NEW PEOPLES BANKSHARES INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution About Forward Looking Statements We make forward looking statements in this annual report on Form 10-K 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. These forward-looking statements are based on various factors and were derived using numerous assumptions as of the date of this Form 10-K and are subject to significant risks. The following important factors, among others, that may cause actual results to differ from that expressed in such forward-looking statements 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 trade restrictions and tariffs, and acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to trade restrictions and tariffs, and 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, including the successful core operating system conversion in 2025; our ability to successfully manage cybersecurity, including generative artificial intelligence risks; our ability to assist in managing third party fraud against customer accounts including but not limited to check, credit and debit card, and electronic funds transfer fraud; 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. 17 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. General The following commentary discusses major components of our business and presents an overview of our consolidated financial position as of December 31, 2024 and 2023, as well as results of operations for the years ended December 31, 2024 and 2023. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K. New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccruing loans and the amount of provision expense added to the allowance for credit losses. The Bank also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold. Critical Accounting Policies Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting estimates 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 “Allowance for Credit Losses” in this discussion. For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements, contained in Item 8 of this Form 10-K. 18 Overview For the year ended December 31, 2024, net income was $8.2 million, or basic and diluted net income per share of $0.35, compared to a net income of $7.2 million, or basic and diluted net income per share of $0.30, for the year ended December 31, 2023, an increase of $1.0 million, or 14.20%. Retained earnings increased $6.5 million, or 45.26%, to $21.0 million as of December 31, 2024 from $14.5 million as of December 31, 2023. Results for the year ended December 31, 2024 were impacted by several non-recurring events. On December 31, 2024 the Bank provided notice of termination of the contract with our core systems provider. We plan to complete the conversion to a new core systems provider in the fourth quarter of 2025. As a result of the termination notice, we recorded termination charges and certain conversion costs estimated to be $850,000. During the fourth quarter of 2024, we had two transactions in our bank owned life insurance portfolio (“BOLI”) that disposed of the entire portfolio. One policy was cancelled and redeemed, resulting in a loss of $49,000; and a benefit claim was filed on the second policy resulting in a gain of $1.6 million. After consideration of the tax impact, these non-recurring items increased earnings by $756,000 or $0.03 per basic and diluted share. In 2023, other noninterest income included $257,000 in insurance proceeds recovery related to costs incurred during the cybersecurity incident in 2022. The following non-GAAP table summarizes the impact of these nonrecurring events: 2024 2023 (Dollars in thousands) Amount Per Share Amount Per Share As reported Net income (GAAP) $ 8,204 $ 0.35 $ 7,184 $ 0.30 Adjust for nonrecurring items: - BOLI benefit (1,565) - Insurance proceeds - (257) BOLI redemption 49 - Core system conversion 850 Total nonrecurring items (666) (257) Applicable tax effect (90) 54 Nonrecurring items net of tax (756) (203) As adjusted for nonrecurring items (non-GAAP) $ 7,448 $ 0.32 $ 6,981 $ 0.29 Adjusted net income and net income per share are non-GAAP financial measures that management uses to supplement the evaluation of the Company’s operating results and believes is beneficial to the users of its financial statements in evaluating the Company’s current operating results in relation to past periods. As discussed in “Net Interest Income and Net Interest Margin”, net interest income for the year ended December 31, 2024 was $28.5 million compared to $28.0 million for the year ended December 31, 2023. The increase was primarily due to a $59.6 million increase in average earning assets. Average interest-bearing liabilities increased $65.3 million to $549.5 million during the comparative twelve-month periods. For the year ended December 31, 2024, noninterest income was $11.3 million, an increase of $1.3 million from the $9.9 million in 2023. Excluding non-recurring items, noninterest income was unchanged at $9.7 million for 2024 and 2023, due to nonrecurring income of $1.6 million and $257,000 recorded in 2024 and 2023, respectively For the year ended December 31, 2024, noninterest expense was $28.8 million, an increase of $800,000 from $28.0 million in 2023. Excluding non-recurring items, noninterest expense decreased $90,000 to $27.9 million compared to $28.0 million for the year ended December 31, 2023. 