BANK OF THE JAMES FINANCIAL GROUP INC

Previous wording

The allowance for credit losses (ACLL) is management’s estimate of the probable losses expected in our loan portfolio. With the exception of loans related to agriculture, the Company is utilizing a discounted cash flow model to estimate its current expected credit losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. For information on the Company's policies on the ACLL please refer to Note 2 – “Allowance for Credit Losses - Loans” in the Company’s Form 10-K for the year ended December 31, 2023. See “Management Discussion and Analysis Results of Operations – Allowance and Provision for Credit losses” below for further discussion of the allowance for credit losses.

Current wording

The allowance for credit losses (ACLL) is management’s estimate of the probable losses expected in our loan portfolio and held-to-maturity securities portfolio. With the exception of loans related to agriculture, the Company is utilizing a discounted cash flow model to estimate its current expected credit losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. For information on the Company's policies on the ACLL please refer to Note 2 – “Allowance for Credit Losses - Loans” in the Company’s Form 10-K for the year ended December 31, 2023. See “Management Discussion and Analysis Results of Operations – Allowance and Provision for Credit losses” below for further discussion of the allowance for credit losses.

Previous wording

(ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for credit losses, as well as the level of its noninterest income, including gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with regulatory requirements, miscellaneous other expenses, franchise taxes, and income taxes.

Current wording

Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for credit losses, as well as the level of its noninterest income, including gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with regulatory requirements, miscellaneous other expenses, franchise taxes, and income taxes.

Previous wording

Real Property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. On September 18, 2023, the Bank purchased real property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that the cost to upfit the building will be minimal. The property is subject to a restrictive covenant that prohibits the Bank from using the property for any banking-related activity until the covenant expires in September 2025. We anticipate that we will relocate the Temporary Nellysford Branch to this location in the fall of 2025.

Current wording

Real Property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. On September 18, 2023, the Bank purchased real property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that the cost to upfit the building will be minimal. The property is subject to a restrictive covenant that prohibits the Bank from using the property for any banking-related activity until the covenant expires in September 2025. Following the expiration of this restrictive covenant, the Bank intends to use this property as a permanent branch in Nellysford, Virginia We anticipate that we will relocate the Temporary Nellysford Branch to this location in the fall of 2025.

Previous wording

In addition to the facilities set forth above, the Bank owns the following properties which are being held for possible expansion:

Current wording

In addition to the facilities set forth above, the Bank owns the following property which is being held for possible expansion:

Previous wording

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of June 30, 2024 and December 31, 2023 and the results of operations of Financial for the three and six month periods ended June 30, 2024 and 2023. This discussion should be read in conjunction with the financial statements included elsewhere herein.

Current wording

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2024 and December 31, 2023 and the results of operations of Financial for the three and nine month periods ended September 30, 2024 and 2023. This discussion should be read in conjunction with the financial statements included elsewhere herein.

Previous wording

Total assets were $978,011,000 on June 30, 2024 compared with $969,371,000 at December 31, 2023, an increase of 0.89%. The increase in total assets was primarily due to increases in loans, net of the allowance for credit losses, loans held for sale, and the cash value of bank-owned life insurance. The increase was offset in part by a decrease in the value of securities available-for-sale.

Current wording

Total assets were $1,008,063,000 on September 30, 2024 compared with $969,371,000 at December 31, 2023, an increase of 3.99%. The increase in total assets was primarily due to increases in cash, Fed funds sold, loans, net of the allowance for credit losses, loans held for sale, and the cash value of bank-owned life insurance. The increase was offset in part by a decrease in the value of securities available-for-sale.

Previous wording

Total deposits increased from $878,459,000 as of December 31, 2023 to $884,902,000 on June 30, 2024, an increase of 0.73%. The increase resulted in large part from increases in noninterest-bearing demand and time deposits and was offset in part by a decrease in NOW, money market and savings deposits. The increase in time deposits generally was driven by our customers’ decisions to lock in higher rates.

