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 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.

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 September 30, 2024 and statements of income of the Company for the three and nine months ended September 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 nine months ended September 30, 2024 may not be indicative of the results to be achieved for the year.

Previous wording

The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations. The Bank’s office locations are well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, central regions of Virginia, and the city of Richmond. Within these markets, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education. The Bank’s products and services are delivered through 20 bank branch offices, a loan production office and customer service centers in two retirement villages. For the location and general character of each of these offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2023. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area.

Current wording

The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations. As of September 30, 2024, the Bank’s office locations were well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, central regions of Virginia, and the city of Richmond. Within these markets, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education. The Bank’s products and services are delivered through 20 bank branch offices, a loan production office and customer service centers in two retirement villages. For the location and general character of each of these offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2023. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area. On October 1, 2024, the Company completed the acquisition of Touchstone with and into the Company, which expanded office locations in the greater Richmond market area, southside of Virginia, and northern North Carolina.

Previous 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.

Current wording

Primary expense categories are salaries and employee benefits, which comprised 57% of noninterest expenses for thenine months ended September 30, 2024, followed by other operating expense, which comprised 10% of noninte rest 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

The $1.1 million decrease in net income resulted primarily from a $1.5 million increase in noninterest expense, a $300 thousand increase in the provision for credit losses, and a $198 thousand decrease in noninterest income. These decreases were partially offset by a $749 thousand increase in net interest income and a $187 thousand decrease in income tax expense.

Current wording

The $873 thousand decrease in net income resulted from a $1.6 million increase in the provision for credit losses, and a $675 thousand increase in noninterest expense. These increases were partially offset by a $1.1 million increase in net interest income, a $150 thousand increase in noninterest income, and a $186 thousand decrease in income tax expense.

Previous wording

Net interest income increased by $749 thousand as total interest income increased by $2.8 million and was partially offset by a $2.0 million increase in total interest expense. Net interest income was positively impacted by a $79.2 million, or 6%, increase in average earning assets and a 4-basis point increase in the net interest margin to 3.40%.

Current wording

Net interest income increased by $1.1 million as total interest income increased by $2.8 million and was partially offset by a $1.7 million increase in total interest expense. Net interest income was positively impacted by a $99.4 million, or 8%, increase in average earning assets and an 8-basis point increase in the net interest margin to 3.43%.

Previous wording

Provision for credit losses increased by $300 thousand. For the second quarter of 2024, provision for credit losses totaled $400 thousand and was comprised of a $432 provision for credit losses on loans, which was partially offset by a $26 thousand recovery of credit losses on unfunded commitments, and a $6 thousand recovery of credit losses on securities held-to-maturity. For the same period of 2023, the provision for credit losses totaled $100 thousand.

Current wording

Provision for credit losses increased by $1.6 million. For thethird quarter of 2024, provision for credit losses totaled $1.7 million and was comprised of a $1.7 million provision for credit losses on loans, which was partially offset by a $17 thousand recovery of credit losses on unfunded commitments, and a $5 thousand recovery of credit losses on securities held-to-maturity. For the same period of 2023, the provision for credit losses totaled $100 thousand.

Previous wording

Noninterest expenses increased by $1.5 million and were primarily attributable to a $650 thousand increase in salaries and employee benefits and a $702 thousand increase in legal and professional expense. Merger costs related to the acquisition of Touchstone totaled $571 thousand during the second quarter of 2024, and $562 thousand of those merger costs were included in legal and professional fees.

Current wording

Noninterest expenses increased by $675 thousand and were primarily attributable to a $422 thousand increase in salaries and employee benefits, a $157 thousand increase in legal and professional expense and a $128 thousand increase in equipment expense. Merger costs related to the acquisition of Touchstone totaled $219 thousand during thethird quarter of 2024, and $138 thousand of those merger costs were included in legal and professional fees.

Previous wording

Comparing the Six-Month Periods Ending June 30, 2024 and June 30, 2023

Current wording

Comparing the Nine-Month Periods Ending September 30, 2024 and September 30, 2023

Previous 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.

Current wording

The $2.6 million decrease in net income resulted from $2.8 million increase in total noninterest expense and a $2.9 million increase in provision for credit losses, which were partially offset by a $1.2 million increase in total noninterest income, a $1.5 million increase in net interest income, and a $477 thousand decrease in income tax expense.

