reputation and business could suffer.

Like many major financial institutions, we are, from time to time, a target of criminal cyber-attacks, phishing schemes and similar fraudulent activity and cyber incidents, and we expect these threats to continue.  As the numerous and evolving cybersecurity threats, including advanced and persistent cyber-attacks and schemes, utilized by cybercriminals in attempts to obtain unauthorized access to our systems or our customers’ accounts have become increasingly more complex and sophisticated and may be difficult to detect for periods of time, we may - like many other major financial institutions - not anticipate, safeguard against, or respond to, these acts adequately.  As these threats continue to evolve and increase, we - like many other major financial institutions - may be required to devote significant additional resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.

During September 2022, the Company detected and confirmed that one of the Bank’s employees was the target of an external cybersecurity event perpetrated by third-party cybercriminals.  In this event, one or more unauthorized persons gained unlawful access to the Microsoft Office 365 account of one Bank employee.  Through such unlawful access, the unauthorized person(s) might have been able to access certain personal information of certain loan applicants and Bank customers.  Investigations into this cyber incident by Bank management, our outside legal counsel, a third-party forensics advisor and law enforcement authorities remain ongoing.

It is expected that we will continue to experience increased costs related to our response to this most recent cyber incident and our efforts to further enhance our security measures.  As was previously disclosed, we were also subject to an external cybersecurity event perpetrated by third-party cybercriminals that occurred during our fiscal year ended December 31, 2020.  Accordingly, in recent periods we have been investing significant resources to improve our cybersecurity protections, and we may need to expend significant additional resources to further enhance our safeguards and protection against cybersecurity breaches, fraudulent activity and cyber incidents, or to redress problems or potential liability caused by such cybersecurity breaches, fraudulent activity or cyber incidents; and such efforts may not be fully effective. Furthermore, even though we carry cyber and other insurance policies that may provide insurance coverage under certain circumstances, we might suffer losses as a result of a cyber incident that exceed the coverage available under our insurance policies or for which we do not have coverage.

Though it is difficult to determine what, if any, harm may directly result from any specific cyber incident or cyber-attack, any failure to maintain the security of, or any actual or perceived loss or unauthorized disclosure or use of, customer or account information likely may lead to our customers losing trust and confidence in us. Damage to our reputation could adversely affect deposits and loans and otherwise negatively affect the Company’s and the Bank’s business, financial condition and results of operations.  In addition, it is possible that this most recent cyber incident or any other cyber incident and any material fraudulent activity, cyber-attacks, breaches of our information security or successful penetration or circumvention of our system security may cause us significant negative consequences, including loss of Bank customers and financial assets and business opportunities, disruption to our operations and business, or misappropriation of our and/or our customers’ confidential information, and may expose us to additional regulatory scrutiny or may result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, devotion of substantial management time, increased costs to maintain insurance coverage (including increased deposit insurance premiums), or additional compliance costs, all of which could adversely impact our business, financial condition, liquidity and results of operations.

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 nine months ended September 30, 2022, the Company did not repurchase any shares related to the equity compensation plan awards.

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Effective October 19, 2021, the Company’s Board of Directors approved the Repurchase Program. The Company is authorized pursuant to this program to repurchase up to 10% of the 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 69,000 shares repurchased under the Repurchase Program during the third quarter of 2022.  As of September 30, 2022, the Company has made aggregate common stock repurchases of 274,695 shares for an aggregate cost of $6.8 million under the Repurchase Program.

The following table summarizes repurchases of the Company’s common stock that occurred during the three months ended September 30, 2022.

ISSUER PURCHASES OF EQUITY SECURITIES

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
July 1, 2022 - July 31, 2022		50,000	$	24.75		50,000		264,979
August 1, 2022 - August 31, 2022		5,500		23.55		5,500		259,479
September 1, 2022 - September 30, 2022		13,500		23.53		13,500		245,979
Total		69,000	$	24.42		69,000

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit No.	Description
3.1	Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009)
3.1.1	Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016)
3.2	Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for September 30, 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 September 30, 2022, formatted in Inline XBRL (included with Exhibit 101)

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SIGNATURES

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

	OLD POINT FINANCIAL CORPORATION
November 14, 2022	/s/Robert F. Shuford, Jr.
	Robert F. Shuford, Jr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)
November 14, 2022	/s/Elizabeth T. Beale
	Elizabeth T. Beale
	Chief Financial Officer & Senior Vice President/Finance
	(Principal Financial & Accounting Officer)

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