What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 297 added, 195 removed, 230 unchanged (68% of the section changed)

44 unchanged sentences

utilized by us;

to successfully manage cybersecurity;

to successfully manage cybersecurity, including generative artificial intelligence risks;

on third-party vendors and correspondent banks;

23 unchanged sentences

Net income for the

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

three months ended June 30, 2024 was $1.7 million, a decrease of $39,000, or 2.56%, from the same period in 2023.

Net interest income

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.

declined 0.43%, or $30,000, from $7.0 million for the quarter ended June 30, 2023 to $7.0 million for the quarter ended June 30, 2024.

The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 124 basis points (“bps”) to

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

2.94% during the quarter ended June 30, 2024 compared to 1.70% during the quarter ended June 30, 2023.

The balance sheet

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

to $638.6 million as of March 31, 2024.

grew to $855.0 million in total assets as of June 30, 2024, from $826.3 million as of December 31, 2023.

Gross loans increased $1.8 million

to $639.9 million as of June 30, 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.

as of June 30, 2024.

Total deposit liabilities as of June 30, 2024 increased $26.8 million to $743.2 million from December 31, 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.

During the second quarter

of 2024, 35,530 shares were repurchased at an average price of $2.54 per share.

Comparison of

the Three Months ended March 31, 2024 and 2023

Quarter-to-date highlights

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;

the Three Months ended June 30, 2024 and 2023

income for the three months ended June 30, 2024 was $1.7 million, a decrease of $39,000, or 2.26%, from the same period in 2023.

interest income declined 0.43%, or $30,000, from $7.0 million for the quarter ended June 30, 2023 to $7.0 million for the quarter ended

June 30, 2024.

The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 124 basis points (“bps”)

to 2.94% during the quarter ended June 30, 2024 compared to 1.70% during the quarter ended June 30, 2023.

balance sheet grew to $855.0 million in total assets as of June 30, 2024, from $826.3 million as of December 31, 2023.

Gross loans increased

$1.8 million to $639.9 million as of June 30, 2024.

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

$72.8 million as of June 30, 2024.

Total deposit liabilities as of June 30, 2024 increased $26.8 million to $743.2 million from December

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

second quarter of 2024, 35,530 shares were repurchased at an average price of $2.54 per share.

of the Three Months ended June 30, 2024 and 2023

Quarter-to-date

highlights include:

on average assets and equity of 0.79% and 10.56% for the second quarter of 2024, compared

to 0.88% and 11.62% for the second quarter of 2023, respectively;

interest income was $7.0 million for the second quarter of 2024, a decrease of $30,000, or

0.43%, compared to the second quarter of 2023;

provision for credit losses was $472,000 for the three months ended June 30, 2024 compared

to a provision of $149,000 for the three months ended June 30, 2023;

· Noninterest

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;

income was $2.5 million, an increase of $128,000, or 5.32%, during the second quarter of

2024 compared to the second quarter of 2023;

· Noninterest

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,

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

$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.

expense was $6.8 million, a decrease of $197,000, or 2.80%, for the second quarter of 2024

compared to the second quarter of 2023.

Company’s primary source of income is net interest income, which showed a slight decrease of $30,000, or 0.43%, to $7.0 million

for the second quarter of 2024 compared to $7.0 million for the second quarter of 2023.

Interest income increased $2.0 million due to

increases in both the volume and yields for loans and interest-bearing deposits with banks.

Average loans increased $39.2 million or

6.5% during the second quarter of 2024, as compared to the second quarter of 2023, while the yield increased 63 bps to 5.89% resulting

from a combination of the repricing of existing loans and the origination of new credits.

The average balance of interest-bearing deposits

with banks increased $31.2 million or 70.4% to $75.5 million for the second quarter of 2024, as compared to the second quarter of 2023,

as we actively manage our liquidity position.

For the same comparative periods the yield on interest-bearing deposits with banks increased

38 bps to 5.37% due to the higher interest rate environment.

Total interest expense increased $2.0 million to $4.0 million as the cost

of interest-bearing liabilities rose 124 bps to 2.94% from 1.70% for the comparative three months ended June 30, 2024 and 2023.

deposits portfolio was the primary contributor to the increase in interest expense due to an increase of 164 bps in the quarterly cost

on time deposits to 3.96% and a $57.6 million increase in the average balance of time deposits due to a shift in the mix from lower cost

deposit products combined with promotional interest rates offered in response to competition for deposits.

