TYSONS CORNER, Va., May 04, 2023 - Our first quarter 2023 results are a strong start in what has been a challenging quarter for the banking industry. Since December 31, 2022, we have further bolstered a balance sheet that displays a strong level of capital and ample liquidity. Our total assets, loans and deposits all increased by approximately 5%, a 20% annualized rate, during the quarter. We delivered our thirteenth consecutive quarter of profitability for the quarter ended March 31, 2023, further validating that our high-touch and personalized approach to client service is working to deliver long-term franchise value for our shareholders. Our tangible book value per share has increased from $10.31 on March 31, 2022, to $10.80 on March 31, 2023. However, our net interest margin (“NIM”) continued to experience compression largely due to the higher cost of deposits and borrowings resulting from the continued increases in short-term interest rates. While the cost of our deposits has been rising in recent months, we are pleased to report that our high customer retention rate has not dropped through the date of this letter. In fact, our deposit base of customers is growing and further supported by a robust deposit pipeline. We are prepared to make the adjustments necessary to operate effectively at a lower NIM than previous periods until the intense pressure on funding cost is reduced. Our experienced and focused board of directors, executive team and team members are committed to positioning our Bank to manage through continued volatility and uncertainty in the banking industry and overall economy.

ODNB Financial Corporation (the “Company” or “ODNB”), the holding company for Old Dominion National Bank (the “Bank”) continues to serve its growing number of customers across Northern Virginia and the Washington, D.C. metropolitan area, Central Pennsylvania, and the Charlottesville, Virginia area. The financial data presented in this letter is now consolidated, which only affects first quarter 2023 and fourth quarter 2022 results. The data for all prior periods are Bank-only financial results.

During the recent market turmoil our team worked hard to ensure solid risk management oversight and communicated with clients regarding secure deposit coverage and the balance sheet strength of Old Dominion National Bank. The Bank has a diverse deposit and loan portfolio from a geographic and industry level, and has stayed clear of the issues that have affected the banks that were closed by the federal regulators in March and April. Our talented team continues to navigate through the rapidly changing interest rate environment and uncertainties in the economy to maintain an acceptable net interest margin and pristine credit quality.

As you know, we formed our bank holding company on July 1, 2022, which has provided us with more capital options to support our growing franchise. In addition, the successful completion of the oversubscribed $24.0 million subordinated debt offering in the third quarter of 2022 positions us with a strong capital base. Also, it sets the stage for further consideration to increase our capital base to support the continued execution of our strategic plan.

Continued Profitability

Net income for the first quarter of 2023 was $1.1 million, compared to $1.3 million in the linked quarter. Our first quarter results were driven by strong quarterly loan growth of $39.7 million, and a NIM of 2.72%, resulting in total net revenue of $7.2 million in the first quarter of 2023, compared to $8.0 million in the fourth quarter of 2022. Non-interest expense increased modestly during the first quarter to $5.8 million compared to $5.5 million in the preceding quarter, primarily due to costs related to professional services, FDIC insurance premiums, bank franchise taxes, and data processing to support our operations and continued growth. While total non-interest expenses grew in the current quarter, our total non-interest expense to average assets decreased to 2.23% from 2.25% in the prior quarter.

As previously mentioned, deposit growth and pricing was an industrywide challenge during the first quarter, and we have not been immune to the effects of the Federal Reserve’s tightening monetary policy. The rapid rise in interest rates has led to higher funding costs and a 66-basis point reduction in the first quarter NIM compared to the preceding quarter, and a 48-basis point decrease compared to the first quarter a year ago. NIM in the first quarter of 2023 was 2.72% compared to 3.38% in the preceding quarter. Non-interest-bearing customer deposits totaled $247.7 million and represented 28.6% of total deposits on March 31, 2023.

High Growth and Strong Balance Sheet

Total assets were $1.08 billion on March 31, 2023, compared to $1.03 billion on December 31, 2022, and $893.4 million on March 31, 2022. Year-over-year asset growth of 20.9% was driven primarily by 9.7% deposit growth combined with an increased level of borrowings, including the $24.0 million subordinated debt offering that closed during the third quarter of 2022. Our organic asset growth was primarily driven by our high-performing commercial and residential banking team fostering new client relationships, and their ability to bring prior business relationships to our Bank. This was supported by a back-office team of professionals dedicated to our client service model.

