FIRST NATIONAL CORP VA

Previous wording

Because of these and other uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results. The following discussion and analysis of the financial condition at March 31, 2024 and statements of income of the Company for the three months ended March 31, 2024 and 2023 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, 2023. The statements of income for the three months ended March 31, 2024 may not be indicative of the results to be achieved for the year.

Current wording

Because of these and other uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results. The following discussion and analysis of the financial condition at June 30, 2024 and statements of income of the Company for the three and six months ended June 30, 2024 and 2023 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, 2023. The statements of income for the six months ended June 30, 2024 may not be indicative of the results to be achieved for the year.

Previous wording

Primary expense categories are salaries and employee benefits, which comprised 59% of noninterest expenses for the three months ended March 31, 2024, followed by occupancy and equipment expense, which comprised 11% of noninterest expenses. The provision for credit losses is also typically a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for credit losses.

Current wording

Primary expense categories are salaries and employee benefits, which comprised 57% ofnoninterest expenses for the six months ended June 30, 2024, followed by other operating expense, which comprised 10% of noninterest expenses. The provision for credit losses is also typically a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for credit losses.

Previous wording

On March 25, 2024, the Company entered into an agreement to acquire Touchstone for an aggregate purchase price of approximately $47.0 million in stock (based on the Company's closing stock price as of March 25, 2024). The closing of the acquisition is subject to customary closing conditions, including shareholder and regulatory approvals, and the Company expects to complete the acquisition in the fourth quarter of 2024. At the time of closing of the acquisition, Touchstone is expected to have 12 retail bank offices serving south-central Virginia and northern North Carolina, and an administrative office in Prince George, Virginia. After the acquisition is completed, the former Touchstone branches will continue to operate as Touchstone Bank, a division of First Bank, until the systems conversion is completed, expected in the first quarter of 2025. As of March 31, 2024, Touchstone reported total assets of $673.2 million, gross loans of $506.0 million, and total deposits of $557.6 million. In connection with the transaction, the Company expects to issue approximately 2.7 million shares of its common stock to the shareholders of Touchstone. There were no merger related expenses incurred for the three months ended March 31, 2024 in connection with its acquisition of Touchstone. The Company estimates that it will incur aggregate pre-tax merger related expenses of approximately $3.3 million during 2024.

Current wording

On March 25, 2024, the Company entered into an agreement to acquire Touchstone for an aggregate purchase price of approximately $47.0 million in stock (based on the Company's closing stock price as of March 25, 2024). The closing of the acquisition is subject to customary closing conditions, including shareholder approval, and the Company expects to complete the acquisition in the fourth quarter of 2024. At the time of closing of the acquisition, Touchstone is expected to have 12 retail bank offices serving south-central Virginia and northern North Carolina, and an administrative office in Prince George, Virginia. After the acquisition is completed, the former Touchstone branches will continue to operate as Touchstone Bank, a division of First Bank, until the systems conversion is completed, expected in the first quarter of 2025. As of June 30, 2024, Touchstone reported total assets of $662.7 million, gross loans of $500.6 million, and total deposits of $546.7 million. In connection with the transaction, the Company expects to issue approximately 2.7 million shares of its common stock to the shareholders of Touchstone. There were $571 thousand in merger related expenses incurred for the six months ended June 30, 2024 in connection with its acquisition of Touchstone. The Company estimates that it will incur additional pre-tax merger related expenses of approximately $10.6 million during 2024.

Previous wording

The decrease in net income resulted from a $326 thousand, or 3%, decrease in net interest income, a $1.0 million increase in provision for credit losses, and a $687 thousand, or 8%, increase in total noninterest expense, which were partially offset by a $1.3 million, or 46%, increase in total noninterest income.

Current wording

The $1.7 million decrease in net income resulted from $2.2 million increase in total noninterest expense and a $1.3 million increase in provision for credit losses, which were partially offset by a $1.1 million increase in total noninterest income, a $423 thousand increase in net interest income, and a $291 thousand decrease in income tax expense.