Previous wording

Net interest income increased $423 thousand from a $5.6 million increase in total interest income, which was partially offset by a $5.2 million increase in total interest expense. Net interest income was positively impacted by an $83.3 million, or 26%, increase in average earning assets, which was partially offset by a 17-basis point decrease in the net interest margin to 3.31%.

Current wording

Net interest income increased $1.5 million from a $8.4 million increase in total interest income, which was partially offset by a $6.9 million increase in total interest expense. Net interest income was positively impacted by an $88.5 million, or 7%, increase in average earning assets, which was partially offset by an 8-basis point decrease in the net interest margin to 3.36%.

Previous wording

Provision for credit losses increased by $1.3 million. For the six months ended June 30, 2024, provision for credit losses totaled $1.4 million and was comprised of a $1.4 million provision for credit losses on loans, which was partially offset by a $25 thousand recovery of credit losses on unfunded commitments, and a $2 thousand provision of credit losses on securities held-to-maturity. For the same period of 2023, the provision for credit losses totaled $100 thousand.

Current wording

Provision for credit losses increased by $2.9 million. For thenine months ended September 30, 2024, provision for credit losses totaled $3.1 million and was comprised of a $3.1million provision for credit losses on loans, which was partially offset by a $42 thousand recovery of credit losses on unfunded commitments, and a $3 thousand recovery of credit losses on securities held-to-maturity. For the same period of 2023, the provision for credit losses totaled $200 thousand.

Previous wording

Noninterest income increased by $1.1 million primarily from a $237 thousand increase in wealth management fees and a $958 thousand increase in other operating income. The increase in other operating income was attributable to a recovery from a loan that was acquired through a business combination in 2021. The increases were partially offset by decreases in service charges on deposits, ATM and check card fees, and fees for other customer services.

Current wording

Noninterest income increased by $1.2 million primarily from a $378 thousand increase in wealth management fees and a $804 thousand increase in other operating income. The increase in other operating income was attributable to a recovery from a loan that was acquired through a business combination in 2021. The increases were partially offset by decreases in service charges on deposits, ATM and check card fees, and fees for other customer services.

Previous wording

Noninterest expenses increased by $2.2 million and were primarily attributable to a $1.2 million increase in salaries and employee benefits and an $811 thousand increase in legal and professional expense, and a $216 thousand decrease in other real estate owned (OREO) income, net. Merger costs related to the acquisition of Touchstone totaled $571 thousand during the six-month period ended June 30, 2024, and $562 thousand of those merger costs were included in legal and professional fees.

Current wording

Noninterest expenses increased by $2.9 million and were primarily attributable to a $1.6 million increase in salaries and employee benefits, a $968 thousand increase in legal and professional expense, and a $252 thousand increase in equipment expense. Merger costs related to the acquisition of Touchstone totaled $790 thousand during thenine-month period ended September 30, 2024, and $700 thousand of those merger costs were included in legal and professional fees.

Previous wording

Net interest income increased $749 thousand, or 7%, to $11.5 million for the second quarter of 2024 compared to the same period in the prior year. Total interest income increased by $2.8 million which was partially offset by interest expense, which increased by $2.0 million. Net interest income was positively impacted by a 4-basis point increase in the net interest margin and a $79.2 million, or 6%, increase in average earning assets.

Current wording

Net interest income increased $1.1 million, or 10%, to $11.7 million for thethird quarter of 2024 compared to the same period in the prior year. Total interest income increased by $2.8 million, which was partially offset by interest expense, which increased by $1.7 million. Net interest income was positively impacted by an 8-basis point increase in the net interest margin and a $99.4 million, or 8%, increase in average earning assets.

Previous 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.

Current wording

The increase in total interest income was attributable to a $1.8 million, or 15%, increase in interest income and fees on loans and an $1.2 million increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 50-basis point increase in yield and a 5% 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 $88.9 million increase in average balances compared to the same period in the prior year.

Previous wording

The increase in total interest expense was attributable to a $1.4 million increase in interest expense on deposits and a $603 thousand increase in interest expense on other borrowings. The higher interest expense on deposits resulted from a 62-basis point increase in the cost of interest-bearing deposits and a 3% 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 $50.0 million increase in the average balance of borrowings from the Federal Reserve Bank through its Bank Term Funding Program.

