What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-16 compared with 2022-11-15 · 403 added, 551 removed, 67 unchanged (93% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations

About Forward-Looking Statements

make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties.

These forward-looking

statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and

allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.

The words “believes,”

“expects,” “may,” “will,” “should,” “projects,” “contemplates,”

“anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward

looking statements.

Caution About Forward-Looking Statements

We make forward-looking

statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties.

These forward-looking statements include

statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit

losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.

The words “believes,” “expects,”

“may,” “will,” “should,” “projects,” “contemplates,” “anticipates,”

“forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

The forward-looking information is based on various factors and was derived using numerous assumptions.

factors that may cause actual results to differ from projections include:

success or failure of our efforts to implement our business plan;

required increase in our regulatory capital ratios;

Important factors that may cause

actual results to differ from projections include:

or failure of our efforts to implement our business plan;

increase in our regulatory capital ratios;

other regulatory requirements that may arise from examinations, changes in the law and other similar factors;

1 unchanged sentence

of asset quality;

in the level of our nonperforming assets and charge-offs;

the level of our nonperforming assets and charge-offs;

of real estate values in our markets;

ability to attract and retain talent;

to attract and retain talent;

demographical

changes in our markets which negatively impact the local economy;

uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;

successful management of interest rate risk;

successful management of liquidity;

in general economic and business conditions in our market area and the United States in general;

risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;

the uncertain

outcome of current or future legislation or regulations or policies of state and federal regulators;

the successful

management of interest rate risk;

the successful

management of liquidity;

general economic and business conditions in our market area and the United States in general;

inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;

with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies

that have substantially greater access to capital and other resources;

development and acceptance of new products and services we have offered or may offer;

effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation,

demand, development

and acceptance of new products and services we have offered or may offer;

deposit flows

and competition for deposits;

of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation,

interest rate, market and monetary fluctuations;

occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing

novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;

the occurrence

of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing novel coronavirus

(COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;

conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S.

or other governments in response

to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S.

utilized by us;

ability to successfully manage cybersecurity;

reliance on third-party vendors and correspondent banks;

in generally accepted accounting principles;

in governmental regulations, tax rates and similar matters;

risks, which may be described, from time to time, in our filings with the Securities and Exchange Commission.

of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

to successfully manage cyber security;

on third-party vendors and correspondent banks;

generally accepted accounting principles;

the allowance for credit losses resulting from the adoption and implementation of the CECL methodology;

the transition

from the use of the LIBOR index;

governmental regulations, tax rates and similar matters;

which may be described, from time to time, in our filings with the Securities and Exchange Commission.

Because of these

uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

In addition, our past results of operations do not necessarily indicate our future results.

1 unchanged sentence

or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Accounting Policies

discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2021 (the 2021

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial

Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset.

allowance represents an amount that, in the Company's judgment, will be adequate to absorb probable and estimable losses inherent in

the loan portfolio.

The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while

taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature

and volume of the loan portfolio, current economic conditions that may affect a borrower's ability to repay and the value of collateral,

Critical Accounting Policies

For discussion of

our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2022, and Note 2 Summary of Significant

Accounting Policies, in Item 1 of this Form 10-Q.

Certain critical accounting policies affect the more significant judgments and estimates

used in the preparation of our financial statements.

Our most critical accounting policies relate to our allowance for credit losses.

The allowance represents

an amount that, in the Company's judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio.

judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration

such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio,

current, reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral,

overall portfolio quality and review of specific potential losses.

1 unchanged sentence

that are susceptible to significant revision as more information becomes available.

tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities

using the enacted marginal tax rate.

In the past, the Company provided a valuation allowance on its net deferred tax assets where it

was deemed more likely than not such assets would not be realized.

At September 30, 2022 and December 31, 2021, the Company had no valuation

allowance on its net deferred tax assets.

Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained

on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial

statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized

upon settlement.

further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income

Taxes” below.

and Highlights

the three months ended September 30, 2022, net income of $2.0 million was recorded;

an increase of $141,000, or 7.6%, from the same period

The primary driver for the improved earnings was a decrease in total noninterest expense of $1.5 million due largely to the

$1.0 million decline in occupancy expenses.

This year-over-year decrease in occupancy expenses offset decreases in net interest income

and noninterest income of $218,000 and $781,000, respectively.

Net interest income decreased $218,000, a result of deferred loan fees

earned from the forgiveness of Paycheck Protection Program (PPP) loans of $1.1 million during the third quarter of 2021 not being replicated

in 2022, resulting in a net decrease in interest and fees on loans of $592,000, or 7.8%.

The decrease in loan fees was largely offset

by increased earnings on interest bearing deposits in banks and investments, which increased $531,000 and $117,000, respectively.

the comparative three-month periods of 2022 and 2021, interest expense increased $284,000, as interest on borrowed funds increased $388,000,

offset by a decrease in interest expense on deposits of $104,000.

the nine months ended September 30, 2022, net income totaled $5.8 million or $0.24 per share compared to $5.1 million or $0.21 per share

for the same nine-month period in 2021.

Interest income was slightly higher and interest expense was slightly lower, resulting in an

improvement of $183,000 in net interest income.

Other drivers of the improvement were reduced noninterest expense, which declined $1.4

million, due largely to charges foe the write down of closed and former branch office sites during the third quarters of 2022 and 2021.

Updated valuations of the two branch offices closed in 2022, resulted in a charge of $195,000 that is included in noninterest expense.

During the same period in 2021, three former branch office sites were sold, resulting in gains of $190,000, and three more former branch

office sites were transferred to other real estate owned, resulting in a combined loss of $1.1 million.

June 15, 2022, we experienced a cybersecurity incident that temporarily interrupted the operability of our computer systems.

operations were restored June 17, 2022, and full operations were restored June 21, 2022.

On June 29, 2022, we issued a press release

outlining the timeline, restoration efforts and communications, services and safeguards being offered to our customers in response to

this incident, and filed a Current Report on Form 8-K relating to the incident.

Since that date, restoration efforts have been completed

and normal operations have resumed.

