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Item 7. Management’s Discussion and Analysis

2026-03-27 compared with 2025-03-28 · 167 added, 188 removed, 464 unchanged (43% of the section changed)

19 unchanged sentences

• the quality or composition of the loan and/or investment portfolios,

• demand for loan products,

• deposit flows,

• competition,

• our ability to maintain existing deposit relationships or attract new deposit relationships,

• changes in consumer spending, borrowing and savings habits,

• increased competition with other financial institutions and fintech companies,

• demand for financial services in the Company’s market,

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The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred.

A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.

A variety of factors could affect the ultimate value obtained when earning income, recognizing expense, recovering an asset or relieving a liability.

Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

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If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted.

The Company designates the following policies as critical:

those governing the allowance for credit losses, goodwill, the pension plan, core deposit intangibles and loans acquired in a business combination.

The Company designates as critical those policies governing the ACLL and the pension plan.

The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.

Please refer to Note 1 of Notes to Consolidated Financial Statements for information on these and other accounting policies.

The ACLL represents the Company's best estimate of current expected credit losses on loans over the expected life as of the measurement date.

The estimation utilizes internal and peer historical credit loss experience, current conditions and reasonable and supportable forecasts.

The results are also dependent upon management's selection of methodologies, loan credit risk ratings, and determination of the impact of internal and external variables.

The Company employs a discounted cash flow ("DCF") model whereby cash flows are projected according to each loan's contractual terms and modified by internal historical prepayment rates.

Cash flows are then discounted at the loan's effective interest rate, modified by loss rates determined using the probability of default ("PD") and loss given default ("LGD") sourced from internal and peer historical experience, and a forecast variable.

Application of historical prepayment rates to project cash flows lowers the ACLL.

Historical prepayment rates may not be representative of realized prepayment rates.

Similarly, historical loss experience modified by the forecast variable may not be representative of realized loss experience.

Key to loss rate application is the Company's risk grading system, which is governed by a robust policy.

Loss rates are calculated and applied by risk grade.

Management relies upon risk grades to identify loans with risk characteristics that are different from other loans within a segment.

Loans graded special mention or classified and that exceed a value threshold are individually evaluated.

If management determines that a borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

Specific reserves for other individually evaluated loans are estimated using a DCF approach.

Cash flows are determined by analyzing the borrower's ability to repay and economic conditions affecting the borrower's industry, discounted at loss rates appropriate to the risk grade.

The ultimate recoverability of the loan may be higher or lower than the specific reserve.

The Company adjusts collectively-evaluated DCF model results for qualitative risk factors that are not inherent in historical losses, but are relevant in assessing expected credit losses within the loan portfolio.

Risks considered include the impact of changes in (i) economic conditions, (ii) the nature and volume of the loan portfolio, (iii) the existence, growth and effect of any concentrations in credit, (iv) lending policies and procedures, including underwriting standards and practices, (v) the quality of the credit review function, (vi) the experience, ability and depth of lending management and staff, (vii) the volume and severity of past due loans, (viii) the value of underlying collateral for collateral-dependent loans, and (ix) other factors such as the regulatory, legal and competitive environments.

Because of low loss rate history, statistical correlation between losses and qualitative risk factors is not possible and adjustments are based upon management judgment.

Management assesses each factor and determines the adjustment to the ACLL based upon a documented and consistently applied methodology.

Management's assessment my be higher or lower than actual impact.

The estimation of the ACLL involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience.

These judgments are inherently subjective and actual losses could be greater or less than the estimate.

Future estimates of the ACLL could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold.

The estimate of the ACLL determines the amount of provision expense and directly affects our financial results.

Please refer to Note 1 and Note 5 of Notes to Consolidated Financial Statements for additional information.

Pension obligations are determined through actuarial calculations based upon significant assumptions, including the IRS mortality table, an effective interest rate of 5.32% for December 31, 2025 and 5.24% for December 31, 2024, a discount rate of 5.50% for December 31, 2025 and 4.75% for December 31, 2024, anticipated rate of compensation increases of 4% for both reporting dates, and an expected long-term rate of return of 7.50% for both reporting dates.