Current wording

The increase in total interest expense was attributable to a $1.1 million increase in interest expense on deposits and a $600 thousand increase in interest expense on other borrowings. The higher interest expense on deposits resulted from a 46-basis point increase in the cost of interest-bearing deposits and a 4% 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 $50.0 million increase in the average balance of borrowings from the Federal Reserve Bank through its Bank Term Funding Program.

Previous wording

The net interest margin was 3.40% for the second quarter of 2024 compared to 3.36% for the same period in the prior year as the increase in the yield on earning assets exceeded the increase in the cost of funds. When compared to the linked first quarter of 2024, the net interest margin increased by 16-basis points as the yield on earning assets continued to increase at a similar pace as in prior quarters, while the increase in the cost of funds slowed when compared to prior 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 by approximately $80 thousand for the second quarter of 2024 because of the transaction, it negatively impacted net interest margin by 11 basis points in the first and second quarters of 2024.

Current wording

The net interest margin was 3.43% for thethird quarter of 2024 compared to 3.35% for the same period in the prior year as the increase in the yield on earning assets exceeded the increase in the cost of funds. When compared to the linked second quarter of 2024, the net interest margin increased by 3-basis points as the yield on earning assets continued to increase at a similar pace as in prior quarters, while the increase in the cost of funds slowed when compared to prior 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 by approximately $80 thousand for thethird quarter of 2024 because of the transaction, it negatively impacted net interest margin by 11-basis points in the third quarter of 2024.

Previous 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.

Current wording

Net interest income increased $1.5 million, or 5%, to $34.1 million for thethird quarter of 2024 compared to the same period in the prior year. Total interest income increased by $8.4 million and was partially offset by interest expense, which increased by $6.9 million. Net interest income was negatively impacted by an 8-basis point decrease in the net interest margin, which was partially offset by a $88.5 million, or 13.8%, increase in average earning assets.

Previous wording

The increase in total interest income was attributable to a $4.1 million, or 18%, increase in interest income and fees on loans and a $1.8 million increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 53-basis point increase in yield and a 6% increase in average balance. The increase in interest income on interest-bearing deposits in other banks was attributable to a 62-basis point increase in yield and a 130% increase in average balance.

Current wording

The increase in total interest income was attributable to a $5.9 million, or 16%, increase in interest income and fees on loans and a $2.9 million increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 52-basis point increase in yield and an 11% increase in average balance. The increase in interest income on interest-bearing deposits in other banks was attributable to a 47-basis point increase in yield and a $69.7 million increase in average balance.

Previous 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.

Current wording

The increase in total interest expense was attributable to a $5.1 million increase in interest expense on deposits and a $1.8 million increase in interest expense on other borrowings. The higher interest expense on deposits resulted from a 72-basis point increase in the cost of interest-bearing deposits and a 9% 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 3.31% 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.

Current wording

The net interest margin was 3.36% for the nine months ended September 30, 2024, compared to 3.44% 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 nine months ended September 30, 2024 was 8-basis points lower than the same period one year ago, the net interest margin has increased 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 thenine months ended September 30, 2024. The net interest margin has increased 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 $400 thousand for the three-month period ended June 30, 2024, compared to $100 thousand for the same period of the prior year. The provision was comprised of a $432 thousand provision for credit losses on loans, which was partially offset by a $6 thousand recovery of credit losses on held-to-maturity securities and a $26 thousand recovery of credit losses on unfunded commitments. The provision for credit losses on loans resulted primarily from net charge-offs totaling $482 thousand and an increase in the specific reserve component of the allowance for credit losses on loans, which was partially offset by a decrease in the general reserve component of the allowance during the period resulting from a change in a qualitative factor related to economic conditions.

Current wording

The provision for credit losses totaled $1.7 million for the three-month period ended September 30, 2024, compared to $100 thousand for the same period of the prior year. The provision was comprised of a $1.7 million provision for credit losses on loans, which was partially offset by a $5 thousand recovery of credit losses on held-to-maturity securities and a $17 thousand recovery of credit losses on unfunded commitments. The provision for credit losses on loans resulted primarily from increases in the specific reserves on loans during the third quarter and an increase in the general reserve component of the allowance during the period, which resulted from an increase in projected losses from a higher projected unemployment rate on September 30, 2024 compared to one year ago.

