What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-14 · 233 added, 361 removed, 192 unchanged (76% of the section changed)

34 unchanged sentences

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,

2 unchanged sentences

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.

or other governments in response

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

utilized by us;

3 unchanged sentences

governmental regulations, tax rates and similar matters;

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

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

Because of these

11 unchanged sentences

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.

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 “Asset Quality” in this discussion.

Overview and Highlights

Net income for the

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

three months ended March 31, 2024 was $1.8 million, a decrease of $235,000, or 11.63%, from the same period in 2023.

Net interest income

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

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

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

declined 1.95%, or $138,000, from $7.1 million for the quarter ended March 31, 2023 to $6.9 million for the quarter ended March 31, 2024.

The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 150 basis points (“bps”) to

2.77% during the quarter ended March 31, 2024 compared to 1.27% during the quarter ended March 31, 2023.

The balance sheet

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

grew to $850.5 million in total assets as of March 31, 2024, from $826.3 million as of December 31, 2023.

Gross loans increased $483,000

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

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

$37.1 million as of September 30, 2023.

During the second

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

Through September

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

to $638.6 million as of March 31, 2024.

Additionally, interest-bearing deposits in other banks increased $22.4 million to $72.8 million

as of March 31, 2024.

During the first three months of 2024 total deposits increased $24.3 million or 3.39% to $740.8 million.

A dividend of $0.07

per share was paid to shareholders during the first quarter of 2024, a 16.7% increase over the dividend paid in 2023.

During the first

quarter of 2024, we extended a previously announced stock repurchase program, to continue through March 31, 2025.

Since the inception

of the program through March 31, 2024, the Company has repurchased 210,299 shares at an average price of $2.34 per share.

Comparison of

the Three Months ended September 30, 2023 and 2022

the Three Months ended March 31, 2024 and 2023

Quarter-to-date highlights

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

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

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

2.21%, compared to the third quarter of 2022;

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

compared to the third quarter of 2022;

on average assets and equity of 0.86% and 11.11% for the first quarter of 2024, compared

to 1.05% and 13.90% for the first quarter of 2023, respectively;

interest income was $6.9 million for the first quarter of 2024, a decrease of $138,000, or

1.95%, compared to the first quarter of 2023;

recovery of credit losses was $43,000 for the three months ended March 31, 2024 compared

to no provision for credit losses for the three months ended March 31, 2023;

· Noninterest

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

2023 compared to the third quarter of 2022;

income was $2.3 million, an decrease of $78,000, or 3.25%, during the first quarter of 2024

compared to the first quarter of 2023;

· Noninterest

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

compared to the third quarter of 2022.

The Company’s

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

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

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

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

Total interest expense increased $1.6 million driven primarily

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

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

The certificates of deposit portfolio was the primary contributor to

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

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

expense was $7.0 million, an increase of $107,000, or 1.56%, for the first quarter of 2024

compared to the first quarter of 2023.

Net interest income

for the quarter ended March 31, 2024 was $6.9 million compared to $7.1 million for the quarter ended March 31, 2023.

The decrease was

primarily due to an increase in the cost of interest-bearing liabilities of 150 bps to 2.77% during the quarter ended March 31, 2024

compared to 1.27% during the quarter ended March 31, 2023.

The time deposits portfolio was the primary contributor to the decline in

the net interest income, due to an increase of 209 bps in the quarterly cost of time deposits to 3.77% and a $64.1 million increase in

the average balance of time deposits due to a combination of new deposits and a shift in the mix from lower cost deposit products.

Additionally,

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

advance costs rose 117 bps to 3.57%.

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

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

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

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

in the yield on earning assets.

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

the quarter ended September 30, 2023.

while the average cost of borrowed funds decreased 101 bps to 5.82%, the related interest expense increased $190,000 due to the increased

average balance related to a Federal Home Loan Bank advance and a Federal Reserve Bank Bank Term Funding Program borrowing, taken in

the second and fourth quarters of 2023, respectively, which increased the overall outstanding average balance $18.1 million.

in the cost of funds was offset in part by an increase of 70 bps in the yield on earning assets.

The yield on loans increased 72 bps

to 5.83%, partially assisted by recovery of interest on prior nonperforming loans, combined with an increase in the average balance of

$49.5 million and interest rate increases on loan renewals and interest rate reset dates, helping to offset the increased cost of funding

during the quarter ended March 31, 2024.