Current wording

Total deposits increased from $878,459,000 as of December 31, 2023 to $907,610,000 on September 30, 2024, an increase of 3.32%. The increase resulted in large part from increases in time deposits, NOW, money market and savings deposits and was offset in part by a decrease in noninterest-bearing demand. The increase in time deposits generally was driven by our customers’ desire to lock in higher interest rates while still possible. The increase in NOW, money market and savings deposits was driven by customers’ desire to earn interest while still maintaining liquidity.

Previous wording

Total loans, excluding loans held for sale, increased to $623,039,000 on June 30, 2024 from $609,333,000 on December 31, 2023. The increase was due primarily to an increase in commercial real estate loans and was offset in part by payoffs and normal amortization of loans. Loans, excluding loans held for sale and net of deferred fees and costs and including the allowance for credit losses, increased to $616,088,000 on June 30, 2024 from $601,921,000 on December 31, 2023, an increase of 2.35%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

Current wording

Total loans, excluding loans held for sale, increased to $634,190,000 on September 30, 2024 from $609,333,000 on December 31, 2023. The increase was primarily due to increases in commercial real estate and residential loans and was offset in part by a decrease in commercial and consumer loans, which decreased due to payoffs and normal amortization of loans. Loans, excluding loans held for sale and net of deferred fees and costs and including the allowance for credit losses, increased to $627,112,000 on September 30, 2024 from $601,921,000 on December 31, 2023, an increase of 4.19%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

Previous wording

The Bank closely monitors concentrations within its commercial real estate loan portfolio. As of June 30, 2024, non-owner occupied commercial real estate loans totaled $184.0 million, or 29.5% of total loans. The Bank has minimal exposure to loans secured by large office buildings or shopping centers, which comprise less than 5% of the non-owner occupied commercial real estate portfolio. The majority of the Bank's non-owner occupied commercial loans are secured by smaller, multi-tenant properties diversified across various industries and geographies within our market areas. We have not seen an increase in delinquencies in loans secured by non-owner occupied commercial real estate. We typically solicit and obtain current financial information, including, where appropriate, rent rolls, for the loans in our non-owner occupied commercial real estate portfolio.

Current wording

The Bank closely monitors concentrations within its commercial real estate loan portfolio. As of September 30, 2024, non-owner occupied commercial real estate loans totaled $189,977,000, or 29.96% of total loans. The Bank has minimal exposure to loans secured by large office buildings or shopping centers, which comprise less than 5% of the non-owner occupied commercial real estate portfolio. The majority of the Bank's non-owner occupied commercial loans are secured by smaller, multi-tenant properties diversified across various industries and geographies within our market areas.

Previous wording

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days or more and still accruing, and OREO increased to$797,000 on June 30, 2024 from $391,000 on December 31, 2023. Because we had no OREO on either June 30, 2024 or December 31, 2023, the nonperforming assets consist entirely of nonperforming loans.

Current wording

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days or more and still accruing, and OREO increased to$1,295,000 on September 30, 2024 from $391,000 on December 31, 2023. Because we had no OREO on either September 30, 2024 or December 31, 2023, the nonperforming assets consist entirely of nonperforming loans.

Previous wording

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. We had no OREO on June 30, 2024 and December 31, 2023. The Bank neither acquired nor disposed of any OREO during the three and six months ended June 30, 2024. As a result, the OREO balance remained $0.

Current wording

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. We had no OREO on September 30, 2024 and December 31, 2023. The Bank neither acquired nor disposed of any OREO during the three and nine months ended September 30, 2024. As a result, the OREO balance remained $0 as of September 30, 2024

Previous wording

Cash and cash equivalents remained relatively constant, decreasing slightly to $74,627,000 on June 30, 2024 from $74,838,000 on December 31, 2023. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including Federal funds sold). Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Current wording

Cash and cash equivalents increased to $109,207,000 on September 30, 2024 from $74,838,000 on December 31, 2023. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including Federal funds sold). This increase was due in large part to the Bank’s sale of securities available-for-sale during the first nine months of 2024, as discussed in more detail below. Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Previous wording

Securities held-to-maturity were essentially flat, decreasing slightly to $3,614,000 on June 30, 2024 from $3,622,000 on December 31, 2023. This decrease is a result of normal net amortization of premiums within the held-to-maturity portfolio.