Previous wording

This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains (loss) on disposal of premises and equipment, other real estate owned (income) expense, net, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities gains. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The methodology for determining this measurement may differ among companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands).

Current wording

This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains (loss) on disposal of premises and equipment, other real estate owned (income) expense, net, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The methodology for determining this measurement may differ among companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands).

Previous wording

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, subordinated debt, and junior subordinated debt. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets. The provision for credit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consist of income from service charges on deposit accounts, revenue from wealth management services, ATM and check card income, revenue from other customer services, income from bank owned life insurance, general and administrative expenses, amortization expense, and other real estate owned expense.

Current wording

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, subordinated debt, and junior subordinated debt. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets. The provision for credit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consist of income from service charges on deposit accounts, revenue from wealth management services, ATM and check card income, revenue from other customer services, income from bank owned life insurance, and general and administrative expenses.

Previous wording

The increase in total interest income was attributable to a $2.0 million, or 17%, increase in interest income and fees on loans and a $944 thousand increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 49-basis point increase in yield and a 6% increase in average balances compared to the same period in the prior year. The increase in interest income on interest-bearing deposits in other banks was attributable to a 117-basis point increase in yield and a $65.8 million, or 187% increase in average balances compared to the same period in the prior year.

Current wording

The increase in total interest income was attributable to a $2.1 million, or 18%, increase in interest income and fees on loans and an $820 thousand increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 57-basis point increase in yield and a 6% increase in average balances compared to the same period in the prior year. The increase in interest income on interest-bearing deposits in other banks was attributable to an 8-basis point increase in yield and a 106% increase in average balances compared to the same period in the prior year.

Previous wording

Net interest income decreased $326 thousand, or 3%, to $10.9 million for the first quarter of 2024 compared to the same period in the prior year. Total interest expense increased by $3.1 million and was partially offset by total interest income, which increased by $2.8 million. Net interest income was negatively impacted by a 36-basis point decrease in the net interest margin, which was partially offset by a $93.3 million, or 7%, increase in average earning assets.

Current wording

Net interest income increased $423 thousand, or 2%, to $22.3 million for the second quarter of 2024 compared to the same period in the prior year. Total interest income increased by $5.6 million which was partially offset by interest expense, which increased by $5.2 million. Net interest income was negatively impacted by a 17-basis point decrease in the net interest margin, which was partially offset by a $83.3 million, or 7%, increase in average earning assets.

Previous wording

The increase in total interest expense was attributable to a $2.6 million increase in interest expense on deposits and a $576 thousand increase in interest expense on other borrowings. The higher interest expense on deposits resulted from a 110-basis point increase in the cost of interest-bearing deposits and a 7% increase in average interest-bearing deposit balances. The increase in the cost of deposits was also impacted by a change in the composition of the deposit portfolio as lower cost deposit balances decreased, while higher cost deposit balances increased. The higher interest expense on other borrowings resulted from a $49.8 million increase in average balances.

Current wording

The increase in total interest expense was attributable to a $4.0 million increase in interest expense on deposits and a $1.2 million increase in interest expense on other borrowings. The higher interest expense on deposits resulted from an 86-basis point increase in the cost of interest-bearing deposits and a 5% increase in average interest-bearing deposit balances. The increase in the cost of deposits was impacted by an increase in rates paid on deposits and a change in the composition of the deposit portfolio as lower cost deposit balances decreased, while higher cost deposit balances increased. The higher interest expense on other borrowings resulted from a $49.9 million increase in average balances.