These rate and volume activities combined to result in a decrease in net interest income of

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

the same period in 2022.

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

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

Through September 30, 2023, the FOMC has

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

The Company continues to evaluate rate adjustments for factors,

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

$138,000, as the net interest margin decreased 35 bps, to 3.48% for the quarter ending March 31, 2024 as compared to the 3.83% margin

for the same period in 2023.

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

Months Ended September 30,

in thousands)

Interest-bearing

deposits in other banks

investment securities

earning assets

for credit losses

AND SHAREHOLDERS’ EQUITY

Interest-bearing

demand deposits

and money market deposits

interest-bearing deposits

preferred securities

interest-bearing liabilities

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

liabilities and shareholders’ equity

interest income

interest margin

interest spread

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

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

(3) Includes mortgage loans held for

Net interest income

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

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

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

and Rate Analysis

Months Ended September 30,

2023 versus 2022

in thousands)

in Interest Income/ Expense

Interest-bearing

deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

Time deposits

FHLB advances

preferred securities

interest-bearing liabilities

in net interest income

Based on our current

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

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

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

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

Non-interest income

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

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

Financial services revenue was impacted

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

immediately after the disruption.

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

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

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

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

Non-interest expense

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

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

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

first quarter of 2023.

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

and marketing and business development costs.

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

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

The increases in salaries and employee benefits

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

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

The efficiency ratio,

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

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

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

Income tax expense

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

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

Comparison of

the Nine Months ended September 30, 2023 and 2022

Year-to-date highlights

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

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

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

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

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

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

· Noninterest

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

September 30, 2022;

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

to the nine months ended September 30, 2022;

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

the nine months ended September 30, 2022

During the nine months

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

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

The following table

presents the rates earned on earning assets and paid on interest-bearing liabilities for the periods indicated.

Interest Margin Analysis

Balances, Income and Expense, and Yields and Rates

months Ended September 30,

in thousands)

Interest-bearing

deposits in other banks

Net Interest Margin

Average Balances,

Income and Expense, and Yields and Rates

Three Months Ended

are in thousands)

bearing deposits in other banks

investment securities

9 unchanged sentences

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

5 unchanged sentences

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

(3) Includes mortgage loans held for

Net interest income

1 unchanged sentence

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

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

to rates and volume for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

and Rate Analysis

months Ended September 30,

2023 versus 2022

Months Ended 2024 Compared to 2023

in thousands)

and Volume Effect

in Interest Income/ Expense

Interest-bearing

deposits in other banks

bearing deposits in other banks

investment securities

4 unchanged sentences

Time deposits

FHLB advances

preferred securities

1 unchanged sentence

in net interest income

Based on our current

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

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

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

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

Non-interest income

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

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

resulting in a combined gain of $130,000;

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

This was offset by decreases in

service charge income and card processing fees totaling a combined $151,000 during the period.

Service charge income decreased due to

changes made in 2022 in assessing certain charges that reduced the number of transactions subject to such fees.

Fees from debit card

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

to normalize.

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

The elimination

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

Non-interest expense

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

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

and deposit insurance of $106,000.

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

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

nine-month period.

The recovery of credit

losses charged to the income statement for the quarter ended March 31, 2024 was $43,000 compared to a provision of $0 for the three months

ended March 31, 2023.

The amount of the provision for credit losses was impacted by net loan recoveries of $146,000 during the quarter

ended March 31, 2024.

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

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

Noninterest income

decreased $78,000 to $2.3 million for the quarter ended March 31, 2024 from $2.4 million for the comparable quarter in 2023.

is due largely to the sales of bank properties in 2024 and 2023.

During the first quarter of 2024, a sales agreement for a former branch

office was executed resulting in a loss of $33,000.

During the same period of 2023, two former office facilities were sold resulting

in a net gain of $130,000.

The net year-over-year change of $163,000 resulting from these sales, included in other noninterest income,

was partially offset by an increase in financial services revenue of $65,000.

Service charge income and revenue from card processing

of $915,000 and $895,000, respectively, for the first three months of 2024, remained relatively unchanged from the same period of 2023.

Noninterest expense

was $7.0 million for the quarter ended March 31, 2024 compared to $6.9 million for the quarter ended March 31, 2023.