Actual outcomes could vary from the assumptions and result in underaccrual or overaccrual of pension obligations.

Please refer to Note 1 and Note 8 of Notes to Consolidated Financial Statements for information on these and other accounting policies.

Performance Summary

Key to understanding the Company’s results of operations and financial position is the interest rate environment, the core system conversion in 2025 and the acquisition of FCB in 2024.

The Federal Reserve's interest rate cuts between September 2024 and December 2025 eased deposit pricing pressure for the fourth quarter of 2024 and the year ended December 31, 2025.

The interest rate environment continues at a level that allows adjustable rate loans to reprice higher than their previous rates.

The Company completed the core system conversion of both the former FCB and the legacy bank during the second quarter of 2025, with related expenses presented in core system conversion expense on the Consolidated Statements of Income.

The acquisition of FCB on June 1, 2024 expanded the Company's footprint into desirable markets and increased its growth potential.

The acquisition added to the balance sheet $118,743 in loans, $129,717 in deposits and $14,299 in equity.

The Company also recorded one-time expenses of $2,916 and provision for credit loss of $1,290 associated with the merger.

For more information on the acquisition, see Note 22:

Business Combination.

Summary information on results of operations, changes in key balances and asset quality is presented below.

Expanded discussion is provided in subsequent sections.

Summary Results of Operations

The following tables present summary income, expenses and key performance indicators for the years indicated.

Key performance indicators provide a summary of the Company’s results and allow comparison with results from prior years.

Year Ended December 31,

Summary Income and Expenses

Interest income

Interest expense

Net interest income

(Recovery of) provision for credit losses

Net interest income after (recovery of) provision for credit losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Year Ended December 31,

Summary Key Performance Indicators

Return on average assets

Return on average equity

Basic net income per common share

Diluted net income per common share

Net interest margin (1)

Efficiency ratio (1)

(1) See "Non-GAAP Financial Measures" below.

Net income for the year ended December 31, 2025 increased when compared with the year ended December 31, 2024, due to net interest margin expansion and a lower provision for credit losses.

The net interest margin as well as key noninterest income and expense items are discussed under “Income Statement” below.

Non-GAAP Financial Measures

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merger-related expense

contract termination expense (1)

proxy-related expense (2)

core system conversion expense

Adjusted noninterest expense (non-GAAP)

Noninterest income (GAAP)

realized securities loss, net

gain on contract contingency (3)

gain on sale of investment (4)

gain on BOLI settlement

Adjusted noninterest income (non-GAAP)

Net interest income, FTE (non-GAAP)

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Efficiency ratio (non-GAAP)

(1) Contract termination expense was recorded to reflect the Company's notification to a vendor that it intends to end its relationship in 2025.

(2) Included in professional services in the Consolidated Statements of Income.

(3) Gain recognized upon receipt of a contract contingency payment associated with the 2022 sale of a private equity investment.

(4) Sale of the Company’s VISA Class B shares.

Performance Summary

Key to understanding the Company’s results of operations and financial position is the acquisition of FCB and the impact of the interest rate environment.

The acquisition of FCB on June 1, 2024 expanded the Company's footprint into desirable markets and increased its growth potential.

The acquisition added to the balance sheet $118,743 in loans, $129,717 in deposits and $14,299 in equity.

The Company also recorded one-time expenses of $2,916 and provision for credit loss of $1,290 associated with the merger.

For more information on the acquisition, see Note 22:

Business Combination.

Between March 2022 and July 2023, the Federal Reserve increased interest rates 525 basis points.

The rapidity and magnitude of the change was unprecedented and spurred intense competitive pressure for deposits, affected the fair value of the Company’s securities, and dampened loan demand.

The effects of the interest rate environment continued into 2024, however the Federal Reserve's 100 basis point interest rate cut between September and December eased deposit pricing pressure somewhat during the fourth quarter of 2024.