19 Total assets as of December 31, 2024 were $854.9 million, an increase of $28.6 million, or 3.46%, from $826.3 million as of December 31, 2023. Gross loans increased $19.4 million, or 3.04%, during 2024 due to continuing loan demand. Investment securities increased $6.2 million during 2024 primarily due to securities purchases executed throughout the year. All of the Company's investments are designated as available-for-sale. Deposits totaled $750.0 million as of December 31, 2024 compared to $716.5 million as of December 31, 2023. The increase of $33.5 million, or 4.68%, was due to efforts to attract and retain deposits, specifically time deposits through targeted promotional rates and terms and money market accounts through more aggressive pricing of rates, combined with cyclical funds inflows. As a result of these efforts, total time deposits increased $16.4 million during the year ended December 31, 2024. New Peoples Bank remains well-capitalized. The leverage ratio is 10.70% as of December 31, 2024, compared to 11.11% as of December 31, 2023. The Company’s key performance indicators are as follows: Year ended December 31, 2024 2023 Return on average assets 0.96 % 0.91 % Return on average shareholders’ equity 12.28 % 12.00 % Average shareholders’ equity to average assets ratio 7.81 % 7.55 % Net Interest Income and Net Interest Margin The Company’s primary source of income is net interest income, which increased $502,000, or 1.79%, in 2024 compared to 2023 due primarily to an increase in average earning assets which increased $59.6 million or 7.8% in 2024. Loans and interest bearing deposits in other banks were the principal drivers of this growth increasing $32.3 million and $29.7 million, respectively. Combined with the increase in the volume of earning assets, the yield on these assets increased 55 basis points (bps; 1 basis point is equal to 1/100th of 1 percent) to 5.42%. The yield on loans increased 61 bps to 5.96%. The increase in interest income was partially offset by the cost of interest-bearing liabilities which increased 105 bps to 2.93% during the year ended December 31, 2024 compared to 1.88% during the year ended December 31, 2023. Time deposits were the primary contributor to the increase in interest expense due to an increase of 137 bps in the cost of time deposits to 3.94% and a $50.6 million increase in the average balance due to a strategy to attract and retain time deposits. Additionally, the cost of borrowed funds decreased 64 bps to 5.79%, as the cost of other borrowings increased 44 bps to 4.04% while trust preferred securities costs rose 7 bps to 7.72%. Aside from the rate increases in borrowed funds, the total average balance increased $9.8 million due primarily to the Bank Term Funding Program borrowing taken in December 2023 and repaid during the fourth quarter of 2024. These rate and volume activities combined to result in an increase in net interest income of $502,000, while the net interest margin decreased to 3.47% for the year ended December 31, 2024, from 3.67% for 2023. 20 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 Yields and Rates 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 641,022 $ 38,208 5.96% $ 608,705 $ 32,552 5.35% Federal funds sold 115 6 5.18% 447 22 4.99% Interest bearing deposits in other banks 74,524 3,875 5.20% 44,864 2,239 4.99% Taxable investment securities 107,278 2,544 2.37% 109,303 2,322 2.12% Total earning assets 822,939 44,633 5.42% 763,319 37,135 4.87% Less: Allowance for credit losses (7,628) (6,937) Non-earning assets 40,103 36,574 Total assets $ 855,414 $ 792,956 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,936 $ 605 0.83% $ 74,939 $ 459 0.61% Savings and money market deposits 171,311 2,833 1.65% 164,429 1,442 0.88% Time deposits 271,835 10,707 3.94% 221,275 5,681 2.57% Total interest-bearing deposits 516,082 14,145 2.74% 460,643 7,582 1.65% Other borrowings 17,486 719 4.04% 7,124 260 3.60% Trust preferred securities 15,904 1,248 7.72% 16,426 1,274 7.65% Total borrowed funds 33,390 1,967 5.79% 23,550 1,534 6.43% Total interest-bearing liabilities 549,472 16,112 2.93% 484,193 9,116 1.88% Non-interest-bearing deposits 229,717 240,121 Other liabilities 9,431 8,781 Total liabilities 788,620 733,095 Shareholders’ equity 66,794 59,861 Total liabilities and shareholders’ equity $ 855,414 $ 792,956 Net interest income $ 28,521 $ 28,019 Net interest margin 3.47% 3.67% Net interest spread 2.49% 2.99% (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 tables set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination of rates and volume, for the periods indicated. 21 Volume and Rate Analysis Increase (decrease) Year 2024 Compared to 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 1,728 $ 3,730 $ 198 $ 5,656 Federal funds sold (16) 1 (1) (16) Interest bearing deposits in other banks 1,480 94 62 1,636 Taxable investment securities (43) 270 (5) 222 Total earning assets 3,149 4,095 254 7,498 Interest expense: Interest-bearing demand deposits (12) 163 (5) 146 Savings and money market deposits 60 1,277 54 1,391 Time deposits 1,298 3,035 693 5,026 Other borrowings 373 32 54 459 Trust preferred securities (40) 11 3 (26) Total interest-bearing liabilities 1,679 4,518 799 6,996 Change in net interest income $ 1,470 $ (423) $ (545) $ 502 Volume and Rate Analysis Increase (decrease) Year 2023 Compared to 2022 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 822 $ 3,876 $ 115 $ 4,813 Federal funds sold 3 9 2 14 Interest bearing deposits in other banks (627) 2,307 (955) 725 Taxable investment securities (72) 275 (10) 193 Total earning assets 126 6,467 (848) 5,745 Interest expense: Interest-bearing demand deposits - 360 1 361 Savings and money market deposits (36) 1,416 (198) 1,182 Time deposits 268 3,310 586 4,164 Other borrowings (326) 242 (157) (241) Trust