Reference to the cybersecurity event is made throughout this Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

balance sheet grew to $828.6 million as of September 30, 2022, from $794.6 million as of December 31, 2021, due to Federal Home Loan

Bank advances taken, in the second quarter of 2022, as a precautionary measure in response to the cybersecurity

Total deposits increased $16.4 million to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021.

decreased $13.9 million to $579.9 million during the first nine months of 2022, due to repayments of several large commercial real estate

loans combined with PPP loan repayments of approximately $6.1 million.

August of 2022, branch offices in Big Stone Gap and Chilhowie, Virginia were closed and the loan and deposit accounts were transferred

to nearby office locations.

Affected personnel were reassigned to other branches or departments.

the second quarter of 2022, we initiated a previously announced stock repurchase program.

Through September 30, 2022, 44,485 shares have

been repurchased at an average price of $2.30 per share.

of the Three Months ended September 30, 2022 and 2021

Quarter-to-date

highlights include:

on average assets and equity of 0.94% and 13.70 % for the third quarter of 2022, compared

to 0.91% and 11.75% for the third quarter of 2021, respectively;

interest income was $7.2 million for the third quarter of 2022, a decrease of $218 thousand,

or 2.9%, compared to the third quarter of 2021;

for loan losses was $225,000 for the third quarter of 2022, and $0 for the third quarter

Overview and Highlights

Net income for the

three months ended March 31, 2023 was $2.0 million, an increase of $100,000, or 5.2%, from the same period in 2022.

The increase was

primarily due to improvement in the net interest margin to 3.83% for the first quarter of 2023 compared to 3.53% for the first quarter

of 2022 due to the increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022

The primary driver for the improved earnings was an increase in net interest income of $447,000 and a reduction of the provision

for credit losses of $100,000, offset by an increase in total noninterest expense of $431,000.

The increase in total non-interest expense

is related to increases in salaries and employee benefits as well as data processing and telecommunications expenses.

The increase in

salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made in the first quarter

The balance sheet

grew to $793.6 million as of March 31, 2023, from $775.4 million as of December 31, 2022, funded by deposits which increased $16.1 million

to $708.8 million as of March 31, 2023 from $692.7 million as of December 31, 2022.

These deposits funded an increase of $10.3 million

in interest bearing deposits in other banks and an increase of $5.88 million in gross loans.

The increase in gross loans is due to a

moderate increase in loan demand and less prepayment activity due to the higher interest rate environment.

During the second

quarter of 2022, we initiated a previously announced stock repurchase program.

Through March 31, 2023, 93,527 shares have been repurchased

at an average price of $2.32 per share.

Comparison of

the Three Months ended March 31, 2023 and 2022

Quarter-to-date highlights

on average assets and equity of 1.07% and 14.05 % for the first quarter of 2023, compared

to 0.97% and 12.35% for the first quarter of 2022, respectively;

interest income was $7.0 million for the first quarter of 2023, an increase of $447,000,

or 6.8%, compared to the first quarter of 2022;

provision for credit losses for the first quarter of 2023 compared to $100,000 for the first

quarter of 2022;

· Noninterest

income was $2.2 million, a decrease of $781 thousand, or 26.3%, during the third quarter

of 2022 compared to the third quarter of 2021;

income was $2.4 million, an increase of $30,000, or 1.3%, during the first quarter of 2023

compared to the first quarter of 2022;

· Noninterest

expense was $6.6 million, a decrease of $1.5 million, or 18.2%, for the third quarter of

2022 compared to the third quarter of 2021.

Company’s primary source of income is net interest income, which decreased by $218 thousand, or 2.9%, to $7.2 million for the third

quarter of 2022 compared to $7.4 million for the third quarter of 2021.

Interest income increased $66 thousand due to a $56 million increase

in the average balance of earning assets, a shift of funds to higher-yielding investment securities;

and increased interest earning deposits

with banks funded from FHLB advances as we maintained additional liquidity as we monitored customer reaction to the cybersecurity incident.

Additionally, the 2022 increases in the fed funds rate partially offset the decline in accelerated fee recognition when PPP loans are

Total interest expense increased $284 thousand driven primarily by a $388 thousand increase in interest on borrowed funds due

to the FHLB advances combined with increased interest rates paid on trust preferred securities.

Increased borrowing expenses were partially

offset by a decrease in interest on deposits which decreased $104 thousand, or 19.9%, for the three months ended September 30, 2022 compared

to the three months ended September 30, 2021.

The lower deposit interest expense resulted largely from reduced time deposit interest

expense due to a decrease in both volume and interest rates.

Overall there was a 12 basis-point increase in the cost of funds to 46 bps

while the net interest margin decreased 38 bps to 3.55%.

During the third quarter of 2022, the Federal Reserve’s Open Market Committee

(FOMC) increased the discount rate two times for a total of 150 bps, bringing the number of rate increases for the first nine months

of 2022 to five, totaling 300 bps.

The Company experienced benefits of the rate increases during the third quarter, but the full impact

will be somewhat lagging as certain loans, investments, and trust preferred securities will not reprice until the individual instruments

next interest rate repricing date.

Deposit rates have not yet been significantly impacted by the rate increases, but the Company continues

to evaluate rate adjustments for factors, including competitive pressure within the local markets, funding needs to support growth and

During the third quarter of 2022, in response to rising interest rates, we initiated some promotional time deposit products.

following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated:

expense was $6.9 million, an increase of $430,000, or 6.7%, for the first quarter of 2023

compared to the first quarter of 2022.

The Company’s

primary source of income is net interest income, which increased by $447,000, or 6.8%, to $7.0 million for the first quarter of 2023

compared to $6.6 million for the first quarter of 2022.

Interest income increased $1.4 million due to increased interest earning deposits

with banks and higher yielding loans resulting from the increase in fed funds rate.

Total interest expense increased $918,000 driven

primarily by the increase in the cost of interest-bearing liabilities, which rose 81 bps to 1.27% from 0.46% for comparative three months

ended March 31, 2023 and 2022.

The increase in interest rates more than offset the modest decrease of $9.4 million, or 1.98% in average

interest-bearing liabilities for the comparative three-month period.

Overall there was a 53 basis-point (“bp”) increase in

the cost of funds to 83 bps while the net interest margin increased 30 bps to 3.83%.

During the first quarter of 2023, the Federal Reserve’s

Open Market Committee (FOMC) increased the discount rate two times for a total of 50 bps, bringing the number of rate increases to eight

since the quarter ended March 31, 2022.

