What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 745 added, 604 removed, 188 unchanged (88% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

About Forward Looking Statements

make forward looking statements in this annual report on Form 10-K 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.

These forward-looking statements are based on various factors and were derived using numerous assumptions as of the

date of this Form 10-K, and are subject to significant risks.

Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking

statements in this annual report on Form 10-K 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.

These forward-looking statements are based on various factors and were derived using numerous assumptions as of the date of this Form

10-K and are subject to significant risks.

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;

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;

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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;

flows and competition for deposits;

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 lingering

impact of the novel coronavirus (COVID-19) outbreak and other catastrophic events;

the occurrence

of significant natural disasters, including severe weather conditions, floods, health related issues and other catastrophic events;

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

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utilized by us;

ability to successfully manage cyber security;

reliance on third-party vendors and correspondent banks;

in generally accepted accounting principles;

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

transition from the use of the LIBOR index;

in governmental regulations, tax rates and similar matters;

risks, which may be described, from time to time, in our filings with the SEC.

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

to successfully manage cybersecurity;

on third-party vendors and correspondent banks;

generally accepted accounting principles;

governmental regulations, tax rates and similar matters;

which may be described, from time to time, in our filings with the SEC.

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.

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

following commentary discusses major components of our business and presents an overview of our consolidated financial position as of

December 31, 2022 and 2021, as well as results of operations for the years ended December 31, 2022 and 2021.

This discussion should be

reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented

elsewhere in this Form 10-K.

Peoples generates a significant amount of its income from the net interest income earned by the Bank.

Net interest income is the difference

between interest income and interest expense.

Interest income depends on the volume of interest-earning assets outstanding during the

period and the interest rates earned thereon.

The Bank's interest expense is a function of the average amount of interest-bearing deposits

and borrowed money outstanding during the period and the interest rates paid thereon.

The quality of the assets further influences the

amount of interest income lost on nonaccruing loans and the amount of provision expense added to the allowance for loan losses.

also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions

on insurance and investment products sold.

Accounting Policies

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

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

related valuation allowance.

provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments.

financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates

would be updated, and additional provisions could be required.

For further discussion of the estimates used in determining the allowance

for loan losses, we refer you to the section on “Allowance for Loan Losses” in this discussion.

further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated

financial statements, contained in Item 8 of this Form 10-K.

Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions,

and customer, public and regulatory expectations regarding operational and information security have increased over time.

the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored

for potential failures, disruptions and breakdowns.

Although the Company has business continuity plans and other safeguards in place,

disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks

or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers

use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines,

penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of

which could materially adversely affect the Company’s results of operations or financial condition.

to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can

be no assurance that it or its subsidiaries will not suffer such losses in the future.

On June 15, 2022, we experienced a cybersecurity

incident that temporarily interrupted the operability of our computer systems.

Limited operations were restored June 17, 2022, and full

operations were restored June 21, 2022.

The following commentary

discusses major components of our business and presents an overview of our consolidated financial position as of December 31, 2023 and

2022, as well as results of operations for the years ended December 31, 2023 and 2022.

This discussion should be reviewed in conjunction

with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form

New Peoples generates

a significant amount of its income from the net interest income earned by the Bank.

Net interest income is the difference between interest

income and interest expense.

Interest income depends on the volume of interest-earning assets outstanding during the period and the interest

rates earned thereon.

The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money

outstanding during the period and the interest rates paid thereon.

The quality of the assets further influences the amount of interest

income lost on nonaccruing loans and the amount of provision expense added to the allowance for credit losses.

The Bank also generates

noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance

and investment products sold.

Critical Accounting

Certain critical

accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

critical accounting estimates relate to our allowance for credit losses.

The allowance for

credit losses reflects the estimated losses resulting from the inability of our customers to make required payments.

If the financial

condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be

updated, and additional provisions could be required.

For further discussion of the estimates used in determining the allowance for credit

losses, we refer you to the section on “Allowance for Credit Losses” in this discussion.

For further discussion

of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements,

contained in Item 8 of this Form 10-K.

Cybersecurity

The Company, primarily

through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer,

public and regulatory expectations regarding operational and information security have increased over time.

Accordingly, the Company’s

and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures,

disruptions and breakdowns.

Although the Company has business continuity plans and other safeguards in place, disruptions or failures

in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches

of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s

and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational

damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect

the Company’s results of operations or financial condition.

Although to date

the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no

assurance that it or its subsidiaries will not suffer such losses in the future.

On June 15, 2022, we experienced a cybersecurity incident

that temporarily interrupted the operability of our computer systems.

Limited operations were restored June 17, 2022, and full operations

were restored June 21, 2022.

Since that date, restoration efforts have been completed and normal operations have resumed.

The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these

threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity

solutions to serve our customers when and how they want to be served.

As a result, cyber security and the continued development and enhancement

of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software,

The Company’s

risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans

to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to

serve our customers when and how they want to be served.

As a result, cybersecurity and the continued development and enhancement of

the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software,

data and networks from attack, damage or unauthorized access, remain a priority for the Company.

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protective measures or to investigate and remediate any information security vulnerabilities.

discussed under the heading “Supervision and Regulation” in Item 1 of this Form 10-K, the federal banking agencies have issued

a joint rule that requires banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after

any cyber-security incident has occurred.

Company made significant progress during 2022 resulting in the highest annual consolidated net income in the history of the Company.

For the year ended December 31, 2022, net income was $8.1 million, or basic and diluted net income per share of $0.34, compared to a

net income of $7.0 million, or basic and diluted net income per share of $0.29, for the year ended December 31, 2021, an improvement

of $1.1 million, or 15.3%.

Retained earnings increased to $8.9 million as of December 31, 2022 from $2.0 million as of December 31, 2021,

an increase of $6.9 million or 339.0%.

interest income for the year ended December 31, 2022 was $28.3 million compared to $27.2 million for the year ended December 31, 2021.

The improvement of $1.1 million in net interest income was primarily attributable to a $33.8 million increase in average earning assets

and rising market interest rates during the year, partially offset by a decrease in loan origination fees compared to 2021 as PPP loans

were forgiven and an increase in costs of our variable rate trust preferred securities in 2022.

Net interest margin was 3.62% compared

to 3.64% for the year ended December 31, 2022, and 2021, respectively.

income was $9.2 million for the year ended December 31, 2022 compared to $10.0 million for the year ended December 31, 2021.

decrease was attributable to $322,000 of gains on the sales of investment securities during the year ended December 31, 2021, $190,000

of gains on the sales of three former branch locations during the year December 31, 2021, as well as a write-down of bank owned life

insurance (BOLI) of $158,000 during the year ended December 31, 2022, and a decrease in gains and commissions on mortgage loan originations

and sales of approximately $162,000 due to the impact of rising interest rates on mortgage demand.

expense was $26.5 million for the year ended December 31, 2022 compared to $27.9 million for the year ended December 31, 2021.

million decrease was primarily due to valuation adjustments of other real estate owned during the year ended December 31, 2021, which

consisted of $1.1 million related to former branch locations and approximately $390,000 in net losses and write-downs on the sales of

other real estate owned.

This was offset by an increase of approximately $703,000 in salaries and benefits during the year ended December

31, 2022, which is attributed to higher bonus accruals based on the Company’s performance, annual wage adjustments, and adjustments

to the minimum starting salaries of employees to reflect rising costs to attract and retain talent.

the year ended December 31, 2022, total assets decreased $19.3 million, or 2.4%, to $775.4 million.