Current wording

Securities held-to-maturity were essentially flat, decreasing slightly to $3,610,000 on September 30, 2024 from $3,622,000 on December 31, 2023. This decrease is a result of normal net amortization of premiums within the held-to-maturity portfolio.

Previous wording

Securities available-for-sale, which are carried on the balance sheet at fair market value, decreased to $206,177,000 on June 30, 2024, from $216,510,000 on December 31, 2023. During the six months ended June 30, 2024, the Bank purchased $12,011,000 in available-for-sale securities. During the same period the Bank sold $8,754,000 and received $11,131,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale. The market value of the securities available-for-sale decreased slightly. As of June 30, 2024, we have an unrealized tax-effected loss of $23,373,000 (or $29,587,000 prior to the tax benefit). Financial does not expect to realize the losses as it has the intent and ability to hold the securities until their recovery, which may be at maturity.

Current wording

Securities available-for-sale, which are carried on the balance sheet at fair market value, decreased to $192,469,000 on September 30, 2024, from $216,510,000 on December 31, 2023. During the nine months ended September 30, 2024, the Bank purchased $15,122,000 in available-for-sale securities. During the same period the Bank sold $30,298,000 and received $13,305,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale. The market value of the securities available-for-sale increased. As of September 30, 2024, we have an unrealized tax-effected loss of $17,782,000 (or $22,509,000 prior to the tax benefit). Financial does not expect to realize the losses as it has the intent and ability to hold the securities until their recovery, which may be at maturity.

Previous wording

At June 30, 2024, Financial, on a consolidated basis, had liquid assets of $280,804,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. The Bank has pledged (market values):

Current wording

At September 30, 2024, Financial, on a consolidated basis, had liquid assets of $301,676,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. The Bank has pledged (market values):

Previous wording

approximately $40,000,000 of our available-for-sale securities as security for public deposits; and

Current wording

approximately $44,000,000 of our available-for-sale securities as security for public deposits; and

Previous wording

approximately $29,000,000 of our available-for-sale securities as collateral for advances at the Federal Reserve Bank’s discount window.

Current wording

approximately $30,000,000 of our available-for-sale securities as collateral for advances at the Federal Reserve Bank’s discount window.

Previous wording

As of June 30, 2024, the Bank has no borrowings from any of these sources. Immediately following the failure of Silicon Valley Bank in the spring of 2023, out of an abundance of caution the Bank borrowed $14,000,000 from the FHLBA to test its contingency funding plan. Approximately two weeks later, the Bank repaid the advance. During the first six months of 2024, the Bank did not experience any unusual inflows or outflows of deposits.

Current wording

As of September 30, 2024, the Bank has no borrowings from any of these sources. Immediately following the failure of Silicon Valley Bank in the spring of 2023, out of an abundance of caution the Bank borrowed $14,000,000 from the FHLBA to test its contingency funding plan. Approximately two weeks later, the Bank repaid the advance. During the first nine months of 2024, the Bank did not experience any unusual inflows or outflows of deposits.

Previous wording

While we have not experienced any unusual pressure on our deposit balances or our liquidity position, management continues to closely monitor our sources and uses of funds in order to meet our cash flow requirements while attempting to maximize profits. The Company’s total uninsured deposits, which are the amount of deposits, subject to the aggregation rules, that exceed the FDIC insurance limit (currently $250,000) were approximately $255,000,000, approximately 29% of our total deposits, at June 30, 2024. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Current wording

While we have not experienced any unusual pressure on our deposit balances or our liquidity position, management continues to closely monitor our sources and uses of funds in order to meet our cash flow requirements while attempting to maximize profits. The Company’s total uninsured deposits, which are the amount of deposits, subject to the aggregation rules, that exceed the FDIC insurance limit (currently $250,000) were approximately $267,498,000, approximately 29.47% of our total deposits, at September 30, 2024. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Previous wording

At June 30, 2024, the Bank had a leverage ratio of approximately 9.51%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 12.45% and a total risk-based capital ratio of approximately 13.38%. As of June 30, 2024 and December 31, 2023, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of June 30, 2024 and December 31, 2023:

Current wording

At September 30, 2024, the Bank had a leverage ratio of approximately 9.62%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 12.58% and a total risk-based capital ratio of approximately 13.52%. As of September 30, 2024 and December 31, 2023, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of September 30, 2024 and December 31, 2023:

Previous wording

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

Current wording

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

Previous wording

Financial had net income including all operating segments of $2,148,000 and $4,335,000 for the three and six months ended June 30, 2024, compared to $2,534,000 and $4,518,000 for the comparable periods in 2023. Basic and diluted earnings per common share for the three and six months ended June 30, 2024 were $0.47 and $0.95, compared to basic and diluted earnings per share of $0.56 and $0.99 for the three and six months ended June 30, 2023.