When comparing current and prior year results, items to note include the Company's 2023 special one-time dividend of $1 per common share, paid in addition to its usual bi-annual dividends.

The dividend rewarded stockholders for the Company’s positive performance during 2022, which included a one-time pre-tax gain on the sale of a private equity investment.

Related to the 2022 gain on the sale of a private equity investment, the Company recorded in 2023 pre-tax income of $232 upon receipt of a contract contingency payment.

Also in 2023, the Company sold its VISA Class B shares and recognized a pre-tax gain of $2,971, and strategically sold securities, recording a pre-tax loss of $3,332.

The Company recognized tax-free income of $1,044 for the settlement of a bank owned life insurance (“BOLI”) policy in 2023, and incurred expense in 2023 of $786 to respond to a proxy contest from an activist investor.

Summary information on results of operations, changes in key balances and asset quality is presented below.

Expanded discussion is provided in subsequent sections.

Summary Results of Operations

The following tables present summary income, expenses and key performance indicators for the years indicated.

Key performance indicators provide a summary of the Company’s results and allow comparison with results from prior years.

Year Ended December 31,

Summary Income and Expenses

Interest income

Interest expense

Net interest income

Provision for (recovery of) credit losses

Net interest income after provision for (recovery of) credit losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Year Ended December 31,

Summary Key Performance Indicators

Return on average assets

Return on average equity

Basic net income per common share

Fully diluted net income per common share

Net interest margin (1)

Efficiency ratio (1)

(1) See "Non-GAAP Financial Measures" above.

Net income for the year ended December 31, 2024 decreased when compared with the year ended December 31, 2023, due to net interest margin compression, merger related expenses and contract termination expense.

The net interest margin as well as key noninterest income and expense items are discussed under “Income Statement” below.

Summary Change in Key Balances

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Stockholders’ equity

Loans, net of deferred fees and costs and the ACLL, increased when December 31, 2024 is compared with December 31, 2023, primarily due to the FCB acquisition.

The higher interest rate environment continues to restrain loan demand.

The Company is positioned to continue to make every loan that meets its underwriting standards.

Securities available for sale are presented at fair value as of each reporting date.

The fair value of bonds moves inversely to interest rate changes and expectations of interest rate changes.

Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022.

The portfolio decreased during 2024 due to maturities and pay downs.

Organic growth accounted for the increase in loans, net of deferred fees and costs and the ACLL, when December 31, 2025 is compared with December 31, 2024.

While the Federal Reserve's rate cuts in 2024 and 2025 were favorable for the net interest margin, the interest rate environment continues to restrain loan demand.

Securities available for sale increased from the prior year due to purchases of $83,872 and improvement in fair value, which moves inversely to interest rate changes and expectations of interest rate changes.

Further detail is provided in the “Balance Sheet” section below.

Customer deposits increased when December 31, 2024 is compared with December 31, 2023, primarily due to the FCB acquisition, supplemented by organic growth.

Total assets increased from December 31, 2023 to December 31, 2024, primarily due to the acquisition of FCB.

Stockholders’ equity increased from December 31, 2023 to December 31, 2024 due to the acquisition of FCB and improvements in accumulated other comprehensive loss related to the market value of securities and the Company's pension plan.

Customer deposits decreased when December 31, 2025 is compared with December 31, 2024.

The Company manages deposits and deposit pricing in consideration of loan demand, optimizing the net interest margin, liquidity needs, and strategic initiatives.

During 2025, the Company strategically lowered pricing on time deposits, resulting in lower time deposit balances and improved deposit costs.

The increase in stockholders’ equity reflects an improvement in unrealized losses on securities available for sale and retained net income.

Summary Asset Quality

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ACLL to loans net of deferred fees and costs

Net charge-off ratio

Ratio of nonperforming assets to loans, net of

Net charge-off to average loans ratio

Ratio of nonperforming loans to loans, net of

deferred fees and costs

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The Company monitors asset quality indicators in managing credit risk and in determining the ACLL and provision for credit losses.

When December 31, 2024 is compared with December 31, 2023, nonaccrual loans improved.

