What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-08-14 · 287 added, 289 removed, 266 unchanged (68% of the section changed)

67 unchanged sentences

Net income for the

three months ended June 30, 2023 was $1.7 million, a decrease of $200,000, or 10.40%, from the same period in 2022.

three months ended September 30, 2023 was $1.9 million, a decrease of $96,000, or 4.83%, from the same period in 2022.

Net interest income

improved 2.28%, or $156,000, from $6.8 million for the quarter ended June 30, 2022 to $7.0 million for the quarter ended June 30, 2023.

While non-interest income also increased $56,000, or 2.39%, from the second quarter in 2022, the decrease in net income is related to

increases in non-interest expense of $337,000 and the provision for credit losses of $74,000.

declined 2.21%, or $159,000, from $7.2 million for the quarter ended September 30, 2022 to $7.0 million for the quarter ended September

The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 135 basis points (“bps”)

to 2.05% during the quarter ended September 30, 2023 compared to 0.70% during the quarter ended September 30, 2022.

The balance sheet

grew to $803.0 million in total assets as of June 30, 2023, from $775.4 million as of December 31, 2022.

grew to $800.0 million in total assets as of September 30, 2023, from $775.4 million as of December 31, 2022.

Gross loans increased $41.6

million to $609.0 million as of June 30, 2023.

Additionally, interest-bearing deposits in other banks increased $5.6 million to $52.4

million as of June 30, 2023.

million to $626.2 million as of September 30, 2023.

Additionally, interest-bearing deposits in other banks decreased $9.6 million to

$37.1 million as of September 30, 2023.

During the second

quarter of 2022, we initiated a previously announced stock repurchase program, which continues through March 31, 2024.

Through June 30,

Through September

30, 2023, the Company has repurchased 138,982 shares at an average price of $2.29 per share.

Comparison of

the Three Months ended June 30, 2023 and 2022

the Three Months ended September 30, 2023 and 2022

Quarter-to-date highlights

on average assets and equity, annualized, of 0.88% and 11.62% for the second quarter of 2023,

compared to 0.94% and 13.45% for the second quarter of 2022, respectively;

interest income was $7.0 million for the second quarter of 2023, an improvement of $156,000,

or 2.28%, compared to the second quarter of 2022;

for credit losses was $149,000 for the second quarter of 2023, an increase of $74,000, or

98.67%, compared to the second quarter of 2022;

on average assets and equity of 0.94% and 12.38% for the third quarter of 2023, compared

to 0.94% and 13.70% for the third quarter of 2022, respectively;

interest income was $7.0 million for the third quarter of 2023, a decrease of $159,000, or

2.21%, compared to the third quarter of 2022;

for credit losses was $155,000 for the third quarter of 2023, a decrease of $70,000, or 31.11%,

compared to the third quarter of 2022;

· Noninterest

income was $2.4 million, an increase of $56,000, or 2.39%, during the second quarter of 2023

compared to the second quarter of 2022;

income was $2.4 million, an increase of $247,000, or 11.28%, during the third quarter of

2023 compared to the third quarter of 2022;

· Noninterest

expense was $7.0 million, an increase of $377,000, or 5.66%, for the second quarter of 2023

compared to the second quarter of 2022.

expense was $6.9 million, an increase of $284,000, or 4.30%, for the third quarter of 2023

compared to the third quarter of 2022.

The Company’s

primary source of income is net interest income, which increased by $156,000, or 2.28%, to $7.0 million for the second quarter of 2023

compared to $6.8 million for the second quarter of 2022.

The increase was primarily due to improvement in the net interest margin to

3.71% for the second quarter of 2023 compared to 3.50% for the second quarter of 2022 due to the increase in asset yields outpacing increases

in funding costs in the rising interest rate environment throughout 2022 and 2023.

The loan portfolio was the primary contributor to

the improvement in the net interest margin due to the 70 bp increase in the quarterly yield on loans to 5.26%.

The yield on overnight

funds improved 406 bps to 4.99% for the quarter ended June 30, 2023 and also contributed to the increase in the net interest margin.