preferred securities (3) 550 (2) 545 Total interest-bearing liabilities (97) 5,878 230 6,011 Change in net interest income $ 223 $ 589 $ (1,078) $ (266) The increases in interest income and interest expense during 2024 were driven by a combination of increased interest rates and increased volumes of interest earning assets and liabilities. Overall, our net interest margin decreased 20 bps to 3.47% in 2024 compared to 3.67% in 2023. The increase in interest income is attributed to an increase in the average balance and yield on earning assets. Average earning assets increased $59.6 million. Specifically average loans increased $32.3 million or 5.31%, and average interest-bearing deposits in other banks increased $29.7 million, or 66.1%. In addition, the yield on average earning assets improved 55 bps to 5.42% for the year ended December 31, 2024 compared to 4.87% for the year ended December 31, 2023. Overall, loan interest income, including fees, increased $5.7 million during the year ended December 31, 2024 compared to December 31, 2023. 22 Interest expense increased $7.0 million, due primarily to an increase in the average balance and yield on interest bearing liabilities. Average time deposits and, money market and savings deposits increased $50.6 million and $6.9 million, respectively. These increases were largely due to aggressive pricing on these deposit products as the cost of interest-bearing deposits increased 109 bps to 2.74%. The increase in yield on interest bearing deposits was partially offset by a decrease in cost of borrowed funds which fell 64 bps to 5.79% due to principal payments made on trust preferred securities and the relatively lower cost for the Bank Term Funding Program borrowing that was outstanding throughout most of 2024. Loans Our primary source of income is interest earned on loans. Total gross loans increased $19.4 million during 2024, or 3.04%, to $657.5 million as of December 31, 2024 as compared to $638.1 million as of December 31, 2023. The primary drivers of this increase in total loans were increases in construction loans, commercial real estate loans and commercial loans which increased $7.3 million to $36.1 million, $3.5 million to $243.6 million and $7.4 million to $60.6 million, respectively. These increases resulted from small business development efforts throughout 2024 and a commercial loan promotion offered. In addition, consumer installment and all other loans increased $5.9 million due to private student loan originations of $1.8 million and the acquisition of $2.9 million in consumer loans. These increases offset reductions in residential and multi-family mortgage loans which decreased $3.4 million to $234.9 million and $2.2 million to $32.4 million during 2024. For more detail on loan balances, refer to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K. Nonaccrual loans decreased approximately $261,000 during 2024 from $3.5 million as of December 31, 2023 to $3.3 million as of December 31, 2024. Nonaccrual loans negatively affect interest income as these loans are nonearning assets. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. For more detail on nonaccrual loans, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K. Individually evaluated loans increased during 2024 to $1.7 million as of December 31, 2024, from $1.1 million as of December 31, 2023. I nterest income and cash receipts on individually evaluated loans are handled differently depending on whether or not the loan is on nonaccrual status. If the individually evaluated loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. For more detail on individually evaluated loan balances, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K. The following table presents the dollar composition and percentage of our loan portfolio as of December 31: Loan Composition 2024 2023 (Dollars in thousands) $ % $ % Real estate secured: Commercial $ 243,646 37.1% $ 240,187 37.6% Construction and land development 36,112 5.5% 28,830 4.5% Residential 1-4 family 234,860 35.7% 238,233 37.3% Multifamily 32,379 4.9% 34,571 5.4% Farmland 16,921 2.6% 16,401 2.6% Total real estate loans 563,918 85.8% 558,222 87.4% Commercial 60,587 9.2% 53,230 8.3% Agriculture 4,025 0.6% 3,508 0.5% Consumer installment loans and all other loans 29,006 4.4% 23,151 3.7% Total loans 657,536 100.0% 638,111 100.0% Less: allowance for credit losses 7,684 7,256 Total $ 649,852 $ 630,855 23 Our loan maturities, and distribution between fixed and variable rate loans as of December 31, 2024 are shown in the following tables: Maturities of Loans (Dollars in thousands) One Year or Less One to Five Years Five to Fifteen Years After Fifteen Years Total Real estate secured: Commercial $ 15,546 $ 42,364 $ 85,505 $ 100,231 $ 243,646 Construction and land development 7,760 3,920 11,587 12,845 36,112 Residential 1-4 family 9,097 13,086 72,704 139,973 234,860 Multifamily 492 3,862 11,731 16,294 32,379 Farmland 897 2,706 8,146 5,172 16,921 Total real estate loans 33,792 65,938 189,673 274,515 563,918 Commercial 18,108 30,129 10,763 1,587 60,587 Agriculture 1,656 1,451 696 222 4,025 Consumer installment loans and all other loans 5,225 17,957 5,791 33 29,006 Total $ 58,781 $ 115,475 $ 206,923 $ 276,357 $ 657,536 The following table presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2024: (Dollars in thousands) Fixed Rate Variable Rate Real estate secured: Commercial $ 74,005 $ 154,095 Construction and land development 8,582 19,770 Residential 1-4 family 76,654 149,109 Multifamily 10,576 21,311 Farmland 3,069 12,955 Total real estate loans 172,886 357,240 Commercial 36,375 6,104 Agriculture 2,142 227 Consumer installment loans and all other loans 22,582 1,199 Total $ 233,985 $ 364,770 Contractual maturities of loans do not reflect the actual term of our loan portfolio. The average life of mortgage loans is substantially less than the contractual life due to prepayments and enforcement of due on sale clauses. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates on existing loans while the average life decreases when rates on existing loans are substantially above current market rates. Some variable rate loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor or may be more than the allowable rate increase under the terms of the loan. In these instances, it may take several reset periods before these loans are fully adjusted. 24 Allowance for Credit Losses The Company maintains its allowance for credit losses based on the expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of management and staff, the volume and severity of past due, rated and nonaccrual assets, loan review system, collateral values, concentrations of credit, and legal or regulatory requirements and competition. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates loan relationships of $250,000 or more that have been determined to meet the regulatory definitions of “classified” as individually evaluated. The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral method”) or the discounted cash flow (“DCF”) method. The allowance for credit losses increased to $7.7 million as of December 31, 2024 from $7.3 million as of December 31, 2023. The allowance for credit losses at the end of 2024 was approximately 1.17% of total loans as compared to 1.14% at the end of 2023. Provisions for credit losses for loans receivable of approximately $506,000 and $712,000 were recorded during the years ended December 31, 2024 and 2023, respectively. Loans charged off, net of recoveries, totaled approximately $78,000, or 0.01% of average loans, for the year ended December 31, 2024, compared to approximately $103,000, or 0.02% of average loans, in 2023. The allowance for credit losses represents an amount that, in the Company's judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. Nonaccrual loans decreased approximately $261,000 during 2024 from $3.5 million as of December 31, 2023 to $3.3 million as of December 31, 2024. The amount of interest income that would have been recognized on these loans had they been accruing interest was approximately $49,000 and $61,000 in the years ended December 31, 2024 and 2023, respectively. There were no loans past due 90 days or greater and still accruing interest at either December 31, 2024 or 2023. There are no commitments to lend additional funds to non-performing borrowers. A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize exposure to losses in cases of default. Increasing real estate values in our area have reduced this exposure somewhat. However, while we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries. 25 Commercial and commercial real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee. Guidance for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss. With regard to the Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for credit losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged-off. For non-1-4 family residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for credit losses. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, or at the time of foreclosure, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for credit losses when the loan becomes contractually 180 days past due, or at the time of foreclosure. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for credit losses. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues. Annualized net charge-offs, as a percentage of average loans, was 0.01% during the year ended December 31, 2024, compared to 0.02% for the same period of 2023. The allowance for credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known credit losses 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 year ended December 31, 2024, we made modest adjustments to our qualitative factors to consider risk factors associated with commercial real estate and residential mortgage loans and the impacts of the hurricane Helene. Those changes, along with the assessment of the historical and specific risks associated with the loan portfolio, resulted in a net provision for credit losses of $625,000, of which $506,000 was provided for the loan portfolio and $119,000 was provided to the allowance for unfunded commitments. The following table summarizes components of the allowance for credit losses and related loans as of December 31, 2024 and 2023: Selected Credit Ratios December 31, (Dollars in thousands) 2024 2023 Allowance for credit losses $ 7,684 $ 7,256 Total loans 657,536 638,111 Allowance for credit losses to total loans 1.17% 1.14% Nonaccrual loans $ 3,273 $ 3,534 Nonaccrual loans to total loans 0.50% 0.55% Ratio of allowance for credit losses to nonaccrual loans 2.35X 2.05X Charge-offs net of recoveries $ 78 $ 103 Average loans $ 641,022 $ 608,705 Net charge-offs to average loans 0.01% 0.02% The following table shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans for the years ended December 31, 2024 and 2023: 26 Average Balance Net Charge-offs (Recoveries) Net Charge-offs (Recoveries) as % of Average Loan Type Average Balance Net Charge-offs (Recoveries) Net Charge-offs (Recoveries) as % of Average Loan Type Commercial $ 240,730 $ 74 0.03% $ 212,409 $ - 0.00% Construction and land development 