Current wording

Financial had net income including all operating segments of $1,990,000 and $6,326,000 for the three and nine months ended September 30, 2024, compared to $2,078,000 and $6,596,000 for the comparable periods in 2023. Basic and diluted earnings per common share for the three and nine months ended September 30, 2024 were $0.44 and $1.39, compared to basic and diluted earnings per share of $0.46 and $1.44 for the three and nine months ended September 30, 2023.

Previous wording

The decrease in net income for the three and six months ended June 30, 2024, as compared to the prior year periods was due primarily to an increase in interest expense of $1,606,000 and $3,709,000 in the three and six months ended June 30, 2024 from the comparable periods in 2024. The decrease was offset in part by increase in interest income and noninterest income.

Current wording

The decrease in net income for the three and nine months ended September 30, 2024, as compared to the prior year periods was due primarily to an increase in interest expense of $1,275,000 and $4,984,000 in the three and nine months ended September 30, 2024 from the comparable periods in 2024. The decrease was offset in part by increases in interest income and noninterest income.

Previous wording

These operating results represent an annualized return on average stockholders’ equity of 14.35% and 14.52% for the three and six month periods ended June 30, 2024, compared with 19.65% and 18.00% for the three and six months ended June 30, 2023. The decrease for the three and six month periods ended June 30, 2024 from the same periods in 2023 was due to the decrease in net income and an increase in average equity, which resulted from an increase in retained earnings. The Company had an annualized return on average assets of 0.87% and 0.89% for the three and six month periods ended June 30, 2024 compared with 1.08% and 0.97% for the three and six month periods ended June 30, 2023. The decreases largely resulted from a decrease in net income and an increase in average assets.

Current wording

These operating results represent an annualized return on average stockholders’ equity of 12.86% and 13.95% for the three and nine month periods ended September 30, 2024, compared with 15.68% and 17.20% for the three and nine months ended September 30, 2023. The decrease for the three and nine month periods ended September 30, 2024 from the same periods in 2023 was due to the decrease in net income and an increase in average equity, which resulted from an increase in retained earnings. The Company had an annualized return on average assets of 0.80% and 0.86% for the three and nine month periods ended September 30, 2024 compared with 0.86% and 0.93% for the three and nine month periods ended September 30, 2023. The decreases largely resulted from a decrease in net income and an increase in average assets.

Previous wording

For the three and six months ended June 30, 2024, interest income increased to $10,935,000 and $21,444,000 from $9,583,000 and $18,681,000 for the same periods in 2023, primarily to an increase in interest rates received on our interest-earning assets. The average rate on loans was 5.42% and 5.35% for the three and six months ended June 30, 2024, as compared to 4.99% and 4.92% for the same periods in 2023. The rate on total average earning assets increased to 4.68% and 4.62% during the three and six months ended June 30, 2024 because of a general increase in market rates and because the loans that we originated in the last six to twelve months had rates significantly higher than the rates referenced above.

Current wording

For the three and nine months ended September 30, 2024, interest income increased to $11,563,000 and $33,007,000 from $10,143,000 and $28,824,000 for the same periods in 2023, primarily to an increase in interest rates received on our interest-earning assets. The average rate on loans was 5.65% and 5.45% for the three and nine months ended September 30, 2024, as compared to 5.13% and 4.99% for the same periods in 2023. The rate on total average earning assets increased to 4.86% and 4.70% during the three and nine months ended September 30, 2024 because of a general increase in market rates and because the loans that we originated in the last six to twelve months had rates significantly higher than the rates referenced above.