Loans receivable decreased $9.1

million, or 1.5%, during 2022, which is partly attributable to several large borrowers selling their businesses or collateral and paying

off the related loans.

Additionally, loan pricing remains very competitive in the Company’s market and has impacted loan originations.

Investment securities decreased $11.0 million in 2022, which is primarily due to the decline in the market value of the investment portfolio

due to rising interest rates.

deposits declined $14.8 million, or 2.1%, during 2022, with most of the decline occurring during the fourth quarter as competition for

funding intensified.

Peoples Bank remains well-capitalized.

Leverage ratio improved to 10.40%.

Company’s key performance indicators are as follows:

As discussed under

the heading “Cybersecurity” in Item 1.C of this Form 10-K, the federal banking agencies have issued a joint rule that requires

banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after any cybersecurity incident

has occurred, and the SEC has outlined rules for public disclosure.

For the year ended

December 31, 2023, net income was $7.2 million, or basic and diluted net income per share of $0.30, compared to a net income of $8.1

million, or basic and diluted net income per share of $0.34, for the year ended December 31, 2022, a decrease of $0.9 million, or 11.1%.

Retained earnings increased to $14.5 million as of December 31, 2023 from $8.9 million as of December 31, 2022, an increase of $5.6 million

As discussed in “Net

Interest Income and Net Interest Margin” net interest income for the year ended December 31, 2023 was $28.0 million compared to

$28.3 million for the year ended December 31, 2022.

The decrease was primarily due to an increase in the cost of interest-bearing liabilities

of 125 basis points (“bps”;

1 basis point is equal to 1/100 th of 1 percent) to 1.88% during the year ended December

31, 2023 compared to 0.63% during the year ended December 31, 2022.

Noninterest income

increased $709,000 to $9.9 million for the year ended December 31, 2023 from $9.2 million for the comparable period in 2022.

drivers of the increase were the sales of a former operations facility and branch location resulting in a combined gain of $130,000;

an increase in financial services revenue of $168,000;

and income resulting from an insurance claim payment in the amount of $257,000.

This was offset by decreases in service charge income and card processing fees totaling a combined $122,000 during the period.

charge income decreased due to changes made in 2022 in assessing certain charges that reduced the number of transactions subject to such

Additional changes to our service charge structure took effect during the fourth quarter of 2023, which eliminated charges for

certain representment items, and certain funds transfer fees.

Fees from debit card activity declined as customer deposit balances have

reverted to pre-pandemic levels and customer spending habits have also begun to normalize.

Noninterest expense

was $28.0 million for the year ended December 31, 2023 compared to $26.5 million for the year ended December 31, 2022.

The $1.5 million

increase was impacted by increases in salaries and employee benefits of $891,000 data processing and telecommunications costs of $112,000,

legal and professional fees of $273,000, cards rewards program expense of $115,000 and deposit insurance of $143,000.

These increases

were partially offset by decreases in occupancy expenses of $192,000, and data processing and telecommunication costs of $171,000, in

comparison to the year ended December 31, 2022.

During the first quarter of 2024 changes will be made to our branch network, with the

consolidation of our two offices in Bristol, VA along with the opening of a full-service branch office in Boone, NC.

It is expected that

personnel and occupancy costs will incur modest increases resulting from these changes.

Total assets as of

December 31, 2023 were $826.3 million, an increase of $51.0 million, or 6.6%, from $775.4 million as of December 31, 2022.

increased $53.5 million, or 9.2%, during 2023 due to continuing strong loan demand.

Investment securities decreased $6.3 million during

2023 primarily due to principal repayments of amortizing investments and other security maturities of $9.4 million, combined with a decrease

of $2.9 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.

Deposits totaled

$716.5 million as of December 31, 2023 compared to $692.7 million as of December 31, 2022.

The increase of $23.8 million, or 3.4%, was

due to efforts to attract and retain deposits, specifically time deposits, combined with cyclical funds inflows.

As a result of these

efforts, total time deposits increased $64.1 million during the year ended December 31, 2023.

The increase 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

New Peoples Bank

remains well-capitalized.

The leverage ratio improved to 11.11% as of December 31, 2023, compared to 10.40% as of December 31, 2022.

The Company’s

key performance indicators are as follows:

ended December 31,

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Interest Income and Net Interest Margin

Company’s primary source of income is net interest income, which increased $1.1 million, or 3.95%, in 2022 compared to 2021 due

primarily to a $33.8 million increase in average earning assets and rising market interest rates during the year.

This was offset by

an increase in interest expense on borrowed funds of approximately $777,000, or 171.5%, related to the increase in variable rates on

trust preferred securities as well as an increase in borrowings from the Federal Home Loan Bank (FHLB) during the year.

in interest income on loans, including fees, was driven by a decrease in fees of $1.8 million resulting from PPP loan forgiveness in

2021 that did not reoccur during 2022.

following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.

The Company’s

primary source of income is net interest income, which decreased $0.3 million, or 0.9%, in 2023 compared to 2022 due primarily to

an increase in the cost of interest-bearing liabilities of 125 bps to 1.88% during the year ended December 31, 2023 compared to 0.63%

during the year ended December 31, 2022.

Time deposits were the primary contributor to the decline in net interest income, due to an

increase of 176 bps in the cost of time deposits to 2.57% and a $33.3 million increase in the average balance due to a shift in the deposit

mix from lower cost products.

Additionally, the cost of borrowed funds increased, as trust preferred securities costs rose 323 bps to

7.65% and other borrowings cost rose 114 bps to 3.60%.

The impact of other borrowings cost increase was partially offset by a reduction

of $13.2 million in the average outstanding balance.

The increase in cost of funds was offset by an increase of 85 bps in the yield on

earning assets.

The yield on loans increased 66 bps to 5.35%, helping to offset the increased cost of funding during the year ended December

These rate and volume activities combined to result in a decrease in net interest income of $266,000, while the net interest

margin rose slightly to 3.67% for the year ended December 31, 2023, from 3.62% for 2022.

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)

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earning assets

for loans losses

for credit losses

AND SHAREHOLDERS’ EQUITY

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and money market deposits

interest-bearing deposits

preferred securities

interest-bearing liabilities

Non-interest-bearing

deposit liabilities and cost of funds

Noninterest-bearing

Shareholders’

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loans have been included in average loan balances.

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

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

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

Yields and rates calculated

based on whole dollars.

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 tables set forth the amounts of the total changes in interest income and interest expense which can be attributed

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in net interest income

increases in interest income and interest expense during 2022 were driven mainly by increased interest rates, as short-term assets and

liabilities tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset

yields outpacing increases in funding costs in the rising interest rate environment.

Overall, our net interest margin decreased 2 basis

points to 3.62% in 2022 compared to 3.64% in 2021.

increase in interest income is primarily attributed to an increase in yields on overnight deposits with banks, which was mainly driven

by higher market rates, as noted above, combined with a reinvesting of funds in investment securities at higher rates.

This increased

income offset a decrease in loan interest Overall, loan interest income, including fees, decreased $584,000 during the year ended December

31, 2022 compared to December 31, 2021, due to the impact of PPP loan fees recognized in 2021, that was not repeated in 2022.

expense increased $404,000, due primarily to an increase in the average balance of FHLB advances of $20.4 million during the year, combined

with increased market rates on trust preferred securities.

This was offset by a decrease in interest expense on time deposits due to

a reduction in volume and rate.

While rates on time deposits reset at lower rates during 2022, this trend is not expected to continue

into 2023, due to the continuing increase in interest rates, combined with the competitive pressures to acquire and retain deposits.

future interest rate structure has been impacted by the commencement of the end of the use of LIBOR, which will completely phase-out

We use LIBOR in pricing some of a limited number of our interest earning assets and liabilities, including our trust preferred

Certain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments.