The Company experienced benefits of the rate increases during the first quarter, but the full

impact will be somewhat lagging as certain loans, investments, and borrowings through trust preferred securities will not reprice until

the individual instruments next interest rate repricing date.

Deposit rates have been impacted by the rate increases, but not yet to

the extent of new loan rates and rates earned on overnight funds.

The Company continues to evaluate rate adjustments for factors, including

competitive pressure within the local markets, funding needs to support growth and other needs.

The following table

shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated:

Interest Margin Analysis

Balances, Income and Expense, and Yields and Rates

Average Balances,

Income and Expense, and Yields and Rates

in thousands)

Months Ended September 30,

Months Ended March 31,

bearing deposits in other banks

1 unchanged sentence

earning assets

for loans losses

for credit losses

AND SHAREHOLDERS’ EQUITY

15 unchanged sentences

Tax exempt income is not significant and has been treated as fully taxable

Includes mortgage loans held for sale

interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

(3) Includes mortgage loans held for

Net interest income

is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

Volume and Rate Analysis

Increase (decrease)

Three Months Ended September 30, 2022 versus 2021

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest Income:

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

on our current assessment of the loan portfolio, a provision of $225 thousand was made in the third quarter of 2022, compared to zero

for the third quarter of 2021, due to a combination of factors, including the rising interest rate environment, overdraft charge-offs

related to the cybersecurity incident realized during the third quarter of 2022, and uncertain economic trends.

The allowance for loan

losses as a percentage of loans increased from 1.13% at December 31, 2021 to 1.14% as of September 30, 2022.

For a discussion of the

factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for Loan Losses, in Item 1 of

this Form 10-Q.

noninterest income decreased $781,000 in the third quarter of 2022 compared to the third quarter of 2021.

The primary drivers of the

quarter-over-quarter decline were $322,000 of gains on sales of investment securities and $190,000 of gains on sale of bank premises

in 2021 that were not repeated in 2022.

In addition, the Company recorded a $100,000 write-down of bank owned life insurance (BOLI) and

a period-over-period decrease in gains and commissions on mortgage loan originations of $82,000, during the third quarter of 2022.

BOLI charge resulted from a decrease in the market value of the underlying investments supporting the policy due to increased interest

Service charge revenue increased $68 thousand, or 6.8%, to $1.1 million for the comparative three-month periods ended September

30, 2022 and 2021 as operations returned to normal operations after the cybersecurity incident.

Card processing and interchange revenue

decreased $67 thousand for the three months ended September 30, 2022, as compared to the same period in 2021, due to a decline in transaction

The increased interest rate environment also contributed to the reduced mortgage revenue as mortgage originations and refinancings

noninterest expense decreased $1.5 million in the third quarter of 2022 compared to the same period of 2021, due primarily to charges

recorded in 2021 of $1.1 million related to the transfer of three former branch office locations to other real estate owned, which is

reflected in occupancy and equipment expense, and $395,000 of write-downs on OREO, which is reflected in other operating expense.

charges more than exceeded the $195,000 charge related to the closure of two branch offices during the third quarter of 2022, which is

included in occupancy expenses.

Salaries and benefits remained virtually flat for the comparative three-month period in 2022 versus 2021.

This was due in part to an adjustment to reduce the liability for our self-insured insurance plan of $100,000 during the third quarter

of 2022, based on a rolling assessment of claims made against the plan.

This liability adjustment offset employee appreciation bonus

payments, totaling $89,000, during the third quarter in recognition of employee response to the cybersecurity incident in June of 2022.

efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest

income, improved to 70.3% for third quarter of 2022 from 77.6% for the third quarter of 2021.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

A review of deposit operations was performed during the third quarter of 2022,

and based on this assessment, several processes will be modified or reassigned to improve operational efficiencies.

August 2022, the Bank closed branch offices in Big Stone Gap and Chilhowie, Virginia.

Accounts serviced at these offices were transferred

to nearby branches, and employees were reassigned to other positions or offices, as available.

Interactive teller machines at these locations

will remain in service for the foreseeable future.

This restructuring of the branch network should improve the efficiency of services

to the customers of these communities.

tax expense for the third quarter of 2022 totaled $579 thousand, an increase of $103 thousand, or 21.6% from the $476 thousand recorded

during the same period in 2021.

The effective tax rate for the three months ended September 30, 2022, was 22.6%, compared to 20.5% for

the same period in 2021.

The year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.

of the Nine Months ended September 30, 2022 and 2021

highlights include:

interest income improved to $20.7 million for the first nine months of 2022, an improvement

of $183 thousand, or 0.9%, compared to the first nine months of 2021;

interest margin was 3.53% for the first nine months of 2022, a decrease of 15 bps compared

to 3.68% for the first nine months of 2021;

for loans losses was $400 thousand for the first nine months of 2022, an increase of $28

thousand, or 7.5%, compared to the first nine months of 2021;

· Noninterest

income was $6.9 million, a decrease of $571 thousand, or 7.6%, compared to the first nine

months of 2021;

and employee benefits expense was $9.9 million, an increase of $530 thousand, or 5.6%, compared

to the first nine months of 2021;

noninterest expense was $19.7 million, a decrease of $1.4 million, or 6.8%, compared to the

first nine months of 2021.

during the nine months ended September 30, 2022, compared to the same period in 2021, net income improved 14.5% to $5.8 million from

$5.1 million.

Although interest income was virtually unchanged, increasing $116 thousand, reduced interest expense of $67 thousand contributed

to an improvement of $183 thousand in net interest income.

The following table presents the rates earned on earning assets and paid on

interest-bearing liabilities for the periods indicated.

Interest Margin Analysis

Balances, Income and Expense, and Yields and Rates

to rates and volume for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

and Rate Analysis

Months Ended March 31, 2023 versus

in thousands)

Months Ended September 30,

in Interest Income/ Expense

bearing deposits in other banks

1 unchanged sentence

earning assets

for loans losses

AND SHAREHOLDERS’ EQUITY

Interest-bearing

1 unchanged sentence

and money market deposits

interest-bearing liabilities

preferred securities

interest-bearing liabilities

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

Liabilities and Shareholders’ Equity

Interest Income

Interest Margin

Interest Spread

(1) Nonaccrual

loans and loans held for sale have been included in average loan balances

exempt income is not significant and has been treated as fully taxable

Includes mortgage loans held for sale

interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

Volume and Rate Analysis

Increase (decrease)

Nine Months Ended September 30, 2022 versus 2021

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest Income:

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

the first nine months of 2022 compared to the same period of 2021, net interest income increased $183 thousand primarily due to a reduction

in interest expense on deposits of $528 thousand, largely offset by increases to the cost of borrowed funds of $461 thousand.

in expense for borrowed funds was due to $95 million of FHLB advances taken during the second quarter, combined with rate increases on

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, there was no provision for credit losses made in the first quarter

of 2023, compared to $100,000 for the first quarter of 2022.