Additionally, while the average

cost of borrowed funds decreased 63 bps to 5.83%, the related interest expense increased $160,000 due to the increased average balance

related to a Federal Home Loan Bank (FHLB) advance and a $10 million borrowing from the Federal Reserve Bank under the Bank Term Funding

Program, taken in the second and fourth quarters of 2023, respectively, which increased the overall outstanding average balance $13.3

The following table

15 unchanged sentences

preferred securities

borrowed funds

interest-bearing liabilities

10 unchanged sentences

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 March 31, 2024, as compared to the three months ended March 31, 2023.

to rates and volume for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

and Rate Analysis

Months Ended 2024 Compared to 2023

Three Months Ended June 30, 2024 versus 2023

in thousands)

7 unchanged sentences

and money market deposits

Time deposits

preferred securities

1 unchanged sentence

in net interest income

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.

The provision for

credit losses charged to the income statement for the three months ended June 30, 2024 was $472,000 compared to $149,000 for the three

months ended June 30, 2023.

The amount of the provision for credit losses was impacted by net loan charge-offs of $101,000 during the

quarter ended June 30, 2024, combined with a specific allocation to the allowance for credit losses of $263,000 for a single credit relationship.

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.

increased $128,000 to $2.5 million for the quarter ended June 30, 2024 from $2.4 million for the comparable quarter in 2023.

is due to increased earnings from service charges, card processing activities, and financial services, which combined for an increase

Additionally, the sale of a lot adjacent to a branch office resulted in a gain of $53,000 as compared to a $6,000 gain recorded

during the second quarter 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

was $6.8 million for the quarter ended June 30, 2024 compared to $7.0 million for the quarter ended June 30, 2023.

The $197,000 dollar

improvement resulted from decreases in salaries and benefits, occupancy and data processing expenses which combined for a $93,000 decrease.

In addition, legal and professional fees, loan and other real estate owned expenses, included in other operating expenses, decreased

a combined $138,000.

The efficiency ratio,

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 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.

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased to 71.96% during

the second quarter of 2024 from 75.42% for the second quarter of 2023.

We continue to assess our operational procedures and structure

to improve efficiencies and contain costs.

tax expense for the second quarter of 2024 totaled $508,000, an increase of $11,000, or 2.21%, from $497,000 recorded during the same

period in 2023.

The effective tax rate for the three months ended June 30, 2024, was 23.18%, compared to 22.39% for the same period in

A contributor to the increase to the effective tax rate is the increase in revenue generated in states which assess income tax.

Comparison of

the Six Months ended June 30, 2024 and 2023

Year-to-date highlights

on average assets and equity of 0.83% and 10.83% for the first six months of 2024, compared

to 0.96% and 12.75% for the first six months of 2023, respectively;

interest income decreased $167,000 or 1.19% to $13.9 million for the six months ended June

30, 2024, compared to $14.1 million for the six months ended June 30, 2023;

interest margin was 3.44% for the six months ended June 30, 2024, a decrease of 33 bps compared

to 3.77% for the same period of 2023;

for credit losses was $429,000 for the six months ended June 30, 2024, an increase of $280,000,

or 187.92%, compared to the six months ended June 30, 2023;

· Noninterest

income was $4.9 million, an increase of $51,000, or 1.06%, compared to the six months ended

Juner 30, 2023;

noninterest expense was $13.8 million, a decrease of $88,000, or 0.63%, compared to the six

months ended June 30, 2023.

For the six months

ended June 30, 2024, net interest income decreased $167,000 to $13.9 million from $14.1 million for the six months ended June 30, 2023.

The yield on earning assets increased 65 bps to 5.35% for the comparative six-month periods, while the average balance increased $60.5

million to $812.4 million.

The cost of interest-bearing liabilities increased 137 bps to 2.86%, while the average balance increased $72.0

million to $542.1 million during the comparative six-month period.

The following table

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

Net Interest Margin

Average Balances,

Income and Expense, and Yields and Rates

Six Months Ended

are in thousands)

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

borrowed funds

interest-bearing liabilities

Non-interest-bearing

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.

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 six months ended June 30, 2024, as compared to the six months ended

June 30, 2023.

and Rate Analysis

Six Months Ended June 30,

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, a provision of $429,000 was made for the six months ended June 30,

The allowance for credit losses as a percentage of loans increased from 1.15% at December 31, 2022 to 1.21% as of June 30, 2024.

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.

During the six months

ended June 30, 2024, noninterest income increased $51,000 to $4.9 million from $4.8 million for the same period in 2023.

is due largely to earnings from service charges, card processing and financial services, which increased a combined $160,000.