Previous wording

The net interest margin was 3.23% for the first quarter of 2024 compared to 3.60% for the same period in the prior year as the increase in the cost of funds exceeded the increase in yield on earning assets. Although the net interest margin in the first quarter of 2024 was 37-basis points lower than the same period one year ago, the net interest margin has been stable in recent quarterly periods. In December 2023, the Bank borrowed $50.0 million from the Federal Reserve Bank through its Bank Term Funding Program and invested the proceeds in interest-bearing deposit in other banks, which increased net interest income. Although net interest income increased, the transaction negatively impacted net interest margin by 9 basis points in the first quarter of 2024. The net interest margin was 3.35% for the linked fourth quarter of 2023, 3.35% for third quarter of 2023, and 3.36% for the second quarter of 2023. The net interest margin has been stable in recent quarterly periods as the rising cost of funds has been offset by an increase in earning asset yields.

Current wording

The net interest margin was 3.31% for the six months ended June 30, 2024, compared to 3.48% for the same period in the prior year as the increase in the cost of funds exceeded the increase in yield on earning assets. Although the net interest margin for the six months ended June 30, 2024 was 17-basis points lower than the same period one year ago, the net interest margin has been stable in recent quarterly periods. In December 2023, the Bank borrowed $50.0 million from the Federal Reserve Bank through its Bank Term Funding Program and invested the proceeds in interest-bearing deposit in other banks, which increased net interest income. Although net interest income increased, the transaction negatively impacted net interest margin by 11 basis points for the six months ended June 30, 2024. The net interest margin has been stable in recent quarterly periods as the rising cost of funds has been offset by an increase in earning asset yields.

Previous wording

The provision for credit losses totaled $1.0 million for the first quarter of 2024. There was no provision for credit losses for the same period of the prior year. The provision was comprised of a $991 thousand provision on loans, and a $9 thousand provision on held-to-maturity securities. The provision for credit losses on loans resulted primarily from net charge-offs totaling $362 thousand, and an increase in the specific reserve component of the allowance for credit losses.

Current wording

The provision for credit losses totaled $1.4 million for the six-month period of 2024, compared to $100 thousand for the same period of the prior year. The provision was comprised of a $1.4 million provision for credit losses on loans and a $2 thousand provision for credit losses on held-to-maturity securities, which were partially offset by a $25 thousand recovery of credit losses on unfunded commitments. The provision for credit losses on loans resulted primarily from net charge-offs totaling $845 thousand and an increase in the specific reserve component of the allowance for credit losses, which were partially offset by a decrease in the general reserve component of the allowance during the period that resulted from a change in a qualitative factor related to economic conditions.

Previous wording

Noninterest income increased $1.3 million, or 46%, to $4.0 million for the first quarter of 2024, compared to the same period of 2023. The increase resulted from an increase in other operating income and wealth management fees. Other operating income increased primarily from a recovery on a loan that was acquired through a business combination in 2021. Wealth management fees increased $107 thousand primarily from an increase in assets under management and from higher market values.

Current wording

Total noninterest income increased $1.1 million, or 19%, to $6.7 million for the six months ended June 30, 2024, compared to the same period of 2023. The increase resulted from an increase in other operating income and wealth management fees. Other operating income increased primarily from a recovery on a loan that was acquired through a business combination in a prior year. Wealth management fees increased $237 thousand primarily from an increase in assets under management and from higher market values.

Previous wording

Income tax expense decreased $104 thousand for the first quarter of 2024, compared to the same period one year ago. The effective tax rate for the first quarter of 2024 was 20.1% compared to 19.0% for the same period in 2023. The increased effective tax rate for 2024 was the result of higher non-deductible expenses and lower nontaxable income in 2024 compared to 2023. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended March 31, 2024, and 2023. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Income tax expense decreased $187 thousand for the second quarter of 2024, compared to the same period one year ago. The effective tax rate for the second quarter of 2024 was 21.8% compared to 19.8% for the same period in 2023. The increased effective tax rate for 2024 was the result of higher non-deductible expenses and lower nontaxable income in 2024 compared to 2023. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended June 30, 2024, and 2023. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

Assets totaled $1.4 billion at March 31, 2024, which was an increase of $27.9 million or 8% (annualized) from December 31, 2023. The asset composition changed during the first three months of the year as interest-bearing deposits in banks increased by $54.3 million and loans, net of the allowance for credit losses, increased by $2.9 million, while total securities decreased by $27.6 million.