Previous wording

Interest expense increased significantly to $3,844,000 and $7,403,000 for the three and six months ended June 30, 2024 from $2,238,000 and $3,694,000 for the three and six months ended June 30, 2023. The increase for the three and six months resulted primarily from an increase in deposit balances and an increase in interest rates paid on deposits during the three and six months ended June 30, 2024. The Company’s average rate paid on interest-bearing deposits was 1.94% and 1.88% for the three and six months ended June 30, 2024 as compared to 1.15% and 0.93% for the same periods in 2023. The Company’s average rate paid on interest-bearing liabilities was 1.99% and 1.93% for the three and six months ended June 30, 2024 as compared to 1.22% and 1.02% for the same periods in 2023.

Current wording

Interest expense increased significantly to $4,054,000 and $11,457,000 for the three and nine months ended September 30, 2024 from $2,779,000 and $6,473,000 for the three and nine months ended September 30, 2023. The increase for the three and nine months resulted primarily from an increase in deposit balances and an increase in interest rates paid on deposits during the three and nine months ended September 30, 2024. The Company’s average rate paid on interest-bearing deposits was 2.01% and 1.93% for the three and nine months ended September 30, 2024 as compared to 1.43% and 1.10% for the same periods in 2023. The Company’s average rate paid on interest-bearing liabilities was 2.05% and 1.97% for the three and nine months ended September 30, 2024 as compared to 1.49% and 1.18% for the same periods in 2023. We anticipate a slight decrease in the rate paid on interest-bearing liabilities due to the FOMC’s decision to lower the Fed funds rate in September.

Previous wording

The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest-earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2024 was $7,091,000 and $14,041,000 as compared to $7,345,000 and $14,987,000 for the same periods in 2023. The net interest margin was 3.03% and 3.02% for the three and six months ended June 30, 2024 as compared to 3.30% and 3.40% for the comparable periods in 2023. The decreases for the three and six month periods ended June 30, 2024, were in large part due to interest rates on interest-bearing liabilities increasing more rapidly than the rates received on interest-earning assets during each of the first two quarters of the year. This was exacerbated by a change in deposit mix, with the balance of time deposits, which generally pay a higher rate than demand deposits, increasing year over year while the average balance of interest-bearing demand deposits decreased over the same period. To combat inflation, the FOMC implemented a series of interest rate increases. These increases negatively impacted our net interest margin and the current interest rate environment is likely to continue to cause long-term uncertainty. Other financial impacts could occur, though such potential impacts are unknown at this time. While management does not anticipate it will be necessary to raise deposit rates, if we need to continue to raise deposit rates, there likely would be an adverse impact on our margin and profitability. A stabilizing interest rate environment is likely to allow us to increase our net interest margin. However, markets expect that the FOMC will cut the Fed funds by September 2024. In the event of rapid rate decreases, in the short term our net interest margin could come under pressure as the Bank is currently asset sensitive.

Current wording

The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest-earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2024 was $7,509,000 and $21,550,000 as compared to $7,364,000 and $22,351,000 for the same periods in 2023. The net interest margin was 3.16% and 3.07% for the three and nine months ended September 30, 2024 as compared to 3.21% and 3.33% for the comparable periods in 2023. The decreases for the three and nine month periods ended September 30, 2024, were in large part due to interest rates on interest-bearing liabilities increasing more rapidly than the rates received on interest-earning assets during each of the first three quarters of the year. This was exacerbated by a change in deposit mix, with the balance of time deposits, which generally pay a higher rate than demand deposits, increasing year over year while the average balance of interest-bearing demand deposits decreased over the same period. To combat inflation, the FOMC implemented a series of interest rate increases beginning in March 2022. These increases negatively impacted our net interest margin. Despite the Fed’s rate cut in September of 2024, the current interest rate environment is likely to continue to cause long-term uncertainty. For example,

Previous wording

Noninterest income increased to $4,191,000 and $7,498,000 for the three and six month periods ended June 30, 2024 from $3,444,000 and $6,488,000 for same periods in 2023. While all noninterest income categories showed increases, the overall increases primarily were due to increases in wealth management fees, life insurance income, and income received from an investment in a Small Business Investment Company, which is reflected in other income.