The loan portfolio and overnight funds contributions offset the 79 bp increase in the cost of funds which rose to 1.12% for the quarter

ended June 30, 2023.

Total interest expense increased $1.4 million driven primarily by the increase in the cost of interest-bearing liabilities,

which rose 119 bps to 1.70% from 0.51% for the comparative three months ended June 30, 2023 and 2022.

The net interest margin increased

21 bps to 3.71% from 3.50% as of June 30, 2023 and 2022, respectively.

There was one increase in the federal funds interest rate by the

Federal Reserve’s Open Market Committee (“FOMC”) during the quarter ended June 30, 2023.

Through June 30, 2023, the

FOMC has increased this rate seven times since the quarter ended June 30, 2022.

The Company continues to evaluate rate adjustments for

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

primary source of income is net interest income, which decreased by $159,000, or 2.21%, to $7.0 million for the third quarter of 2023

compared to $7.2 million for the third quarter of 2022.

Interest income increased $1.5 million due to higher yielding loans and interest-bearing

deposits with banks resulting from the increase in the fed funds rate.

Total interest expense increased $1.6 million driven primarily

by the increase in the cost of interest-bearing liabilities, which rose 135 basis points (“bps”) to 2.05% from 0.70% for

the comparative three months ended September 30, 2023 and 2022.

The certificates of deposit portfolio was the primary contributor to

the decline in net interest income, due to an increase of 197 bps in the quarterly cost on certificates of deposit to 2.72% and a $44.4

million increase in the average balance of certificates of deposit due to a shift in the mix from lower cost deposit products.

Additionally,

the cost of borrowed funds increased, as trust preferred securities costs rose 342 bps to 8.27% and Federal Home Loan Bank (“FHLB”)

advance costs rose 117 bps to 3.57%.

The impact of the FHLB advances rate increase was more than offset by a reduction of $36.8 million

in the average outstanding balance, as borrowings advanced in response to the cybersecurity incident in 2022, were repaid and a separate

advance of $10.0 million was taken in the second quarter of 2023.

The increase in the cost of funds was offset by an increase of 95 bps

in the yield on earning assets.

The yield on loans increased 71 bps to 5.43%, helping to offset the increased cost of funding during

the quarter ended September 30, 2023.

These rate and volume activities combined to result in a decrease in net interest income of $159,000,

while the net interest margin increased 8 bps, to 3.63% for the quarter ended September 30, 2023 as compared to the 3.55% margin for

the same period in 2022.

There was one increase in the federal funds interest rate by the Federal Reserve’s Open Market Committee

(“FOMC”) during the quarter ended September 30, 2023, raising the rate to 5.50%.

Through September 30, 2023, the FOMC has

increased this rate six times since the quarter ended September 30, 2022.

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

1 unchanged sentence

Interest Margin Analysis

Average Balances,

Income and Expense, and Yields and Rates

Months Ended June 30,

are in thousands)

loans held for sale

bearing deposits in other banks

Balances, Income and Expense, and Yields and Rates

Months Ended September 30,

in thousands)

Interest-bearing

deposits in other banks

investment securities

earning assets

for loans losses

for credit losses

AND SHAREHOLDERS’ EQUITY

14 unchanged sentences

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

(3) Includes mortgage loans held for

Net interest income

1 unchanged sentence

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 June 30, 2023, as compared to the three months ended June 30, 2022.

Volume and Rate Analysis

Increase (decrease)

Months Ended June 30,

to rates and volume for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

and Rate Analysis

Months Ended September 30,

2023 versus 2022

(Dollars are in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

Mortgage loans held for sale

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

in thousands)

in Interest Income/ Expense

Interest-bearing

deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

Time deposits

FHLB advances

Trust preferred securities

Total interest-bearing liabilities

Change in net interest income

preferred securities

interest-bearing liabilities

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, a provision of $149,000 was made in the second quarter of 2023.

allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.12% as of June 30, 2023.