The net charge-off ratio and accruing loans past due 90 days or more increased, though remain at historically low levels.

The Company believes that sufficient resources have been dedicated to resolving problem assets, and exposure to loss is somewhat mitigated by sufficient collateralization.

Nonaccrual loans improved when December 31, 2025 is compared with December 31, 2024, due to the return of one loan relationship to accrual status.

The net charge-off ratio remained at the same low level and accruing loans past due 90 days or more increased slightly, but remain low.

The Company dedicates resources to resolving problem assets, and exposure to loss is somewhat mitigated by collateralization.

More information about nonaccrual and past due loans is provided in Note 1 and Note 5 of Notes to Consolidated Financial Statements.

The Company continues to carefully monitor risk levels within the loan portfolio.

Income Statement

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Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in correspondent banks and affect other interest-earning assets over time.

The net interest margin for the year ended December 31, 2024 decreased when compared with the year ended December 31, 2023.

Loans, adjustable rate securities and interest bearing deposit assets repriced upward, but did not fully offset higher interest expense.

The Federal Reserve's interest rate cuts during the last four months of 2024 immediately decreased interest rates on deposits with pricing based on the prime interest rate, however current interest rates are still at a level that will allow interest income and the yield on earning assets to grow as adjustable loans reach repricing dates.

The net interest margin for the year ended December 31, 2025 increased when compared with the year ended December 31, 2024.

Loans repriced upward while the Federal Reserve's interest rate cuts resulted in lower yields on adjustable rate securities and interest

bearing deposit assets, as well as lower cost of deposits.

Current interest rates are still at a level that will allow improved yield on loans as adjustable loans reach repricing dates.

The frequency and/or magnitude of future changes in market interest are difficult to predict and may have a greater short-term impact on net interest income than adjustments by management.

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Year Ended December 31,

($ in thousands)

Interest-earning assets:

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(5) Interest on nontaxable loans and securities is computed on an FTE basis using a Federal income tax rate of 21%.

(6) Includes restricted stock.

(6) Included in interest expense is amortization of premium on acquired time deposits of $149 and $278 for the twelve months ended December 31, 2025 and 2024, respectively.

The following table reconciles net interest income on an FTE basis (non-GAAP) to net interest income on a GAAP basis for the years indicated.

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(2) Variances caused by the change in rate multiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.

The acquisition of FCB increased the volume of both loans and deposits, contributing to higher interest income and interest expense.

The elevated rate environment increased interest income and while interest expense continued to rise, the increase moderated when compared with 2023.

A portion of the Company’s taxable securities portfolio is subject to monthly repricing, while many of the Company’s loans are adjustable with repricing dates in the future.

The volume of interest-bearing deposit assets increased due to higher customer deposits.

Interest Rate Sensitivity

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The simulation process requires certain estimates and assumptions including, but not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions.

Asset growth and the mix of assets can, to a degree, be influenced by management.

Asset growth and the mix of

assets can, to a degree, be influenced by management.

Other areas, such as the interest rate environment and economic factors, cannot be controlled.

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The Company’s profitability in the near-term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment.

Provision for (Recovery of) Credit Losses

Provision expense for the year ended December 31, 2024 was $1,227, reflecting provision for credit losses for funded loans of $1,242 and recovery of credit losses for unfunded loan balances of $15.

Provision for funded loans included $1,290 in provision for non-PCD loans recorded upon acquisition date, offset by $48 resulting from changes in the Company's assessment of credit risk.

For the year ended December 31, 2023, the Company recorded a net recovery of $1,261, reflecting an improvement in portfolio metrics and economic conditions when compared with December 31, 2022.

(Recovery of) Provision for Credit Losses

The Company recovered provision of $16 for the year ended December 31, 2025 , made up of a recovery of credit losses on funded loans of $63 partially offset by provision for credit losses on unfunded loan balances of $47.