Current wording

Noninterest income increased to $3,823,000 and $11,321,000 for the three and nine month periods ended September 30, 2024 from $3,201,000 and $9,689,000 for same periods in 2023. The overall increases primarily were due to increases in wealth management fees, life insurance income, gains on sales of loans, and income received from an investment in a Small Business Investment Company fund, which is reflected in other income.

Previous wording

Purchase mortgage originations totaled $47,203,000 and $78,218,000 or 87.15% and 86.28% respectively, of the total mortgage loans originated in the three and six months ended June 30, 2024, as compared to $40,549,000 and $67,417,000 or 82.02% and 82.12%, respectively, of the total mortgage loans originated in the same period in 2023. Because of a relatively higher mortgage interest rate environment, management anticipates that in the short-term purchase mortgage originations will continue to represent a significant percentage of mortgage originations. Management also believes that a continued increase in long-term market interest rates could limit refinancing activity.

Current wording

Purchase mortgage originations totaled $31,016,000 and $120,657,000 or 84.98% and 83.02% respectively, of the total mortgage loans originated in the three and nine months ended September 30, 2024, as compared to $37,811,000 and $105,228,000 or 89.00% and 84.80%, respectively, of the total mortgage loans originated in the same period in 2023. Because of a relatively higher mortgage interest rate environment, management anticipates that in the short-term purchase mortgage originations will continue to represent a significant percentage of mortgage originations. Management also believes that a continued increase in long-term market interest rates could limit refinancing activity.

Previous wording

We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that has approximately $789 million in assets under management and advisement as of June 30, 2024. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income.

Current wording

We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that has approximately $828 million in assets under management and advisement as of September 30, 2024. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income.

Previous wording

Noninterest expense for the three and six months ended June 30, 2024 increased to $8,739,000 and $16,827,000 from $7,876,000 and $15,951,000 for the same periods in 2023, increases of 10.96% and 5.49%, respectively. These increases resulted primarily from increases in salaries and employee benefits and to a lesser extent in the six month period, professional, data processing and other outside expenses. Other expenses increased because we had a recovery in 2023 related to a previous fraud loss, which had the effect of reducing other expense for both the three and six month periods in 2023. Total personnel expense was $4,892,000 and $9,337,000 for the three and six month periods ended June 30, 2024 as compared to $4,345,000 and $8,613,000 for the same periods in 2023. Personnel expense increased largely because of increases in salaries, compensation related accruals, and additional personnel hired in connection with the opening of new branches.

Current wording

Noninterest expense for the three and nine months ended September 30, 2024 increased to $8,776,000 and $25,602,000 from $8,140,000 and $24,091,000 for the same periods in 2023, increases of 7.81% and 6.27%, respectively. These increases resulted primarily from increases in salaries and employee benefits and to a lesser extent in the nine month period, professional, data processing and other outside expenses. While other expenses increased for the three and nine month periods in 2024, the increase for the nine months was due large part because we had a recovery in 2023 related to a previous fraud loss, which had the effect of reducing other expense for the nine month period in 2023. Total personnel expense was $4,920,000 and $14,256,000 for the three and nine month periods ended September 30, 2024 as compared to $4,683,000 and $13,296,000 for the same periods in 2023. Personnel expense increased largely because of increases in salaries, compensation related accruals, and additional personnel hired in connection with the opening of new branches.

Previous wording

The allowance for credit losses represents an amount that, in our judgment, will be adequate to absorb probable losses expected in the loan portfolio. The provision for credit losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for credit losses is charged to earnings to bring the total allowance to a level deemed appropriate by management. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and loans with borrowers whose performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the credit loss calculation, the Bank recovered $123,000 and $676,000 for the three and six months ended June 30, 2024 as compared with a recovery of $254,000 and $114,000 for the same periods in 2023. For the six month periods ended June 30, 2024, and 2023, the recovery attributable to unfunded commitments was $76,000 and $56,000, respectively, and was not included in the allowance. Despite an increase in loan balances, the amount of additional provision otherwise needed to reflect loan growth was offset in part by recoveries of approximately $149,000. In addition, the recovery in both periods was driven by the continuing evaluation of risks inherent within the loan portfolio required by CECL.

