UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021

or

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

For the transition period from____________ to___________

Commission File Number: 000-12896

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5,244,635 shares of common stock ($5.00 par value) outstanding as of August 9, 2021

OLD POINT FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
 
PART I - FINANCIAL INFORMATION
 
 
Page
     
Item 1.
1
     
 
1
     
 
2
     
 
3
     
 
4
     
 
6
     
 
7
     
Item 2.
29
     
Item 3.
42
     
Item 4.
42
     
 
PART II - OTHER INFORMATION
 
     
Item 1.
42
     
Item 1A.
43
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
43
     
Item 6.
44
     
  44
 
i
Index
GLOSSARY OF DEFINED TERMS

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

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

   
June 30,
   
December 31,
 
(dollars in thousands, except share data)
 
2021
   
2020
 
   
(unaudited)
       
Assets
           
             
Cash and due from banks
 
$
21,118
   
$
21,799
 
Interest-bearing due from banks
   
134,377
     
98,633
 
Federal funds sold
   
3
     
5
 
Cash and cash equivalents
   
155,498
     
120,437
 
Securities available-for-sale, at fair value
   
213,211
     
186,409
 
Restricted securities, at cost
   
1,033
     
1,367
 
Loans held for sale
   
2,284
     
14,413
 
Loans, net
   
823,200
     
826,759
 
Premises and equipment, net
   
32,419
     
33,613
 
Premises and equipment, held for sale
   
871
     
-
 
Bank-owned life insurance
   
28,817
     
28,386
 
Goodwill
   
1,650
     
1,650
 
Core deposit intangible, net
   
297
     
319
 
Other assets
   
15,531
     
12,838
 
Total assets
 
$
1,274,811
   
$
1,226,191
 
                 
Liabilities & Stockholders’ Equity
               
                 
Deposits:
               
Noninterest-bearing deposits
 
$
398,908
   
$
360,602
 
Savings deposits
   
555,744
     
512,936
 
Time deposits
   
179,365
     
193,698
 
Total deposits
   
1,134,017
     
1,067,236
 
Overnight repurchase agreements
   
12,239
     
6,619
 
Federal Reserve Bank borrowings
   
3,313
     
28,550
 
Other borrowings
   
-
     
1,350
 
Accrued expenses and other liabilities
   
5,314
     
5,291
 
Total liabilities
   
1,154,883
     
1,109,046
 
                 
Stockholders’ equity:
               
Common stock, $5 par value, 10,000,000 shares authorized; 5,244,635 and 5,224,019 shares outstanding (includes 39,103 and 29,576 of nonvested restricted stock, respectively)
   
26,028
     
25,972
 
Additional paid-in capital
   
21,372
     
21,245
 
Retained earnings
   
69,457
     
65,859
 
Accumulated other comprehensive income, net
   
3,071
     
4,069
 
Total stockholders’ equity
   
119,928
     
117,145
 
Total liabilities and stockholders’ equity
 
$
1,274,811
   
$
1,226,191
 

See Notes to Consolidated Financial Statements.
 
1
Index
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income

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

See Notes to Consolidated Financial Statements.
2
Index
Old Point Financial Corporation
Consolidated Statements of Comprehensive Income

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

See Notes to Consolidated Financial Statements.

3
Index
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity

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

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

See Notes to Consolidated Financial Statements.

5
Index
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows

   
Six Months Ended June 30,
 
(unaudited, dollars in thousands)
 
2021
   
2020
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
4,854
   
$
3,744
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
         
Depreciation and amortization
   
1,052
     
1,070
 
Amortization of right of use lease asset
   
185
     
179
 
Accretion related to acquisition, net
   
(7
)
   
(40
)
Provision for loan losses
   
150
     
600
 
Net amortization of securities
   
438
     
300
 
Decrease (increase) in loans held for sale, net
   
12,129
     
(2,904
)
Income from bank owned life insurance
   
(430
)
   
(423
)
Stock compensation expense
   
130
     
143
 
Deferred tax benefit
   
(12
)
   
(1,030
)
(Decrease) in other assets
   
(2,602
)
   
(201
)
Increase (decrease) in accrued expenses and other liabilities
   
23
     
(1,012
)
Net cash provided by (used in) operating activities
   
15,910
     
(576
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of available-for-sale securities
   
(49,310
)
   
(30,891
)
Proceeds from redemption (purchase) of restricted securities, net
   
334
     
(226
)
Proceeds from maturities and calls of available-for-sale securities
   
8,280
     
5,316
 
Proceeds from sales of available-for-sale securities
   
3,130
     
9,385
 
Paydowns on available-for-sale securities
   
9,397
     
5,831
 
Net decrease (increase) in loans held for investment
   
3,438
     
(109,499
)
Purchases of premises and equipment
   
(760
)
   
(662
)
Proceeds from sale of premises and equipment
    31       1,297  
Net cash used in investing activities
   
(25,460
)
   
(119,449
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase in noninterest-bearing deposits
   
38,306
     
81,165
 
Increase in savings deposits
   
42,808
     
60,359
 
Decrease in time deposits
   
(14,333
)
   
(19,100
)
Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net
   
4,270
     
(3,780
)
Increase in Federal Home Loan Bank advances
   
-
     
25,000
 
Repayment of Federal Home Loan Bank advances
   
-
     
(20,000
)
Increase in Federal Reserve Bank borrowings
    -       37,515  
Repayment of Federal Reserve Bank borrowings
   
(25,237
)
   
(175
)
Proceeds from ESPP issuance
   
53
     
46
 
Cash dividends paid on common stock
   
(1,256
)
   
(1,251
)
Net cash provided by financing activities
   
44,611
     
159,779
 
                 
Net increase in cash and cash equivalents
   
35,061
     
39,754
 
Cash and cash equivalents at beginning of period
   
120,437
     
89,865
 
Cash and cash equivalents at end of period
 
$
155,498
   
$
129,619
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash payments for:
               
Interest
 
$
1,693
   
$
3,059
 
                 
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
               
Unrealized (loss) gain on securities available-for-sale
 
$
3,887
   
$
4,343
 
Loans transferred to other real estate owned
 
$
-
   
$
254
 
Former bank property transferred from fixed assets to held for sale assets
 
$
902
   
$
-
 
Right of use lease asset and liability
 
$
1,277
   
$
789
 

See Notes to Consolidated Financial Statements.
6
Index
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 1. Accounting Policies

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

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

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

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

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

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

The Company’s business, financial condition and results of operations generally rely upon the ability of its borrowers to repay their loans, the value of collateral underlying secured loans, and the demand for loans and other products and services offered, which are highly dependent on the business environment in the Company’s primary markets. As of June 30, 2021, the Company had loan modifications of $54 thousand down from approximately $7.4 million as of December 31, 2020.