Most of these contracts

have been, or will be, replaced with the secured overnight funding rate (SOFR).

primary source of income is interest earned on loans.

Total gross loans decreased $9.1 million during 2022, or 1.54%, to $584.6 million

as of December 31, 2022 as compared to $593.7 million at December 31, 2021.

The primary drivers of this decrease in total loans were

a reduction in commercial real estate loans, multifamily, and commercial loans of $9.1 million, $3.3 million, and $7.6 million, respectively.

This was offset by an increase in construction and land development loans of $10.1 million in comparison to December 31, 2021.

in commercial real estate and commercial loans was partly attributable to several large borrowers selling their businesses or collateral

and paying off the related loans.

For more detail on loan balances, refer to Note 6 of the consolidated financial statements contained

in Item 8 of this Form 10-K.

loans increased approximately $472,000 during 2022 from $2.9 million as of December 31, 2021 to $3.4 million as of December 31, 2022.

Nonaccrual loans negatively affect interest income as these loans are nonearning assets.

about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following

The increases in

interest income and interest expense during 2023 were driven mainly by increased interest rates, as short-term assets and liabilities

tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset yields outpacing

increases in funding costs in the rising interest rate environment.

Overall, our net interest margin increased five basis points to 3.67%

in 2023 compared to 3.62% in 2022.

The increase in interest

income is primarily attributed to an increase in yields on loans, which was mainly driven by higher market rates, combined with higher

rates on interest bearing deposits in other banks.

Overall, loan interest income, including fees, increased $4.8 million during the year

ended December 31, 2023 compared to December 31, 2022.

Interest expense

increased $6.0 million, due primarily to an increase in the average balance and yield on time deposits, as noted above, combined with

increased market rates on interest-bearing demand deposits, savings and money market deposits, and trust preferred securities.

offset by a decrease in interest expense on other borrowings due to a reduction in volume.

Our interest rate

structure was impacted by the end of the use of LIBOR, which phased-out in 2023.

We used LIBOR in pricing a limited number of our interest

earning assets and liabilities, including our trust preferred securities.

Most of these contracts were replaced with the secured overnight

funding rate (“SOFR”).

Our primary source

of income is interest earned on loans.

Total gross loans increased $53.5 million during 2023, or 9.15%, to $638.1 million as of December

31, 2023 as compared to $584.6 million as of December 31, 2022.

The primary driver of this increase in total loans was an increase of

$43.1 million in commercial real estate loans to $240.2 million as of December 31, 2023 compared to $197.1 million as of December 31,

Additionally, residential 1-4 family, multifamily, commercial, and consumer installment loans increased $11.0 million, $4.9 million,

$6.5 million, and $3.3 million, respectively.

This was offset by decreases of $13.6 million in construction and land development loans;

$1.3 million in farmland loans;

$248,000 in agricultural loans;

and $114,000 in all other loans.

For more detail on loan balances, refer

to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K.

Nonaccrual loans

increased approximately $0.1 million during 2023 from $3.4 million as of December 31, 2022 to $3.5 million as of December 31, 2023.

loans negatively affect interest income as these loans are nonearning assets.

When doubt about

the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following

circumstances:

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financial statements in Item 8 of this Form 10-K.

loan balances decreased during 2022, to $2.7 million as of December 31, 2022, from $2.8 million as of December 31, 2021.

income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status.

impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method.

more detail on impaired loan balances, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.

following table presents the dollar composition and percentage of our loan portfolio as of December 31:

Individually evaluated

loans, previously known as impaired loans under the incurred loss methodology, decreased during 2023, to $1.1 million as of December

31, 2023, from $2.7 million as of December 31, 2022.

I nterest income and cash receipts on individually

evaluated loans are handled differently depending on whether or not the loan is on nonaccrual status.

If the individually evaluated loan

is not on nonaccrual status, the interest income on the loan is computed using the effective interest method.

For more detail

on individually evaluated loan balances, refer to Note 6 of the consolidated financial statements

in Item 8 of this Form 10-K.

The following table

presents the dollar composition and percentage of our loan portfolio as of December 31:

in thousands)

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installment loans

allowance for loan losses

loan maturities, and distribution between fixed and variable rate loans as of December 31, 2022 are shown in the following tables :

allowance for credit losses 1

Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022

are shown using the incurred loss methodology.

Our loan maturities,

and distribution between fixed and variable rate loans as of December 31, 2023 are shown in the following tables:

in thousands)

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installment loans

following table presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December

The following table

presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2023:

in thousands)

3 unchanged sentences

installment loans

maturities of loans do not reflect the actual term of our loan portfolio.

The average life of mortgage loans is substantially less than

the contractual life due to prepayments and enforcement of due on sale clauses.

Scheduled principal amortization also reduces the average

life of the loan portfolio.

The average life of mortgage loans tends to increase when current market mortgage rates are substantially

above rates on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.

variable rate loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above

the rate floor, or may be more than the allowable rate increase under the terms of the loan.

In these instances, it may take several

reset periods before these loans are fully adjusted.

for Loan Losses

methodology we use to calculate the allowance for loan losses is considered a critical accounting policy.

The adequacy of the allowance

for loan losses is based upon management’s judgment and analysis.

The following factors are included in our evaluation of determining

the adequacy of the allowance:

risk characteristics of the loan portfolio, current and historical loss experience, concentrations, and

internal and external factors such as general economic conditions.

the fourth quarter of 2021, in response to rising price inflation, we added inflation to the economic factors considered in the model.

Throughout 2022, we continued to adjust external factors impacting the allowance for loan loss model to best reflect changes in the general

and local economies, the increasing interest rate environment, and the risks in the portfolio.

allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries.

are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely.

Subsequent to charging off a loan, management makes best efforts to recover any charged-off balances.

allowance for loan losses remained at $6.7 million as of December 31, 2022.

The allowance for loan losses at the end of 2022 was approximately

1.15% of total loans as compared to 1.13% at the end of 2021.

Provisions for loan losses of approximately $625,000 and $372,000 were

recorded during the years ended December 31, 2022 and 2021, respectively.

Loans charged off, net of recoveries, totaled approximately

$633,000, or 0.11% of average loans, for the year ended December 31, 2022, compared to approximately $828,000, or 0.14% of average loans,

The allowance for loan losses is being 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.

loans present higher risks of default, and we have experienced an increase in the volume of these loans during 2022, while the number

of nonaccrual loans decreased.

As of December 31, 2022, there were 41 nonaccrual loans totaling $3.4 million, or 0.58% of total loans.

As of December 31, 2021, there were 65 nonaccrual loans totaling $2.9 million, or 0.50% of total loans.

The amount of interest income

that would have been recognized on these loans had they been accruing interest was approximately $10,000 and $223,000 in the years ended

December 31, 2022 and 2021, respectively.

There were no loans past due 90 days or greater and still accruing interest at either December

31, 2022 or 2021.

Contractual maturities

of loans do not reflect the actual term of our loan portfolio.

The average life of mortgage loans is substantially less than the contractual

life due to prepayments and enforcement of due on sale clauses.

Scheduled principal amortization also reduces the average life of the

loan portfolio.

The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates

on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.

Some variable rate

loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor

or may be more than the allowable rate increase under the terms of the loan.

In these instances, it may take several reset periods before

these loans are fully adjusted.

for Credit Losses

January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses

on Financial Instruments (ASC 326).