For a discussion

of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary of Significant Accounting

Polices and Note 7, Allowance for Credit Losses, in Item 1 of this Form 10-Q.

assessment of the loan portfolio and related unfunded commitments, a provision for credit losses of $155,000 was made in the third quarter

The allowance for credit losses as a percentage of loans decreased from 1.15% as of December 31, 2022 to 1.10% as of September

For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary

of Significant Accounting Policies and Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q.

Non-interest income

increased $56,000 to $2.4 million for the quarter ended June 30, 2023 from $2.3 million for the comparable quarter in 2022.

This increase

is due largely to the reduction in certain fee and other income during the second quarter of 2022, resulting from the impact of the cybersecurity

incident in June 2022.

During the period immediately after the cybersecurity incident, we temporarily stopped assessing overdraft and

certain other service charges.

Additionally, financial services revenue was impacted as we were limited in executing client transactions,

especially new account activity during the disruption.

For the three-months ended June 30, 2023, increases to service charges and fee

income of $64,000 and insurance and investment revenue of $64,000 were offset by decreases in card processing fees of $84,000 and mortgage

income of $34,000, as compared to the three-months ended June 30, 2022.

increased $247,000 to $2.4 million for the quarter ended September 30, 2023 from $2.2 million for the comparable quarter in 2022.

increase is due largely to the increase in financial services revenue and other noninterest income.

Financial services revenue was impacted

in the third quarter of 2022, due to the effect on production after the cybersecurity incident in June 2022, especially new account activity

immediately after the disruption.

For the three months ended September 30, 2023, insurance and investment fees increased $101,000, or

60.5%, compared to the three months ended September 30, 2022.

Other noninterest income increased $168,000, or 442.1% due to a $100,000

nonrecurring write-down of bank owned life insurance recorded during the third quarter of 2022.

Non-interest expense

was $7.0 million for the quarter ended June 30, 2023 compared to $6.7 million for the quarter ended June 30, 2022.

The $377,000 increase

was impacted by increases in salaries and employee benefits, which increased $270,000, as well as other operating expenses, which increased

The increase in salaries and employee benefits related to performance raises and benefits enhancements initiated in the first

quarter of 2023.

The quarter-over-quarter increase in other operating expenses was due to increases in deposit insurance premium, professional

fees, marketing and business development costs, and data processing and telecommunication costs.

These quarter-over-quarter increases

were due to a combination of adjustments due to contractual or inflationary factors, along with decisions to increase or incur certain

costs as part of our overall strategic plan.

was $6.9 million for the quarter ended September 30, 2023 compared to $6.6 million for the quarter ended September 30, 2022.

increase was impacted by the $277,000 increase in salaries and employee benefits, as well as other operating expenses, which increased

The increase in salaries and employee benefits was related to performance raises and benefits enhancements initiated in the

first quarter of 2023.

The increase in other noninterest expenses was due to increases in deposit insurance premium, professional fees,

and marketing and business development costs.

These increases were due to adjustments for contractual or inflationary factors, along

with decisions to increase or incur certain costs as part of our overall strategic plan.

The increases in salaries and employee benefits

and other operating expenses were partially offset by a $232,000 decrease in occupancy costs, due largely to a write-down taken during

the third quarter of 2022 related to the closure of two branches.

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 74.81% for the second quarter of 2023 from 72.43% for the second quarter of 2022.

to 72.62% during the third quarter of 2023 from 70.25% for the third quarter of 2022.

We continue to assess our operational procedures

1 unchanged sentence

Income tax expense

for the second quarter of 2023 totaled $497,000, a decrease of $39,000, or 7.28% from $536,000 recorded during the same period in 2022.

The effective tax rate for the three months ended June 30, 2023, was 22.39%, compared to 21.80% for the same period in 2022.

for the third quarter of 2023 totaled $549,000, a decrease of $30,000, or 5.18% from $579,000 recorded during the same period in 2022.

The effective tax rate for the three months ended September 30, 2023, was 22.51%, compared to 22.57% for the same period in 2022.