Those increases

offset the impact of the sales of bank properties in 2024 and 2023.

During the first six months of 2024, a former branch office and a

lot were sold resulting in a net gain of $20,000.

During the same period of 2023, two former office facilities and a vehicle were sold

resulting in a net gain of $135,000

For the six months

ended June 30, 2024, noninterest expense decreased $88,000 to $13.8 million compared to $13.9 million for the six months ended June 30,

The decrease was impacted by reductions in occupancy costs of $22,000 combined with decreases in legal and professional fees, consulting

and other real estate owned expenses of $212,000.

The expense reductions were partially offset by increases in salaries and employee

benefits of $39,000, as well as advertising, ATM network and miscellaneous expenses which combined for an increase of $116,000.

in salaries and employee benefits related to performance raises, along with severance costs related to the elimination of several positions

during the first quarter of 2024 and other contractual payments associated with the recent retirement of the previous chief executive

Balance Sheet

Total assets as of

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

assets as of June 30, 2024 were $854.7 million, an increase of $28.4 million, or 3.43%, from $826.3 million as of December 31, 2023.

Gross loans at June 30, 2024 of $639.9 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 six months of 2024.

Investment securities

increased $2.5 million during the first six months of 2024 due to purchases of $8.0 million offset by an increase in the unrealized loss

on securities available for sale of $271,000, combined with payments and amortization of $5.3 million.

Consumer loans increased

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

$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

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.

$4.5 million or 20.08% which included the purchase of $1.6 million of individual loans, and the funding of $1.8 million of private student

loans during the first six months of 2024.

Commercial real estate and multi-family loans increased $1.0 million and $533,000, respectively,

during the first six months of 2024.

Commercial and Residential 1-4 family loans decreased $2.4 million and $1.6 million, respectively,

from December 31, 2023 to June 30, 2024.

Loan originations during the first six months of 2024 were impacted by higher interest rates

affecting borrower requests.

deposits were $743.2 million as of June 30, 2024 compared to $716.5 million as of December 31, 2023.

The increase of $26.8 million, or

3.7%, was due to efforts to attract and retain time deposits and money market account relationships, combined with cyclical funds inflows.

As a result of these efforts, total time deposits increased $18.6 million, including $3.0 million of brokered time deposits, and money

market accounts increased $15.1 million during the first six 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.

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 June 30, 2024 remained unchanged in comparison to December 31, 2023.

the first six months of 2024 total shareholders’ equity increased $1.4 million to $66.2 million as of June 30, 2024, due to earnings

of $3.5 million which were offset by dividends paid of $1.7 million, the $214,000 increase in the net unrealized loss on available-for-sale

investment securities, and the repurchase of common stock totaling $175,000.

Consequently, book value per share increased to $2.80 as

of June 30, 2024 compared to $2.73 at December 31, 2023.

The Bank remains well capitalized per regulatory guidance.

1 unchanged sentence

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.

As of June 30,

2024, the Company had repurchased 69,843 shares during the first six months of 2024 at an average price of $2.51 per share.

commencement of the repurchase plan, 246,029 shares have been repurchased at an average price of $2.37.

1 unchanged sentence

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

credit losses as a percentage of total loans was 1.21%, or $7.7 million, as of June 30, 2024, and 1.14%, or $7.3 million, as of December

The allowance for credit losses on unfunded commitments was $287,000 as of June 30, 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

(recoveries), as a percentage of average loans, was (0.01)% during the first six months of 2024, compared to 0.02% in the first six months

Nonperforming assets,

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

which include nonaccrual loans and other real estate owned, totaled $5.5 million as of June 30, 2024, an increase of $1.8 million, or

49.42%, 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

Nonperforming assets as a percentage of total assets were 0.65% as of June 30, 2024, and 0.45% as of December

Other real estate

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.

owned of $103,000 as of June 30, 2024 represents a $54,000 decrease from December 31, 2023, due to the sale of one parcel that resulted

in a gain of $34 thousand, along with the addition of a property valued at $20,000.

Expenses associated with other real estate owned

were $6,000 for the six months ended June 30, 2024, after excluding the gain recognized on the sale, compared to $16,000 during the six

months ended June 30, 2023.

On August 12, 2024 a commercial real estate property securing a loan, that was individually evaluated as

part of our assessment of the allowance for credit losses, was acquired in a foreclosure sale.

As a result, approximately $1.2 million

was transferred from the loan portfolio to other real estate owned with no loss recognized.