For the year ended December 31, 2024, the Company recorded a net provision of $1,227, which included a provision of $1,290 for non-PCD loans recorded upon acquisition of FCB, offset by $48 recovery reflecting changes in the Company's assessment of credit risk for both funded and unfunded loan balances.

More information about the ACLL is provided in “Balance Sheet – Loans – Allowance for Credit Losses” below and in Notes 1 and 5 of Notes to Consolidated Financial Statements.

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Year Ended December 31,

Service charges on deposits

Service charges on deposit accounts

Other service charges and fees

Credit and debit card fees, net

Gain on sale of investment

Gain on sale of mortgage loans

Realized securities loss, net

Gain on sale of mortgage loans held for sale

Total noninterest income

Service charges on deposit accounts increased when the year ended December 31, 2024 is compared with the year ended December 31, 2023, primarily due to changes in fee structure, the FCB acquisition, and increased customer use of the Bank’s overdraft program.

Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees.

Other service charges and fees decreased when 2024 is compared with 2023, due to lower fees associated with letters of credit and one time fee income received in 2023.

Service charges on deposit accounts increased when the year ended December 31, 2025 is compared with the year ended December 31, 2024, due to increased customer use of the Bank’s overdraft program, ATM fees and wire transfer fees.

Other service charges and fees decreased when 2025 is compared with 2024, due to nonrecurring fee income received in 2024 and lower fees associated with non-customer use of NBB ATMs.

Other service charges and fees also include charges for official checks, income from the sale of checks to customers, safe deposit box rent, and income from commissions on the sale of credit life, accident and health insurance.

Credit and debit card fees, net, decreased when 2024 is compared with 2023 due to higher processing costs.

Credit and debit card fees are presented net of certain processing expenses and are dependent on the volume of transactions.

Trust income increased when the year ended December 31, 2024 is compared with the year ended December 31, 2023 due to higher volume.

Credit and debit card fees, net, increased when 2025 is compared with 2024 due to contract re-negotiation associated with the core system conversion.

Trust income increased when the year ended December 31, 2025 is compared with the year ended December 31, 2024, reflecting the Company's investment in business development.

Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships.

Trust income varies depending on the number and type of accounts under management and financial market conditions.

BOLI income decreased when 2024 is compared with 2023, due to a gain of $1,044 recorded in 2023 for settlement of a policy.

During 2023, the Company sold its VISA Class B securities, recognizing a gain of $2,971.

The gain on sale of mortgage loans increased from 2024 to 2025 as volume improved.

Other income includes dividends, adjustments to partnership basis in investments, commissions from investment and insurance sales and other miscellaneous components.

During 2023, the Company recorded income of $232 upon receipt of a contract contingency payment.

The Company recorded a net loss on the sale of securities during 2023, discussed in further detail under the “Securities” section.

Improved commissions from investment and insurance sales and a vendor incentive payment drove the increase from 2024 to 2025.

Noninterest Expense

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Occupancy, furniture and fixtures

Data processing and ATM

Data processing

FDIC assessment

Intangible asset amortization

Net costs of other real estate owned

Franchise taxes

1 unchanged sentence

Merger-related expenses

Contract termination expenses

Core system conversion expense

Other operating expenses

Total noninterest expense

Salaries and employee benefits, which include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when 2024 is compared with 2023, reflecting the addition of FCB employees.

When the year ended December 31, 2024 is compared with the year ended December 31, 2023, occupancy, furniture and fixtures expense and data processing and ATM expense increased due to ATM upgrades, higher maintenance costs, and additional assets acquired from FCB.

Salaries and employee benefits, which include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k) plan, pension service costs, incentives and salary continuation, increased when 2025 is compared with 2024, reflecting the addition of FCB employees and normal merit adjustments.

When the year ended December 31, 2025 is compared with the year ended December 31, 2024, occupancy, furniture and fixtures expense increased due to higher maintenance costs and depreciation related to assets acquired from FCB, infrastructure investment and the opening of the Roanoke branch.

Data processing expense decreased when the year ended December 31, 2025 is compared with the year ended December 31, 2024, reflecting savings from the core system conversion and other technology upgrades.