This standard replaced the incurred loss methodology with an expected loss methodology that is referred

to as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining

estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally

applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance

sheet credit exposures such as unfunded commitments to extend credit.

Financial assets measured at amortized cost will be presented at

the net amount expected to be collected by using an allowance for credit losses.

Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach

for all financial assets measured at amortized cost and off-balance sheet credit exposures.

The transition adjustment for the adoption

of CECL included a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding,

and an increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities.

The Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL,

which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded.

Results for reporting periods

beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously

applicable accounting standards (“Incurred Loss”).

The allowance for

credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected

on the loans.

Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Accrued interest receivable

is excluded from the estimate of credit losses.

The allowance for

credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date.

The allowance

for credit losses is estimated by management using relevant available information, from both internal and external sources, relating

to past events, current conditions, and reasonable and supportable forecasts.

The Company primarily

utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of

current expected credit losses.

To further adjust the allowance for credit losses for expected losses not already included within the

quantitative component of the calculation, the Company may consider the following qualitative adjustment factors:

policies and procedures, national and local economic conditions, the experience and ability of management and staff, the volume and severity

of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements

and competition.

The Company measures

expected credit losses for loans on a pooled basis when similar risk characteristics exist.

Loans that do not share risk characteristics

are evaluated on an individual basis.

The Company designates loan relationships of $250,000 or more that have been determined to meet

the regulatory definitions of “special mention” or “classified” (together known as “criticized”)

as individually evaluated.

The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral

method”) or the discounted cash flow (“DCF”) method.

The allowance for

credit losses increased to $7.3 million as of December 31, 2023 from $6.7 million as of December 31, 2022.

The allowance for credit losses

at the end of 2023 was approximately 1.14% of total loans as compared to 1.15% at the end of 2022.

Provisions for credit losses for loans

receivable of approximately $712,000 and $625,000 were recorded during the years ended December 31, 2023 and 2022, respectively.

charged off, net of recoveries, totaled approximately $103,000, or 0.02% of average loans, for the year ended December 31, 2023, compared

to approximately $633,000, or 0.11% of average loans, in 2022.

The allowance for credit losses represents an amount that, in the Company's

judgment, will be adequate to absorb expected 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 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.

This evaluation is inherently subjective because it requires estimates that are susceptible

to significant revision as more information becomes available.

Nonaccrual loans

increased approximately $0.1 million during 2023 from $3.4 million as of December 31, 2022 to $3.5 million as of December 31, 2023.

amount of interest income that would have been recognized on these loans had they been accruing interest was approximately $61,000 and

$10,000 in the years ended December 31, 2023 and 2022, respectively.

There were no loans past due 90 days or greater and still accruing

interest at either December 31, 2023 or 2022.

There are no commitments to lend additional funds to non-performing borrowers.

majority of our loans are collateralized by real estate located in our market area.

It is our policy to sufficiently collateralize loans

to help minimize exposure to losses in cases of default.

A majority of our

loans are collateralized by real estate located in our market area.

It is our policy to sufficiently collateralize loans to help minimize

exposure to losses in cases of default.

Increasing real estate values in our area have reduced this exposure somewhat.

However, while we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural

As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries.

As a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased

Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been

adversely impacted by the global and domestic economic slowdown coupled with rising inflation.

We are monitoring these industries and

consider these segments to be the primary higher risks in the loan portfolio.

and commercial real estate loans are initially risk rated by the originating loan officer.

If deterioration in the financial condition

of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee.

Guidance for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for

However, while

we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas.

a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries.

a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk.

Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely

impacted by the global and domestic economic slowdown coupled with rising inflation.

We are monitoring these industries and consider

these segments to be the primary higher risks in the loan portfolio.

Commercial and commercial

real estate loans are initially risk rated by the originating loan officer.

If deterioration in the financial condition of the borrower

and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee.

for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.

Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.

regard to the Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification

and Account Management Policy which affects our estimate of the allowance for loan losses.

With regard to the

Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification

and Account Management Policy which affects our estimate of the allowance for credit losses.

Under this approach, a consumer or consumer

3 unchanged sentences

is unsecured upon being deemed Substandard, the entire loan amount is charged-off.

non-1-4 family residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation

costs are compared to the loan balance to calculate any potential deficiency.

If the collateral is sufficient, then no charge-off is

If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against

the allowance for loan loss.

In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a

current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate

any deficiency.

Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually

180 days past due.

If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off

against the allowance for loan loss.

Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership,

liquidation ensues.

loans of $250,000 or more, along with selected other credits, classified as substandard, doubtful or loss are individually reviewed for

impairment in accordance with Accounting Standards Codification (ASC) 310-10-35.

The increase in the threshold to $250,000 during 2022,

did not significantly impact level of loans assessment for impairment.

In evaluating impairment, a current appraisal is generally used

to determine if the collateral is sufficient.

Appraisals are typically less than a year old and must be independently reviewed to be

If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable.

If this review determines that the appraisal is not reasonable, then a new appraisal is ordered.

Impaired loan balances decreased during

2022, to $2.7 million, with a related allowance of approximately $86,000, as of December 31, 2022, from $2.8 million, with a related

allowance of approximately $166,000, as of December 31, 2021.

Management is aggressively working to reduce the impaired credits at minimal

determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450),

we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the

performance of loans with similar characteristics, and external and internal risk factors.

We consider the overall quality of our underwriting

process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables

topic of the Accounting Standards Codification (ASC 310).

If an appraisal is older than one year, a new external certified appraisal

may be obtained and used to determine impairment.

If an exposure exists, a specific allowance is directly made in the amount of the potential

loss, in addition to estimated liquidation and disposal costs.

The evaluation is inherently subjective as it requires estimates that

are susceptible to significant revision as more information becomes available.

addition to impaired loans, the remaining loan portfolio is evaluated based on net charge-off history, economic conditions, and internal

To calculate the net charge-off history factor, we perform a 12-quarter look-back and use the average net charge offs as a

percentage of the loan balances.

To calculate the economic conditions factor, we use current economic data which includes national and

local unemployment information, local housing price changes, gross domestic product growth, and interest rates.

Lastly, we evaluate our

internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices.

As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may

be needed to the allowance for loan losses.

For non-1-4 family

residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared

to the loan balance to calculate any potential deficiency.

If the collateral is sufficient, then no charge-off is necessary.

If a deficiency

exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for credit losses.

In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and

after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency.

Subsequently,

any noted deficiency is then charged-off against the allowance for credit losses when the loan becomes contractually 180 days past due.

If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against

the allowance for credit losses.

Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation

Prior to the adoption

of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable

to collect all amounts due in accordance with the original contractual terms of the loan agreements.

Impaired loans included loans on

nonaccrual status and accruing troubled debt restructurings.

When determining if the Company would be unable to collect all principal

and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s

capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient

to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether

or not currently classified as such.

The tables below include all loans deemed impaired, whether or not individually assessed for impairment.

If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the

present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was

expected solely from the collateral.

Interest payments on impaired loans were typically applied to principal unless collectability of

the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

Annualized net charge-offs,

as a percentage of average loans, was 0.02% during the year ended December 31, 2023, compared to 0.11% 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

credit losses 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 year

ended December 31, 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 $649,000, of which $712,000 was provided for the loan portfolio;

offset by a reduction of the allowance for unfunded commitments of $63,000.