Current wording

Assets totaled$1.5 billion at June 30, 2024, which was an increase of $38.2 million or 5% (annualized) from December 31, 2023. The asset composition changed during the first six months of the year as interest-bearing deposits in banks increased by $48.9 million and loans, net of the allowance for credit losses, increased by $20.0 million, while total securities decreased by $32.8 million.

Previous wording

Total liabilities increased by $26.4 million during the three-month period ended March 31, 2024, primarily from a $25.4 million or 8% (annualized) increase in total deposits from December 31, 2023. The composition of deposits was consistent during the first quarter as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased $4.9 million, $15.3 million, and $5.2 million, respectively from December 31, 2023.

Current wording

Total liabilities increased by $34.6 million during the six-month period ended June 30, 2024, primarily from a $32.1 million or 5% (annualized) increase in total deposits from December 31, 2023. Composition of deposits as of June 30, 2024 did not change significantly as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased $18.6 million, $3.0 million, and $10.5 million, respectively from December 31, 2023.

Previous wording

Total shareholders’ equity increased by $1.5 million during the first three months of 2024, primarily from a $2.3 million increase in retained earnings, which was partially offset by an $811 thousand increase in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss was attributable to higher unrealized losses in the available-for-sale securities portfolio. Retained earnings increased as $3.2 million of net income was partially offset by $941 thousand of cash dividends on common stock. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Current wording

Total shareholders’ equity increased by $3.6 million during the first six months of 2024, primarily from a $3.8 million increase in retained earnings, which was partially offset by an $336 thousand increase in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss was attributable to higher unrealized losses in the available-for-sale securities portfolio. Retained earnings increased as $5.7 million of net income was partially offset by $1.9 million of cash dividends on common stock. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Previous wording

Loans totaled $973.0 million at March 31, 2024, which was a $3.5 million or 2% (annualized) increase from December 31, 2023, and a $55.0 million, or 6%, increase over March 31, 2023. The growth in loans over the periods did not have a significant impact on the composition of the loan portfolio. The loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, and commercial and industrial loans, which totaled 36%, 46%, and 12% of the loan portfolio, respectively, at March 31, 2024.

Current wording

Loans totaled $990.0 million at June 30, 2024, which was a $20.5 million or 4% (annualized) increase from December 31, 2023, and a $59.8 million, or 6%, increase over June 30, 2023. The growth in loans over the periods did not have a significant impact on the composition of the loan portfolio. The loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, and commercial and industrial loans, which totaled 35%, 45%, and 12% of the loan portfolio, respectively, at June 30, 2024.

Previous wording

The loan portfolio includes loans that were acquired through business combinations and loans that were purchased through a third-party loan originator. Loans acquired through business combinations included unamortized discounts, net of unamortized premiums totaling $1.8 million and $1.9 million, as of March 31, 2024 and December 31, 2023, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $23.6 million as of March 31, 2024, which included unamortized premiums totaling $7.4 million, compared to loans totaling $24.6 million as of December 31, 2023, which included unamortized premiums totaling $7.9 million.

Current wording

The loan portfolio includes loans that were acquired through business combinations and loans that were purchased through a third-party loan originator. Loans acquired through business combinations included unamortized discounts, net of unamortized premiums totaling $1.8 million and $1.9 million, as of June 30, 2024 and December 31, 2023, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $22.9 million as of June 30, 2024, which included unamortized premiums totaling $7.1 million, compared to loans totaling $24.6 million as of December 31, 2023, which included unamortized premiums totaling $7.9 million.