FDIC assessment expense increased from 2024 to 2025, due to an expanded assessment base after the FCB acquisition.

Upon acquisition of FCB in 2024, the Company recognized a core deposit intangible asset that is amortized over 10 years.

Franchise tax expense increased from 2023 to 2024.

Franchise tax expense decreased from 2024 to 2025.

Franchise taxes are levied by the states in which NBB operates and are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.

Professional services, which includes legal and other expenses decreased when 2024 is compared to 2023.

During 2023, the Company incurred legal and consulting expenses of $786 to respond to a threatened proxy contest from an activist shareholder.

When 2025 is compared with 2024, higher legal and audit expenses drove the increase in professional services, which also includes consulting expense.

Merger-related expenses included legal, accounting, regulatory, and executive and employee severance costs associated with the FCB acquisition.

The Company does not expect any further material expense related to the transaction.

During 2024, the Company recorded a contract termination expense when it gave formal notification to a vendor that it intends to end its relationship in 2025.

Other operating expenses increased when the years ended December 31, 2024 and 2023 are compared.

The core system conversion was completed during the second quarter of 2025 positioning the Company for future growth.

Other operating expenses decreased when the years ended December 31, 2025 and 2024 are compared.

The category of other operating expenses includes expense for marketing and business development, supplies, non-service pension cost and charitable donations.

Marketing and business development expenses increased during 2024 for advertising campaigns associated with the FCB acquisition and the coming Roanoke branch.

Multiple additional items increased by smaller amounts.

Included within other operating expense and data processing and ATM expense are expenses related to cybersecurity.

The decrease is due to non-service pension cost, resulting from a higher expected return on plan assets when 2025 is compared with 2024, higher recognized net gain due to settlement when 2025 is compared with 2024, and a net actuarial loss in 2024 that was not recognized in 2025.

Included within other operating expense and data processing expense are expenses related to cybersecurity.

These expenses include testing and vulnerability assessment, technological defenses, insurance and employee training.

The cost of these measures was $409 for 2025 and $365 for 2024.

The Company places high priority on cybersecurity.

The decrease in expense reflects renegotiation of contracts and licensing.

Income tax expense for 2025 was $3,340 compared to $1,499 in 2024.

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The Company’s effective tax rates for 2025 and 2024 were 17.43% and 16.43%, respectively.

The Company’s effective tax rate is lower than the statutory rate of 21% due to investments in tax-advantaged loans and securities.

The Company’s effective tax rate is lower than the statutory rate of 21% primarily due to investments in tax-advantaged loans and securities.

The Company's effective tax rate for 2024 was also affected by a significant portion of merger related expense that was not tax deductible.

During 2023, the Company recognized a gain on the settlement of a BOLI policy that was not taxable.

See Note 9 of Notes to Consolidated Financial Statements for information relating to income taxes.

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Commercial non-real estate loans include agricultural loans, operating capital lines and loans secured by capital assets.

Public sector and industrial development authority (“IDA”) loans are extended to municipalities.

Public sector and industrial

development authority (“IDA”) loans are extended to municipalities.

Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts.

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Consumer non-real estate

Less deferred fees and costs

deferred fees and costs

Loans, net of deferred fees and costs

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Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements.

Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances.

Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary

circumstances.

Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants.

The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources.

Please refer to Note 5 of Notes to Financial Statements for information on modifications to loans for borrowers experience financial difficulty during the years ended December 31, 2024 and December 31, 2023.

Please refer to Note 5 of Notes to Financial Statements for information on modifications to loans for borrowers experiencing financial difficulty during the years ended December 31, 2025 and December 31, 2024.

During the years ended December 31, 2025 and 2024, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

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The Company’s risk analysis as of December 31, 2025 determined an ACLL of $9,892, or 0.99% of loans net of deferred fees and costs.

This compares with an allowance of $9,094 as of December 31, 2023, or 1.06% of loans.

This compares with an ACLL of $10,262 as of December 31, 2024, or 1.04% of loans net of deferred fees and costs.