30,063 (44) -0.15% 39,920 (35) -0.09% Residential 1-4 family 234,848 (25) -0.01% 232,280 14 0.01% Multifamily 33,782 95 0.28% 33,332 (111) -0.33% Farmland 16,557 (297) -1.79% 17,253 - 0.00% Total real estate loans 555,980 (197) -0.04% 535,194 (132) -0.02% 54,669 153 0.28% 48,586 26 0.05% 3,611 - 0.00% 3,596 54 1.50% 26,319 122 0.46% 20,748 155 0.75% 443 - 0.00% 581 - 0.00% $ 641,022 $ 78 0.01% $ 608,705 $ 103 0.02% The following table shows the balance and percentage of our allowance for credit losses allocated to each major category of loans. Allocation of the Allowance for Credit Losses December 31, 2024 December 31, 2023 (Dollars in thousands) Amount % of ACL % of Loans Amount % of ALLL % of Loans Real estate secured: Commercial $ 2,565 33.4 37.1 $ 2,518 34.7 37.6 Construction and land development 322 4.2 5.5 300 4.1 4.5 Residential 1-4 family 2,923 38.0 35.7 2,666 36.7 37.3 Multifamily 382 5.0 4.9 509 7.0 5.4 Farmland 149 1.9 2.6 163 2.2 2.6 Total real estate loans 6,341 82.5 85.8 6,156 84.7 87.4 Commercial 751 9.8 9.2 673 9.3 8.3 Agriculture 36 0.5 0.6 33 0.5 0.5 Consumer and all other loans 556 7.2 4.4 394 5.5 3.8 Total $ 7,684 100.0 100.0 $ 7,256 100.0 100.0 We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the expected credit losses within each of the categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that credit losses in future years will occur in the same proportions or that the allocation indicates future credit loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio. The allocation of the allowance for credit losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 33.4% of the allowance to commercial real estate loans, which constituted 37.1% of our loan portfolio at December 31, 2024. This allocation decreased slightly compared to 34.7% in 2023, due primarily to the slight decrease in nonaccrual and past due loans for this segment of the loan portfolio. We have allocated 9.8% of the allowance to commercial loans, which constituted 9.2% of our loan portfolio at December 31, 2024. This allocation percentage increased compared to December 31, 2023, due to the increase in this component of the loan portfolio. Both residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities. We allocated 4.2% of the allowance to real estate construction loans, which constituted 5.5% of our loan portfolio as of December 31, 2024. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Additionally, these credits are generally shorter-term projects of eighteen months or less. 27 These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities. We allocated 38.0% of the allowance to residential real estate loans, which constituted 35.7% of our loan portfolio as of December 31, 2024. We allocated 7.2% of the allowance to consumer and all other loans, which constituted 4.4% of our loan portfolio as of December 31, 2024. Our allocation increased compared to the allocation as of December 31, 2023, due to the impact of activity on overdrawn deposit accounts. Other Real Estate Owned Other real estate owned decreased $70,000, or 44.59%, to approximately $87,000 as of December 31, 2024 from $157,000 as of December 31, 2023. During 2024, five properties were sold in the amount of $1.5 million and four properties were acquired in the amount of $1.3 million. While the levels of problem credits and foreclosed properties have been reduced significantly over the past several years, we remain mindful of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for credit losses as we expedite the resolution of these problem assets. Investment Securities Total investment securities increased $6.2 million, or 6.88%, to $96.0 million as of December 31, 2024 from $89.8 million as of December 31, 2023. All securities are classified as available-for-sale for liquidity purposes. The increase in investment securities during 2024 was due to purchases of $23.3 million, which more than offset sales of $2.1 million, and maturities, payments and amortization of $14.6 million and a $419,000 increase 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.There were no sales of securities during 2023. During 2023, there were maturities, calls and paydowns of $9.4 million, and the Company purchased $0.5 million in investment securities. Investment securities with a carrying value of $35.2 million and $36.8 million as of December 31, 2024 and 2023, respectively, were pledged to secure public deposits and for other purposes required, or permitted, by law. Our strategy is to invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity. The fair value of our investment portfolio is substantially affected by changes in interest rates. Losses could be realized if liquidity and/or business strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S. fiscal policies or other factors affecting market interest rates. As of December 31, 2024, we had a net unrealized loss in our investment portfolio totaling $15.2 million as compared to a $14.8 million loss as of December 31, 2023. As market interest rates increase, the level of unrealized losses could change substantially. However, these changes would have no impact on earnings or regulatory capital, unless the securities were sold at a loss. We believe that all unrealized losses resulted from temporary changes in interest rates and current market conditions and are not a result of credit deterioration. No allowance for credit losses on available-for-sale securities was recorded as of December 31, 2024 and 2023. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings. The fair value and weighted average yield of investment securities as of December 31, 2024 are shown in the following schedule by contractual maturity and do not reflect principal paydowns for amortizing securities. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are calculated by dividing the contractual interest for each time period by the average amortized contractual cost. 28 Less than One Year One to Five Years Five to ten years After ten years Total (Dollars in thousands) Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield U.S. Treasuries $ 2,685 1.55% $ 4,296 1.03% $ 980 4.12% $ - -% $ 7,961 1.57% U.S. Government Agencies 1,230 3.15% 1,466 4.59% 3,660 3.54% 2,449 3.11% 8,805 3.10% Taxable municipals - -% 730 2.44% 6,066 2.18% 11,728 2.56% 18,524 2.44% Corporate bonds - -% 1,408 3.24% 845 2.88% - -% 2,253 3.10% Mortgage backed securities - -% 2,860 3.84% 9,231 3.54% 46,350 2.21% 58,441 2.50% $ 3,915 2.05% $ 10,760 2.57% $ 20,782 3.10% $ 60,527 2.31% $ 95,984 2.48% Bank Owned Life Insurance As of December 31, 2024 and 2023, the Bank had an aggregate total cash surrender value of $0 and $4.6 million, respectively, on life insurance policies covering former key officers. During 2024, one policy was surrendered at market value resulting in a loss of $49,000. In December 2024, a death benefit receivable of $5.4 million was recorded, resulting in an income accrual of $1.6 million. Excluding the loss on surrender and the income accrued on the death benefit, the Company recognized income of approximately $73,000 and $40,000 during the years ended December 31, 2024 and 2023. Deposits Total deposits were $750.0 million as of December 31, 2024, an increase of $33.5 million, or 4.68%, from $716.5 million as of December 31, 2023, due to efforts to attract and retain deposits, specifically time deposits, combined with more aggressive pricing on money market accounts and cyclical fund inflows. Most of the increase was driven by money market deposits which increased $30.2 million, or 55.9%, to $84.1 million, and time deposits, which increased $16.4 million, or 6.51%, to $268.7 million as of December 31, 2024 and 2023. These increases more than offset a reduction in noninterest bearing demand deposits of $8.9 million. The increases in time and money market deposits resulted from small business development efforts throughout 2024, revamping certain accounts to better suit customer needs and offering periodic rate promotions. Information detailing average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net Interest Income and Net Interest Margin” section. Core deposits are considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings and money market products. Noninterest bearing demand deposits decreased $8.9 million in 2024, while interest bearing demand deposits, savings and money market deposits increased $26.0 million. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities. Time deposits of $250,000 or more equaled approximately 6.84% of deposits at the end of 2024 and 7.36% of deposits at the end of 2023. As of December 31, 2024 and 2023, uninsured deposits are estimated to be $91.9 million and $93.8 million, respectively. Estimated uninsured deposits represented 12.3% and 13.1% of total deposits as of December 31, 2024 and 2023, respectively. Included in estimated uninsured deposits are $22.9 million and $27.9 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit we have with the Federal Home Loan Bank of Atlanta (the FHLB). The following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise. Maturities of Time Deposits of Greater Than $250,000 (Dollars in thousands) December 31, 2024 Three months or less $ 12,138 Over three months through six months 16,280 Over six months through twelve months 9,275 Over one year 10,846 Total $ 48,539 29 As of December 31, 2024 and 2023, $35.2 million and $36.8 million of securities, respectively, were pledged to collateralize public deposits, including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB. Additionally, we held letters of credit from the FHLB for $14.0 million and $12.0 million at December 31, 2024 and 2023, respectively, to secure public deposits, including time deposits, held in our Virginia offices. We held $3.0 million in brokered deposits at December 31, 2024, and no brokered deposits as of December 31, 2023. While not a primary source of funding, brokered deposits provide a means to efficiently manage funding and liquidity. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section. Total Certificate of Deposit Registry Service (“CDARS”) time deposits were $7.0 million and $6.3 million at December 31, 2024 and 2023, respectively. Noninterest Income For the year ended December 31, 2024, noninterest income totaled $11.3 million. After excluding non-recurring items, as shown in the table below, which is a non-GAAP measure, noninterest income was $9.7 million for 2024 compared to $9.9 million for 2023. A $244,000, or 22.51%, increase in financial services revenue to $1.3 million from the $1.1 million recorded during 2023 offset modest decreases in service charges and card processing revenue of $48,000 and $28,000, respectively. In addition, noninterest income was impacted by the sales of bank properties in 2024 and 2023. During 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 $130,000. In 2023, other noninterest income included $257,000 in insurance proceeds recovery related to costs incurred during the cybersecurity incident in 2022, that was not repeated in 2024. Excluding this item noninterest income for 2023 and the nonrecurring items in 2024, noninterest income would have been unchanged at $9.7 million. Noninterest Expense For the year ended December 31, 2024, noninterest expense totaled $28.8 million. After excluding non-recurring items, as shown in the table below, noninterest expense decreased $90,000 to $27.9 million compared to $28.0 million for the year ended December 31, 2023. The decrease was impacted by reductions in legal and professional fees, consulting, printing and supplies and loan expenses totaling $450,000. The expense reductions were partially offset by increases in advertising, ATM network and deposit insurance expenses, which combined for an increase of $111,000. While we experienced no significant losses resulting from fraud in 2024, we experienced an increase in the volume and sophistication of fraudulent transaction attempts. These fraudulent transaction attempts ranged from unauthorized electronic transactions to check theft and forgery. We work continuously with customers to educate them on identifying potential fraud and the efforts they can take to reduce the risk of fraud. We expect increased fraudulent transaction attempts to continue for the foreseeable future. Our efficiency ratio, a non-GAAP measure, is defined as noninterest expense divided by the sum of net interest income plus noninterest income and was 72.40% in 2024 compared to 73.71% in 2023. The performance improvement in this ratio is a result of the increase in net interest income, as discussed in the “Net Interest Income and Net Interest Margin” section earlier in this Item 7. After adjusting for non-recurring items, the efficiency ratio increases slightly to 73.01%, as shown in the table below. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity. (Dollars in thousands) Net Interest Income Noninterest Income Total Income Noninterest Expense Efficiency Ratio As reported (GAAP) $ 28,521 $ 11,254 $ 39,775 $ 28,797 72.40% Adjust for nonrecurring items: BOLI benefit - (1,565) (1,565) - BOLI redemption - - - (49) Core system conversion - - - (850) As adjusted for nonrecurring items (non-GAAP) $ 28,521 $ 9,689 $ 38,210 $ 27,898 73.01% 30 Income Taxes and Deferred Tax Assets Income taxes were $2.1 million for the year ended December 31, 2024, compared to $2.1 million for the same period in 2023. The effective tax rates were 20.76%, and 23.01% for 2024 and 2023, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally due to the lessened impact of tax preference items, along with the effect of certain state income taxes. The lower effective tax rate in 2024 is the result of non-taxable income resulting from the BOLI insurance benefit accrual included in pre-tax earnings. Deferred tax assets represent the future tax benefit of future deductible differences. If it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, the Company did not include a valuation allowance against its deferred tax assets as of December 31, 2024 or 2023. Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense. Capital Resources During the year ended December 31, 2024, total shareholders’ equity increased $5.9 million to $70.7 million due to the earnings of $8.2 million which was partially offset by a cash dividend payment of $1.7 million, the repurchase of common stock totaling $282,000 and the $331,000 increase in the net unrealized loss on available-for-sale investment securities, net of taxes. As previously reported, the Board extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2025. During 2024, the Company repurchased 109,176 shares at an average price of $2.58 per share. Since commencement of the stock repurchase program, 285,362 shares have been repurchased at an average rate of $2.42. The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The capital adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in Note 22, Capital, to the consolidated financial statements in Item 8 of this Form 10-K. The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 (“CET1”) ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of December 31, 2024, the Bank meets all capital adequacy requirements to which it is subject. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth. The Company paid a cash dividend of $0.07 per share in 2024. On February 24, 2025, the Board of Directors declared a dividend of $0.08 per share, to be paid on March 31, 2025. 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 parent company. 31 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 investments. Collectively, those balances were $128.5 million as of December 31, 2024, up from $118.0 million as of December 31, 2023. The increase is primarily due to deposit growth exceeding funding needs for loan growth. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs. The Bank’s primary funding source is deposits from customers in the markets in which it provides banking services. As discussed previously, deposits increased during 2024 but competition for deposits remains intense from both bank and non-bank institutions. The Company expects that pressure on the rates paid on deposits will continue and that it may be required to pay higher rates than currently projected to retain existing customers and attract new deposit relationships to fund loans and other activities. As discussed below, the Company has other liquidity sources to manage its liquidity needs as they arise. As of December 31, 2024, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $60.8 million, which is net of the $35.2 million of securities pledged as collateral. Generally, the investment portfolio serves as a source of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond (the FRB). 