Previous wording

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for credit losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of purchase premiums and discounts, recognized evenly over the life of the loans.

Current wording

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for credit losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of purchase premiums and discounts, recognized over the life of the loans.

Previous wording

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. Loans greater than 90 days past due and still accruing totaled $175 thousand and $524 thousand at March 31, 2024 and 2023, respectively. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

Current wording

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. There were no loans greater than 90 days past due and still accruing at June 30, 2024 compared to $225 thousand for the same period in 2023. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

Previous wording

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $8.0 million and $6.8 million at March 31, 2024 and December 31, 2023, representing approximately 0.55% and 0.48% of total assets, respectively. Nonaccrual loans totaled $8.0 million and $6.8 million at March 31, 2024 and December 31, 2023, respectively. There was no OREO at March 31, 2024 and December 31, 2023, respectively. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in bank operations, but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of March 31, 2024

Current wording

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $8.6 million and $6.8 million at June 30, 2024 and December 31, 2023, representing appr oximately 0.59% and 0.48% of total assets, respectively. Nonaccrual loans totaled $8.6 million and $6.8 million at June 30, 2024 and December 31, 2023, respectively. There was no OREO at June 30, 2024 and December 31, 2023, respectively. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in bank operations, but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of June 30, 2024

Previous wording

On March 31, 2024 commercial and industrial loans comprised 90% of non-performing assets and residential real estate loans comprised 10%. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $1.7 million and $287 thousand at March 31, 2024 and December 31, 2023, respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.

Current wording

On June 30, 2024 commercial and industrial loans and residential real estate loans comprised 91% and 9% of non-performing assets, respectively. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $1.7 million and $287 thousand at June 30, 2024 and December 31, 2023, respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.

Previous wording

The Company purchased commercial and industrial loans between October 2021 and October 2023 from a third-party finance company that originated and serviced loans to health care professionals. The finance company operated a program that historically provided credit support to the Company through, among other things, the repurchase of their loans and unamortized loan premiums when loans did not pay according to the loan agreements. On March 31, 2024, loans purchased from the finance company totaled $23.6 million, which was comprised of $16.2 million of loan balances and unamortized premiums totaling $7.4 million. As of March 31, 2024, $3.4 million of these loans were non-accrual including premiums totaling $1.0 million and thus were individ ually evaluated. Specific reserves on these individually evaluated loans totaled $2.4 million and were included in the Company’s allowance for credit losses on loans. The remaining $20.2 million of loans with premiums of $6.4 million were considered performing and were included in the calculation of the general reserve component of the allowance for credit losses. Premiums are amortized over the life of the loans using the effective interest method. On March 31, 2024, there was a total of 171 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 7.3 years.

Current wording

The Company purchased commercial and industrial loans between October 2021 and October 2023 from a third-party finance company that originated and serviced loans to health care professionals. The finance company operated a program that historically provided credit support to the Company through, among other things, the repurchase of their loans and unamortized loan premiums when loans did not pay according to the loan agreements. On June 30, 2024, loans purchased from the finance company totaled $22.9 million, which was comprised of $15.8 million of loan balances and unamortized premiums totaling $7.1 million. As of June 30, 2024, $3.9 million of these loans were non-accrual including premiums totaling $1.2 million and thus were individ ually evaluated. Specific reserves on these individually evaluated loans totaled $2.7 million and were included in the Company’s allowance for credit losses on loans. The remaining $19.0 million of loans with premiums of $5.9 million were considered performing and were included in the calculation of the general reserve component of the allowance for credit losses. Premiums are amortized over the life of the loans using the effective interest method. On June 30, 2024, there was a total of 171 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 6.8 years.

Previous wording

The securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value. Restricted securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.

Current wording

The securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value withany unrealized gain (or loss) in the value of the investment reported within the stockholders’ equity. Restricted securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.