For information on the Company’s policies on the ACLL, please refer to Note 1 and Note 5 of Notes to Consolidated Financial Statements.

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Please refer to Note 1 of Notes to Consolidated Financial Statements for information on the Company’s identification of individually evaluated loans.

As of December 31, 2024, three individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation.

The remaining individually evaluated loans were measured using the discounted cash flow method, resulting in an allocation of $80.

As of December 31, 2025, two individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation.

The remaining individually evaluated loans were measured using the DCF method, resulting in an allocation of $106.

Collectively Evaluated Loans

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At December 31, 2024, collectively evaluated loans totaled $978,092, with an allowance of $10,182.

Collectively evaluated loans are divided into pools based upon risk characteristics.

Utilizing historical loss information and peer data, the Company calculates probability of default (“PD”) and loss given default (“LGD”) for each class, which is adjusted for a reasonable and supportable forecast.

Collectively evaluated loans are divided into classes based upon risk characteristics.

Utilizing historical loss information and peer data, the Company calculates PD and LGD for each class, which is adjusted for a reasonable and supportable forecast.

Cash flow projections based on each loan’s contractual terms are modified by the adjusted PD and LGD for its class.

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The Company determined that 12 months represents a reasonable and supportable forecast period as of December 31, 2025, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied as of December 31, 2024 projects that unemployment will rise over the next 12 months to a higher level than the forecast applied as of December 31, 2023.

The higher unemployment forecast increased the required level of the ACLL when December 31, 2024 is compared with December 31, 2023.

The forecast applied as of December 31, 2025 projects that unemployment will be stable over the next 12 months at a similar level to the forecast applied as of December 31, 2024.

Qualitative Factors:

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Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk.

Compared with data available at December 31, 2023, business bankruptcy filings and personal bankruptcy filings increased.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market.

Higher levels increase credit risk.

The residential vacancy rate available at December 31, 2024 increased from the data incorporated into the December 31, 2023 calculation, resulting in a higher allocation.

Housing data available as of December 31, 2024 showed higher inventory than at December 31, 2023, resulting in a higher allocation.

Compared with data available at December 31, 2024, business bankruptcy filings decreased while personal bankruptcy filings increased.

Residential vacancy rates and housing inventory are used to measure the health of the housing market.

The housing market directly or indirectly affects all loan classes.

Higher vacancy and inventory levels increase credit risk.

The residential vacancy rate available at December 31, 2025 increased compared to the data incorporated into the December 31, 2024 calculation, resulting in a higher allocation.

Housing inventory increased when December 31, 2025 is compared with December 31, 2024, resulting in a higher allocation.

Qualitative Factors:

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Increases in past due loans indicate heightened credit risk.

On a portfolio level, accruing loans past due 30-89 days were 0.30% of total loans at December 31, 2024, an increase from 0.19% at December 31, 2023.

On a portfolio level, accruing loans past due 30-89 days increased to 0.35% of total loans at December 31, 2025, from 0.30% at December 31, 2024.

Qualitative Factors:

Other Considerations

The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans.

The interest rate environment impacts variable rate loans.

The Federal Reserve’s substantial interest rate increases between March 2022 and July 2023 have increased and are expected to continue to increase payments on the Company’s variable rate loans as they reach contractual repricing dates, despite the Federal Reserve’s recent reduction in its target rate.

The Company allocates additional reserve each time the Federal Reserve increases rates, under the expectation that higher payments may increase credit risk.

After the rate increase has been in effect for one year, the allocation may be removed if management deems that the impact of the change has become integrated to the portfolio.

As of December 31, 2024, the Company reduced its allocation from December 31, 2023.

The competitive, legal and regulatory environments were evaluated for changes that would affect credit risk.

Higher competition for loans increases credit risk, while lower competition decreases credit risk.

Compared with December 31, 2023, the competitive, legal and regulatory environments remained in similar postures and no changes were made to related allocations.

Lending policies, loan review procedures and management’s experience influence credit risk.