Subsequent to adoption of ASU 2016-13 on January 1, 2023, based on management's

analysis since the implementation date through March 31, 2023, no further provision for credit losses was required for the first quarter.

The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.13% as of March 31, 2023.

a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 7, Allowance for Credit

Losses for Loans, in Item 1 of this Form 10-Q.

Non-interest income

increased $30,000 to $2.4 million for the quarter ended March 31, 2023 from $2.4 million for the comparable quarter in 2022.

driver of the increase was the sale of the former call center building in Bristol, Virginia, and a former branch office in Big Stone

Gap, Virginia, which resulted in a combined gain of $130,000.

This was offset by decreases in service charge income and card processing

fees totaling a combined $107,000 during the period.

Service charge income decreased due to changes made in 2022 in assessing certain

charges, that reduced the number of transactions subject to such fees.

Fees from debit card activity declined, as stimulus funds payments

resulting from tax credits and direct payments have been curtailed.

Non-interest expense

was $6.9 million for the quarter ended March 31, 2023 compared to $6.4 million for the quarter ended March 31, 2022.

The $431,000 increase

was impacted by increases in salaries and employee benefits as well as data processing and telecommunications expenses.

in salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made during the first quarter

As previously reported, the Company approved a Long-Term Cash Incentive Plan (the “Plan”), effective February 27,

2023, for cash incentive awards to Plan participants based on quarterly earnings per share of common stock.

The efficiency ratio,

a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, increased

to 72.56% for first three months of 2023 from 71.59% for the first quarter of 2022.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

Income tax expense

for the first quarter of 2023 totaled $576,000, an increase of $46,000, or 8.68% from the $530,000 recorded during the same period in

The effective tax rate for the three months ended March 31, 2023, was 22.2%, compared to 21.6% for the same period in 2022.

year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.

Balance Sheet

Total assets as of

March 31, 2023 were $793.6 million, an increase of $18.3 million, or 2.4%, from $775.4 million as of December 31, 2022.

Gross loans increased

$5.9 million, or 1.0%, during 2023, due to a moderate increase in loan demand, combined with less incentive for prepayments, by borrowers,

due to the higher interest rate environment.

Investment securities increased $646,000 during 2023 primarily due to a decrease of $2.7

million in the unrealized loss position offset by a decrease in mortgage-backed securities, agencies, and collateralized mortgage obligations

of $2.1 million, collectively, due to principal repayments of amortizing investments.

Gross loans increased

$5.9 million, or 1.0% during the first three months of 2023.

The increase is primarily related to multifamily and residential 1-4 family

real estate secured loans.

Multifamily real estate loans increased $4.5 million, or 15%, from $29.7 as of December 31, 2022 to $34.2

million as of March 31, 2023.

Residential 1-4 family real estate increased $1.5 million, or 0.7% from $227.2 million as of December 31,

2022 to $228.7 million as of March 31, 2023.

Loan originations, specifically commercial real estate and multi-family loans, continue

to be positively impacted by our Boone, NC, loan production office, as well as originations in the Kingsport and Johnson City, Tennessee

Deposits were $708.8

million as of March 31, 2023 compared to $692.7 million as of December 31, 2022.

The increase of the $16.1 million, or 2.3%, was due

to efforts to attract and retain time deposits, combined with cyclical funds inflows primarily attributed to tax refunds, and pension

and social security deposits, received by customers.

Trust preferred securities

The reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail

time deposits, which declined 23 basis points, to 0.75% from 0.98%, plus a decrease in average balances of $33.7 million.

modest increase in interest income of $116 thousand due to increases to the investment portfolio and increased rates paid on deposits

with other banks.

These improvements offset reductions in loan interest and fees due principally to the reduction in fees from PPP loan

repayments as these fees fell $1.6 million during the comparative nine-month periods.

As a result, the net interest margin for the first

nine months of 2022 was 3.53%, a reduction of 15 bps compared to 3.68% for the first nine months of 2021.

the first nine months of 2022, the FOMC increased the discount rate five times for a total of 300 bps.

This increased interest rate environment

has improved returns on certain assets that immediately adjust as these changes are made, such as interest-bearing deposits in other

banks, credit cards, home equity lines of credit and certain commercial and commercial real estate loans.

It is anticipated that yields

on these assets will improve moving forward.

Conversely, it is expected that there will be a need to adjust, upward, rates paid on deposit

accounts, which will increase our overall cost of funds.

Additionally, in response to the June 2022 cybersecurity incident, during the

third quarter of 2022, we began offering a customer appreciation time deposit product to recognize the patience and loyalty of our customers.

This promotional product pays a higher rate than is currently offered on similar non-promotional products and is expected to contribute

to an increased cost of funds going forward.

on our current assessment of the loan portfolio, $400 thousand was provided to the allowance for loan losses during the first nine months

of 2022 compared to $372 thousand provided during the same period in 2021.

For more information on the factors affecting the allowance

for loan losses, including provision expense, refer to Note 7, Allowance for loan Losses, in Item 1 of this Form 10-Q.

Depending on changes

to economic conditions and the impact those changes may have on individual borrowers, it is possible that additional provisions may be

needed beyond those necessary to support organic growth of the loan portfolio.

noninterest income decreased $571,000 for the first nine months of 2022, compared to the same period in 2021, to $6.9 million.

on the sale of investment securities and a gain on the sale of bank premises in 2021 account for $322,000 and $190,000, respectively,

of the decrease, as those earnings were not replicated in 2022.

Additionally, a BOLI adjustment of $100,000 was recorded in 2022, as

previously discussed.

Aside from these individual events, financial services and secondary market mortgage lending activities were impacted

by the cybersecurity event and the rising interest rate environment, showing year-over-year revenue declines of $74,000 and $116,000,

respectively.