Previous 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.

Current wording

The provision for credit losses totaled $3.1 million for the nine-month period of 2024, compared to $200 thousand for the same period of the prior year. The provision was comprised of a $3.1 million provision for credit losses on loans, which was partially offset by a $3 thousand recovery for credit losses on held-to-maturity securities and a $42 thousand recovery of credit losses on unfunded commitments. The provision for credit losses on loans resulted primarily from an increase in specific reserves on loans and an increase in the general reserve component of the allowance during the period that resulted from an increase in projected losses from a higher projected unemployment rate on September 30, 2024 compared to one year ago.

Previous wording

Noninterest income decr eased $198 thousand, or 7%, to $2.7 million for the second quarter of 2024, compared to the same period of 2023. The decrease resulted from decreases in other operating income of $187 thousand, service charges on deposit accounts of $71 thousand, and fees for other customer services of $42 thousand. The decreases were offset by an increase in wealth management fees of $130 thousand primarily from an increase in assets under management and from higher market values.

Current wording

Noninterest income increased $150 thousand, or 5%, to $3.2 million for thethird quarter of 2024, compared to the same period of 2023. The increase resulted primarily from increases in wealth management fees of $141 thousand and fees for other customer services of $154 thousand. The increases were offset by a decrease in other operating income of $154 thousand.

Previous 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.

Current wording

Total noninterest income increased $1.2 million, or 14%, to $9.9 million for the nine months ended September 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 $378 thousand primarily from an increase in assets under management and from higher market values.

Previous wording

Noninterest expenses increased $1.5 million, or 16%, to $10.7 million for the three-month period ended June 30, 2024, compared to the same period one year ago. The increase was primarily attributable to a $650 thousand, or 13%, increase in salaries and employee benefits and a $702 thousand increase in legal and professional fees. Salaries and employee benefits increased primarily from an increase in the number of employees. Legal and professional fees increased from wealth management advisory expense and $562 thousand of merger related expenses. Merger related costs totaled $571 thousand for the second quarter of 2024.

Current wording

Noninterest expenses increased $675 thousand, or 7%, to $10.5 million for the three-month period ended September 30, 2024, compared to the same period one year ago. The increase was primarily attributable to a $422 thousand, or 8%, increase in salaries and employee benefits, a $157 thousand, or 36%, increase in legal and professional fees, a $128 thousand, or 21%, increase in equipment expense, and a $58 thousand, or 28%, increase in marketing expense. Salaries and employee benefits increased primarily from an increase in the number of employees. Legal and professional fees increased from wealth management advisory expense and legal fees from merger related expenses. Merger related costs totaled $219 thousandfor the third quarter of 2024.

Previous wording

Noninterest expenses incr eased $2.2 million or 12%, to $20.5 million for the six-month period ended June 30, 2024, compared to the same period one year ago. The increase was primarily attributable to a $1.2 million, or 11%, increase in salaries and employee benefits and a $811 thousand, or 106%, increase in legal and professional fees. Salaries and employee benefits increased primarily from an increase in the number of employees. Legal and professional fees increased primarily due to a $100 thousand increase in wealth management advisory expense and $562 thousand of merger related expenses. Merger related costs totaled $571 thousand for the six-month period ended June 30, 2024.

Current wording

Noninterest expenses increased $2.9 million or 10%, to $31.0 million for the nine-month period ended September 30, 2024, compared to the same period one year ago. The increase was primarily attributable to a $1.6 million, or 10%, increase in salaries and employee benefits and a $968 thousand, or 80%, increase in legal and professional fees and a $252 thousand, or 14%, increase in legal and professional fees. Salaries and employee benefits increased primarily from an increase in the number of employees. Legal and professional fees increased from wealth management advisory expense and legal fees from merger related expenses. Merger related costs totaled $790 thousand for the nine-month period ended September 30, 2024.

Previous 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.