The following table summarizes components of the allowance

for credit losses and related loans as of December 31, 2023 and 2022:

Credit Ratios

in thousands)

for loan losses

for loan losses to total loans

for credit losses 1

for credit losses to total loans 1

loans to total loans

of allowance for loan losses to nonaccrual loans

of allowance for credit losses 1 to nonaccrual loans

net of recoveries

1 unchanged sentence

to average loans

above table includes $823,000 and $1.1 million in nonaccrual loans as of December 31, 2022 and 2021, respectively, which have been classified

as troubled debt restructurings.

No troubled debt restructurings were past due 90 days or more and still accruing interest as of December

31, 2022 or 2021.

There were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022, as compared to

$2.5 million in loans classified as troubled debt restructurings as of December 31, 2021.

For more detail on nonaccrual, impaired, past

due and restructured loans, refer to Note 6 and Note 8 to the consolidated financial statements in Item 8 of this Form 10-K.

following table shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major

category of loans for the years ended December 31, 2022 and 2021:

December 31, 2021

in thousands)

1 The Company

adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022 are shown

using the incurred loss methodology.

The following table

shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans

for the years ended December 31, 2023 and 2022:

Charge-offs (Recoveries)

2 unchanged sentences

Charge-offs (Recoveries) as % of Average Loan Type

estate secured:

and land development

real estate loans

and all other loans

following table shows the balance and percentage of our allowance for loan losses allocated to each major category of loans.

of the Allowance for Loan Losses

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer and all other loans

The following table

shows the balance and percentage of our allowance for credit losses allocated to each major category of loans.

Allocation of the

Allowance for Credit Losses 1

in thousands)

3 unchanged sentences

and all other loans

have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being

incurred within each of the categories of loans.

The allocation of the allowance as shown in the table above should not be interpreted

as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss

Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur

within such categories since the total allowance is a general allowance applicable to the entire portfolio.

allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan.

allocated 35.1% of the allowance to commercial real estate loans, which constituted 33.7% of our loan portfolio at December 31, 2022.

This allocation increased slightly compared to the 31.7% in 2021, due primarily to the impact of the external factors considered as part

of the determination of the overall allowance for loan losses.

We have allocated 5.7% of the allowance to commercial loans, which constituted

8.0% of our loan portfolio at December 31, 2022.

This allocation percentage decreased compared to December 31, 2021, due to a lower loss

rate on commercial loans for the historical period assessed in the loan loss model for 2022.

residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable.

These loans are

made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

allocated 5.2% of the allowance to real estate construction loans, which constituted 7.3% of our loan portfolio as of December 31, 2022.

Construction loans are secured by real estate with values that are dependent upon market and economic conditions.

Additionally, these

credits are generally shorter-term projects, of eighteen months or less.

These loans are made consistent with appraisal policies and

real estate lending policies which detail maximum loan-to-value ratios and maturities.

allocated 35.1% of the allowance to residential real estate loans, which constituted 38.9% of our loan portfolio as of December 31, 2022.

allocated 5.74% of the allowance to consumer and all other loans, which constituted 3.41% of our loan portfolio as of December 31, 2022.

Our allocation increased as a percentage of the allowance for loan losses due to the impact of overdrawn deposit account losses resulting

from the cybersecurity incident, combined with a change in the treatment of deposit account charge-offs during 2022.

As of December 31,

2022, we had an unallocated portion of the allowance for loan losses totaling approximately $440,000.

While our legacy loan loss model

calculation did not fully allocate the entire allowance, we believe that the lingering impact of the pandemic, combined with the recent

impact of inflation warrant the maintenance of the allowance for loan losses.

implemented the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model for the first quarter of 2023.

The cumulative

effects of this implementation were immaterial.

Real Estate Owned

real estate owned decreased $1.1 million, or 80.82%, to approximately $261,000 as of December 31, 2022 from $1.4 million as of December

All properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special

Assets division.

Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping

in mind the impact to earnings and capital.

During 2022, three former branch locations transferred to OREO in 2021 were sold, which decreased

OREO approximately $912,000.

the levels of problem credits and foreclosed properties have been reduced significantly over the past several years, 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 losses as we expedite the resolution of these problem assets.

investment securities decreased $11.3 million, or 10.51%, to $96.1 million as of December 31, 2022 from $107.4 million as of December

All securities are classified as available-for-sale for liquidity purposes.

There were no sales of securities during the year

ended December 31, 2022.

Sales of securities during 2021 totaled $7.7 million, with gains of approximately $322,000 realized.

the year ended December 31, 2022 and 2021, there were maturities, calls and paydowns of $14.0 million and $16.3 million, respectively.

The Company purchased $19.8 million and $85.1 million in investment securities during the year ended December 31, 2022 and 2021, respectively.

Investment securities with a carrying value of $27.3 and $12.1 million as of December 31, 2022 and 2021, respectively, were pledged to

secure public deposits and for other purposes required, or permitted, by law.

strategy is to invest excess funds in investment securities, which typically yield more interest income than other short-term investment

options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.

fair value of our investment portfolio is substantially affected by changes in interest rates.

Losses could be realized if liquidity

and/or business strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S.

fiscal policies

or other factors affecting market interest rates.

As of December 31, 2022, we had a net unrealized loss in our investment portfolio totaling

$17.6 million as compared to a $1.0 million loss as of December 31, 2021.

As market interest rates increase the level of unrealized losses

could change substantially.

However, these changes would have no impact on earnings or regulatory capital, unless the securities were

sold at a loss.

We have reviewed our investment portfolio and no investment security is deemed to have other than temporary impairment.

1 The Company

adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022 are shown

using the incurred loss methodology.

We have allocated

the allowance according to the amount deemed to be reasonably necessary to provide for the expected credit losses within each of the

categories of loans.

The allocation of the allowance as shown in the table above should not be interpreted as an indication that credit

losses in future years will occur in the same proportions or that the allocation indicates future credit loss trends.

Furthermore, the

portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since

the total allowance is a general allowance applicable to the entire portfolio.

The allocation of

the allowance for credit losses is based on our judgment of the relative risk associated with each type of loan.

We have allocated 34.7%

of the allowance to commercial real estate loans, which constituted 37.6% of our loan portfolio at December 31, 2023.

This allocation

decreased slightly compared to 35.1% in 2022, due primarily to the impact of the CECL methodology.

We have allocated 9.3% of the allowance

to commercial loans, which constituted 8.3% of our loan portfolio at December 31, 2023.

This allocation percentage increased compared

to December 31, 2022, due to the impact of the CECL methodology.

Both residential

and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable.

These loans are made consistent

with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

We allocated 4.1%

of the allowance to real estate construction loans, which constituted 4.5% of our loan portfolio as of December 31, 2023.

loans are secured by real estate with values that are dependent upon market and economic conditions.

Additionally, these credits are

generally shorter-term projects of eighteen months or less.

These loans are made consistent with appraisal policies and real estate lending

policies which detail maximum loan-to-value ratios and maturities.

We allocated 36.7%

of the allowance to residential real estate loans, which constituted 37.3% of our loan portfolio as of December 31, 2023.

We allocated 5.5%

of the allowance to consumer and all other loans, which constituted 3.8% of our loan portfolio as of December 31, 2023.

Our allocation

generally remained consistent with the allocation as of December 31, 2022.

Other Real Estate

Other real estate

owned decreased $104,000, or 39.9%, to approximately $157,000 as of December 31, 2023 from $261,000 as of December 31, 2022.

All properties

are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division.

2023, four properties were sold in the amount of $132,000 and three properties were acquired in the amount of $124,000.

While the levels

of problem credits and foreclosed properties have been reduced significantly over the past several years, 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 credit losses as we expedite the resolution of these problem assets.

