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 September 30, 2024 was $2.1 million, an increase of $218,000, or 11.53%, from the same period in 2023. Net interest 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 $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 in its path. 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 third quarter of 2024, 23,989 shares were repurchased at an average price of $2.67 per share. Comparison of the Three Months ended September 30, 2024 and 2023 Quarter-to-date highlights include: · Returns 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; · Net 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; · The 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 $2.4 million, a $10,000 decrease during the third quarter of 2024 compared to the third quarter of 2023; and · Noninterest 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 assets. 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 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. 25 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. Although 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 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 September 30, 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 639,707 $ 9,728 6.05% $ 618,008 $ 8,453 5.43% Federal funds sold 117 2 5.45% 306 4 5.19% Interest bearing deposits in other banks 86,773 1,164 5.34% 42,493 559 5.22% Taxable investment securities 107,947 653 2.42% 108,253 569 2.09% Total earning assets 834,544 11,547 5.51% 769,060 9,585 4.94% Less: Allowance for credit losses (7,867) (6,930) Non-earning assets 41,706 37,104 Total assets $ 868,383 $ 799,234 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,521 $ 160 0.88% $ 72,208 $ 123 0.68% Savings and money market deposits 174,313 811 1.85% 167,796 436 1.03% Time deposits 278,833 2,861 4.08% 225,921 1,551 2.72% Total interest-bearing deposits 525,667 3,832 2.90% 465,925 2,110 1.80% Other borrowings 20,000 211 4.13% 10,000 90 3.51% Trust preferred securities 16,186 323 7.81% 16,496 344 8.16% Total borrowed funds 36,186 534 5.77% 26,496 434 6.41% Total interest-bearing liabilities 561,853 4,366 3.09% 492,421 2,544 2.05% Non-interest-bearing deposits 228,961 237,516 Other liabilities 9,663 8,712 Total liabilities 800,477 738,649 Shareholders’ equity 67,906 60,585 Total liabilities and shareholders’ equity $ 868,383 $ 799,234 Net interest income $ 7,181 $ 7,041 Net interest margin 3.43% 3.63%% Net interest spread 2.42% 2.89% (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. 26 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 September 30, 2024, as compared to the three months ended September 30, 2023. Volume and Rate Analysis Increase (decrease) Three Months Ended September 30, 2024 versus 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 1,178 $ 3,851 $ (3,754) $ 1,275 Federal funds sold (10) 1 7 (2) Interest bearing deposits in other banks 2,311 50 (1,756) 605 Taxable investment securities (6) 359 (269) 84 Total earning assets 3,473 4,261 (5,772) 1,962 Interest expense: Interest-bearing demand deposits 2 146 (111) 37 Savings and money market deposits 67 1,376 (1,068) 375 Time deposits 1,441 3,069 (3,200) 1,310 Other borrowings 351 62 (292) 121 Trust preferred securities (25) (58) 62 (21) Total interest-bearing liabilities 1,836 4,595 (4,609) 1,822 Change in net interest income $ 1,637 $ (334) $ (1,163) $ 140 The provision for 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 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. Noninterest expense was $6.8 million for the three months ended September 30, 2024 compared to $6.9 million for the quarter ended September 30, 2023. 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 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. 27 Comparison of the Nine Months ended September 30, 2024 and 2023 Year-to-date highlights include: · Returns 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; · Net 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; · Net 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; · Provision 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 $7.3 million, an increase of $42,000, or 0.58%, compared to the nine months ended September 30, 2023; and · Total 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 30, 2023. 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 $71.1 million to $548.7 million during the comparative nine-month periods. 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 Nine Months Ended September 30, 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 638,403 $ 28,316 5.93% $ 601,729 $ 23,711 5.27% Federal funds sold 116 5 5.40% 536 20 4.99% Interest bearing deposits in other banks 74,798 2,999 5.36% 44,901 1,642 4.89% Taxable investment securities 106,537 1,852 2.32% 110,547 1,752 2.12% Total earning assets 819,854 33,172 5.40% 757,713 27,125 4.79% Less: Allowance for credit losses (7,581) (6,869) Non-earning assets 39,950 37,273 Total assets $ 852,223 $ 788,117 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,914 $ 456 0.84% $ 76,099 $ 331 0.58% Savings and money market deposits 168,134 2,030 1.61% 165,670 951 0.77% Time deposits 271,491 8,004 3.94% 213,365 3,620 2.27% Total interest-bearing deposits 512,539 10,490 2.73% 455,134 4,902 1.44% Other borrowings 20,000 630 4.14% 6,007 165 3.63% Trust preferred securities 16,186 971 7.88% 16,496 950 7.60% Total borrowed funds 36,186 1,601 5.81% 22,503 1,115 6.54% Total interest-bearing liabilities 548,725 12,091 2.94% 477,637 6,017 1.68% Non-interest-bearing deposits 228,350 242,139 Other liabilities 9,569 8,657 Total liabilities 786,644 728,433 Shareholders’ equity 65,579 59,684 Total liabilities and shareholders’ equity $ 852,223 $ 788,117 Net interest income $ 21,081 $ 21,108 Net interest margin 3.44% 3.73% Net interest spread 2.46% 3.11% (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. 