7
Index
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU No. 2016-13 as codified in Topic 326, including ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11, ASU No. 2020-02, and ASU No. 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  The Company has formed a committee to oversee the adoption of the new standard, has engaged a third party to assist with implementation, has performed data fit gap and loss driver analyses, intends to run parallel models beginning in 2022, and is continuing to evaluate the impact that ASU No. 2016-13 will have on its consolidated financial statements.

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

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


Note 2. Securities



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


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


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



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

8
Index

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



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


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



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


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



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


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


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



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



Restricted Securities

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.

10
Index

Note 3. Loans and the Allowance for Loan Losses


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

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

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

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

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



The Company did not have any outstanding principal balance or related carrying amount of purchased credit-impaired loans as of June 30, 2021 and December 31, 2020. The following table presents changes in the accretable yield on purchased credit-impaired loans, for which the Company applies FASB ASC 310-30, at June 30, 2021 and 2020:


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



CREDIT QUALITY INFORMATION

The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.



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

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

10
Index

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


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


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

 

AGE ANALYSIS OF PAST DUE LOANS BY CLASS

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


11
Index
Age Analysis of Past Due Loans as of June 30, 2021
 
(dollars in thousands)
 
30 - 59
Days Past
Due
   
60 - 89
Days
Past Due
   
90 or More
Days Past
Due and
still
Accruing
   
PCI
   
Nonaccrual
(2)
   
Total
Current
Loans (1)
   
Total
Loans
 
Mortgage loans on real estate:
                                         
Residential 1-4 family
 
$
-
   
$
14
   
$
-
   
$
-
   
$
245
   
$
117,628
   
$
117,887
 
Commercial - owner occupied
   
-
     
-
     
58
     
-
     
843
     
170,980
     
171,881
 
Commercial - non-owner occupied
   
-
     
-
     
-
     
-
     
185
     
165,275
     
165,460
 
Multifamily
   
-
     
-
     
-
     
-
     
-
     
20,880
     
20,880
 
Construction
   
65
     
-
     
-
     
-
     
130
     
50,619
     
50,814
 
Second mortgages
   
-
     
-
     
-
     
-
     
-
     
9,707
     
9,707
 
Equity lines of credit
   
-
     
-
     
-
     
-
     
-
     
51,238
     
51,238
 
Total mortgage loans on real estate
 
$
65
   
$
14
   
$
58
   
$
-
   
$
1,403
   
$
586,327
   
$
587,867
 
Commercial and industrial loans
   
-
     
-
     
-
     
-
     
-
     
119,911
     
119,911
 
Consumer automobile loans
   
591
     
132
     
306
     
-
     
-
     
78,515
     
79,544
 
Other consumer loans
   
539
     
201
     
626
     
-
     
-
     
35,624
     
36,990
 
Other
   
16
     
2
     
3
     
-
     
-
     
8,340
     
8,361
 
Total
 
$
1,211
   
$
349
   
$
993
   
$
-
   
$
1,403
   
$
828,717
   
$
832,673
 


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


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


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

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


In the table above, the past due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.2 million at December 31, 2020.

12
Index
Although the portions of the student loan portfolios that are 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans as of June 30, 2021, management does not expect significant increases in delinquencies of these loans to have a material effect on the Company.

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

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

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

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

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

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

Nonaccrual Loans by Class

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

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

 
Six Months Ended June 30,
 
(dollars in thousand)
2021
 
2020
 
Interest income that would have been recorded under original loan terms
 
$
61
   
$
118
 
Actual interest income recorded for the period
   
-
     
8
 
Reduction in interest income on nonaccrual loans
 
$
61
   
$
110
 




13
Index
TROUBLED DEBT RESTRUCTURINGS
The Company’s loan portfolio includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.

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

There were no new TDRs in the six months ended June 30, 2021 and 2020.

At June 30, 2021 and 2020, 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 June 30, 2021 and 2020.

In the three and six months ended June 30, 2021 and 2020, 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 all amounts when due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified in a TDR. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allocation in the allowance or a charge-off to the allowance.

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

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

Impaired Loans by Class

    
As of June 30, 2021
   
For the Six Months Ended
June 30, 2021
 
(Dollars in thousands)
 
Unpaid Principal
Balance
   
Without
Valuation
Allowance
   
With Valuation
Allowance
   
Associated
Allowance
   
Average
Recorded
Investment
   
Interest Income
Recognized
 
Mortgage loans on real estate:
                                   
Residential 1-4 family
 
$
412
   
$
72
   
$
311
   
$
36
   
$
387
   
$
-
 
Commercial
   
2,931
     
1,098
     
432
     
12
     
1,500
     
1
 
Construction
   
212
     
130
     
81
     
-
     
212
     
2
 
Second mortgages
   
131
     
-
     
129
     
3
     
130
     
3
 
Total mortgage loans on real estate
   
3,686
     
1,300
     
953
     
51
     
2,229
     
6
 
Commercial and industrial loans
   
4
     
3
     
-
     
-
     
4
     
-
 
Other consumer loans
   
12
     
11
     
-
     
-
     
11
     
-
 
Total
 
$
3,702
   
$
1,314
   
$
953
   
$
51
   
$
2,244
   
$
6
 


14
Index
Impaired Loans by Class


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

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

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

Each portfolio segment has risk characteristics as follows:

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

Each segment of the portfolio is pooled by risk grade or by days past due. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At June 30, 2021 and December 31, 2020 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.

15
Index
Based on credit risk assessments and management’s analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions (including uncertainties associated with the COVID-19 pandemic), trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

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

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

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

ALLOWANCE FOR LOAN LOSSES BY SEGMENT
The total allowance reflects management’s estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $9.5 million adequate to cover probable loan losses inherent in the loan portfolio at June 30, 2021.