Previous wording

On March 31, 2024 securities totaled $275.6 million, a decrease of $27.6 million, or 9.1%, from $303.2 million at December 31, 2023. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of March 31, 2024, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio totaled $51 thousand and $61 thousand at March 31, 2024 and December 31, 2023, respectively. Gross unrealized losses in the available for sale portfolio totaled $22.2 million and $20.7 million at March 31, 2024 and December 31, 2023, respectively. Gross unrealized gains in the held to maturity portfolio totaled $40 thousand and $107 thousand at March 31, 2024 and December 31, 2023, respectively. Gross unrealized losses in the held to maturity portfolio totaled $11.9 million and $10.8 million at March 31, 2024 and December 31, 2023, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2023 to March 31, 2024 was related to changes in market interest rates and was not related to credit concerns of the issuers.

Current wording

On June 30, 2024 securities totaled $270.4 million, a decrease of $32.8 million, or 22% annualized, from $303.2 million at December 31, 2023. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of June 30, 2024, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio totaled $54 thousand and $61 thousand at June 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the available for sale portfolio totaled $22.0 million and $20.7 million at June 30, 2024 and December 31, 2023, respectively. Gross unrealized gains in the held to maturity portfolio totaled $27 thousand and $107 thousand at June 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the held to maturity portfolio totaled $11.4 million and $10.8 million at June 30, 2024 and December 31, 2023, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2023 to June 30, 2024 was related to changes in market interest rates and was not related to credit concerns of the issuers.

Previous wording

On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and an unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $367 thousand, or $290 thousand net of tax, for the first three months of 2024. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.

Current wording

On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and an unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $687 thousand, or $543 thousand net of tax, for the first six months of 2024. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.

Previous wording

Deposits totaled $1.3 billion on March 31, 2024, which was a $25.4 million or 8% (annualized) increase from December 31, 2023. Noninterest-bearing deposits increased $4.8 million, savings and interest-bearing deposits increased $15.3 million, and time deposits increased $5.2 million. The composition of the deposit portfolio remained consistent with the prior period.

Current wording

Deposits totaled $1.3 billion on June 30, 2024, which was a $32 million increase from December 31, 2023, and a $23.4 million, or 2%, incr ease from June 30, 2023. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 31%, 53%, and 16%, of total deposits, respectively on June 30, 2024, compared to 31%, 54%, and 15% on December 31, 2023, and 32%, 54%, and 14%, on June 30, 2023. The composition of the deposit portfolio remained largely consistent with the prior period.

Previous wording

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program, and available lines of credit totaled $554.8 million on March 31, 2024 and $562.3 million on March 31, 2023.

Current wording

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program, and available lines of credit totaled $533.3 million on June 30, 2024 and $561.7 million on June 30, 2023.

Previous wording

The Bank maintains liquidity to fund loan growth and to meet potential demand from deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $391.9 on March 31, 2024, $368.2 million on December 31, 2023, and $407.5 million on March 31, 2023. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $308.6 on March 31, 2024, $293.7 million on December 31, 2023, and $330.4 million on March 31, 2023.

Current wording

The Bank maintains liquidity to fund loan growth and to meet potential demand from deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $419.4 on June 30, 2024, $368.2 million on December 31, 2023, and $343.0 million on June 30, 2023. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $324.5 on June 30, 2024, $293.7 million on December 31, 2023, and $257.7 million on June 30, 2023.

Previous wording

Commitments to extend credit, which amounted to $214.7 million at March 31, 2024, and $170.2 million at March 31, 2023, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Current wording

Commitments to extend credit, which amounted to $212.3 million at June 30, 2024, and $175.0 million at June 30, 2023, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Previous wording

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. At March 31, 2024 and December 31, 2023, the Bank had $17.0 million and $17.6 million in outstanding standby letters of credit, respectively.

Current wording

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. At June 30, 2024 and December 31, 2023, the Bank had $16.4 million and $17.6 million in outstanding standby letters of credit, respectively.