Current wording

Income tax expense decreased $186 thousand for thethird quarter of 2024, compared to the same period one year ago. The effective tax rate for thethird quarter of 2024 was 19.5% 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 September 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

Income tax expense decreased $291 thousand, or 16%, for the first six months of 2024 compared with the same period in 2023. The effective tax rate for the first six months of 2024 was 20.8% compared with 19.4% for the same period in 2023. Like the three month period ended June 30, 2024, the increased effective tax rate for 2024 was the result of lower nontaxable income in 2024 compared to 2023 and non-deductible merger expenses.

Current wording

Income tax expense decreased $477 thousand, or 19%, for the first nine months of 2024 compared with the same period in 2023. The effective tax rate for the first nine months of 2024 was 20.4% compared with 19.3% for the same period in 2023. Like the three-month period ended September 30, 2024, the increased effective tax rate for 2024 was the result of lower nontaxable income in 2024 compared to 2023 and non-deductible merger expenses.

Previous 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.

Current wording

Assets totaled $1.5 billion at September 30, 2024, which was an increase of $31.4 million or 2% (annualized) from December 31, 2023. The asset composition changed during the first nine months of the year as interest-bearing deposits in banks increased by $38.4 million and loans, net of the allowance for credit losses, increased by $24.5 million, while total securities decreased by $33.4 million.

Previous 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.

Current wording

Total liabilities increased by $22.6 million during thenine-month period ended September 30, 2024, primarily from a $19.5 million or 2% (annualized) increase in total deposits from December 31, 2023. Composition of deposits as of September 30, 2024 did not change significantly as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased $4.2 million, $1.8 million, and $13.6 million, respectively from December 31, 2023.

Previous 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.

Current wording

Total shareholders’ equity increased by $8.8 million during the first nine months of 2024, primarily from a $5.1 million increase in retained earnings and a $3.3 million decrease in accumulated other comprehensive loss. The decrease in accumulated other comprehensive loss was attributable to lower unrealized losses in the available-for-sale securities portfolio. Retained earnings increased as $7.9 million of net income was partially offset by $2.2 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 $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.

Current wording

Loans totaled $994.7 million at September 30, 2024, which was a $25.3 million or 3% (annualized) increase from December 31, 2023, and a $42.69 million, or 4%, increase over September 30, 2024. 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 September 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 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.

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 $1.7 million and $1.9 million, as of September 30, 2024 and December 31, 2023, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $20.8 million as of September 30, 2024, which included unamortized premiums totaling $6.5 million, compared to loans totaling $24.6 million as of December 31, 2023, which included unamortized premiums totaling $7.9 million.

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. 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.

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 September 30, 2024 compared to $370 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 $8.6 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

Current wording

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $6.0 million and $6.8 million at September 30, 2024 and December 31, 2023, representing approximately 0.41% and 0.48% of total assets, respectively. Nonaccrual loans totaled $5.9 million and $6.8 million at September 30, 2024 and December 31, 2023, respectively. There was $56 thousand of OREO at September 30, 2024 There was no OREO at December 31, 2023. 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 September 30, 2024

Previous 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.

Current wording

On September 30, 2024 commercial and industrial loans and residential real estate loans comprised 85% and 14% 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 $2.2 million and $287 thousand at September 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 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.

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 September 30, 2024, loans purchased from the finance company totaled $20.8 million, which was comprised of $14.3 million of loan balances and unamortized premiums totaling $6.5 million. As of September 30, 2024, $2.9 million of these loans were non-accrual including premiums totaling $970 thousand and thus were individually evaluated. Specific reserves on these individually evaluated loans totaled $2.1 million and were included in the Company’s allowance for credit losses on loans. The remaining $17.9 million of loans with premiums totaling $4.4 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 September 30, 2024, there was a total of 163 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 6.9 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 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.

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 with any 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 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.

Current wording

On September 30, 2024 securities totaled $269.6 million, a decrease of $33.6 million, or 11% 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 September 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 $65 thousand and $61 thousand at September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the available for sale portfolio totaled $17.3 million and $20.7 million at September 30, 2024 and December 31, 2023, respectively. Gross unrealized gains in the held to maturity portfolio totaled $108 thousand and $107 thousand at September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the held to maturity portfolio totaled $7.8 million and $10.8 million at September 30, 2024 and December 31, 2023, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2023 to September 30, 2024 was related to changes in market interest rates and was not related to credit concerns of the issuers.