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 a main source of liquidity at this time 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 borrowed funds. Total investment securities increased $6.2 million, or 6.88%, during 2024 from $89.8 million as of December 31, 2023 to $96.0 million as of December 31, 2024. The Bank also has additional borrowing capacity on lines for which investments are currently pledged. Our loan to deposit ratio was 87.7% as of December 31, 2024 and 89.1% as of December 31, 2023. Available third-party sources of liquidity remain intact as of December 31, 2024 which includes the following: our line of credit with the FHLB totaling $220.1 million subject to pledging requirements, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the FRB. We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of December 31, 2024. We have used our line of credit with FHLB to issue letters of credit totaling $14.0 million to the Treasury Board of Virginia for collateral on public funds and a $10.0 million fixed rate borrowing maturing in May of 2028. No draws on the letters of credit have been issued. These letters of credit are considered to be draws on our FHLB line of credit. An additional $196.1 million was available on December 31, 2024 on the $220.1 million line of credit, of which $110.6 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. We held $3.0 million in brokered deposits as of December 31, 2024. No brokered deposits were held as of December 31, 2023. As of December 31, 2024, we had $7.0 million in reciprocal CDARS time deposits, compared to $6.3 million as of December 31, 2023. The Bank has access to additional liquidity through the FRB’s Discount Window for overnight funding needs. We have collateralized this line with investment securities. As part of the discount window capacity, the FRB offered borrowings through the Bank Term Funding Program, which was created to support businesses and consumers by making additional funds available to eligible depository institutions. We participated in this program in December 2023, through a $10 million borrowing for one year at a rate of 4.83%, which was repaid during the fourth quarter of 2024. During the fourth quarter of 2024, we made a voluntary principal payment of $1.2 million on one of the outstanding trust preferred securities, originally issued in 2004. In January 2025, we made another voluntary principal payment of $3.0 million on the same trust preferred issue. We may consider making future principal payments based on our available liquidity and considering other funding opportunities that may be available. 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, some of which are beyond our control. With the current economic uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the wars in Ukraine and Gaza, we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands. Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability Committee. 32 Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary and discussion of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2024 and 2023 is presented in Note 20 to the consolidated financial statements in Item 8 of this Form 10-K. As of December 31, 2024 and 2023 the allowance for credit losses on unfunded commitments totaled $404,000 and $285,000, respectively. Interest Sensitivity As of December 31, 2024, we had a negative cumulative gap rate sensitivity ratio of 25.11% for the one-year re-pricing period, compared to 21.59% as of December 31, 2023. A negative cumulative gap generally indicates that net interest income would decline in a rising interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would likely increase in periods during which interest rates are decreasing. The below table is based on contractual maturities and next repricing date and does not take into consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits. When considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment; however, the ability to control the repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access to and availability of other funding sources. With indications that the period of rate increases has tapered and consensus is that at least some modest rate decreases can be anticipated in the near- to mid-term, we are implementing strategies to moderate any potential adverse impact to our current interest rate risk profile, from what could be a period of flat to decreasing interest rates. 33 Interest Sensitivity Analysis December 31, 2024 (Dollars in thousands) 1 - 90 Days 91-365 Days 1 - 3 Years 4-5 Years 6-10 Years Over 10 Years Total Uses of funds: Loans $ 119,642 $ 98,132 $ 227,380 $ 154,382 $ 48,693 $ 9,307 $ 657,536 Federal funds sold 150 - - - - - 150 Deposits with banks 54,300 - - - - 54,300 Investments 3,903 9,583 22,214 16,742 33,394 25,318 111,154 Bank owned life insurance - - - - - - - Total earning assets $ 177,995 $ 107,715 $ 249,594 $ 171,124 $ 82,087 $ 34,625 $ 823,140 Sources of funds: Int Bearing DDA 73,244 - - - - - 73,244 Savings & MMDA 183,061 - - - - - 183,061 Time Deposits 67,404 153,691 38,971 8,673 - - 268,739 Trust Preferred Securities 14,986 - - - - - 14,986 Other Borrowings - - - 10,000 - - 10,000 Total interest bearing liabilities $ 338,695 $ 153,691 $ 38,971 $ 18,673 $ - $ - $ 550,030 Discrete Gap $ (160,700) $ (45,976) $ 210,623 $ 152,451 $ 82,087 $ 34,625 $ 273,110 Cumulative Gap $ (160,700) $ (206,676) $ 3,947 $ 156,398 $ 238,485 $ 273,110 Cumulative Gap as % of Total Earning Assets -19.52% -25.11% 0.48% 19.00% 28.97% 33.18% Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required. 34