Current wording

The allowance for credit losses represents an amount that, in our judgment, will be adequate to absorb probable losses expected in the loan portfolio. The provision for credit losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for credit losses is charged to earnings to bring the total allowance to a level deemed appropriate by management. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and loans with borrowers whose performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the credit loss calculation, the Bank recorded a provision of $92,000 for the three months ended September 30, 2024 and provision recoveries of $584,000 for the nine months ended September 30, 2024. This compares to provision recoveries of $164,000 and $278,000 for the same periods in 2023. For the nine month periods ended September 30, 2024, and 2023, the provision recovery attributable to unfunded commitments was $90,000 and $90,000, respectively, and was not included in the allowance. Despite an increase in loan balances, the amount of additional provision otherwise needed to reflect loan growth was offset in part by principal recoveries of loans previously charged off of approximately $21,000 and $244,000, respectively, for the three and nine months ended September 30, 2024.

Previous wording

A June 30, 2024, the allowance for credit losses was 1.12% of total loans outstanding, versus 1.22% and 1.23% of total loans outstanding at December 31, 2023 and June 30, 2023, respectively. The allowance for credit losses for individually evaluated loans was $0 at both June 30, 2024 and December 31, 2023. As shown in Note 8, the total balance in the allowance decreased, from $7,412,000 as of December 31, 2023 to $6,951,000 as of June 30, 2024.

Current wording

A September 30, 2024, the allowance for credit losses was 1.12% of total loans outstanding, versus 1.22% and 1.21% of total loans outstanding at December 31, 2023 and September 30, 2023, respectively. The allowance for credit losses for individually evaluated loans was $0 at both September 30, 2024 and December 31, 2023. As shown in Note 8, the total balance in the allowance decreased, from $7,412,000 as of December 31, 2023 to $7,078,000 as of September 30, 2024.

Previous wording

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for credit losses and constitute a realized loss. We had charged-off loans of $19,000 and $84,000 for the three and six month periods ended June 30, 2024 as compared to $19,000 and $52,000 for the same periods in 2023. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. We had recoveries of $149,000 and $223,000 for the three and six month periods ended June 30, 2024 as compared to a recoveries of $88,000 and $192,000 for the same periods in 2023.

Current wording

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for credit losses and constitute a realized loss. We had charged-off loans of $0 and $84,000 for the three and nine month periods ended September 30, 2024 as compared to $144,000 and $196,000 for the same periods in 2023. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. We had principal recoveries of $21,000 and $244,000 for the three and nine month periods ended September 30, 2024 as compared to principal recoveries of $8,000 and $200,000 for the same periods in 2023.

Previous wording

If indicated by Bank policy, certain nonaccrual loans are individually analyzed for impairment. The principal balance on our nonaccrual loans totaled $797,000 and $391,000 at June 30, 2024 and December 31, 2023, respectively. If interest on these loans had been accrued, such income cumulatively would have approximated $50,000 and $37,000 on June 30, 2024 and December 31, 2023, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

Current wording

If indicated by Bank policy, certain nonaccrual loans are individually analyzed for impairment. The principal balance on our nonaccrual loans totaled $1,295,000 and $391,000 at September 30, 2024 and December 31, 2023, respectively. If interest on these loans had been accrued, such income cumulatively would have approximated $51,000 and $37,000 on September 30, 2024 and December 31, 2023, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

Previous wording

For the three and six months ended June 30, 2024, Financial had an income tax expense of $518,000 and $1,053,000 as compared to $633,000 and $1,120,000 for the same periods in 2023. This represents an effective tax rate of 19.43% and 19.54% for the three and six months ended June 30, 2024 as compared with 19.99% and 19.87% for the three and six months ended June30, 2023. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and interest earned on tax free municipal bonds.

Current wording

For the three and nine months ended September 30, 2024, Financial had an income tax expense of $474,000 and $1,527,000 as compared to $511,000 and $1,631,000 for the same periods in 2023. This represents an effective tax rate of 19.24% and 19.44% for the three and nine months ended September 30, 2024 as compared with 19.74% and 19.82% for the three and nine months ended September 30, 2023. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and interest earned on tax free municipal bonds.