The $107,000 increase

was impacted by the $97,000 increase in salaries and employee benefits, as well as occupancy expenses, which increased $11,000.

in salaries and employee benefits related to performance raises, along with severance costs and other contractual payments associated

with the recent retirement of the previous chief executive officer and the elimination of several positions during the first quarter

The increase in occupancy costs are related to the opening of a branch office in Boone, North Carolina during the first quarter

The efficiency ratio,

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

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, increased to 75.42% during

the first quarter of 2024 from 72.56% for the first quarter of 2023.

We continue to assess our operational procedures and structure to

improve efficiencies and contain costs.

Income tax expense

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

the same period in 2022.

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

same period in 2022.

for the first quarter of 2024 totaled $531,000, a decrease of $45,000, or 7.81% from $576,000 recorded during the same period in 2023.

The effective tax rate for the three months ended March 31, 2024, was 22.92%, compared to 22.18% for the same period in 2023.

Balance Sheet

Total assets as of

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

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

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

Investment securities decreased $8.6 million during 2023 primarily

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

combined with

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

All of the Company’s investments

are designated as available-for-sale.

March 31, 2024 were $850.5 million, an increase of $24.2 million, or 2.9%, from $826.3 million as of December 31, 2023.

Gross loans at

March 31, 2024 of $638.6 million were largely unchanged from $638.1 million at December 31, 2023.

Liquid assets in the form of interest-bearing

deposits with banks increased $22.4 million, or 44.6% during the first quarter of 2024.

Investment securities decreased $791,000 during

the first quarter of 2024 due to a $1.1 million increase in the unrealized loss on securities available for sale during the quarter,

which, combined with payments and amortization of $2.8 million, more than offset purchases of $3.1 million.

Gross loans receivable

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

Commercial real estate

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

Residential 1-4 family loans and multifamily loans

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

These increases were a result of

continuing strong loan demand.

increased $483,000 to $638.6 million as of March 31, 2024 from $638.1 million as of December 31, 2023.

Consumer loans increased $2.4

million or 10.69% which included the purchase of $1.0 million of individual loans during the quarter.

Commercial real estate and commercial

loans decreased $587,000 and $1.2 million, respectively, during the first quarter of 2024.

Residential 1-4 family loans and multifamily

loans decreased $808,000 and $77,000, respectively, from December 31, 2023 to March 31, 2024.

Loan originations during the first quarter

of 2024 were impacted by higher interest rates affecting borrower requests, combined with retrenching from the $11.9 million increase

in loans during the fourth quarter of 2023.

Total deposits were

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

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

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

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

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

experienced over the past eighteen months.

In May 2023, an advance

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

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

There were no FHLB advances outstanding as of December 31, 2022.

Trust preferred securities

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

$740.8 million as of March 31, 2024 compared to $716.5 million as of December 31, 2023.

The increase of $24.3 million, or 3.4%, was due

to efforts to attract and retain time deposits and money market account relationships, combined with cyclical funds inflows.

of these efforts, total time deposits increased $15.5 million, including $3.0 million of brokered time deposits, and money market accounts

increased $4.8 million during the first three months of 2024, respectively.

The increase in time and money market deposits contributed

to the increase in our cost of funds, as previously discussed, due to the continuing rising interest rate environment combined with ongoing

competition for deposits.

Total borrowings

consisting of Trust preferred securities of $16.2 million, Federal Home Loan Bank advances of $10.0 million and Federal Reserve Bank

Bank Term Funding Program Loan of $10.0 million as of March 31, 2024 remained unchanged in comparison to December 31, 2023.

During the first

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

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

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

Additionally, the implementation

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

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

three months of 2024 total shareholders’ equity decreased $795,000 to $64.0 million as of March 31, 2024, due to earnings of $1.8

million which were offset by dividends paid of $1.7 million, the $835,000 increase in the net unrealized loss on available-for-sale investment

securities, and the repurchase of common stock totaling $85,000.

Consequently, book value per share decreased to $2.70 as of March 31,

2024 compared to $2.73 at December 31, 2023.

The Bank remains well capitalized per regulatory guidance.

As previously announced,

the Board extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2025.

As of March 31,

2024, the Company had repurchased 34,113 shares during the first three months of 2024 at an average price of $2.48 per share.

commencement of the repurchase plan, 210,299 shares have been repurchased at an average price of $2.34.