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

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

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

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

16
Index
For the Year ended December 31, 2020
 
(Dollars in thousands)
 
Commercial
and Industrial
   
Real Estate Construction
   
Real Estate -
Mortgage (1)
   
Real Estate -
Commercial
   
Consumer (2)
   
Other
   
Unallocated
   
Total
 
Allowance for loan losses:
                                               
Balance, beginning
 
$
1,244
   
$
258
   
$
2,505
   
$
3,663
   
$
1,694
   
$
296
   
$
-
   
$
9,660
 
Charge-offs
   
(25
)
   
-
     
(149
)
   
(654
)
   
(822
)
   
(355
)
   
-
     
(2,005
)
Recoveries
   
47
     
10
     
69
     
317
     
377
     
66
     
-
     
886
 
Provision for loan losses
   
(616
)
   
71
     
135
     
1,108
     
53
     
116
     
133
     
1,000
 
Ending Balance
 
$
650
   
$
339
   
$
2,560
   
$
4,434
   
$
1,302
   
$
123
   
$
133
   
$
9,541
 
                                                                 
Individually evaluated for impairment
 
$
-
   
$
-
   
$
10
   
$
1
   
$
-
   
$
-
   
$
-
   
$
11
 
Collectively evaluated for impairment
   
650
     
339
     
2,550
     
4,433
     
1,302
     
123
     
133
     
9,530
 
Purchased credit-impaired loans
   
-
     
-
     
-
     
-
     
-
     
-
             
-
 
                                                                 
Ending Balance
 
$
650
   
$
339
   
$
2,560
   
$
4,434
   
$
1,302
   
$
123
   
$
133
   
$
9,541
 
                                                                 
Loans Balances:
                                                               
Individually evaluated for impairment
   
6
     
83
     
586
     
1,427
     
14
     
-
     
-
     
2,116
 
Collectively evaluated for impairment
   
141,740
     
43,649
     
206,950
     
315,424
     
118,354
     
8,067
     
-
     
834,184
 
Purchased credit-impaired loans
   
-
     
-
     
-
     
-
     
-
     
-
             
-
 
Ending Balance
 
$
141,746
   
$
43,732
   
$
207,536
   
$
316,851
   
$
118,368
   
$
8,067
   
$
-
   
$
836,300
 

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

Note 4. Leases

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

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

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

The following tables present information about the Company’s leases:

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


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
Lease cost (in thousands)
 
2021
   
2020
   
2021
   
2020
 
Operating lease cost
 
$
81
   
$
91
   
$
185
   
$
179
 
Total lease cost
 
$
81
   
$
91
   
$
185
   
$
179
 
                                 
Cash paid for amounts included in the measurement of lease liabilities
 
$
84
   
$
93
   
$
187
   
$
177
 
17
Index
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

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

18
Index
Note 5. Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both June 30, 2021 and December 31, 2020. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia; develop and implement strategies to maintain projects as low-income housing; deliver Federal Low Income Housing Credits to investors; allocate tax losses and other possible tax benefits to investors; and preserve and protect project assets.

The investments in these funds were recorded as other assets on the consolidated balance sheets and were $2.2 million and $2.3 million at June 30, 2021 and December 31, 2020, respectively. The expected terms of these investments and the related tax benefits run through 2033. Total projected tax credits to be received for 2021 are $361 thousand, which is based on the most recent quarterly estimates received from the funds. There were no additional capital calls expected for the funds at June 30, 2021.  Additional capital calls expected for the funds totaled $18 thousand at December 31, 2020 and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.

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

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

*
Computed using a 21% tax rate.

Note 6. Borrowings

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

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

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

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

19
Index
LONG-TERM BORROWINGS
At June 30, 2021 the Company had borrowings under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF) of $3.3 million.  These borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of which will mature within 24 months of origination. No new advances are being made pursuant to the PPPLF as of the program’s expiration on July 30, 2021.

The Company also obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens National Bank (Citizens) acquisition. The terms of the loan included a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At December 31, 2020, the outstanding balance was $1.4 million, and the then-current interest rate was 2.61%. The Company elected to pay the loan in full during the first quarter of 2021.

Note 7. Commitments and Contingencies

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

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

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

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

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 to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.

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

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

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

20
Index
The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.77 years.

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

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

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

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

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

Note 9. Stockholders’ Equity and Earnings per Share

STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive Income (Loss)
The following table presents information on amounts reclassified out of accumulated other comprehensive income (loss), by category, during the periods indicated:

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

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

(dollars in thousands)
 
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
   
Accumulated Other
Comprehensive Income
 
             
Six Months Ended June 30, 2021
           
Balance at beginning of period
 
$
4,069
   
$
4,069
 
Net other comprehensive loss
   
(998
)
   
(998
)
Balance at end of period
 
$
3,071
   
$
3,071
 
                 
Six Months Ended June 30, 2020
               
Balance at beginning of period
 
$
(79
)
 
$
(79
)
Net other comprehensive income
   
3,431
     
3,431
 
Balance at end of period
 
$
3,352
   
$
3,352
 

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

21
Index
The following tables present the change in each component of accumulated other comprehensive income (loss) on a pre-tax and after-tax basis for the periods indicated.

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

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

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

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

(dollars in thousands except per share data)
 
Net Income Available to
Common Shareholders
(Numerator)
   
Weighted Average
Common Shares
(Denominator)
   
Per Share
 Amount
 
Three Months Ended June 30, 2021
                 
Net income, basic
 
$
1,842
     
5,237
   
$
0.35
 
Diluted
 
$
1,842
     
5,237
   
$
0.35
 
                         
Three Months Ended June 30, 2020
                       
Net income, basic
 
$
2,494
     
5,220
   
$
0.48
 
Diluted
 
$
2,494
     
5,220
   
$
0.48
 
                         
Six Months Ended June 30, 2021
                       
Net income, basic
 
$
4,854
     
5,231
   
$
0.93
 
Diluted
 
$
4,854
     
5,231
   
$
0.93
 
                         
Six Months Ended June 30, 2020
                       
Net income, basic
 
$
3,744
     
5,210
   
$
0.72
 
Potentially dilutive common shares - employee stock purchase program
    -
      1
      -
 
Diluted
 
$
3,744
     
5,211
   
$
0.72
 

22
Index
The Company had no antidilutive shares outstanding in the six months ended June 30, 2021 and 2020, respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.

Note 10. Fair Value Measurements

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

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

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

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


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

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

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

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

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

23
Index
The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:

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

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

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

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

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

24
Index
Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. Because the loan is discounted at its effective rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as part of the provision for loan losses on the Consolidated Statements of Income.