These declines were offset by increased service charge revenue which increased $299,000, despite a period during the cybersecurity

event where service charges were waived for all accounts.

the nine months ended September 30, 2022, compared to the same period in 2021, total noninterest expense decreased $1.4 million to $19.7

million, primarily due to a $1.4 million decrease in occupancy and equipment expense that was driven nearly entirely by the $1.1 million

in losses on three former branch office locations discussed above, which were transferred into other real estate owned in 2021, partially

offset by a similar $195,000 charge recorded in 2022.

Due to the reduction in the number of branch office locations, year-over-year depreciation

expense decreased $286,000.

Salaries and benefits increased $530,000, or 5.6%, to $9.9 million for the comparative nine-month period

of 2022 versus 2021, as salary adjustments, accruals for performance bonus and profit sharing programs, along with costs for new or amended

benefits, accounted for approximately $485,000 of the increase, along with approximately $89,000 of employee appreciation bonus payments,

made to all employees, as a result of their efforts in addressing the cybersecurity incident.

taxes increased $291,000, or 21.5%, to $1.6 million, which generally correlates to the increase in pretax earnings.

efficiency ratio, a non-GAAP measure, improved to 71.4% for the first nine months of 2022 from 77.6.% for the same period of 2021.

assets increased $33.9 million, or 4.3%, to $828.6 million at September 30, 2022 from $794.6 million at December 31, 2021.

was primarily driven by the FHLB advances, now totaling $25.0 million, and total deposits which increased $16.4 million, as noninterest-bearing

deposits increased $17.8 million while interest-bearing deposits decreased $1.4 million.

The year-to-date deposit activity is due to

a combination of factors including customer reaction to the cybersecurity incident, time deposit customers seeking higher interest rates

and actions taken by customers at the two branch locations closed in August 2022.

The FHLB advance funds were transferred to interest

bearing deposits with other banks which increased $51.6 million year-to-date.

investments decreased $8.5 million, or 7.9%, to $98.8 million at September 30, 2022 due primarily to an increase of $16.4 million in

net unrealized losses and $11.5 million of repayments and maturities, which more than offset purchases of $19.8 million.

Future purchases

of investment securities will depend on a number of factors, including changes in loans and deposits, liquidity needs and the results

of the Company’s interest rate risk modeling.

decreased $13.9 million, or 2.3% during the first nine months of 2022.

Commercial real estate and multifamily loans decreased $8.1 million

or 3.9% and $4.0 million or 12.1% to $198.1 million and $29.1 million, respectively at September 30, 2022, as several large commercial

loan borrowers liquidated their holdings in projects we financed and repaid the corresponding loans.

These repayments were partially

offset by increases in construction and development loans, and residential real estate which increased $6.3 million, or 19.4%, and $2.2

million, or 1.0%, respectively.

Commercial loans decreased $9.2 million or 16.9% to $45.1 million at September 30, 2022, due largely

to repayments and forgiveness of PPP loans which declined $6.1 million during the first nine months of 2022.

At September 30, 2022, PPP

loans totaled $298 thousand and no longer represent a significant component of our loan portfolio.

Loan originations, specifically commercial

real estate and multi-family loans, continue to be positively impacted by our Boone, NC, loan production office, as well as originations

in the Kingsport and Johnson City, Tennessee markets.

deposits increased $16.4 million, or 2.3%, to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021, as noninterest

bearing deposits increased $17.8 million, or 7.1%.

The increase in noninterest bearing deposits more than offset a decrease in interest

bearing deposits which declined $1.4 million, or 0.3% during the first nine months of 2022.

Despite the net increase in deposits, we

experienced some deposit runoff in response to the cybersecurity incident.

Additionally, other factors also influenced customers’

deposit activities, including interest rates available for time deposits and the closure of two branch offices in August 2022.

the closure of the two branch offices, runoff of accounts from those offices has been minimal, totaling approximately $555 thousand through

September 30, 2022.

Additionally, some of this deposit activity is due to normal churn of deposit accounts and depositors.

Specifically,

time deposit runoff totaled $16.6 million, or 8.4%, during the first nine months of 2022.

The decrease in time deposits was offset by

increases in non-interest bearing and interest-bearing transaction accounts which increased $17.8 million, or 7.1%, and $15.3 million,

or 5.9%, during the nine months ended September 30, 2022.

Another factor influencing deposit retention is the dissipation of liquidity

experienced by depositors, as stimulus and other economic support funds distributed during the height of the COVID-19 pandemic are spent

or otherwise distributed.

While it is likely that recent and expected increases to the federal funds rate will, at some point, impact

liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our

customer base and communities.

September 30, 2022, FHLB advances totaling $25 million were outstanding.

As previously discussed, overnight and term advances totaling

$95 million were taken in June 2022, as a precautionary measure related to the cybersecurity incident with $60 million outstanding as

of June 30, 2022.

During the third quarter of 2022, an advance totaling $20.0 million matured and was repaid, and a $15.0 million partial

prepayment was made on the remaining $40.0 million advance which matures in December 2022.

We anticipate repaying the $25.0 million outstanding

advance at maturity.

Trust preferred securities of $16.5 million at September 30, 2022 were unchanged compared to December 31, 2021.

equity at September 30, 2022 was $55.2 million, a decrease of $8.4 million, or 13.2%, compared to $63.6 million at December 31, 2021.

As discussed previously and in the Capital Resources section below, the primary driver of the decline was the $12.9 million net increase

in the accumulated other comprehensive loss, related to the unrealized loss on available for sale investment securities, along with a

cash dividend payment and repurchases of common shares.

The increase in other accumulated comprehensive loss is related to the recent

increase in interest rates and is not related to any deterioration in the credit quality of any investment securities held.

Nonperforming

assets include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest.

Our policy is to place loans on nonaccrual status once they reach 90 days past due.

of $16.5 million at March 31, 2023 were unchanged compared to December 31, 2022.

Total equity as of

March 31, 2023 was $59.7 million, an increase of $2.5 million, or 4.3%, compared to $57.2 million as of December 31, 2022.

previously and in the Capital Resources section below, the primary driver of the increase was related to the decrease of $2.1 million

in the net unrealized loss on available-for-sale investment securities combined with the quarter-to-date earnings of $2.0 million, offset

by a cash dividend payment of $1.4 million, and the repurchase of common stock totaling $46,000.