Asset Quality

The allowance for

credit losses as a percentage of total loans was 1.16%, or $7.4 million, as of March 31, 2024, and 1.14%, or $7.3 million, as of December

The allowance for credit losses on unfunded commitments was $238,000 at March 31, 2024 as compared to $285,000 at December

Annualized net charge-offs

(recoveries), as a percentage of average loans, was (0.09)% during the first quarter of 2024, compared 0.01% in the first quarter of

Nonperforming assets,

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

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

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

and 0.47% as of December 31, 2022.

which include nonaccrual loans and other real estate owned, totaled $5.7 million as of March 31, 2024, an increase of $2.0 million, or

55.6%, since year-end 2023.

Nonperforming assets as a percentage of total assets were 0.67% as of March 31, 2024, and 0.45% as of December

Other real estate

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

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

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

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

to work to reduce nonperforming and under-performing assets.

owned of $157,000 as of March 31, 2024 is unchanged from December 31, 2023.

Expenses associated with other real estate owned were $4,000

for the three months ended March 31, 2024, compared to $6,000 during the three months ended March 31, 2023.

Nonaccrual loans increased

$2.0 million to $5.5 million as of March 31, 2024 from $3.5 million at December 31, 2023, due largely to a single loan relationship that

was downgraded and placed in nonaccrual status during the first quarter of 2024.

For detailed information

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

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

on nonaccrual loans and other real estate owned as of March 31, 2024 and December 31, 2023, refer to Note 6 Loans and Note 10 Other Real

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

Loans rated substandard

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

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

Our allowance for

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

at December 31, 2022.

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

30, 2023, as compared to $2.7 million as of December 31, 2022 with an estimated related specific allowance of $86,000 of impaired loans

at the end of 2022.

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

months of 2022.

Annualized net charge-offs,

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

allowance for credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known

impairments within the loan portfolio, whether or not the losses are actually ever realized.

Through our quarterly assessment, we continue

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

However, future provisions may be deemed necessary.

During the first

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

and residential mortgage loans.

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

portfolio, resulted in a net provision for credit losses of $304,000, of which $377,000 was provided for the loan portfolio;

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

The following table summarizes components of the allowance for credit

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

or below totaled $5.5 million as of March 31, 2024, an increase of $2.0 million from $3.5 million as of December 31, 2023.

due loans increased to $6.7 million as of March 31, 2024 from $6.2 million as of December 31, 2023.

The allowance for

credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known impairments

within the loan portfolio, whether or not the losses are actually ever realized.

Through our quarterly

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

However, future provisions may be deemed

During the first three months of 2024, we maintained the adjustments to our qualitative factors initiated in 2023, to consider

risk factors associated with commercial real estate and residential mortgage loans.

Those changes, along with recoveries of loans previously

charged off and the assessment of the historical and specific risks associated with the loan portfolio, resulted in a recovery of credit

losses of $43,000, of which $4,000 was a provision for the loan portfolio;

offset by a reduction of the allowance for unfunded commitments

The following table summarizes components of the allowance for credit losses and related loans as of March 31, 2024 and December

Credit Ratios

in thousands)

for credit losses

for credit losses - loans

for credit losses to total loans

loans to total loans

of allowance for credit losses to nonaccrual loans

Charge-offs net of recoveries 1

of allowance for credit losses loans to nonaccrual loans

net of recoveries

Average loans

Net charge-offs

to average loans 1

Net (recoveries)

charge-offs to average loans 1

Deferred Tax Asset

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Due to timing differences

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

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

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

the unrealized loss on securities available-for-sale of $3.3 million and $3.1 million, existed as of March 31, 2024 and December 31,

2023, respectively.

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nontaxable income or nondeductible expenses.

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

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

Capital Resources

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

As of September 30,

As of March 31, 2024,

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

The ratios mentioned above for the

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

The ratios mentioned above for the Bank

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

Book value per common

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

share was $2.70 and $2.73 as of March 31, 2024 and December 31, 2023, respectively.

The modest decrease in book value was due to the

dividend payment of $0.07 per share paid during the first quarter of 2024, combined with the $835,000 increase in unrealized loss on

available for sale investment securities and the $85,000 repurchase of common shares during the quarter.

Other key performance

indicators are as follows:

months ended September 30,

Return on average

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and applicable legal and regulatory requirements.

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

price of $2.29 per share.