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

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

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

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


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

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

25
Index
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments as of the dates indicated are as follows:

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

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

Note 11. Segment Reporting

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

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

26
Index
Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and six months ended June 30, 2021 and 2020 follows:

   
Three Months Ended June 30, 2021
 
(dollars in thousands)
 
Bank
   
Trust
   
Parent
   
Eliminations
   
Consolidated
 
Revenues
                             
Interest and dividend income
 
$
9,853
   
$
6
   
$
2,029
   
$
(2,029
)
 
$
9,859
 
Income from fiduciary activities
   
-
     
1,051
     
-
     
-
     
1,051
 
Other income
   
2,219
     
283
     
50
     
(65
)
   
2,487
 
Total operating income
   
12,072
     
1,340
     
2,079
     
(2,094
)
   
13,397
 
                                         
Expenses
                                       
Interest expense
   
752
     
-
     
1
     
-
     
753
 
Provision for loan losses
   
-
     
-
     
-
     
-
     
-
 
Salaries and employee benefits
   
5,299
     
764
     
164
     
-
     
6,227
 
Other expenses
   
3,999
     
252
     
122
     
(65
)
   
4,308
 
Total operating expenses
   
10,050
     
1,016
     
287
     
(65
)
   
11,288
 
                                         
Income before taxes
   
2,022
     
324
     
1,792
     
(2,029
)
   
2,109
 
                                         
Income tax expense (benefit)
   
248
     
69
     
(50
)
   
-
     
267
 
                                         
Net income
 
$
1,774
   
$
255
   
$
1,842
   
$
(2,029
)
 
$
1,842
 
                                         
Capital expenditures
 
$
598
   
$
36
   
$
-
   
$
-
   
$
634
 
                                         
Total assets
 
$
1,267,532
   
$
7,213
   
$
120,000
   
$
(119,934
)
 
$
1,274,811
 

   
Three Months Ended June 30, 2020
 
(dollars in thousands)
 
Bank
   
Trust
   
Parent
   
Eliminations
   
Consolidated
 
Revenues
                             
Interest and dividend income
 
$
9,837
   
$
11
   
$
2,679
   
$
(2,679
)
 
$
9,848
 
Income from fiduciary activities
   
-
     
909
     
-
     
-
     
909
 
Other income
   
2,816
     
249
     
50
     
(66
)
   
3,049
 
Total operating income
   
12,653
     
1,169
     
2,729
     
(2,745
)
   
13,806
 
                                         
Expenses
                                       
Interest expense
   
1,361
     
-
     
14
     
-
     
1,375
 
Provision for loan losses
   
300
     
-
     
-
     
-
     
300
 
Salaries and employee benefits
   
4,571
     
741
     
152
     
-
     
5,464
 
Other expenses
   
3,452
     
236
     
118
     
(66
)
   
3,740
 
Total operating expenses
   
9,684
     
977
     
284
     
(66
)
   
10,879
 
                                         
Income before taxes
   
2,969
     
192
     
2,445
     
(2,679
)
   
2,927
 
                                         
Income tax expense (benefit)
   
441
     
41
     
(49
)
   
-
     
433
 
                                         
Net income
 
$
2,528
   
$
151
   
$
2,494
   
$
(2,679
)
 
$
2,494
 
                                         
Capital expenditures
 
$
288
   
$
6
   
$
-
   
$
-
   
$
294
 
                                         
Total assets
 
$
1,214,546
   
$
7,008
   
$
117,558
   
$
(117,867
)
 
$
1,221,245
 

27
Index
   
Six Months Ended June 30, 2021
 
(dollars in thousands)
 
Bank
   
Trust
   
Unconsolidated Parent
   
Eliminations
   
Consolidated
 
Revenues
                             
Interest and dividend income
 
$
20,826
   
$
11
   
$
5,177
   
$
(5,177
)
 
$
20,837
 
Income from fiduciary activities
   
-
     
2,078
     
-
     
-
     
2,078
 
Other income
   
5,085
     
539
     
100
     
(130
)
   
5,594
 
Total operating income
   
25,911
     
2,628
     
5,277
     
(5,307
)
   
28,509
 
                                         
Expenses
                                       
Interest expense
   
1,570
     
-
     
5
     
-
     
1,575
 
Provision for loan losses
   
150
     
-
     
-
     
-
     
150
 
Salaries and employee benefits
   
10,619
     
1,507
     
328
     
-
     
12,454
 
Other expenses
   
8,062
     
531
     
176
     
(130
)
   
8,639
 
Total operating expenses
   
20,401
     
2,038
     
509
     
(130
)
   
22,818
 
                                         
Income before taxes
   
5,510
     
590
     
4,768
     
(5,177
)
   
5,691
 
                                         
Income tax expense (benefit)
   
798
     
125
     
(86
)
   
-
     
837
 
                                         
Net income
 
$
4,712
   
$
465
   
$
4,854
   
$
(5,177
)
 
$
4,854
 
                                         
Capital expenditures
 
$
719
   
$
41
   
$
-
   
$
-
   
$
760
 
                                         
Total assets
 
$
1,267,532
   
$
7,213
   
$
120,000
   
$
(119,934
)
 
$
1,274,811
 

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

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


Note 12. Subsequent Events



On July 14, 2021, the Company completed the issuance of $30.0 million in aggregate principal amount of subordinated notes (the Notes) due in 2031 in a private placement transaction.  The subordinated notes will initially bear interest at a fixed rate of 3.5% for five years and at the three month SOFR plus 286 basis points, resetting quarterly, thereafter.  The notes were structured to qualify as Tier 2 capital for regulatory purposes, and the proceeds will be used for general corporate purposes.