Gross loans increased 38.0% to $932.8 million as of March 31, 2023, compared to $675.7 million a year earlier and grew 4.4% compared to $893.0 million three months earlier. This growth is a direct result of our deep and expanding lending team continuing to be the primary driver of our loan growth in the first quarter of 2023. We do anticipate reducing the rate of growth in the loan portfolio as we put an even higher emphasis on deposit gathering and liquidity in future quarters.

Our most recent loan growth has been funded through relationship-driven customer deposit gathering activities within our markets, together with borrowings and other alternative funding sources. Total deposits were $868.1 million at March 31, 2023, a $37.4 million increase or 4.5% from three months earlier. Deposit retention and acquisition remains competitive, but we are grateful for our loyal client base and the response from prospective value-aligned depositors. The cost of deposits and borrowing funds has increased significantly with the extraordinary move in higher market interest rates since the beginning of 2022. Despite these headwinds, balance sheet liquidity, which includes cash and unencumbered marketable securities, remains strong at $112.5 million, or 11.43% of total liabilities, at March 31, 2023. Furthermore, access to additional liquidity sources remains strong with over $150 million in available liquidity, defined as the sum of secured borrowing available at the Federal Reserve and the Federal Home Loan Bank.

Strong Asset Quality and Capital Strength

Asset quality remained solid with nonperforming assets of $496 thousand, representing 0.05% of total assets at March 31, 2023. Additionally, there were no loans 30 days or more past due for payment on March 31, 2023. Beginning January 1, 2023, we implemented the Current Expected Credit Losses (“CECL”), which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model. The transition required only a $985 thousand initial provision to equity and no provision to earnings was necessary for the first quarter of 2023. On March 31, 2023, our allowance for loan losses was 1.14% of gross loans compared to 1.19% on December 31, 2022.

Our Bank’s capital base exceeds regulatory “well capitalized” levels by a wide margin, with a tier one leverage ratio of 11.69% and total risk-based capital ratio of 13.12% at March 31, 2023. Additionally, we maintain rigorous risk management practices and adhere to strict regulatory guidelines to ensure the safety and security of our customers’ deposits.

Common tangible book value (“TBV”) per share was $10.80 on March 31, 2023, compared to $10.31 on March 31, 2022, reflecting retained earnings growth, which was partially offset by the change in unrealized losses on marketable securities available-for-sale (“AFS”) due to fair value adjustments resulting from rising interest rates. Accounting for these unrealized losses reduces accumulated other comprehensive income (“AOCI”) as a component of stockholders’ equity on the balance sheet, which in turn affects TBV per share, even though there is no impact on the income statement or earnings. While the application of these accounting rules may create volatility in our TBV per share, given our intent to hold these bonds to maturity, we anticipate a full recovery of TBV related to these temporary unrealized losses. Excluding a $0.69 impact of the unrealized mark-to-market losses on the AFS portfolio (a non-GAAP financial measure), the common TBV per share would have been $11.49 as of March 31, 2023. Our total bond portfolio assets as a percentage to total assets was just 7.3% at March 31, 2023. As a result, the total unrealized losses reflected in equity from the AFS portfolio was $6.1 million, representing just 6.46% of total shareholders’ equity. This is among the industry’s lowest level of exposure to price risk in the bond portfolio.

Since 2016, the success of our Bank has always been driven by our talented people, relationship-based model, and intimate knowledge of our customers that sets us apart. We have successfully navigated various macroeconomic and interest rate environments in the past, and are prepared to do so in the current challenging environment. On behalf of our entire team, we thank you for your continued support as a shareholder in ODNB. We ask that you please work with our client service team to explore ways to expand your relationship with our Bank. We stand ready to address any questions you may have and welcome all client referrals. For shareholder information, please visit our website’s Investor Relations webpage or email shareholders@ODNBonline.com.