28 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 nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. Volume and Rate Analysis Increase (decrease) Nine Months Ended September 30, 2024 versus 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 1,932 $ 4,009 $ (1,336) $ 4,605 Federal funds sold (21) 2 4 (15) Interest bearing deposits in other banks 1,462 209 (314) 1,357 Taxable investment securities (85) 225 (40) 100 Total earning assets 3,288 4,445 (1,686) 6,047 Interest expense: Interest-bearing demand deposits (19) 193 (49) 125 Savings and money market deposits 19 1,400 (340) 1,079 Time deposits 1,319 3,563 (498) 4,384 Other borrowings 508 30 (73) 465 Trust preferred securities (24) 46 (1) 21 Total interest-bearing liabilities 1,803 5,232 (961) 6,074 Change in net interest income $ 1,485 $ (787) $ (725) $ (27) Based on our 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. The increase 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 from 2023. 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. 29 Balance Sheet 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. Gross loans 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 $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 for sale. 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 of 2024. Commercial real estate and commercial loans increased $5.3 million and $3.4 million, respectively, during the first nine months of 2024. 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%, 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 $25.1 million, including $3.0 million of brokered time deposits, and money 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 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 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 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 $5.1 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 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 30, 2023. 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 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 $4.8 million as of September 30, 2024, an increase of $1.3 million from $3.5 million as of December 31, 2023. Total 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 due. 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 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. 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: Selected Credit Ratios September 30, December 31, (Dollars in thousands) 2024 2023 Allowance for credit losses - loans $ 7,670 $ 7,256 Total loans 646,356 638,111 Allowance for credit losses to total loans 1.19% 1.14% Nonaccrual loans $ 4,084 $ 3,534 Nonaccrual loans to total loans 0.63% 0.55% Ratio of allowance for credit losses loans to nonaccrual loans 1.88X 2.05X Net charge-offs $ 39 $ 103 Average loans $ 638,403 $ 608,705 Net 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 $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. 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 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. Book value per common 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. 31 Other key performance indicators are as follows: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Return on average assets 1 0.97% 0.94% 0.87% 0.96% Return on average shareholders’ equity 1 12.35% 12.38% 11.36% 12.62% Average equity to average assets 7.82% 7.58% 7.70% 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. 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 September 30, 2024, the Company has repurchased 270,018 shares at an average price of $2.40 per share since the inception of the plan. 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. 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 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 $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. 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 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 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. 32 We have used our line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public 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 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. 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 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 $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. 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 $21.4 million were pledged as of September 30, 2024. Time deposits of $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 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 $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 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 nine months ended September 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.