Additionally, the implementation of

the CECL methodology, resulted in a onetime net of tax, direct charge to retained earnings of $212,000.

Asset Quality

Nonperforming assets

include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest.

policy is to place loans on nonaccrual status once they reach 90 days past due.

The makeup of the nonaccrual loans is primarily those

secured by residential mortgages and commercial real estate.

OREO is primarily made up of farmland and residential lots.

Nonperforming

assets decreased $275 thousand, or 6.4%, during the first nine months of 2022, driven by a decrease in OREO of $1.0 million, which offset

an increase in nonaccrual loans of $765 thousand.

The increase in nonaccrual loans is attributed to a single credit for a commercial

construction loan.

This account has been assessed as part of our determination of the adequacy of the allowance for loan losses, and

collection efforts are ongoing.

OREO is primarily made up of residential and commercial lots.

Nonperforming assets

decreased $586,000, or 15.9%, during the first three months of 2023, driven by a decrease of $586,000 in nonaccrual loans.

in nonaccrual loans is attributed to a general improvement in the performance of nonaccrual loans, resulting in several accounts being

returned to accruing status.

No loans 90 days or more past due are accruing interest.

As a result, the ratio of nonperforming assets

to total assets decreased to 0.49% at September 30, 2022 compared to 0.54% at December 31, 2021.

September 30, 2022, OREO is primarily made up of farmland and land acquired through foreclosure.

During 2022, two former branch sites

that had been transferred to OREO in 2021, were sold bringing our OREO balance down to $321 thousand.

We continue extensive and aggressive

measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets.

We remain mindful

of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets.

However, we may recognize some losses

and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

detailed information for nonaccrual loans and other real estate owned as of September 30, 2022, and December 31, 2021, refer to Note

6 Loans and Note 9 Other Real Estate Owned in Item 1 of this Form 10-Q.

rated substandard or below totaled $3.7 million at September 30, 2022, an increase of $788 thousand from $2.9 million at December 31,

Total past due loans increased slightly to $3.8 million at September 30, 2022 from $3.4 million at December 31, 2021.

due loans at September 30, 2022, represent a decrease of $6.3 million, or 62.4%, from the $10.0 million reported at June 30, 2022, as

delays in loan billing and notice presentation related to the cybersecurity incident, during the second quarter of 2022, were addressed

during the third quarter.

allowance for loan losses at September 30, 2022 was $6.6 million, or 1.14% of total loans, as compared to $6.7 million, or 1.13% of total

to total assets decreased to 0.39% at March 31, 2023 compared to 0.47% at December 31, 2022.

As of March 31, 2023,

OREO is primarily made up of residential and commercial lots acquired through foreclosure.

It remained consistent with a balance of $261,000

as of March 31, 2023 and December 31, 2022.

Expenses associated with OREO were $6,000 for the quarter ended March 31, 2023, compared

to $130,000 during the quarter ended March 31, 2022, due to costs associated with the sale of other real estate owned during the first

three months of 2022.

We continue to work to reduce nonperforming and under-performing assets.

For detailed information

for nonaccrual loans and other real estate owned as of March 31, 2023, and December 31, 2022, refer to Note 6 Loans and Note 9 Other

Real Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard

or below totaled $2.8 million as of March 31, 2023, a decrease of $586,000 from $3.4 million at December 31, 2022.

Total past due loans

decreased $2.9 million, to $2.6 million at March 31, 2023 from $5.5 million at December 31, 2022.

As discussed in Note

2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted CECL effective January 1, 2023.

The transition

adjustment for the adoption of CECL resulted in a decrease to the allowance for credit losses on loans of $80,000.

Our allowance for

credit losses for loans as of March 31, 2023 was $6.7 million, or 1.13% of total loans, as compared to $6.7 million, or 1.15% of total

loans, at December 31, 2022.

Impaired loans totaled $3.1 million with an estimated related specific allowance of $269 thousand at September

30, 2022, as compared to $2.8 million of impaired loans with an estimated related allowance of $166 thousand at the end of 2021.

of $400 thousand was recorded for the first nine months of 2022 compared to $372 thousand during the first nine months of 2021.

the first nine months of 2022, net charge-offs totaled $542 thousand, or 0.12% of average loans, annualized, as compared to $906 thousand,

or 0.21% of average loans, for the same period in 2021.

Of the net charge-offs recorded in 2022, approximately $320 thousand represents

overdraft charge-offs resulting from customer activity during the several days of the cybersecurity event when we increased daily transaction

limits for debit card and ATM activity to meet customer needs while core services were restored.

The allowance for loan losses is maintained

at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether

or not the losses are actually ever realized.

Through our quarterly assessment, we continue to adjust the allowance for loan loss model

to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures;

however, future provisions

may be deemed necessary.

During the first nine months of 2022, we adjusted our external qualitative factors to reflect positive employment

and home sales statistics, along with adjusting for the impact of historically high inflation.

Those changes along with the assessment

of the inherent and specific risks associated with the loan portfolio resulted in a

provision to the allowance of $400 thousand for the first nine months 2022.

The following table summarizes components of the allowance

for loan losses and related loans as of September 30, 2022 and December 31, 2021:

Selected Credit Ratios

September 30,

(Dollars in thousands)

Allowance for loan losses

Allowance for loan losses to total loans

Nonaccrual loans

Nonaccrual loans to total loans

Ratio of allowance for loan losses to nonaccrual loans

Charge-offs net of recoveries

Average loans

Individually evaluated loans totaled $715,000 with an estimated related specific allowance of $64,000 at

March 31, 2023, as compared to $2.7 million as of December 31, 2022 with an estimated related specific allowance of $86,000 of impaired

loans at the end of 2022.

There was no provision for credit losses recorded during the three months ended March 31, 2023, compared to

a provision for loan losses of $100,000 recorded in the three months ended March 31, 2022, which was under the incurred loss model.

the three-months ended March 31, 2023, the net provision for credit losses of zero, was comprised of a provision of $24,000 to the allowance

for credit losses for loans and reversal of $24,000 from the allowance for unfunded loan commitments.

In the first three

months of 2023, net charge-offs totaled $10,000, or 0.01% of average loans, annualized, as compared to $76,000, or 0.05% of average loans,

for the same period in 2022.

