NEW PEOPLES BANKSHARES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution About Forward-Looking Statements We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include: the success or failure of our efforts to implement our business plan; any required increase in our regulatory capital ratios; satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors; deterioration of asset quality; changes in the level of our nonperforming assets and charge-offs; fluctuations of real estate values in our markets; our ability to attract and retain talent; demographical changes in our markets which negatively impact the local economy; the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators; the successful management of interest rate risk; the successful management of liquidity; changes in general economic and business conditions in our market area and the United States in general; credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks; competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources; demand, development and acceptance of new products and services we have offered or may offer; deposit flows and competition for deposits; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations; the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues and other catastrophic events; geopolitical 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. and abroad; technology utilized by us; our ability to successfully manage cybersecurity, including generative artificial intelligence risks; our reliance on third-party vendors and correspondent banks; changes in generally accepted accounting principles; changes in governmental regulations, tax rates and similar matters; and, other risks, which may be described, from time to time, in our filings with the SEC. Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 24 Critical Accounting Policies For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2023, and Note 2 Summary of Significant Accounting Policies, in Item 1 of this Form 10-Q. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our allowance for credit losses. The allowance for credit losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for credit losses, we refer you to the section on “Asset Quality” in this discussion. Overview and Highlights Net income for the 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 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. The 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 31, 2023. During the first quarter of 2024, we extended a previously announced stock repurchase program, to continue through March 31, 2025. 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 June 30, 2024 and 2023 Net 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. Net 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. The 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 31, 2023. During the first quarter of 2024, we extended a previously announced stock repurchase program, to continue through March 31, 2025. 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 June 30, 2024 and 2023 Quarter-to-date highlights include: · Returns 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; · Net 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; · The 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 $2.5 million, an increase of $128,000, or 5.32%, during the second quarter of 2024 compared to the second quarter of 2023; and · Noninterest 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. The 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. The time 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 million. 25 The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated: Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates Three Months Ended June 30, 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 639,918 $ 9,374 5.89% $ 600,712 $ 7,876 5.26% Federal funds sold 110 2 5.44% 673 8 4.77% Interest bearing deposits in other banks 75,549 1,009 5.37% 44,325 551 4.99% Taxable investment securities 107,082 626 2.34% 110,698 583 2.11% Total earning assets 822,659 11,011 5.38% 756,408 9,018 4.78% Less: Allowance for credit losses (7,447) (6,816) Non-earning assets 39,334 37,914 Total assets $ 854,546 $ 787,506 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 74,082 $ 160 0.87% $ 75,847 $ 112 0.59% Savings and money market deposits 169,190 676 1.61% 162,652 293 0.72% Time deposits 271,587 2,672 3.96% 214,029 1,240 2.32% Total interest-bearing deposits 514,859 3,508 2.74% 452,528 1,645 1.46% Other borrowings 20,000 209 4.13% 6,374 56 3.52% Trust preferred securities 16,186 324 7.93% 16,496 317 7.71% Total borrowed funds 36,186 533 5.83% 22,870 373 6.46% Total interest-bearing liabilities 551,045 4,041 2.94% 475,398 2,018 1.70% Non-interest-bearing deposits 229,837 243,974 Other liabilities 9,524 8,675 Total liabilities 790,406 728,047 Shareholders’ equity 64,140 59,459 Total liabilities and shareholders’ equity $ 854,546 $ 787,506 Net interest income $ 6,970 $ 7,000 Net interest margin 3.41% 3.71% Net interest spread 2.44% 3.08% (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) 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 liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. 26 Volume and Rate Analysis Increase (decrease) Three Months Ended June 30, 2024 versus 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 2,062 $ 3,802 $ (4,366) $ 1,498 Federal funds sold (27) 17 4 (6) Interest bearing deposits in other banks 1,557 171 (1,270) 458 Taxable investment securities (76) 264 (145) 43 Total earning assets 3,516 4,254 (5,777) 1,993 Interest expense: Interest-bearing demand deposits (10) 210 (152) 48 Savings and money market deposits 47 1,439 (1,103) 383 Time deposits 1,338 3,496 (3,402) 1,432 Other borrowings 474 42 (363) 153 Trust preferred securities (24) 52 (21) 7 Total interest-bearing liabilities 1,825 5,239 (5,041) 2,023 Change in net interest income $ 1,691 $ (985) $ (736) $ (30) 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 increased $128,000 to $2.5 million for the quarter ended June 30, 2024 from $2.4 million for the comparable quarter in 2023. The increase is due to increased earnings from service charges, card processing activities, and financial services, which combined for an increase of $100,000. 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 $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, 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. Income 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 2023. 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 include: · Returns 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; · Net 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; 27 · Net 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; · Provision 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; and · Total 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 Analysis Average Balances, Income and Expense, and Yields and Rates Six Months Ended June 30, 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 637,744 $ 18,587 5.86% $ 593,457 $ 15,258 5.18% Federal funds sold 116 3 5.38% 652 16 4.95% Interest bearing deposits in other banks 68,744 1,835 5.37% 46,125 1,083 4.73% Taxable investment securities 105,824 1,199 2.27% 111,713 1,183 2.14% Total earning assets 812,428 21,624 5.35% 751,947 17,540 4.70% Less: Allowance for credit losses (7,436) (6,864) Non-earning assets 39,062 37,388 Total assets $ 844,054 $ 782,471 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 73,113 $ 297 0.82% $ 78,077 $ 208 0.54% Savings and money market deposits 165,011 1,218 1.48% 164,590 515 0.63% Time deposits 267,779 5,143 3.86% 206,983 2,068 2.01% Total interest-bearing deposits 505,903 6,658 2.65% 449,650 2,791 1.25% Other borrowings 20,000 418 4.13% 3,978 76 3.85% Trust preferred securities 16,186 648 7.92% 16,496 606 7.41% Total borrowed funds 36,186 1,066 5.83% 20,474 682 6.62% Total interest-bearing liabilities 542,089 7,724 2.86% 470,124 3,473 1.49% Non-interest-bearing deposits 228,042 244,489 Other liabilities 9,521 8,632 Total liabilities 779,652 723,245 Shareholders’ equity 64,402 59,226 Total liabilities and shareholders’ equity $ 844,054 $ 782,471 Net interest income $ 13,900 $ 14,067 Net interest margin 3.44% 3.77% Net interest spread 2.49% 3.21% (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) 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 liabilities. 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. 28 Volume and Rate Analysis Increase (decrease) Six Months Ended June 30, 2024 versus 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 2,296 $ 4,014 $ (2,981) $ 3,329 Federal funds sold (26) 2 11 (13) Interest bearing deposits in other banks 1,071 292 (611) 752 Taxable investment securities (126) 160 (18) 16 Total earning assets 3,215 4,468 (3,599) 4,084 Interest expense: Interest-bearing demand deposits (27) 218 (102) 89 Savings and money market deposits 3 1,405 (705) 703 Time deposits 1,225 3,824 (1,974) 3,075 Other borrowings 609 13 (280) 342 Trust preferred securities (23) 101 (36) 42 Total interest-bearing liabilities 1,787 5,561 (3,097) 4,251 Change in net interest income $ 1,428 $ (1,093) $ (502) $ (167) 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, 2024. 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. The increase 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, 2023. 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. The increase 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 officer. Balance Sheet Total 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. 29 Consumer loans increased $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. Total 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. 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 June 30, 2024 remained unchanged in comparison to December 31, 2023. During 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. 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 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. Since the commencement of the repurchase plan, 246,029 shares have been repurchased at an average price of $2.37. Asset Quality The allowance for 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 31, 2023. The allowance for credit losses on unfunded commitments was $287,000 as of June 30, 2024 as compared to $285,000 at December 31, 2023. Annualized net charge-offs (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 of 2023. Nonperforming assets, 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 0.65% as of June 30, 2024, and 0.45% as of December 31, 2023. Other real estate 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 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 $6.5 million as of June 30, 2024, an increase of $3.0 million from $3.5 million as of December 31, 2023. Total past 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. 30 The allowance for credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. Through our quarterly assessment, we continue to adjust the CECL model to best reflect the risks in the portfolio. However, future provisions may be deemed necessary. During the first six months of 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 of $3,000. The following table summarizes components of the allowance for credit losses and related loans as of June 30, 2024 and December 31, 2023: Selected Credit Ratios June 30, December 31, (Dollars in thousands) 2024 2023 Allowance for credit losses - loans $ 7,727 $ 7,256 Total loans 639,934 638,111 Allowance for credit losses to total loans 1.21% 1.14% Nonaccrual loans $ 5,412 $ 3,534 Nonaccrual loans to total loans 0.85% 0.55% Ratio of allowance for credit losses loans to nonaccrual loans 1.43X 2.05X Charge-offs net of (recoveries) $ (45) $ 103 Average loans $ 637,744 $ 608,705 Net (recoveries) charge-offs to average loans 1 (0.01)% 0.02% 1 - Annualized Deferred Tax Asset and Income Taxes Due to timing differences 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 $3.2 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. Capital Resources The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q. As of June 30, 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. Book value per common 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. 31 Other key performance indicators are as follows: Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Return on average assets 1 0.79 % 0.88 % 0.83 % 0.96 % Return on average shareholders’ equity 1 10.56 % 11.62 % 10.83 % 12.75 % Average equity to average assets 7.51 % 7.55 % 7.63 % 7.57 % 1 - Annualized Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient. During the first quarter of 2024, the Company paid a cash dividend of $0.07 per common share to our shareholders. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the Company. On April 28, 2022 the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through June 30, 2023. As previously reported, this plan was extended by the Board of Directors through March 31, 2025. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. As of 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 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. Liquidity We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available-for-sale securities. As of June 30, 2024, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $56.9 million, which is net of the $35.4 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, 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 86.10% and 89.06% as of June 30, 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 June 30, 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 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 funds. 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 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. The 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. 32 As 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”). As of June 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 coverage. Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $20.7 million were pledged as of June 30, 2024. Time deposits of $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 sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control. The bank holding company has approximately $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, to fund dividend payments to shareholders and to repurchase shares. The Company makes quarterly interest payments on the trust preferred securities. As discussed in the Capital Resources section, the Company is authorized to repurchase up to 500,000 shares of the Company’s outstanding common stock through March 31, 2025. Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank, and are not expected to have a material impact on available liquidity. Off Balance Sheet Items and Contractual Obligations 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.