Comparison of

the Six Months ended June 30, 2023 and 2022

the Nine Months ended September 30, 2023 and 2022

Year-to-date highlights

interest income improved to $14.1 million for the first half of 2023, an improvement of $602,000

or 4.47%, compared to the first half of 2022;

interest margin was 3.77% for the first half of 2023, an increase of 25 bps compared to 3.52%

for the first half of 2022;

for credit losses was $149,000 for the first half of 2023, a reduction of $26,000, or 14.86%,

compared to the first half of 2022;

interest income increased to $21.1 million for the nine months ended September 30, 2023,

an improvement of $443,000, or 2.14%, compared to the nine months ended September 30, 2022;

interest margin was 3.73% for the nine months ended September 30, 2023, an increase of 20

bps compared to 3.53% for the same period of 2022;

for credit losses was $304,000 for the nine months ended September 30, 2023, a reduction

of $96,000, or 24.00%, compared to the nine months ended September 30, 2022;

· Noninterest

income was $4.8 million, an increase of $85,000, or 1.80%, compared to the first half of

income was $7.2 million, an increase of $331,000, or 4.79%, compared to the nine months ended

September 30, 2022;

and employee benefits expense was $10.8 million, an increase of $821,000, or 8.25%, compared

to the first half of 2022;

noninterest expense was $13.9 million, an increase of $806,000, or 6.15%, compared to the

first half of 2022.

During the six months

ended June 30, 2023, compared to the same period in 2022, net income decreased 2.60% to $3.7 million from $3.8 million.

interest income and non-interest income increased, total non-interest expense increased at a greater percentage.

to the nine months ended September 30, 2022;

noninterest expense was $20.8 million, an increase of $1.1 million, or 5.53%, compared to

the nine months ended September 30, 2022

During the nine months

ended September 30, 2023, compared to the same period in 2022, net income decreased 3.34% to $5.6 million from $5.8 million.

net interest income and non-interest income increased, total non-interest expense increased more and at a greater percentage.

The following table

1 unchanged sentence

Interest Margin Analysis

Average Balances,

Income and Expense, and Yields and Rates

Months Ended June 30,

are in thousands)

loans held for sale

bearing deposits in other banks

Balances, Income and Expense, and Yields and Rates

months Ended September 30,

in thousands)

Interest-bearing

deposits in other banks

investment securities

earning assets

for loans losses

for credit losses

AND SHAREHOLDERS’ EQUITY

12 unchanged sentences

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.

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

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

(3) Includes mortgage loans held for

Net interest income

1 unchanged sentence

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 six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2023 versus 2022

(Dollars are in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

Mortgage loans held for sale

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

to rates and volume for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

and Rate Analysis

months Ended September 30,

2023 versus 2022

in thousands)

in Interest Income/ Expense

Interest-bearing

deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

Time deposits

FHLB advances

Trust preferred securities

Total interest-bearing liabilities

Change in net interest income

preferred securities

interest-bearing liabilities

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, a provision of $149,000 was made for the six months ended June 30,

The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.12% as of June 30, 2023.

For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary of Significant

Accounting Polices and Note 7, Allowance for Credit Losses, in Item 1 of this Form 10-Q.

assessment of the loan portfolio and related unfunded commitments, a provision of $304,000 was made for the nine months ended September

The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.10% as of September

For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary

of Significant Accounting Policies and Note 7, Allowance for Credit Losses, in Item 1 of this Form 10-Q.

Non-interest income

increased $85,000 to $4.8 million for the six months ended June 30, 2023 from $4.7 million for the comparable period in 2022.

drivers of the increase were the sales 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, and an increase in brokerage revenue of $84,000.

This was offset by decreases

in service charge income and card processing fees totaling a combined $128,000 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.

increased $331,000 to $7.2 million for the nine months ended September 30, 2023 from $6.9 million for the comparable period in 2022.

The primary drivers of the increase were the sales of a former operations facility and branch location, during the first quarter of 2023,

resulting in a combined gain of $130,000;

and an increase in financial services revenue of $180,000.