The allowance for credit losses is maintained at a level that management deems appropriate to absorb any

potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized.

our quarterly assessment, we continue to adjust the CECL model to best reflect the characteristics in the portfolio.

However, future

provisions may be deemed necessary.

During the first three months of 2023, we made modest adjustments to our qualitative factors as part

of our CECL implementation.

Those changes, along with the assessment of the historical and specific risks associated with the loan portfolio,

resulted in a net provision for credit losses of zero, with offsetting adjustments to the loan and loan commitment components recorded

during the first three months of 2023.

The following table summarizes components of the allowance for credit losses and related loans

as of March 31, 2023 and December 31, 2022:

Credit Ratios

in thousands)

for credit losses

for credit losses to total loans

loans to total loans

of allowance for credit losses to nonaccrual loans

net of recoveries

net charge-offs to average loans

are in the process of implementing the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model.

estimated we would be running concurrent models by June 30, 2022, due to the cybersecurity incident, we delayed the start of parallel

runs, which began late in the third quarter of 2022.

Initial CECL model runs have occurred using only historical loss information.

assumptions have been input and are being layered onto the initial runs of historical loan and loss activity.

The Company will run the

new methodology parallel to the current allowance methodology for the first three quarters of 2022 before full implementation.

we have retained a third-party vendor to perform a validation of the CECL model implementation.

Tax Asset and Income Taxes

to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred

tax asset on the unrealized loss on securities available for sale, of $916 thousand and $1.5 million existed at September 30, 2022 and

December 31, 2021, respectively.

Deferred Tax Asset

and Income Taxes

Due to timing differences

between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the

unrealized loss on securities available for sale, of $4.1 thousand and $4.6 million existed as of March 31, 2023 and December 31, 2022,

respectively.

Our income tax expense was computed at the corporate income tax rate of 21% of taxable income.

no significant nontaxable income or nondeductible expenses.

shareholders’ equity at September 30, 2022 was $55.2 million compared to $63.6 million at December 31, 2021, a decrease of $8.4

million, or 13.2%.

As previously discussed, this decline was driven by the $12.9 million net increase in the accumulated other comprehensive

loss related to the unrealized loss on investment securities available-for-sale.

Excluding the impact of the unrealized loss, equity

increased $4.5 million, due to net income of $5.8 million less the cash dividend payment of $1.2 million and $103 thousand used for share

Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s

Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory

The Bank continues to be subject to various capital requirements administered by banking agencies.

Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in

Item 1 of this Form 10-Q.

September 30, 2022, the Bank remains well capitalized under the regulatory framework for prompt corrective action.

The ratios mentioned

above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

value per common share was $2.31 at September 30, 2022, and $2.66 at December 31, 2021.

Excluding the impact of the accumulated other

comprehensive loss, book value per share was $2.89 and $2.69 at September 30, 2022 and December 31, 2021, respectively.

We have no significant nontaxable

income or nondeductible expenses.

The implementation of the CECL methodology resulted in a onetime deferred tax charge of $56,000.

to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q

Capital Resources

Total shareholders’

equity as of March 31, 2023 was $59.7 million compared to $57.2 million at December 31, 2022, an increase of $2.5 million, or 4.3%.

increase was driven by a decrease in net unrealized loss on available-for-sale investment securities of $2.1 million, which, when combined

with quarter-do-date earnings of $2.0 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common

stock totaling $46,000.

Additionally, the implementation of the CECL methodology resulted in a onetime net of tax, direct charge to retained

earnings of $212,000.

The Company meets

the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding

Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital.

The Bank continues

to be subject to various capital requirements administered by banking agencies.

The Bank’s capital ratios along

with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in Item 1 of this Form 10-Q.

As of March 31, 2023,

the Bank remains well capitalized under the regulatory framework for prompt corrective action.

The ratios mentioned above for the Bank

comply with the Federal Reserve rules to align with the Basel III Capital requirements.

Book value per common

share was $2.50 as of March 31, 2023, and $2.40 at December 31, 2022.

Other key performance

indicators are as follows:

months ended September 30,

on average assets 1

1 unchanged sentence

equity to average assets

current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while

being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current

capital levels will be sufficient.

the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders.

Earnings will continue

to be retained to provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends

to shareholders.

the second quarter of 2022, the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s

outstanding common stock through March 31, 2023.

The actual means and timing of any purchases, number of shares and prices or range of

prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the

Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements.

During the third

quarter of 2022, 26,831 shares were purchased at an average price of $2.32 per share;

bringing the total shares repurchased through September

30, 2022 to 44,485 at an average price of $2.30 per share.

There is no assurance that the Company will purchase any additional shares

under this program.

discussed previously, in response to the cybersecurity incident, during the second quarter of 2022, we took efforts to increase on balance

sheet liquidity through a series of FHLB advances transferred to our account at Federal Reserve Bank and pledging additional investment

securities as collateral against unused funding sources for emergency needs.

The deposit runoff since the cybersecurity incident has

not been significant.

Based on the customer response and an assessment of our overall liquidity, during the third quarter of 2022, we

repaid a maturing FHLB advance totaling $20.0 million, and partially prepaid $15.0 million on the remaining $40.0 million advance.

closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available

for sale investments.

Collectively, those balances were $185.5 million at September 30, 2022, an increase of $26.2 million from $159.3

million at December 31, 2021.

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity

needs during 2022.

September 30, 2022, all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity

in the amount of $70.5 million, which is net of the $28.3 million of securities pledged as collateral.

Investment securities available

for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds

sold and overnight deposits with the Federal Reserve Bank.

Due to the increase in the unrealized loss on securities available for sale,

the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital;

the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings.

loan to deposit ratio was 80.1% at September 30, 2022 and 83.9% at December 31, 2021.

We anticipate this ratio to remain at or below

90% for the foreseeable future.

third-party sources of liquidity at September 30, 2022 include the following:

a line of credit with the FHLB, access to brokered certificates

of deposit markets and the discount window at the Federal Reserve Bank.

We also have the ability to borrow $30.0 million in unsecured

federal funds through credit facilities extended by correspondent banks.

Bank’s line of credit with the FHLB is $211.7 million, with unused availability at September 30, 2022 of $179.7 million.