Total investment

securities decreased $6.3 million, or 6.5%, to $89.8 million as of December 31, 2023 from $96.1 million as of December 31, 2022.

securities are classified as available-for-sale for liquidity purposes.

There were no sales of securities during 2023 and 2022.

2023 and 2022, there were maturities, calls and paydowns of $9.4 million and $14.0 million, respectively.

The Company purchased $0.5

million and $19.8 million in investment securities during 2023 and 2022, respectively.

Investment securities with a carrying value of

$36.8 million and $27.3 million as of December 31, 2023 and 2022, respectively, were pledged to secure public deposits and for other

purposes required, or permitted, by law.

Our strategy is to

invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such

as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.

The fair value of

our investment portfolio is substantially affected by changes in interest rates.

Losses could be realized if liquidity and/or business

strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S.

fiscal policies or other factors

affecting market interest rates.

As of December 31, 2023, we had a net unrealized loss in our investment portfolio totaling $14.8 million

as compared to a $17.6 million loss as of December 31, 2022.

As market interest rates increase, the level of unrealized losses could

change substantially.

However, these changes would have no impact on earnings or regulatory capital, unless the securities were sold

We believe that all unrealized losses resulted from temporary changes in interest rates and current market conditions and

are not a result of credit deterioration.

No allowance for credit losses on available-for-sale securities was recorded as of December

We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.

fair value and weighted average yield of investment securities as of December 31, 2022 are shown in the following schedule by contractual

maturity and do not reflect principal paydowns for amortizing securities.

Expected maturities will differ from contractual maturities

because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Weighted average yields

are calculated by dividing the contractual interest for each time period by the average amortized contractual cost.

Less than One Year

One to Five Years

Five to ten years

After ten years

The fair value and

weighted average yield of investment securities as of December 31, 2023 are shown in the following schedule by contractual maturity and

do not reflect principal paydowns for amortizing securities.

Expected maturities will differ from contractual maturities because issuers

may have the right to call or prepay obligations with or without call or prepayment penalties.

Weighted average yields are calculated

by dividing the contractual interest for each time period by the average amortized contractual cost.

than One Year

to Five Years

(Dollars in thousands)

Average Yield

U.S Treasuries

3 unchanged sentences

Mortgage backed securities

Owned Life Insurance

of December 31, 2022 and 2021, the Bank had an aggregate total cash surrender value of $4.5 million and $4.7 million, respectively, on

life insurance policies covering former key officers.

Company recorded a loss of $136,000 due to a write-down of approximately $158,000, partially offset by earnings of $22,000, during the

year ended December 31, 2022.

The write-down was due to the impact of rising interest rates on the value of the underlying assets supporting

the policies.

The Company recognized income of approximately $32,000 during the year ended December 31, 2021.

deposits were $692.7 million as of December 31, 2022, a decrease of $14.8 million, or 2.1%, from $707.5 million as of December 31, 2021.

Most of the decrease was driven by savings and money market deposits, which decreased $20.6 million, or 10.7%, to $171.5 million as of

December 31, 2022.

The majority of the decline occurred during the fourth quarter of 2022 as competition for funds for lending and other

needs intensified among banks and non-banks in the Company’s markets.

detailing average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained

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

deposits are considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings

products, all of which decreased in 2022.

Overall, we continue to maintain core deposits through attractive consumer and commercial deposit

products and strong ties with our customer base and communities.

deposits of $250,000 or more equaled approximately 3.87% of deposits at the end of 2022 and 4.00% of deposits at the end of 2021.

of December 31, 2022 and 2021, uninsured deposits are estimated to be $87.5 million and $93.8 million, respectively.

Included in estimated

uninsured deposits are $14.4 million and $13.6 million of public funds, for such respective periods, considered secured via pledged securities

or letters of credit we have with the FHLB.

following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise.

Bank Owned Life

As of December 31,

2023 and 2022, the Bank had an aggregate total cash surrender value of $4.6 million and $4.5 million, respectively, on life insurance

policies covering former key officers.

The Company recognized

income of approximately $40,000 during the year ended December 31, 2023.

The Company recorded a loss of $136,000 due to a write-down

of approximately $158,000, partially offset by earnings of $22,000, during the year ended December 31, 2022.

The write-down was due to

the impact of rising interest rates on the value of the underlying assets supporting the policies.

Total deposits were

$716.5 million as of December 31, 2023, an increase of $23.8 million, or 3.4%, from $692.7 million as of December 31, 2022, due to efforts

to attract and retain deposits, specifically time deposits, combined with cyclical fund inflows.

Most of the increase was driven by time

deposits, which increased $64.1 million, or 34.0%, to $252.3 million as of December 31, 2023.

Information detailing

average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net

Interest Income and Net Interest Margin” section.

Core deposits are

considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings products,

all of which decreased in 2023.

Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products

and strong ties with our customer base and communities.

Time deposits of

$250,000 or more equaled approximately 7.36% of deposits at the end of 2023 and 3.87% of deposits at the end of 2022.

As of December 31,

2023 and 2022, uninsured deposits are estimated to be $93.8 million and $87.5 million, respectively.

Estimated uninsured deposits represented

13.1% and 12.6% of total deposits as of December 31, 2023 and 2022, respectively.

Included in estimated uninsured deposits are $27.9

million and $14.4 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit

we have with the FHLB.

The following table

shows maturities of all time deposits considered uninsured by the FDIC or otherwise.

of Uninsured Time Deposits

3 unchanged sentences

six months through twelve months

of December 31, 2022 and 2021, $27.3 million and $12.1 million of securities, respectively, were pledged to collateralize public deposits,

including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB.

Additionally,

we held letters of credit from the FHLB for $7.0 million and $12.0 million at December 31, 2022 and 2021, respectively, to secure public

deposits, including time deposits, held in our Virginia offices.

held no brokered deposits at December 31, 2022 or 2021.

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

and the surrounding geographical area.

The average balance of and the average 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 Service

(CDARS) time deposits were $1.4 million and $5.8 million at December 31, 2022 and 2021, respectively.

the year ended December 31, 2022, noninterest income decreased approximately $740,000, or 7.4%, to $9.2 million, or 1.1% of average assets,

from $10.0 million, or 1.3% of average assets, for the same period in 2021.

The decrease was primarily attributable to non-recurring

net gains on sales of investment securities of $322,000 in 2021 and net gains on sales of fixed assets of $190,000 in 2021.

period immediately after the cybersecurity incident, in June 2022, we temporarily stopped assessing overdraft and certain other service

we estimate that additional normalized charges of approximately $125,000 would have been realized during this period.

Additionally,

the Company recognized a write-down on BOLI of $158,000 during the year ended December 31, 2022 due to declines in the market value of

the underlying investments supporting the policy related to increased interest rates.

Gains and commissions on mortgage loan originations

decreased approximately $162,000 due to rising interest rates on mortgage loans.

expenses decreased $1.3 million, or 4.8%, to $26.5 million for the year ended December 31, 2022, compared to $27.9 million for the year

ended December 31, 2021.

Noninterest expense as a percent of total average assets decreased to 3.2% in 2022 from 3.5% in 2021.

in noninterest expense was primarily due to a decrease of $1.7 million in occupancy and equipment expense.

decrease in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch

office locations, which were transferred into other real estate owned during the third quarter of 2021.

decrease in occupancy and equipment was partially offset by a $703,000 increase in salaries and benefits expense attributable to higher

bonus accruals based on Company performance, annual performance raises, and adjustments to minimum starting salaries to reflect rising

costs to attract and retain talent.

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 70.6% in 2022 compared to 75.6% in 2021.