29
Index

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s 2020 Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2020. Highlighted in the discussion are material changes from prior reporting periods and certain identifiable trends affecting the Company. Results of operations for the three and six months ended June 30, 2021 and 2020 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

Cautionary Statement Regarding Forward-Looking Statements
This report contains statements concerning the Company’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to: statements regarding expected future operations and financial performance; the Company’s technology and efficiency initiatives and anticipated completion timelines; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations, certain items that management does not expect to have an ongoing impact on consolidated net income, future dividend payments, net interest margin compression and items affecting net interest margin, strategic business initiatives and the anticipated effects thereof, lending under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA), asset quality, adequacy of allowances for loan losses and the level of future chargeoffs, liquidity and capital levels, the Company’s assessment of and ability to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the Bank and its customers and employees, perpetrated by third-party cybercriminals, the effect of future market and industry trends and the effects of future interest rate levels and fluctuations. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in:


•
interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates

•
general business conditions, as well as conditions within the financial markets

•
general economic conditions, including unemployment levels and slowdowns in economic growth, and particularly related to further and sustained economic impacts of the COVID-19 pandemic

•
the effectiveness of the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein

•
potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act, as subsequently amended

•
the Company’s branch realignment initiatives

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

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

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

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

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

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

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

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

•
the quality or composition of the loan portfolios and the value of the collateral securing those loans

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

•
the effects of management’s investment strategy and strategy to manage the net interest margin

29
Index

•
the level of net charge-offs on loans and the adequacy of our allowance for loan and lease losses

•
performance of the Company’s dealer lending program

•
deposit flows

•
the strength of the Company’s counterparties

•
competition from both banks and non-banks

•
demand for financial services in the Company’s market area

•
implementation of new technologies

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

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

•
reliance on third parties for key services

•
cyber threats, attacks or events

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

•
technological risks and developments

•
the commercial and residential real estate markets

•
the demand in the secondary residential mortgage loan markets

•
expansion of the Company’s product offerings

•
accounting principles, policies and guidelines and elections made by the Company thereunder

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

Available Information
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings. The information available on the Company’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.

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

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

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

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

Critical Accounting Policies and Estimates
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.

The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses. Accordingly, the Company’s significant accounting policies are discussed in Note 1 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company’s 2020 Annual Report on Form 10-K.

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

For the six months ended June 30, 2021 and 2020, net income was $4.9 million, or $0.93 earnings per diluted common share, and $3.7 million, or $0.72 earnings per diluted common share, respectively.  The increase was primarily attributable to increased net interest income, decreased provision for loan losses, and increased noninterest income partially offset by increased noninterest expense.

Highlights of the quarter are as follows:


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


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


•
Non-performing assets (NPAs) increased slightly to $2.4 million at June 30, 2021 compared to $2.0 million at December 31, 2020, but decreased significantly from $7.0 million as of June 30, 2020. NPAs as a percentage of total assets was 0.19% at June 30, 2021, which compared to 0.16% at December 31, 2020 and 0.57% at June 30, 2020.
 

•
Quarterly average earning assets grew $111.6 million, or 10.5%, to $1.2 billion as of June 30, 2021 compared to $1.1 billion as of June 30, 2020.
 

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

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

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

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

For the six months ended June 30, 2021 and 2020, net interest income was $19.3 million and $16.9 million, respectively. Net interest income, on a fully tax-equivalent basis, was $19.4 million for the six months ended June 30, 2021, compared to $17.0 million for the six months ended June 30, 2020, an increase of $2.4 million, or 14.2%. The increase was driven by the growth in average earning assets and the lower cost of funds from the first half of 2020, tempered by the impacts of lower yields on earning assets and increases in average interest bearing liabilities. Accelerated recognition of deferred fees and costs related to PPP forgiveness also positively impacted net interest income for the 2021 period. Average earning assets for the six months ended June 30, 2021 increased $149.5 million, or 14.7%, compared to the first six months of 2020, primarily due to growth in loans (including PPP loans) and investment securities, funded by deposit growth. Average interest bearing liabilities increased $35.9 million, or 5.0%, for the six months ended June 30, 2021 compared to the comparative 2020 period. The average tax-equivalent yield and average interest bearing cost decreased by 31 basis points and 41 basis points, respectively, for the first six months of 2021 compared to the first six months of 2020.

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

Average money market, savings and interest-bearing demand deposits increased $107.4 million and $107.2 million for the second quarter and first six months of 2021, respectively, and average time deposits decreased $28.5 million and $30.2 million for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift from time deposits as a result of lower interest rates. Average noninterest-bearing demand deposits increased $74.8 million for the second quarter of 2021 and increased $94.8 million for the first six months of 2021, compared to the same periods in 2020. The average cost of interest-bearing deposits decreased 32 basis points for the second quarter of 2021 and decreased 34 basis points for the first six months of 2021, compared to the same periods in 2020, due primarily to lower rates on deposits and a shift in composition from time deposits. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.

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

The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, the timing and extent of any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment; and (3) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.

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

AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

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

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

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Index
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

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

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

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

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

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

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

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

Noninterest Income
Noninterest income was $3.5 million and $7.7 million , respectively, in the three and six months ended June 30, 2021, a decrease of $420 thousand or 10.6% from the second quarter of 2020 and an increase of $436 thousand from the six months ended June 30, 2020. Increases in fiduciary and asset management fees, other service charges, commissions and fees, and mortgage banking income were offset by the impact of non-recurring gains on available for sale securities and fixed assets that were recognized during the second quarter of 2020, which resulted in a decline in noninterest income for the second quarter of 2021 when compared to the prior year quarter. Year over year, fiduciary and asset management fees and other service charges, commission and fees increased while service charges on deposit accounts decreased primarily due to lower nonsufficient funds, or NSF, fees which historically trend downward during periods of economic uncertainty and lower service charges due to higher deposit balances.  Mortgage banking income increased primarily due to (i) higher volume resulting from the current interest rate environment, (ii) higher gains on sales of loans as a result of higher margins on loan originated for resale and (iii) expansion of the mortgage lending team.  Excluding non-recurring gains recognized in 2020, noninterest income increased quarter-over-quarter and year-over-year.

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

Total salaries and benefits costs increased $763 thousand, or 14.0%, when comparing the second quarters of 2021 and 2020 and $996 thousand, or 8.7%, when comparing the six months ended June 30, 2021 to the same period in 2020.  The increase in salaries and employee benefits is primarily attributable to (i) increased commission expense related to higher mortgage loan origination volume in 2021; (ii) increased temporary employee expense; and (iii) lower levels of deferred costs related to PPP loan origination, partially offset by reduced salary expense related primarily to lower full time equivalent employee levels. The costs related to PPP loan originations were deferred at time of origination and are being amortized to interest income over the remaining lives of the loans, which may be 24 or 60 months at origination.  These costs are amortized against the related loan fees received for the origination of the PPP loans.  Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans.  The Company has benefited from the early retirement transitions to redeploy resources in highly skilled and experienced relationship officers as well as officers with experience in creating efficiencies through improvements in operations and technology.