FHLB advances

totaling $25 million were outstanding at September 30, 2022, but the credit line also secures a letter of credit totaling $7.0 million.

The available line and the outstanding letters of credit are secured by a blanket lien on our residential real estate loans which amounted

to $123.2 million at September 30, 2022.

Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS).

At September 30, 2022,

we held no brokered deposits while $2.8 million in CDARS reciprocal time deposits and $23.1 million in ICS reciprocal interest-bearing

demand deposits are outstanding.

liquidity is available through the Federal Reserve Bank discount window for overnight funding needs.

We may collateralize this line with

investment securities and loans at our discretion;

however, while we do not anticipate using this as a primary funding source, securities

with an estimated market value of $24.4 million were pledged at September 30, 2022.

the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources

to meet our requirements and needs for the foreseeable future.

However, liquidity can be further affected by a number of factors such

as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond

bank holding company has approximately $371 thousand in cash on deposit at the Bank at September 30, 2022.

The holding company receives

periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and to fund

dividend payments to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust preferred securities.

discussed in the Capital Resources section, the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding

Under current economic

conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb

potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will

be sufficient.

During the first

quarter of 2023, the Company paid a cash dividend of $0.06 per common share to our shareholders.

Future payments of cash dividends will

depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing

the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company.

During the second

quarter of 2022, the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding

common stock through March 31, 2023.

Payments for any repurchases will be distributed from available funds, or from dividend payments

from the Bank, and are not expected to have a material impact on available liquidity.

Balance Sheet Items and Contractual Obligations

have been no material changes during the nine months ended September 30, 2022, to the off-balance sheet items and the contractual obligations

disclosed in our 2021 Form 10-K.

As previously reported, this plan was extended by the Board of Directors through March 31, 2024.

The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its

discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and

economic conditions, and applicable legal and regulatory requirements.

As of March 31, 2023, the Company has repurchased 93,527 shares

at an average price of $2.32 per share.

During the quarter ended March 31, 2023, the Company repurchased 19,932 shares at an average

price of $2.28 per share.

There is no assurance that the Company will purchase any additional shares under this program.

We closely monitor

our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments.

Collectively, those balances were $143.7 million as of March 31, 2023, an increase of $13.2 million from $130.5 million as of December

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2023.

As of March 31, 2023,

all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity in the amount

of $69.4 million, which is net of the $27.3 million of securities pledged to secure public funds and as collateral for advances against

the discount window.

Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other

short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.

Due to the unrealized

loss on securities available for sale, the sale of investments would not be considered a primary source of liquidity due to the immediate

impact on regulatory capital;

however, the majority of the portfolio is considered high credit quality investments and would be available

to pledge against borrowings.

Our loan to deposit

ratio was 83.3% as of March 31, 2023 and 84.4% at December 31, 2022.

We anticipate this ratio to remain at or below 90% for the foreseeable

Available third-party

sources of liquidity as of March 31, 2023 include the following:

a line of credit with the FHLB, access to brokered certificates of deposit

markets and the discount window at the Federal Reserve Bank.

Additionally, in March 2023, the FRB, initiated a supplemental term funding

program offering borrowings, of up to one year, secured by securities valued at par rather than market value.

This program offers an

additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds

We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent

We have used our

line of credit with FHLB to issue a letter of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public

No draws on the letter of credit have been issued.

This letter of credit is considered to be a draw on our FHLB line of credit.

An additional $186.8 million was available as of March 31, 2023 on the $193.8 million line of credit, of which $116.5 million is secured

by a blanket lien on our residential real estate loans.

We held no brokered

deposits as of March 31, 2023 and December 31, 2022.

Internet accounts are limited to customers located in our primary market area and

the surrounding geographical area.

The average balance of and the rate paid on deposits is shown in the net interest margin analysis

table in the “Net Interest Income and Net Interest Margin” section.

Total Certificate of Deposit Registry Services (“CDARS”)

time deposits were $2.5 million and $1.4 million as of March 31, 2023 and December 31, 2022, respectively.

Aside from the availability

of CDARS time deposits, we also offer a similar deposit product for transaction account customers Intrafi Cash Service (“ICS”).

At March 31, 2023 approximately $34.9 million were placed in this product as compared to $23.9 million at December 31, 2022.

CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit

insurance coverage.

Additional liquidity

is available through the Federal Reserve Bank discount window for overnight funding needs.

We may collateralize this line with investment

securities and loans at our discretion;

however, while we do not anticipate using this as a primary funding source, securities with an

estimated market value of $27.3 million were pledged at March 31, 2023.

In March and May,

2023, three regional banks, each with assets in excess of $100 billion, were taken into receivership through FDIC and were sold in-whole,

or in part to other financial institutions.

Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara,

California, and First Republic Bank (“FR”) headquartered in San Francisco, California, experienced significant outflows of

deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits

at both institutions.

These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined

with the long-term maturities of the investments and other earning assets held by SVB.

Concerns related to FR related to exposure to

long-term jumbo mortgages made to preferred deposit customers and the impact to net interest earnings and the value of those mortgages

in the rising rate environment.

While we, or any other financial institution, can be impacted by sudden changes in market conditions

or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound.

In addition, our deposit

customer base is diverse without significant exposure to uninsured deposit relationships.

Prior to receivership of SVB and FR our deposit

fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates.

the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully

test certain liquidity facilities in the event of any future deposit outflows.

With the on-balance

sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements

and needs for the foreseeable future.

However, liquidity can be further affected by a number of factors such as counterparty willingness

or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control.

The bank holding

company has approximately $460,000 in cash on deposit at the Bank as of March 31, 2023.

The holding company receives periodic dividend

payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and to fund dividend payments

to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust preferred securities.

As discussed in the

Capital Resources section, the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock

through March 31, 2024.

Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank,

and are not expected to have a material impact on available liquidity.

Off Balance Sheet Items and Contractual

There have been no

material changes during the three months ended March 31, 2023, to the off-balance sheet items and the contractual obligations disclosed

in our 2022 Form 10-K.

As discussed in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted

CECL effective January 1, 2023 to include an assessment of off-balance sheet credit exposures.

The transition adjustment for the adoption

of CECL included establishment of an allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other

and Qualitative Disclosures About Market Risk

Not Applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 2. Management’s Discussion and Analysis