This was offset by decreases in

service charge income and card processing fees totaling a combined $151,000 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 customer discretionary funds have begun to decline and customer spending habits have begun to normalize.

as discussed previously, certain service fees and other revenues, adversely impacted by the cybersecurity incident in June of 2022, recovered

activity declined as customer deposit balances have begun to return to pre-pandemic levels and customer spending habits have also begun

to normalize.

Additional changes to our service charge structure will take effect during the fourth quarter of 2023.

The elimination

of these charges is not expected to have a material impact on operations or liquidity.

Non-interest expense

was $13.9 million for the six months ended June 30, 2023 compared to $13.1 million for the six months ended June 30, 2022.

increase was impacted by increases in salaries and employee benefits of $545,000 as well as data processing and telecommunications expenses

of $106,000, professional fees of $203,000, and deposit insurance of $73,000.

These increases were partially offset by decreases in occupancy

expenses of $88,000, and costs associated with other real estate owned, which decreased $129,000 over the comparative six-month period.

was $20.8 million for the nine months ended September 30, 2023 compared to $19.7 million for the nine months ended September 30, 2022.

The $1.1 million increase was impacted by increases in salaries and employee benefits of $821,000 as well as professional fees of $269,000,

and deposit insurance of $106,000.

These increases were partially offset by decreases in occupancy expenses of $319,000, data processing

and telecommunication costs of $115,000, and costs associated with other real estate owned, which decreased $87,000 over the comparative

nine-month period.

The efficiency ratio,

a non-GAAP measure, increased to 73.68% for the six months ended June 30, 2023 from 72.03% for the six months ended June 30, 2022.

a non-GAAP measure, increased to 73.33% for the nine months ended September 30, 2023 from 71.44% for the nine months ended September

Income tax expense

for the six months ended June 30, 2023 totaled $1.1 million, an increase of $7,000, or 0.66% from $1.1 million recorded during the same

period in 2022.

The effective tax rate for the six months ended June 30, 2023, was 22.28%, compared to 21.71% for the same period in

for the nine months ended September 30, 2023 totaled $1.6 million, a decrease of $24,000, or 1.46%, from $1.6 million recorded during

the same period in 2022.

The effective tax rate for the nine months ended September 30, 2023, was 22.34%, compared to 22.01% for the

same period in 2022.

Balance Sheet

Total assets as of

June 30, 2023 were $803.0 million, an increase of $27.6 million, or 3.6%, from $775.4 million as of December 31, 2022.

Gross loans increased

$24.4 million, or 4.2%, during 2023, due to continued loan demand with less incentives for prepayments by borrowers due to the higher

interest rate environment.

Investment securities decreased $3.0 million during 2023 primarily due to a decrease of $1.2 million in the

unrealized loss position, offset by principal repayments of amortizing investments of $3.4 million and the maturity of U.S.

agency securities of $732,000.

All of the Company’s investments are designated as available-for-sale.

September 30, 2023 were $800.0 million, an increase of $24.6 million, or 3.2%, from $775.4 million as of December 31, 2022.

increased $41.6 million, or 7.1%, during 2023 due to continuing strong loan demand, combined with reductions in additional principal

payments and refinancing due to the general increase in interest rates.

Investment securities decreased $8.6 million during 2023 primarily

due to et amortization, principal repayments of amortizing investments, and other security maturities of $7.7 million;

combined with

an increase of $1.4 million in the unrealized loss position, partially offset by $500,000 in purchases.

All of the Company’s investments

are designated as available-for-sale.

Gross loans receivable

increased $24.4 million to $609.0 million as of June 30, 2023 from $584.6 million as of December 31, 2022.

Commercial real estate loans

increased $12.7 million, or 6.50%, from December 31, 2022 to June 30, 2023.

Residential 1-4 family and multifamily loans, each, increased

$4.4 million individually from December 31, 2022 to June 30, 2023.

These increases were a result of continuing loan demand.

Total deposits increased

$15.4 million from $692.7 million as of December 31, 2022 to $708.1 million as of June 30, 2023.

The increase related primarily to interest-bearing

deposits which increased $18.2 million.

The increase was due to efforts to attract and retain time deposits, combined with cyclical funds

As a result of these efforts, total time deposits increased $31.9 million during the first six months of 2023.

increased $41.6 million to $626.2 million as of September 30, 2023 from $584.6 million as of December 31, 2022.

Commercial real estate

loans increased $25.1 million, or 12.7%, from December 31, 2022 to September 30, 2023.

Residential 1-4 family loans and multifamily loans

increased $8.4 million and $4.4 million, respectively, from December 31, 2022 to September 30, 2023.

These increases were a result of

continuing strong loan demand.

Total deposits were

$704.8 million as of September 30, 2023 compared to $692.7 million as of December 31, 2022.

The increase of $12.1 million, or 1.7%, was

due to efforts to attract and retain time deposits in an extremely competitive environment for deposits, combined with cyclical funds

As a result of these efforts, total time deposits increased $36.6 million during the first nine months of 2023.

in time deposits contributed to the increase in our cost of funds, as previously discussed, due to the rising interest rate environment

experienced over the past 18 months.

experienced over the past eighteen months.

In May 2023, an advance

from the Federal Home Loan Bank (“FHLB”) in the amount of $10.0 million was drawn with an interest rate of 3.51% and a maturity

from the Federal Home Loan Bank (“FHLB”) in the amount of $10.0 million was taken with an interest rate of 3.51% and a maturity

date of May 4, 2028, to support pending loan closings.

1 unchanged sentence

Trust preferred securities

of $16.5 million as of June 30, 2023 remained unchanged in comparison to December 31, 2022.

of $16.5 million as of September 30, 2023 remained unchanged in comparison to December 31, 2022.

During the first

six months of 2023 total shareholders’ equity increased $2.9 million to $60.2 million as of June 30, 2023, as the net unrealized

loss on available-for-sale investment securities decreased $1.2 million, which when combined with year-to-date earnings of $3.7 million,

more than offset a cash dividend payment of $1.4 million and the repurchase of common stock totaling $101,000.

nine months of 2023 total shareholders’ equity increased $2.7 million to $60.0 million as of September 30, 2023, due to the year-to-date

earnings of $5.6 million which was partially offset by the $1.1 million increase in the net unrealized loss on available-for-sale investment

securities, a cash dividend payment of $1.4 million and the repurchase of common stock totaling $147,000.

Additionally, the implementation

of the current expected credit loss (“CECL”) methodology resulted in a one-time net of tax, direct charge to retained earnings

Consequently, book value per share has increased to $2.53 as of June 30, 2023 compared to $2.40 at December 31, 2022.

Bank remains well capitalized per regulatory guidance.

Consequently, book value per share increased to $2.52 as of September 30, 2023 compared to $2.40 as of December 31, 2022.

The Bank remains well capitalized per regulatory guidance.

Asset Quality

Nonperforming assets,

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

Our 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 comprised of residential and commercial lots.

Nonperforming assets

totaled $2.8 million as of June 30, 2023, a decline of $826,000, or 22.48%, since year-end 2022, driven by a decrease of $826,000 in

nonaccrual loans.

The decrease 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.

Nonperforming assets

as a percentage of total assets were 0.35% as of June 30, 2023, and 0.47% at December 31, 2022.

As of June 30, 2023,

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

As of June 30, 2023, OREO totaled $261,000,

unchanged from December 31, 2022.

Expenses associated with OREO were $10,000 for the quarter ended June 30, 2023 compared to $15,000

for the quarter ended June 30, 2022, due to costs associated with the sale of OREO owned during the second quarter of 2022.

which include nonaccrual loans and other real estate owned (“OREO”), totaled $3.1 million as of September 30, 2023, a decline

of $601,000, or 16.36%, since year-end 2022.

Nonperforming assets as a percentage of total assets were 0.38% as of September 30, 2023,

and 0.47% as of December 31, 2022.

Other real estate

owned of $261,000 as of September 30, 2023, which consists primarily of residential and commercial lots, is unchanged from December 31,

Expenses associated with other real estate owned were $23,000 for the nine months ended September 30, 2023, compared to $110,000

during the nine months ended September 30, 2022, due to costs associated with sale of other real estate owned during the first nine months

Nonaccrual loans decreased $601,000 to $2.8 million as of September 30, 2023 from $3.4 million at December 31, 2022, as we continue

to work to reduce nonperforming and under-performing assets.

For detailed information

on nonaccrual loans and other real estate owned as of June 30, 2023 and December 31, 2022, refer to Note 6 Loans and Note 10 Other Real

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

on nonaccrual loans and other real estate owned as of September 30, 2023 and December 31, 2022, refer to Note 6 Loans and Note 10 Other

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

Loans rated substandard

or below totaled $2.6 million as of June 30, 2023, a decrease of $849,000 from $3.4 million at December 31, 2022.

Total past due loans

decreased to $3.7 million as of June 30, 2023 from $5.5 million at December 31, 2022.

or below totaled $2.8 million as of September 30, 2023, a decrease of $600,000 from $3.4 million as of December 31, 2022.

due loans decreased to $4.5 million as of September 30, 2023 from $5.5 million as of December 31, 2022.

Our allowance for

credit losses as of June 30, 2023 was $6.8 million or 1.12% of total loans as compared to $6.7 million, or 1.15% of total loans at December

Individually evaluated loans totaled $639,000 with an estimated related specific allowance of $121,000 as of June 30, 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

A provision of $149,000 was recorded for the first six months of 2023 compared to $175,000 during the first six months of

In the first six

months of 2023, net charge-offs totaled $49,000, or 0.02% of average loans, annualized, as compared to $94,000, or 0.03%, of average

loans, annualized, 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.

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

However, future provisions

may be deemed necessary.

During the first six months of 2023, we made modest adjustments to our qualitative factors, to consider risk

factors associated with commercial real estate and residential mortgage loans, 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 $149,000, of which $216,000 was provided for the loan portfolio;

offset by a reduction of the allowance for unfunded commitments of

The following table summarizes components of the allowance for credit losses and related loans as of June 30, 2023 and December

credit losses as of September 30, 2023 was $6.9 million or 1.10% of total loans as compared to $6.7 million, or 1.15% of total loans,

at December 31, 2022.

Individually evaluated loans totaled $346,000 with an estimated related specific allowance of $115,000 as of September

30, 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.

A provision of $304,000 was recorded for the first nine months of 2023 compared to $400,000 during the first nine

months of 2022.

Annualized net charge-offs,

as a percentage of average loans, was 0.03% during the first nine months of 2023, compared to 0.12% for the same period of 2022.

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.

Through our quarterly assessment, we continue

to adjust the CECL model to best reflect the risks in the portfolio.

However, future provisions may be deemed necessary.

During the first

nine months of 2023, we made modest adjustments to our qualitative factors to consider risk factors associated with commercial real estate

and residential mortgage loans.

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 $304,000, of which $377,000 was provided for the loan portfolio;

a reduction of the allowance for unfunded commitments of $73,000.

The following table summarizes components of the allowance for credit

losses and related loans as of September 30, 2023 and December 31, 2022:

Credit Ratios

are in thousands)

for loan losses

in thousands)

for credit losses

for credit losses to total loans

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of allowance for credit losses to nonaccrual loans

net of recoveries 1

charge-offs to average loans 1

Charge-offs net of recoveries 1

Average loans

Net charge-offs

to average loans 1

Deferred Tax Asset

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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 $4.4 million and $4.6 million existed as of June 30, 2023 and December 31, 2022,

unrealized loss on securities available-for-sale, of $5.0 million and $4.6 million existed as of September 30, 2023 and December 31,

2022, respectively.

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

We have no significant nontaxable

income or nondeductible expenses.

We have no significant

nontaxable income or nondeductible expenses.

The implementation of the CECL methodology resulted in a one-time deferred tax charge of

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

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

Capital Resources

Total shareholders’

equity as of June 30, 2023 was $60.2 million compared to $57.2 million at December 31, 2022, an increase of $2.9 million, or 5.1%.

increase was driven by a decrease in net unrealized loss on available-for-sale securities of $937,000, which, when combined with year-to-date

earnings of $3.7 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common stock totaling $101,000.

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

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

As of June 30, 2023,

As of September 30,

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.

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 $2.53 and $2.40 as of June 30, 2023 and December 31, 2022, respectively.

share was $2.52 and $2.40 as of September 30, 2023 and December 31, 2022, respectively.

Other key performance

indicators are as follows:

ended June 30,

months ended September 30,

Return on average

on average shareholders’ equity 1

Average equity to average assets

Average equity to average

Under current economic

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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.

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

On April 28, 2022

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and applicable legal and regulatory requirements.

As of June 30, 2023, the Company has repurchased 119,229 shares at an average price

of $2.29 per share.

During the quarter ended June 30, 2023, the Company repurchased 25,702 shares at an average price of $2.18 per share.

As of September 30, 2023, the Company has repurchased 138,982 shares at an average

price of $2.29 per share.

During the quarter ended September 30, 2023, the Company repurchased 19,753 shares at an average price of $2.29

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

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

As of June 30, 2023,

As of September 30,

2023, all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity in the amount

of $56.2 million, which is net of the $36.9 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 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.

These investments provide a source of liquidity in the

amount of $52.2 million, which is net of the $35.3 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 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 86.01% and 84.40% as of June 30, 2023 and December 31, 2022, respectively.

Generally, our policy has been to manage this ratio

at or below 90.00%.

ratio was 88.85% and 84.40% as of September 30, 2023 and December 31, 2022, respectively.

Generally, our policy has been to manage this

ratio at or below 90.00%.

Available third-party

sources of liquidity as of June 30, 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 Federal Reserve Bank initiated a supplemental

sources of liquidity as of September 30, 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.

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line of credit with the FHLB to issue a letter of credit totaling $12.0 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.

No draws on these letters of credit have been issued.

The letters of credit are considered to be draws on our FHLB line of credit.

In May 2023, we borrowed $10.0 million from FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity

An additional $176.5 million was available as of June 30, 2023 on the $198.5 million line of credit, of which $106.7 million is

secured by a blanket lien on our residential real estate loans.

An additional $178.8 million was available as of September 30, 2023 on the $200.8 million line of credit, of which $99.7 million

is secured by a blanket lien on our residential real estate loans.

We held no brokered

deposits as of June 30, 2023 and December 31, 2022.

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

the surrounding geographical area.

deposits as of September 30, 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

Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.6 million and $1.4 million as of June

Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.7 million and $1.4 million as of September

30, 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”).

As of June 30, 2023 approximately $27.3 million were placed

in this product as compared to $23.9 million at December 31, 2022.

Both the CDARS and ICS offerings assist us in maintaining deposit

relationships, while assuring the depositors’ funds retain federal deposit insurance coverage.

for transaction account customers through Intrafi Cash Service (“ICS”).

As of September 30, 2023 approximately $27.0 million

were placed in this product as compared to $23.9 million at December 31, 2022.

Both the CDARS and ICS offerings assist us in maintaining

deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage.

Additional liquidity

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

estimated market value of $36.9 million were pledged as of June 30, 2023.

estimated market value of $35.3 million were pledged as of September 30, 2023.

In March and May

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facilities in the event of any future deposit outflows.

Time deposits of

$250,000 or more equaled approximately 5.97% of total deposits at September 30, 2023 and 3.87% of deposits at December 31, 2022.

With the on-balance

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The bank holding

company has approximately $449,000 in cash on deposit at the Bank as of June 30, 2023.

company has approximately $743,000 in cash on deposit at the Bank at September 30, 2023.

The holding company receives periodic dividend

10 unchanged sentences

There have been no

material changes during the six months ended June 30, 2023, to the off-balance sheet items and the contractual obligations disclosed

material changes during the nine months ended September 30, 2023, to the off-balance sheet items and the contractual obligations disclosed

in our 2022 Form 10-K.

2 unchanged sentences

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

Item 2. Management’s Discussion and Analysis