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

As of March 31, 2024, the Company has repurchased 210,299 shares at an average price

of $2.34 per share since inception of the plan.

During the quarter ended March 31, 2024, the Company repurchased 34,113 shares at an

average price of $2.48 per share.

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

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

As of September 30,

As of March 31, 2024,

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

These investments provide a source of liquidity in the

amount of $52.2 million, which is net of the $35.3 million of securities pledged as collateral.

Investment securities available-for-sale

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

and overnight deposits with the Federal Reserve Bank.

Due to the unrealized loss on securities available-for-sale, the sale of investments

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

however, the majority of the

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

These investments provide a source of liquidity in the amount

of $53.0 million, which is net of the $36.0 million of securities pledged as collateral.

Investment securities available-for-sale serve

as a source of liquidity and interest rate risk management while generally yielding a higher return versus other short-term investment

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

Due to the unrealized loss on securities available-for-sale,

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

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

Our loan to deposit

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

Generally, our policy has been to manage this

ratio at or below 90.00%.

ratio was 86.21% and 89.06% as of March 31, 2024 and December 31, 2023, respectively.

Generally, our policy has been to manage this ratio

at or below 90.00%.

Available third-party

sources of liquidity as of September 30, 2023 include the following:

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

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

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

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

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

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

sources of liquidity as of March 31, 2024 include the following:

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

markets and the discount window at the Federal Reserve Bank.

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

through credit facilities extended by correspondent banks.

We have used our

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

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

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

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

We held no brokered

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

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

and the surrounding geographical area.

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

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

30, 2023 and December 31, 2022, respectively.

Aside from the availability of CDARS time deposits, we also offer a similar deposit product

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

As of September 30, 2023 approximately $27.0 million

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

Both the CDARS and ICS offerings assist us in maintaining

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

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

liquidity needs.

In December 2023 we borrowed $10.0 million through the Federal Reserve Bank Bank Term Funding Program for one year,

which can be prepaid prior to maturity without penalty.

An additional $184.6 million was available as of March 31, 2024 on the $206.6

million line of credit, of which $96.4 million is secured by a blanket lien on our residential real estate loans.

Full use of the FHLB

borrowing capacity would require the Company to pledge additional assets.

During the first

quarter of 2024 we accepted $3.0 million of brokered time deposits to augment our balance sheet liquidity.

We held no brokered deposits

as of December 31, 2023.

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

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

Total reciprocal Certificate

of Deposit Registry Services (“CDARS”) time deposits were $6.8 million and $6.3 million as of March 31, 2024 and December

31, 2023, respectively.

Aside from the availability of CDARS time deposits, we also offer a similar deposit product for transaction account

customers through Intrafi Cash Service (“ICS”).

As of March 31, 2024 approximately $24.9 million were placed in this product

as compared to $20.5 million at December 31, 2023.

Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while

assuring the depositors’ funds retain federal deposit insurance coverage.

Additional liquidity

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

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

In March and May

of 2023, three regional banks, each with assets in excess of $100.0 billion, were taken into receivership through FDIC and were sold

in-whole, or in part to other financial institutions.

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

Clara, California, and First Republic Bank headquartered in San Francisco, California, experienced significant outflows of deposit funds

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

These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities

of the investments and other earning assets held by SVB.

The concerns for First Republic Bank related to exposure to long-term jumbo

mortgages made to preferred deposit customers and the impact to net interest income and the value of those mortgages in the rising rate

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 these financial institutions our deposit fluctuations

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

Since the date of these

receiverships, we have not experienced any significant or unusual deposit outflows and we took steps to successfully test certain liquidity

facilities in the event of any future deposit outflows.

estimated market value of $35.3 million were pledged as of March 31, 2024.

Time deposits of

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

$250,000 or more were approximately 6.96% of total deposits at March 31, 2024 and 7.36% of total deposits at December 31, 2023.

With the on-balance

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The bank holding

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

The holding company receives periodic dividend

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

payments, and to fund dividend payments to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust

preferred securities.

company has approximately $434,000 in cash on deposit at the Bank at March 31, 2024.

The holding company receives periodic dividend payments

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

and to fund dividend payments to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust preferred

As discussed in the

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There have been no

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

material changes during the three months ended March 31, 2024, to the off-balance sheet items and the contractual obligations disclosed

in our 2023 Form 10-K.

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis