What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 275 added, 258 removed, 269 unchanged (66% of the section changed)

70 unchanged sentences

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.

three months ended September 30, 2024 was $2.1 million, an increase of $218,000, or 11.53%, from the same period in 2023.

income increased 1.99%, or $140,000, from $7.0 million for the quarter ended September 30, 2023 to $7.2 million for the quarter ended

September 30, 2024.

The increase was primarily due to an increase in interest income of $2.0 million to $11.5 million due to the combination

of an increase of 57 basis points (“bps”) in the yield on earning assets to 5.51%, and a $65.5 million increase in the average

balance of earning assets.

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.

grew to $880.3 million in total assets as of September 30, 2024, from $826.3 million as of December 31, 2023.

Gross loans increased $8.2

million to $646.4 million as of September 30, 2024.

Additionally, interest-bearing deposits in other banks increased $40.2 million to

$90.6 million as of September 30, 2024.

Total deposit liabilities as of September 30, 2024 increased $47.1 million to $763.6 million

from December 31, 2023.

On September 27,

2024 Hurricane Helene passed through western North Carolina, southwest Virginia and northeast Tennessee, causing flood and wind damage

We are assessing the impact of this event on our customers and any collateral securing outstanding loans.

At this time,

we are not aware of any widespread impairment of collateral, but we continue to monitor the effects of this event and will address any

situations as needed, including providing payment relief to affected borrowers.

During the first

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

During the second quarter

During the third quarter

of 2024, 23,989 shares were repurchased at an average price of $2.67 per share.

Comparison of

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;

the Three Months ended September 30, 2024 and 2023

Quarter-to-date highlights

on average assets and equity of 0.97% and 12.35% for the third quarter of 2024, compared

to 0.94% and 12.38% for the third quarter of 2023, respectively;

interest income was $7.2 million for the third quarter of 2024, an increase of $140,000,

or 1.99%, compared to the third quarter of 2023;

provision for credit losses was $49,000 for the three months ended September 30, 2024 compared

to a provision of $155,000 for the three months ended September 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;

income was $2.4 million, a $10,000 decrease during the third quarter of 2024 compared to

the third quarter of 2023;

· 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.

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.

expense was $6.8 million, a decrease of $54,000, or 0.78%, for the third quarter of 2024

compared to the third quarter of 2023.

During the three

months ended September 30, 2024, interest income increased $2.0 million to $11.5 million due to the combination of an increase of 57

basis points (“bps”) in the yield on earning assets to 5.51%, and a $65.5 million increase in the average balance of earning

The loan portfolio was the primary driver of both increases, as the yield rose 62 bps to 6.05%, while the average balance increased

$21.7 million for the comparative quarters ending September 30, 2024 and 2023.

The increased interest income was offset by increased

interest expense which rose $1.8 million to $4.4 million during the third quarter of 2024 as compared to $2.5 million reported for the

same period in 2023.

Interest-bearing deposits accounted for $1.7 million of the increase as the average rate increased 110 bps and the

average balance increased $59.7 million for the comparative quarters ending September 30, 2024 and 2023.

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

cost of borrowed funds decreased 64 bps to 5.77%, the related interest expense increased $100,000

due to the increased average balance related to a $10.0 million borrowing from the Federal Reserve Bank under the Bank Term Funding Program

taken in the fourth quarter of 2023, which increased the overall outstanding average balance by $9.7 million.

The net interest margin

decreased 20 bps, to 3.43% for the quarter ending September 30, 2024, as compared to the 3.63% net interest margin for the same period

in 2023 due to the increase in funding costs outpacing improvements in the yield on earning assets;

however, growth in earning assets

offset the impact of a smaller net interest margin, resulting in the $140,000 increase in net interest income.

On September 18,

2024 the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board lowered the targeted federal funds rate by 50

bps in response to easing inflation and softening employment numbers.

This was the first rate cut since the FOMC began increasing rates

in March of 2022.

On November 7, 2024 the FOMC reduced the federal funds rate another 25 bps.

As a result of these actions, interest

earned on immediately repriceable loans tied to the prime interest rate and interest-earning funds held with other financial institutions,

including the Federal Reserve Bank, have decreased 75 bps.

The Bank has responded by lowering the rates on some deposit products.

there are indications of more rate cuts to follow, future actions by the FOMC cannot be reasonably estimated, due to a number of factors

including future economic and unemployment data.

We continually monitor our rate sensitive assets and liabilities and assess opportunities

to manage these assets and liabilities to maximize returns and mitigate downside risks.

The following table

4 unchanged sentences

Three Months Ended

September 30,

are in thousands)

2 unchanged sentences

earning assets

for credit losses

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

17 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 June 30, 2024, as compared to the three months ended June 30, 2023.

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

and Rate Analysis

Three Months Ended June 30, 2024 versus 2023

Three Months Ended September 30,

in thousands)

11 unchanged sentences

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.

credit losses charged to the income statement for the three months ended September 30, 2024 was $49,000 compared to a provision of $155,000

for the three months ended September 30, 2023.

The provision for credit losses in the third quarter of 2024 was impacted by the resolution

of a loan relationship that had resulted in a $263,000 specific allowance allocation during the second quarter of 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 and Asset Quality, below.

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.

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 $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.

was largely unchanged for the comparative three month periods, decreasing $10,000 to $2.4 million for the quarter ended September 30,

2024 from $2.4 million for the comparable quarter in 2023.

Modest decreases in earnings from service charges of $25,000, card processing

activities of $5,000 and other noninterest income of $23,000, were largely offset by increased revenue from financial services which

increased $36,000.

expense was $6.8 million for the three months ended September 30, 2024 compared to $6.9 million for the quarter ended September 30,

The $54,000 improvement resulted from modest decreases in salaries and benefits of $40,000, and occupancy expenses of $3,000.

In addition, legal and professional fees, loan and loan related expenses, included in other operating expenses, decreased by a

combined $90,000.

These decreases offset increases in data processing and telecommunication expenses and other noninterest expenses

of $10,000 and $59,000, respectively.

The efficiency ratio,

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased to 71.10% 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.

the third quarter of 2024 from 72.62% for the third quarter of 2023.

We continue to assess our operational procedures and structure to

improve efficiencies and contain costs.

Income tax expense

for the third quarter of 2024 totaled $621,000, an increase of $72,000, or 13.11%, from $549,000 recorded during the same period in 2023.

The effective tax rate for the three months ended September 30, 2024, was 22.76%, compared to 22.51% 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

the Nine Months ended September 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;

on average assets and equity of 0.87% and 11.36% for the first nine months of 2024, compared

to 0.96% and 12.62% for the first nine months of 2023, respectively;

interest income decreased $27,000, or 0.13% to $21.1 million for the nine months ended September

30, 2024, compared to $21.1 million for the nine months ended September 30, 2023;

interest margin was 3.44% for the nine months ended September 30, 2024, a decrease of 29

bps compared to 3.73% for the same period of 2023;

for credit losses was $478,000 for the nine months ended September 30, 2024, an increase

of $174,000, or 57.24%, compared to the nine months ended September 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

income was $7.3 million, an increase of $42,000, or 0.58%, compared to the nine months ended

September 30, 2023;

noninterest expense was $20.6 million, a decrease of $141,000, or 0.68%, compared to the

nine months ended September 30, 2023.

For the nine months

ended September 30, 2024, net interest income decreased $27,000 to $21.1 million from $21.1 million for the nine months ended September

The yield on earning assets increased 61 bps to 5.40% for the comparative nine-month periods, while the average balance increased

$62.1 million to $819.9 million.

The cost of interest-bearing liabilities increased 126 bps to 2.94%, while the average balance increased

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

$71.1 million to $548.7 million during the comparative nine-month periods.

The following table

3 unchanged sentences

Income and Expense, and Yields and Rates

Six Months Ended

Nine Months Ended

September 30,

are in thousands)

21 unchanged sentences

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.

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, 2024, as compared to the nine months ended September 30, 2023.

and Rate Analysis

Six Months Ended June 30,

Nine Months Ended September 30,

in thousands)

10 unchanged sentences

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

current assessment of the loan portfolio and related unfunded commitments, a provision of $478,000 was made for the nine months

ended September 30, 2024.

The allowance for credit losses as a percentage of loans increased from 1.14% at December 31, 2023 to

1.19% as of September 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, and Asset Quality, below.

For the nine months

ended September 30, 2024, noninterest income increased $42,000 to $7.3 million from $7.2 million for the same period in 2023.

is due largely to financial services revenue of $998,000, an increase of $168,000, or 20.24%, from the $830,000 recorded during the first

nine months of 2023.

Service charges and card processing revenue totaling $2.9 million and $2.8 million respectively were largely unchanged

These improvements were partially offset by the impact of the sales of bank properties in 2024 and 2023.

During the first

nine months of 2024, a former branch office and a lot were sold, along with the sale of furniture, resulting in a net gain of $23,000.

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 nine months

ended September 30, 2024, noninterest expense decreased $141,000 to $20.6 million compared to $20.8 million for the nine months ended

September 30, 2023.

The decrease was impacted by reductions in occupancy costs of $26,000 combined with decreases in legal and professional

fees of $140,000, consulting fees of $57,000 and loan and other real estate owned expenses of $98,000, excluding net gains on sales of

other real estate owned.

The expense reductions were partially offset by increases in advertising of $19,000, ATM network expenses of

$25,000 and miscellaneous expenses of $131,000 which combined for an increase of $175,000.

Balance Sheet

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.

Total assets as of

September 30, 2024 were $880.3 million, an increase of $54.0 million, or 6.53%, from $826.3 million as of December 31, 2023.

of $646.4 million as of September 30, 2024 reflected an increase of $8.2 million from $638.1 million at December 31, 2023.

Liquid assets

in the form of cash and cash equivalents increased $38.8 million or 59.64% during the first nine 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

$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.

increased $6.8 million during the first nine months of 2024 due to purchases of $14.0 million, which more than offset sales of $2.1 million,

and maturities, payments and amortization of $8.2 million and a $3.3 million decrease in the unrealized loss on securities available

During the third quarter of 2024, odd lot investment securities totaling $2.1 million were sold, and the proceeds were used

to reinvest in other securities.

These sales generated a net gain of $4,000.

Consumer loans increased $5.5 million, or 24.10% which included

the purchase of $2.5 million of individual loans, and the funding of $1.8 million of private student loans during the first nine months

Commercial real estate and commercial loans increased $5.3 million and $3.4 million, respectively, during the first nine months

Residential 1-4 family loans decreased $6.0 million from December 31, 2023 to September 30, 2024.

Loan originations during the

first nine months of 2024 were impacted by higher interest rates affecting borrower requests.

Total deposits were

$763.6 million as of September 30, 2024 compared to $716.5 million as of December 31, 2023.

The increase of $47.1 million, or 6.57%,

1 unchanged sentence

As a result of these efforts, total time deposits increased $25.1 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.

market accounts increased $27.1 million during the first nine 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.

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.

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

contributed to the increase in our cost of funds, as previously discussed, due to the continuing repricing of maturing time deposits

in the higher interest rate environment combined with ongoing competition for deposits.

As of September 30,

2024, borrowed funds totaled $36.2 million, unchanged from December 31, 2023.

Since September 30, 2024, $10.0 million borrowed from the

Federal Reserve Bank under the Bank Term Funding Program has been repaid, and a $1.2 million principal reduction was paid toward outstanding

trust preferred securities.

These repayments made from available liquidity, will improve net interest income and the net interest margin

in future periods.

During the first

nine months of 2024, total shareholders’ equity increased $6.3 million to $71.1 million as of September 30, 2024, due to net income

of $5.6 million and a decrease in the net unrealized loss on available-for-sale investment securities of $2.6 million which was offset

by dividends paid to shareholders of $1.7 million and the repurchase of common stock totaling $239,000.

Additional discussion of shareholders’

equity is presented in the Capital Resources discussion below.

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

The allowance for credit losses on unfunded commitments was $287,000 as of June 30, 2024 as compared to $285,000 at December

credit losses was $7.7 million, or 1.19% as a percentage of total loans, as of September 30, 2024, and $7.3 million, or 1.14%, as of

December 31, 2023.

The allowance for credit losses on unfunded commitments was $309,000 as of September 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

as a percentage of average loans was 0.01% during the first nine months of 2024 compared to 0.03% during the same period 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

which include nonaccrual loans and other real estate owned, totaled $5.1 million as of September 30, 2024, an increase of $1.4 million,

or 39.34%, since year-end 2023.

Nonperforming assets as a percentage of total assets were 0.58% as of September 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.

owned increased $903,000 to $1.1 million as of September 30, 2024 compared to December 31, 2023.

The increase was due to the foreclosure

of a commercial property, which is anticipated to be sold during the fourth quarter of 2024.

Expenses associated with other real estate

owned were $13,000 for the nine months ended September 30, 2024, excluding the effects of the sales of foreclosed properties during the

second and third quarters of 2024 which resulted in a gain of $44,000, compared to expenses of $23,000 during the nine months ended September

Nonaccrual loans increased $550,000 to $4.1 million as of September 30, 2024 from $3.5 million at December 31, 2023, largely

due to a commercial real estate loan moving to nonaccrual status.

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.

on nonaccrual loans and other real estate owned as of September 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.

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.

or below totaled $4.8 million as of September 30, 2024, an increase of $1.3 million from $3.5 million as of December 31, 2023.

past due loans increased to $7.3 million as of September 30, 2024 from $6.2 million as of

December 31, 2023.

The increase in past due loans is largely attributed to an increase in residential mortgage loans 30-59 days past

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

During the first nine

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

Additionally, in consideration

of the impact of Hurricane Helene on the financial performance of borrowers and the underlying loan collateral, a

qualitative factor adjustment was made for September 30, 2024.

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 $478,000, of which

$453,000 was a provision for the loan portfolio;

and a provision for unfunded commitments of $25,000.

The following table summarizes

components of the allowance for credit losses and related loans as of September 30, 2024 and December 31, 2023:

Credit Ratios

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of allowance for credit losses loans to nonaccrual loans

net of (recoveries)

(recoveries) charge-offs to average loans 1

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 $3.2 million and $3.1 million, existed as of June 30, 2024 and December 31, 2023,

the unrealized loss on securities available-for-sale of $2.4 million and $3.1 million, existed as of September 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 June 30, 2024,

As of September 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.

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.

share was $3.00 and $2.73 as of September 30, 2024 and December 31, 2023, respectively.

The increase in book value was due to the net

income of $5.6 million for the first nine months of 2024, which exceeded the dividend payment of $0.07 per share paid during the first

quarter of 2024, combined with the $2.6 million decrease in the unrealized loss on available for sale investment securities and the $239,000

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

Other key performance

indicators are as follows:

Return on average

September 30,

on average assets 1

on average shareholders’ equity 1

Average equity to average

equity to average assets

Under current economic

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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 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.

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 September 30, 2024, the Company has repurchased 270,018 shares at an average price of $2.40 per share since the inception

During the quarter ended September 30, 2024, the Company repurchased 23,989 shares at an average price of $2.67 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 June 30, 2024,

As of September 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

These investments provide a source of liquidity in the

amount of $50.0 million, which is net of the $38.5 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.

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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%.

ratio was 84.65% and 89.06% as of September 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.

sources of liquidity as of September 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

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

No draws on these letters of credit have been issued.

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rate 5-year advance, to support loan fundings and other general liquidity needs.

An additional $190.7 million was available as of June

An additional $190.7 million was available as of September

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.

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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.

through the Federal Reserve Bank Bank Term Funding Program for one year, which was repaid using available liquid funds on October 1,

2024 without penalty.

As of September 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”).

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 $7.2 million

and $6.3 million as of September 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 September

30, 2024 approximately $26.4 million were placed in this product as compared to $20.5 million at December 31, 2023.

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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.

estimated market value of $21.4 million were pledged as of September 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.

$250,000 or more were approximately 7.22% of total deposits at September 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 $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

company has approximately $20,000 in cash on deposit at the Bank at September 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

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Off Balance Sheet Items and Contractual

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.

There have been no

material changes during the nine months ended September 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