The decrease in this ratio is a result of improvements in net interest income

and noninterest expense, as discussed above and in the “Net Interest Income and Net Interest Margin” section earlier in this

We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming

assets and increasing productivity.

Taxes and Deferred Tax Assets

taxes were $2.3 million for the year ended December 31, 2022, compared to $1.9 million for the same period in 2021.

The effective tax

rates were 22.2%, and 21.7% for 2022 and 2021, respectively.

The effective tax rate for the periods differed from the federal statutory

rate of 21.0% principally due to the impact of the recapture of operating loss carryforwards and applicable credits, along with the effect

of certain state income taxes.

The higher effective tax rate in 2022 is the result of an increase in pre-tax earnings in relation to

the various tax preference items.

As of December 31,

2023 and 2022, $36.8 million and $27.3 million of securities, respectively, were pledged to collateralize public deposits, including

time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB.

Additionally, we held letters

of credit from the FHLB for $12.0 million and $7.0 million at December 31, 2023 and 2022, respectively, to secure public deposits, including

time deposits, held in our Virginia offices.

We held no brokered

deposits at December 31, 2023 or 2022.

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

geographical area.

The average balance of and the average 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 Service (“CDARS”)

time deposits were $6.3 million and $1.4 million at December 31, 2023 and 2022, respectively.

Noninterest Income

Noninterest income

increased $709,000 to $9.9 million for the year ended December 31, 2023 from $9.2 million for the comparable period in 2022.

drivers of the increase were the sales of a former operations facility and branch location resulting in a combined gain of $130,0000;

an increase in financial services revenue of $168,000;

and income resulting from an insurance claim payment from the cybersecurity incident

in the amount of $257,000.

This was offset by decreases in service charge income and card processing fees totaling a combined $122,000

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.

Additional changes to our service charge structure took effect during the fourth quarter of 2023,

which eliminated charges for certain representment items, and certain funds transfer fees.

Fees from debit card activity declined as

customer deposit balances have reverted to pre-pandemic levels and customer spending habits have also begun to normalize.

Noninterest expense

was $28.0 million for the year ended December 31, 2023 compared to $26.5 million for the year ended December 31, 2022.

The $1.5 million

increase was impacted by increases in salaries and employee benefits of $891,000, data processing and telecommunications costs of $112,000,

legal and professional fees of $273,000, cards rewards program expense of $115,000 and deposit insurance of $143,000.

These increases

were partially offset by decreases in occupancy expenses of $192,0000, and data processing and telecommunication costs of $171,000, in

comparison to the year ended December 31, 2022.

Our efficiency ratio,

a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 73.7%

in 2023 compared to 70.6% in 2022.

The modest performance decline in this ratio is a result of the decline in net interest income and

increased noninterest expenses, as discussed above and in the “Net Interest Income and Net Interest Margin” section earlier

in this Item 7.

We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing

nonperforming assets and increasing productivity.

Income Taxes and

Deferred Tax Assets

Income taxes were

$2.1 million for the year ended December 31, 2023, compared to $2.3 million for the same period in 2022.

The effective tax rates were

23.0%, and 22.2% for 2023 and 2022, respectively.

The effective tax rate for the periods differed from the federal statutory rate of

21.0% principally due to the lessened impact of tax preference items, along with the effect of certain state income taxes.

effective tax rate in 2023 is the result of an increase in pre-tax earnings in relation to the various tax preference items, and increased

income in states that maintain a tax structure based on allocated income.

tax assets represent the future tax benefit of future deductible differences.

15 unchanged sentences

The Company classifies interest and penalties as a component of income tax expense.

total shareholders’ equity at the end of 2022 was $57.2 million compared to $63.6 million at the end of 2021.

The decrease was

$6.4 million, or 10.1%.

Book value per common share was $2.40 at December 31, 2022 compared to $2.66 at December 31, 2021.

As previously

discussed, the year-over-year decline was primarily driven by the $13.1 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

$6.7 million.

2022, the board of directors authorized the repurchase of up to 500,000 shares of common stock through March 31, 2023.

Through December

31, 2022, 73,595 shares have been repurchased at an average price of $2.33 per share.

On February 27, 2023, the board of directors approved

an extension of the repurchase program through March 31, 2024.

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

Bank Holding Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital.

The Bank continues

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

Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section

38 of the FDIA.

The capital adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,”

are set forth in Note 21, Capital, to the consolidated financial statements in Item 8 of this Form 10-K.

Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act.

The final rules require the Bank to comply with the following minimum capital ratios:

During the year ended

December 31, 2023, total shareholders’ equity increased $7.6 million to $64.8 million due to the earnings of $7.2 million and the

$2.3 million decrease in the net unrealized loss on available-for-sale investment securities, which was partially offset by a cash dividend

payment of $1.4 million and the repurchase of common stock totaling $237,000.

Additionally, the implementation of the current expected

credit loss (“CECL”) methodology resulted in a one-time net of tax, direct charge to retained earnings of $212,000.

Consequently,

book value per share increased to $2.73 as of December 31, 2023 compared to $2.40 as of December 31, 2022.

The Bank remains well capitalized

per regulatory guidance.

As previously reported,

the Board extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2024.

During 2023, the

Company repurchased 100,875 shares at an average price of $2.31 per share.

Since commencement of the repurchase plan, 174,470 shares

have been repurchased at an average rate of $2.32.

The Company meets

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

Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital.

The Bank continues to be subject

to various capital requirements administered by banking agencies.

The Bank is characterized

as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA.

adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in Note 22,

Capital, to the consolidated financial statements in Item 8 of this Form 10-K.

The Bank is also

subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act.

The final rules

require the Bank to comply with the following minimum capital ratios:

(i) a Common Equity Tier 1 (“CET1”) ratio of at least

10 unchanged sentences

Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.

Company paid its first cash dividend of $0.05 per share in 2022.

On February 27, 2023, the board of directors declared a dividend of

$0.06 per share, to be paid on March 31, 2023.

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.

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

The Company paid

a cash dividend of $0.06 per share in 2023.

On February 28, 2024, the Board of Directors declared a dividend of $0.07 per share, to be

paid on March 29, 2024.

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.

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 $118.0 million as of December 31, 2023, down from $130.5 million as of December 31, 2022.

As discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities,

which generally return higher yields, while still providing liquidity, as discussed below, and the decrease in deposits.

short-term assets is maintained at levels management deems adequate to meet potential liquidity needs.

Bank’s primary funding source is deposits from customers in the markets in which it provides banking services.

As discussed previously,

deposits declined during the fourth quarter of 2022 as competition for deposits intensified from both bank and non-bank institutions.

The Company expects that pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid

on its deposit products, possibly faster and to a higher degree not currently projected, to retain existing customers and attract new

deposit relationships to fund loans and other activities.

As discussed below, the Company has other liquidity sources to manage its liquidity

needs as they arise.

December 31, 2022, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount

of $68.8 million, which is net of the $27.3 million of securities pledged as collateral.

Generally, the investment portfolio serves as

a source of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such

as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond.

Total investment securities decreased $11.3 million,

or 10.51%, during 2022 from $107.4 million as of December 31, 2021 to $96.1 million as of December 31, 2022.

loan to deposit ratio was 84.4% as of December 31, 2022 and 83.9% as of December 31, 2021.

third-party sources of liquidity remain intact at December 31, 2022 which includes the following:

our line of credit with the FHLB totaling

$200.1 million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal

Reserve Bank of Richmond.

We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks

is primarily due to loan growth exceeding funding growth through deposits and other borrowings.