35
Index
As part of the Company’s 2021 roadmap for implementing bank-wide technology and efficiency initiatives, the Company has fully implemented a new loan origination system and a new online appointment scheduling solution. In addition, the Company remains on track to implement a deposit origination platform and a new online account opening solution, and complete the ATM upgrade project in the third quarter of 2021. The Company plans to complete upgrades to critical infrastructure software related to imaging and to implement a new data analytics solution and teller system during the fourth quarter of 2021. These initiatives have driven an increase of $393 thousand from the quarter ended June 30, 2020 to the quarter ended June 30, 2021 and are expected to continue to contribute to increased noninterest expenses during the implementation and transition timeframes as our operational structure pivoted from in-house to outsourced environments and shifted costs previously included in occupancy and equipment expense. The Company expects to continue its bank-wide technology initiative implementations into 2022.

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

The Company’s income tax expense decreased $166 thousand for the second quarter and increased $288 thousand for first six months of 2021 when compared to the same periods in 2020 primarily due to changes in the levels of net income and lower federal income tax credits for investment in certain housing projects. The effective federal income tax rates for the three and six months ended June 30, 2021 was 12.7% and 14.7% and the effective tax rates for the three and six months ended June 30, 2020 was 14.7% and 12.8%, respectively.

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

Total assets of $1.3 billion as of June 30, 2021 increased by $48.6 million from December 31, 2020. Net loans held for investment decreased $3.6 million, or 0.4%, from December 31, 2020 to $823.2 million at June 30, 2021. The change in net loans held for investment was primarily attributed to a decline of $25.7 million in the PPP loan segment due to forgiveness of $74.0 million of PPP loans, which was partially offset by new PPP originations of $48.3 million.  Loan growth in the commercial real estate and construction, land deployment, and other land loan segments was $20.9 million on a combined basis for the same period. Cash and cash equivalents increased $35.1 million, or 29.1%. Securities available for sale, at fair value, increased $26.8 million from December 31, 2020 to $213.2 million at June 30, 2021, as additional liquidity provided by growth in deposit accounts continues to be deployed in the Company’s investment portfolio.

Total deposits increased $66.8 million, or 6.3%, to $1.1 billion at June 30, 2021. Noninterest-bearing deposits increased $38.5 million, or 10.6%, savings deposits increased $42.8 million, or 8.3%, and time deposits decreased $14.3 million, or 7.4%. Growth in the Company’s deposits continues to be driven by government stimulus, PPP loan related deposits, and higher levels of consumer savings. Key strategies continue to be expanding the low cost deposit base and re-pricing to reduce interest expense and buffer NIM compression during this low rate environment. Total borrowings decreased $21.0 million from December 31, 2020 to June 30, 2021.  The primary driver of the decrease was repayment of borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) initiated by the Federal Reserve to partially fund PPP loan originations, resulting in the Company borrowing $3.3 million as of June 30, 2021 as compared to $28.6 million at December 31, 2020.  PPPLF borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of which will mature within 24 months of origination.

Average assets for the first six months of 2021 increased $141.1 million, or 12.6%, compared to the first six months of 2020. Comparing the first six months of 2021 to the first six months of 2020, average loans increased $41.6 million, and average investment securities increased $38.8 million. Total average deposits increased $171.8 million with year-over-year average balance increases of 33.1% in non-interest bearing deposits and 24.7% in savings deposits, including interest-bearing transaction and money market accounts.  Average borrowings decreased $41.1 million.

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

36
Index
A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB and FRB. As of the end of the second quarter of 2021, the Company had $375.1 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the second quarter of 2021, the Company had $105.0 million available in federal funds lines to address any short-term borrowing needs.

As disclosed in the Company’s consolidated statements of cash flows, net cash provided by operating activities was $15.9 million, net cash used in investing activities was $25.5 million, and net cash provided by financing activities was $44.6 million for the six months ended June 30, 2021. Combined, this contributed to a $35.1 million increase in cash and cash equivalents for the six months ended June 30, 2021.

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

Based on the Company’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.

Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. OREO consists of real estate from a foreclosure on loan collateral. The Company had no OREO as of June 30, 2021 and December 31, 2020.

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

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

37
Index
The following table presents information on nonperforming assets, as of the dates indicated:

NONPERFORMING ASSETS

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

Nonperforming assets as of June 30, 2021 were $2.4 million, $438 thousand higher than nonperforming assets as of December 31, 2020. Nonaccrual loans increased $189 thousand when comparing the balances as of June 30, 2021 to December 31, 2020. The increase was primarily driven by one credit relationship of $130 thousand which has subsequently been resolved. See Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for additional information about the change in nonaccrual loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regarding the cash flow, anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.

The majority of the balance of nonaccrual loans at June 30, 2021 was related to one large credit relationship of $843 thousand, representing 60.1% of the $1.4 million of nonaccrual loans at June 30, 2021. This relationship has been analyzed to determine whether the cash flow of the borrower and the Company believes that the collateral pledged to secure the loans is sufficient to cover the outstanding principal balance. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect.

Loans past due 90 days or more and accruing interest increased $249 thousand. As of June 30, 2021, $626 thousand of the $993 thousand of loans past due 90 days or more and accruing interest were government-guaranteed student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company.

38
Index
Total restructured loans decreased by $99 thousand from December 31, 2020 to June 30, 2021 primarily due to pay-offs and paydowns. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

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

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

The majority of the Company’s TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company is waiting on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of June 30, 2021 and December 31, 2020, the impaired loan component of the allowance for loan losses was $51 thousand and $11 thousand, respectively.

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

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

Both the historical loss and qualitative factor components of the allowance are applied to loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the call report applicable to the Bank. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan’s payments are current (including loans 1 – 29 days past due), or are 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company’s internally assigned risk grades: substandard, other assets especially mentioned (OAEM, rated 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 June 30, 2021 and December 31, 2020 the Company had no loans in these categories.

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

On a combined basis, the historical loss and qualitative factor components amounted to $9.4 million as of June 30, 2021 and $9.5 million at December 31, 2020.  Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to identify areas within the loan portfolio which may create elevated levels of risk should the economic environment created by the COVID-19 pandemic or effects of federal government relief programs present indications of economic instability that is other than temporary in nature.