Nonaccrual loans increased $1.9 million to

$5.4 million as of June 30, 2024 from $3.5 million as of 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 March 31, 2024 and December 31, 2023, refer to Note 6 Loans and Note 10 Other Real

on nonaccrual loans and other real estate owned as of June 30, 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 $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

or below totaled $6.5 million as of June 30, 2024, an increase of $3.0 million from $3.5 million as of December 31, 2023.

due loans increased to $7.4 million as of June 30, 2024 from $6.2 million as of December 31, 2023.

The increase in past due loans is

largely attributed to the loan relationship that was transferred to nonaccrual status during the first quarter of 2024.

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

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

Through our quarterly assessment, we continue

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

However, future provisions may be deemed necessary.

During the first

six months of 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, however the qualitative adjustment for commercial real estate loans was reduced

as factors used in determining the adjustment have begun to be reflected in the portfolio as it seasons.

Those changes, along with net

charge-offs for the period and the assessment of the historical and specific risks associated with the loan portfolio, resulted in a

provision for credit losses of $429,000, of which $426,000 was a provision for the loan portfolio;

and a provision for unfunded commitments

The following table summarizes components of the allowance for credit losses and related loans as of June 30, 2024 and December

Credit Ratios

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net of (recoveries)

Average loans

Net (recoveries)

charge-offs to average loans 1

(recoveries) charge-offs to average loans 1

Deferred Tax Asset

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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,

the unrealized loss on securities available-for-sale of $3.2 million and $3.1 million, existed as of June 30, 2024 and December 31, 2023,

respectively.

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

We have no significant

nontaxable income or nondeductible expenses.

We have no significant nontaxable

income or nondeductible expenses.

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 March 31, 2024,

As of June 30, 2024,

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

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Book value per common

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.

share was $2.80 and $2.73 as of June 30, 2024 and December 31, 2023, respectively.

The modest increase in book value was due to the net

income of $3.5 million for the first six months of 2024, which exceeded the dividend payment of $0.07 per share paid during the first

quarter of 2024, combined with the $214,000 increase in unrealized loss on available for sale investment securities and the $175,000

repurchase of common shares during the first six months of 2024.

Other key performance

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

through March 31, 2023.

through June 30, 2023.

As previously reported, this plan was extended by the Board of Directors through March 31, 2025.

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and applicable legal and regulatory requirements.

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

As of June 30, 2024, the Company has repurchased 246,029 shares at an average price

of $2.37 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.

During the quarter ended June 30, 2024, the Company repurchased 35,530 shares at an average

price of $2.54 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 March 31, 2024,

As of June 30, 2024,

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

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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.

the sale of investments, other than shorter-term investments with minimal unrealized losses or more recently purchased investments, would

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

however, the majority of the portfolio

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

Our loan to deposit

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

ratio was 86.10% and 89.06% as of June 30, 2024 and December 31, 2023, respectively.

Generally, our policy has been to manage this ratio

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Available third-party

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

sources of liquidity as of June 30, 2024 include the following:

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

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We have used our

line of credit with the FHLB to issue a letter of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public

line of credit with FHLB to issue a letter of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public

No draws on these letters of credit have been issued.

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

In May 2023, we borrowed $10.0 million from 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.

In July 2024, we increased our letters of credit to $14.0 million.

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 needs.

An additional $190.7 million was available as of June

30, 2024 on the $212.7 million line of credit, of which $95.5 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.

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.

Federal Reserve Bank ended the Bank Term Funding Program in March 2024, so at maturity, the repayment or replacement of this borrowing

will be dependent on our liquidity and/or interest rate risk needs at that time.

of June 30, 2024 total deposits included $3.0 million of brokered time deposits, acquired during the first quarter of 2024 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 area.

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

$6.7 million and $6.3 million as of June 30, 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”).

30, 2024 approximately $25.9 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

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 March 31, 2024.

estimated market value of $20.7 million were pledged as of June 30, 2024.

Time deposits of

$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.

$250,000 or more were approximately 6.89% of total deposits at June 30, 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 $434,000 in cash on deposit at the Bank at March 31, 2024.

company has approximately $430,000 in cash on deposit at the Bank at June 30, 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.

to fund dividend payments to shareholders and to repurchase shares.

The Company makes quarterly interest payments on the trust preferred

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Off Balance Sheet Items and Contractual

There have been no

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.

There have been

no material changes during the six months ended June 30, 2024, to the off-balance sheet items and the contractual obligations

disclosed in our 2023 Form 10-K.

and Qualitative Disclosures About Market Risk

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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