A surplus of short-term assets is maintained

at levels management deems adequate to meet potential liquidity needs.

primary funding source is deposits from customers in the markets in which it provides banking services.

As discussed previously, deposits

increased during 2023 but competition for deposits remains intense from both bank and non-bank institutions.

The Company expects that

pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid on its deposit products,

possibly faster and to a higher degree not currently projected, to retain existing customers and attract new deposit relationships to

fund loans and other activities.

As discussed below, the Company has other liquidity sources to manage its liquidity needs as they arise.

As of December 31,

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 funds.

2023, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $53.0

million, which is net of the $36.8 million of securities pledged as collateral.

Generally, the investment portfolio serves as a source

of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such as federal

funds sold and overnight deposits with the Federal Reserve Bank of Richmond.

Total investment securities decreased $6.3 million, or 6.5%,

during 2023 from $96.1 million as of December 31, 2022 to $89.8 million as of December 31, 2023.

The Bank also has additional borrowing

capacity on lines for which investments are currently pledged.

Our loan to deposit

ratio was 89.1% as of December 31, 2023 and 84.4% as of December 31, 2022.

Available third-party

sources of liquidity remain intact as of December 31, 2023 which includes the following:

our line of credit with the FHLB totaling $200.1

million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve

Bank of Richmond.

We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of

December 31, 2023.

We have used our

line of credit with FHLB to issue letters 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

An additional $200.1 million was available on December 31, 2022 on the $207.1 million line of credit, of which $113.7 million

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

we have access to the brokered deposits market, we held no brokered deposits as of December 31, 2022 or 2021.

As of December 31, 2022,

we had $1.4 million in reciprocal CDARS time deposits, compared to $5.8 million as of December 31, 2021.

Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs.

We have collateralized this line with investment securities;

however, we do not anticipate using this funding source except as a last

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, some of which are beyond our control.

With the current economic uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the

war in Ukraine, we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands.

Additionally,

our contingency funding plan is reviewed quarterly with our Asset Liability Committee.

March 10, 2023, Silicon Valley Bank (SVB) a regional banking company headquartered in Santa Clara, California, with total assets in excess

of $200 billion, was taken into receivership through FDIC, after the bank experienced a significant outflow of deposit funds fueled by

concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at SVB.

These concerns

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.

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 our deposit fluctuations

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

Since the date of the

receivership, 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.

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

An additional $178.1 million was available on December 31, 2023 on the $200.1 million line of credit, of which $118.9 million is secured

by a blanket lien on our residential real estate loans.

While we have access

to the brokered deposits market, we held no brokered deposits as of December 31, 2023 or 2022.

As of December 31, 2023, we had $6.3 million

in reciprocal CDARS time deposits, compared to $1.4 million as of December 31, 2022.

The Bank has access

to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs.

We have collateralized

this line with investment securities.

As part of the discount window capacity the FRB, starting in March 2023, offered borrowings through

the Bank Term Funding Program which was created to support businesses and consumers by making additional funds available to eligible

depository institutions.

This program, which expired in March 2024, provided loans of up to one year in length, at a fixed rate, with

no prepayment penalties.

Collateral guidelines for this program valued eligible collateral at par value with the margin of 100% of par

We participated in this program in December 2023, through a $10 million borrowing for one year at a rate of 4.83%.

This borrowing

supplemented loan fundings during the month.

During the fourth

quarter of 2023 we made a voluntary principal payment of $310,000 on one of the outstanding trust preferred securities, originally issued

We may consider making future principal payments based on our available liquidity and considering other funding opportunities

that may be available.

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, some of which are beyond our control.

With the current economic

uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the wars in Ukraine and Gaza,

we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands.

Additionally, our contingency

funding plan is reviewed quarterly with our Asset Liability Committee.

Instruments with Off-Balance-Sheet Risk

6 unchanged sentences

notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to

extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Bank uses the same credit

policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2022 and 2021 is as follows:

in thousands)

to extend credit

letters of credit

to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract.

generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of the commitments are

expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Bank evaluates each customer’s credit worthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary

by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty.

Collateral held varies but

may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

commitments under lines of credit are commitments for possible future extensions of credit to existing customers.

Those lines of credit

may not actually be drawn upon to the total extent to which the Bank is committed.

In response to two bank failures in March, 2023, and

liquidity concerns for other super-regional banks, we have not experienced any significant unusual activity by borrowers drawing against

their lines of credit, nor do we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.

letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

Those guarantees

are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral

is deemed necessary.

of December 31, 2022, we had a negative cumulative gap rate sensitivity ratio of 17.89% for the one-year re-pricing period, compared

to 12.97% as of December 31, 2021.

A negative cumulative gap generally indicates that net interest income would decline in a rising interest

rate environment as liabilities re-price more quickly than assets.

Conversely, net interest income would likely increase in periods during

which interest rates are increasing.

The below table is based on contractual maturities and next repricing date and does not take into

consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits.

considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion

of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment;

however, the ability

to control the repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access

to and availability of other funding sources.

With the FOMC initiating a series of rate increases, which are expected to continue into

2023, we believe our current interest risk profile remains acceptable.

Furthermore, we are implementing strategies to moderate any potential

adverse impact to our current interest rate risk profile, from what could be a sustained medium- to long-term environment of rising interest

exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit

and standby letters of credit is represented by the contractual amount of those instruments.

The Bank uses the same credit policies in

making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary and discussion

of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2023 and 2022 is presented at “Consolidated

Financial Statements and Notes” “Note 20 Financial Instruments with Off-Balance Sheet Risk”.

With the implementation

of CECL in 2023, we established an allowance for credit losses on unfunded commitments, which totaled $285,000 at December 31, 2023.

Unfunded commitments

under lines of credit are commitments for possible future extensions of credit to existing customers.

Those lines of credit may not actually

be drawn upon to the total extent to which the Bank is committed.

In response to two bank failures in March 2023, and resulting liquidity

concerns for other super-regional banks, we drew a short-term advance from FHLB as precaution against any significant unusual activity

by borrowers drawing against their lines of credit.

We did not experience any significant draws by borrowers during that period nor do

we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.

Interest Sensitivity

As of December 31,

2023, we had a negative cumulative gap rate sensitivity ratio of 21.59% for the one-year re-pricing period, compared to 17.89% as of

December 31, 2022.

A negative cumulative gap generally indicates that net interest income would decline in a rising interest rate environment

as liabilities re-price more quickly than assets.

Conversely, net interest income would likely increase in periods during which interest

rates are decreasing.

The below table is based on contractual maturities and next repricing date and does not take into consideration

prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits.

When considering these

prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit

portfolio, we are in a position to increase interest income in a rising interest rate environment;

however, the ability to control the

repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access to and availability

of other funding sources.

With indications that the period of rate increases has tapered and consensus is that at least some modest rate

decreases can be anticipated in the near- to mid-term, we are implementing strategies to moderate any potential adverse impact to our

current interest rate risk profile, from what could be a period of flat to decreasing interest rates.

Sensitivity Analysis

thousands of dollars)

owned life insurance

earning assets

Preferred Securities

funds purchased

interest bearing liabilities

Gap as % of Total Earning Assets

(In thousands

Uses of funds:

Federal funds sold

Deposits with banks

Bank owned life insurance

Total earning assets

Sources of funds:

Int Bearing DDA

Savings & MMDA

Time Deposits

Trust Preferred Securities

Other Borrowings

Total interest bearing

Cumulative Gap

Cumulative Gap as % of Total Earning Assets

and Qualitative Disclosures About Market Risk

Not required.

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-K

Item 7. Management’s Discussion and Analysis