39
Index
The allowance for loan losses was 1.14% of total loans held for investment on June 30, 2021 and December 31, 2020. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.23% at June 30, 2021 and 1.27% at December 31, 2020. The decrease in the ALLL as a percentage of loans held for investment, excluding PPP loans, from December 31, 2020 to June 30, 2021 is primarily related to higher outstanding loan balances, excluding PPP, combined with decreasing historical loss rates partially offset by increased qualitative reserves. Loans held for investment excluding PPP loans is a non-GAAP financial measure. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below. As of June 30, 2021, the allowance for loan losses was 395.4% of nonperforming loans and nonperforming assets, respectively; this compares to 487.3% of both nonperforming loans and nonperforming assets as of December 31, 2020. Management believes it has provided an adequate reserve for nonperforming loans at June 30, 2021.

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

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

Capital Resources
Total stockholders’ equity as of June 30, 2021 was $119.9 million, an increase of $2.8 million or 2.4% from $117.1 million at December 31, 2020. The increase was the result of increased retained earnings partially offset by net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income on the consolidated balance sheets. The movement in the unrealized gain/loss position was driven by changes in market rates and shift in portfolio composition.

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

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

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

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the 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.

40
Index
The following is a summary of the Bank’s capital ratios at June 30, 2021. As shown below, these ratios were all well above the recommended regulatory minimum levels.

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

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

Book value per share was $22.87 at June 30, 2021 as compared to $22.19 at June 30, 2020. Cash dividends were $1.3 million or $0.24 per share in the first six months of 2021 and 2020, respectively.

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

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

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

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

41
Index
Non-GAAP Financial Measures
In reporting the results of the quarter ended June 30, 2021, the Company has provided supplemental financial measures on a tax equivalent or an adjusted basis.  These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP.  In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.

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

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 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 as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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

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

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

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings.

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.

42
Index
Item 1A.
Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2020 Annual Report on Form 10-K.

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

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

During the six months ended June 30, 2021, the Company did not repurchase any shares pursuant to the Company’s stock repurchase program. The Company is authorized to repurchase, during any given calendar year, up to an aggregate of 5 percent of the shares of the Company’s common stock outstanding as of January 1 of that calendar year.

Item 3.
Defaults Upon Senior Securities.

None.

Item 4.
Mine Safety Disclosures.

None.

Item 5.
Other Information.

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

Amendment No. 1 to Settlement Agreement

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

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

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

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

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

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

43
Index
Item 6.
Exhibits.

Exhibit
No.
 
Description
2.1
 
Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)
     
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)
     
 
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)
     
4.1
 
Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 16, 2021)
     
 
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 16, 2021)
     
 
Amendment No. 1 to Settlement Agreement, dated August 12, 2021, among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe
     
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101
 
The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for June 30, 2021), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)
     
104
 
The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, formatted in Inline XBRL (included with Exhibit 101)

SIGNATURES

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

 
OLD POINT FINANCIAL CORPORATION
     
August 16, 2021
/s/Robert F. Shuford, Jr.
 
 
Robert F. Shuford, Jr.
 
 
Chairman, President & Chief Executive Officer
 
 
(Principal Executive Officer)
 
     
August 16, 2021
/s/Elizabeth T. Beale
 
 
Elizabeth T. Beale
 
 
Chief Financial Officer & Senior Vice President/Finance
 
 
(Principal Financial & Accounting Officer)
 


44
Exhibit 10.14.1

AMENDMENT NO. 1 TO
SETTLEMENT AGREEMENT

THIS AMENDMENT NO. 1 (this “Amendment”) to the SETTLEMENT AGREEMENT, which was entered into as of March 16, 2016 (the “Agreement”), is made and entered into as of August 12, 2021, by and among (a) Old Point Financial Corporation, a Virginia corporation (the “Company”); (b) Financial Edge Fund, L.P., a Delaware limited partnership, Financial Edge-Strategic Fund, L.P., a Delaware limited partnership, PL Capital/Focused Fund, L.P., a Delaware limited partnership, PL Capital, LLC, a Delaware limited liability company (“PL Capital”), PL Capital Advisors, LLC, a Delaware limited liability company (“PL Capital Advisors”), Goodbody/PL Capital, L.P., a Delaware limited partnership, Goodbody/PL Capital, LLC, a Delaware limited liability company (“Goodbody/PL LLC”), John W. Palmer and Richard J. Lashley, as Managing Members of PL Capital, PL Capital Advisors and Goodbody/PL LLC (collectively, the “PL Capital Group”); and (c) Mr. William F. Keefe (“Mr. Keefe”). The Company, the PL Capital Group and Mr. Keefe are each referred to herein as a “Party” and collectively, as the “Parties.”

PREAMBLE
 
Since the execution of the Agreement, the Parties have determined that it is in the best interest of all Parties to update the provisions of the Agreement specified herein.

In consideration of their mutual promises and obligations hereunder, and intending to be legally bound hereby, the Parties hereby agree as follows:

ARTICLE I
AMENDMENT

Section 1.01     Standstill; Beneficial Ownership. Section 4(a) of the Agreement is hereby deleted in its entirety and replaced with the following:

(a)(i) acquire, offer or agree to acquire, or acquire rights to acquire (except by way of stock dividends or other distributions or offerings made available to holders of voting securities of the Company generally on a pro rata basis), directly or indirectly, whether by purchase, tender or exchange offer, through the acquisition of control of another person, by joining a group, through swap or hedging transactions or otherwise, any voting securities of the Company or any voting rights decoupled from the underlying voting securities which would result in the ownership, control or other beneficial ownership interest in more than 14.99% of the then-outstanding shares of the Common Stock in the aggregate; or (ii) knowingly sell, offer or agree to sell, all or substantially all, through swap or hedging transactions or otherwise, the voting securities of the Company or any voting rights decoupled from the underlying voting securities held by the PL Capital Group, Mr. Keefe and their respective Representatives to any Third Party which would result in such Third Party, together with its Representatives, having any beneficial ownership interest of 5.0% or more of the then-outstanding shares of Common Stock (except for Schedule 13G filers that are mutual funds, pension funds or index funds with no known history of activism).

Signature page to Amendment No. 1

Section 1.02     Standstill; Transactions. Section 4(g) of the Agreement is hereby deleted in its entirety and replaced with the following:

(g) effect or seek to effect, offer or propose to effect, cause or participate in, or in any way assist or facilitate any other person to effect or seek, offer or propose to effect or participate in, any acquisition of more than 14.99% of any securities, or any material assets or businesses, of the Company or any of its subsidiaries; any tender offer or exchange offer, merger, acquisition, share exchange or other business combination involving more than 14.99% of any of the voting securities or any of the material assets or businesses of the Company or any of its subsidiaries; or any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to the Company or any of its subsidiaries or any material portion of its or their businesses.

Section 1.03     Termination. The first sentence of Section 12 of the Agreement is hereby deleted in its entirety and replaced with the following:

Each Party shall have the right to terminate this Agreement by giving at least five (5) Business Days’ written notice to the Other Party at any time after the close of business on the date immediately following the date of the 2022 Annual Meeting (the date of such termination, the “Termination Date”); provided, however, that the Termination Date may not be in any time period between the notice deadline pursuant to the Bylaws for the nomination of director candidates for election to the Board for an Annual Meeting with respect to any Annual Meeting and the conclusion of such Annual Meeting.

ARTICLE II
MISCELLANEOUS

Section 2.01       Definitions.  Capitalized terms used herein but not defined herein shall have the meanings set forth in the Agreement, as amended hereby.

Section 2.02       Continuation. The Agreement is hereby modified to reflect the terms of this Amendment and shall continue in full force and effect. All other provisions of the Agreement not specifically modified herein shall remain in full force and effect.

Section 2.03       Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be an original, but such counterparts together shall constitute one and the same agreement. This Amendment and any signed agreement or instrument entered into in connection with this Amendment may be executed by facsimile signature or other electronic transmission signature and such signature shall constitute an original for all purposes. No party to any such agreement or instrument shall raise the use of facsimile machine or email delivery of a “.pdf.” format data file to deliver a signature to any such agreement or instrument or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine or e-mail delivery of a “.pdf” format data file as a defense to the formation of a contract and each party forever waives any such defense.

2
Section 2.04       Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia without regard to its conflict of law principles.

Section 2.05       Amendment or Modification. Any amendment or modification of the terms and conditions set forth in the Agreement, as amended by this Amendment, must be agreed to in a writing signed by each Party.

Section 2.06      Representations and Warranties of the PL Capital Group and of Mr. Keefe.  Mr. Keefe represents and warrants that he is sui juris and of full capacity.  Each member of the PL Capital Group and Mr. Keefe represent and warrant that they have full power and authority to execute, deliver and carry out the terms and provisions of this Amendment and to consummate the transactions contemplated by the Agreement as amended by this Amendment, and that this Amendment has been duly and validly executed and delivered by each member of the PL Capital Group and Mr. Keefe, constitutes a valid and binding obligation and agreement of each member of the PL Capital Group and Mr. Keefe and is enforceable against each member of the PL Capital Group and Mr. Keefe in accordance with its terms.  Each member of the PL Capital Group and Mr. Keefe represent and warrant that they have not formed, are not members of, any group with any other person and do not act in concert with any other person. Each member of the PL Capital Group represents and warrants that it has not, directly or indirectly, compensated or agreed to, and shall not, compensate the PL Capital Designee for his service as a director of the Company with any cash, securities (including any rights or options convertible into or exercisable for or exchangeable into securities or any profit sharing agreement or arrangement) or other form of compensation directly or indirectly related to the Company or its securities, except for the PL Capital Group's agreement to indemnify and reimburse Mr. Keefe as described in the Nomination Notice.

Section 2.07       Representations and Warranties of the Company.  The Company hereby represents and warrants that it has the power and authority to execute, deliver and carry out the terms and provisions of the Agreement as amended by this Amendment and to consummate the transactions contemplated hereby and thereby, and that this Amendment has been duly and validly authorized, executed and delivered by the Company, constitutes a valid and binding obligation and agreement of the Company and is enforceable against the Company in accordance with its terms.

Section 2.08       Resignation Letter of PL Capital Designee. Prior to the execution of this Amendment, the PL Capital Designee has executed and delivered to Old Point an irrevocable resignation as director in the form attached hereto as Exhibit A.

[Signature pages follow]
 
3
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized officers as of the day and year first above written.

OLD POINT FINANCIAL CORPORATION
 
   
By:
/s/ Robert F. Shuford Jr.  
Name:
Robert F. Shuford, Jr.
Title:
Chairman

FINANCIAL EDGE FUND, L.P.,
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member, PL Capital LLC, General Partner

FINANCIAL EDGE-STRATEGIC FUND, L.P.
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member, PL Capital LLC, General Partner

PL CAPITAL/FOCUSED FUND, L.P.
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member, PL Capital LLC, General Partner

PL CAPITAL, LLC
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member

Signature page to Amendment No. 1

PL CAPITAL ADVISORS, LLC
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member

GOODBODY/PL CAPITAL, L.P.
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member, Goodbody PL Capital LLC, General Partner

GOODBODY/PL CAPITAL, LLC
 
   
By:
/s/ Richard J. Lashley  
Name:
Richard J. Lashley
Title:
Managing Member

JOHN W. PALMER
 
   
/s/ John W. Palmer
 
John W. Palmer
 
   
RICHARD J. LASHLEY
 
   
/s/ Richard J. Lashley
 
Richard J. Lashley
 
   
WILLIAM F. KEEFE
 
   
/s/ William F. Keefe
 
William F. Keefe
 

Signature page to Amendment No. 1

 
Exhibit 31.1
CERTIFICATIONS

I, Robert F. Shuford, Jr., certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Old Point Financial Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 16, 2021
/s/Robert F. Shuford, Jr.

 
Robert F. Shuford, Jr.
 
Chairman, President & Chief Executive Officer


Exhibit 31.2
CERTIFICATIONS

I, Elizabeth T. Beale, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Old Point Financial Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 16, 2021
/s/Elizabeth T. Beale

 
Elizabeth T. Beale
 
Chief Financial Officer & Senior Vice President/Finance


Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Point Financial Corporation (the “Company”) on Form 10-Q for the quarter ended June 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

August 16, 2021
/s/Robert F. Shuford, Jr.

 
Robert F. Shuford, Jr.
 
Chairman, President & Chief Executive Officer
   
August 16, 2021
/s/Elizabeth T. Beale

 
Elizabeth T. Beale
 
Chief Financial Officer & Senior Vice President/Finance