The Company considers other factors that impact credit risk, including the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans.

Competitive, legal and regulatory environments were evaluated for changes that would affect credit risk.

Higher competition for loans is deemed to increase credit risk, while lower competition is deemed to decrease credit risk.

Prior allocations for the competitive and regulatory environments were evaluated and management determined that a sufficient period of time had passed so as to conclude that the impact is now integrated to loss rates, reducing the allocation.

The legal environment remains in a similar posture to December 31, 2024, and no allocation was provided.

Lending policies, loan review procedures and management experience influence credit risk.

Policies and procedures remain similar to those at December 31, 2024.

The Company added an allocation for the addition of FCB lenders and removed a previously added allocation recorded for the retirement of a long-time credit administration manager.

The Company maintained an allocation to account for integration of FCB lenders.

Levels of high-risk loans are considered in the determination of the level of the ACLL.

A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class.

Total high risk loans increased from the level at December 31, 2023, resulting in an increased allocation.

A decrease in the level of high-risk loans

within a class decreases the required allocation for the loan class, and an increase in the level of high-risk loans within a class increases the required allocation for the loan class.

Total high-risk loans increased from the level at December 31, 2024.

The Company monitors local economic news and internal indicators to consider the presence of risk that may not be reflected in its designated qualitative factors above.

As of December 31, 2025, management identified local unemployment data and collection activity.

An unanticipated increase in unemployment in some of the Company’s market areas during the third quarter of 2025 resulted in a local unemployment rate that exceeded national unemployment.

Historically, local unemployment has been correlated with national unemployment but slightly lower.

The levels moderated during the fourth quarter of 2025, but remain higher than those as of December 31, 2024.

The Company also documented an increase in collection activity, that while successful, may indicate additional credit risk.

The Company added an allocation to account for the change.

Unallocated Surplus

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The following table presents information on securities available for sale as of the dates indicated.

As of December 31,

Amortized cost

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Securities available for sale, at fair value

The securities portfolio is subject to the volatility and risk in the financial markets.

The risk in financial markets, including interest rate risk and credit risk, affects the Company in the same way that it affects other institutional and individual investors.

The fair value of available for sale securities is reflected on the Company's balance sheet.

The unrealized loss in the Company’s investment portfolio is due to interest rate risk.

The majority of the securities portfolio was purchased prior to the Federal Reserve’s rate increases during 2022 and 2023.

The Company’s Asset Liability Management Committee closely monitors all of the Company’s financial assets and liabilities in managing interest rate risk.

During 2024, the Company did not purchase securities to replace matured securities.

During the first half of 2023, the Company strategically selected and sold securities with an amortized cost of $46,850, realizing a loss of $3,332.

The strategy for the sales prioritized enhancement of long-term earnings.

Credit risk in the Company’s investment portfolio is evaluated on an individual security basis.

The Company’s investment portfolio includes corporate bonds.

If the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest.

To date, there have been no defaults in any of the corporate bonds held in the portfolio.

The Company’s investment portfolio also contains a large percentage of municipal bonds.

If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations.

There have been no defaults among the municipal bonds in the Company’s investment portfolio.

As of December 31, 2024, there are no credit risk concerns with any of the Company’s securities.

In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations.

During 2025, the Company purchased securities in anticipation of coming maturities and to capitalize on higher interest rates.

Investment decisions are managed by a subcommittee within the Company’s Asset Liability Management Committee, which monitors all of the Company’s financial assets and liabilities.

In making investment decisions, management seeks to optimize yield and risk profiles, adhering to internal policy guidelines for security quality and industry and geographic concentrations.

The unrealized loss in the Company’s investment portfolio is due to interest rate risk associated with securities purchased prior to the Federal Reserve’s rate increases during 2022 and 2023.

Improvement in the unrealized loss reflects lower interest rates as of December 31, 2025 when compared with December 31, 2024.

Management regularly monitors the quality of the investment portfolio as part of its risk management function.

Credit risk in the Company’s investment portfolio is evaluated on an individual security basis.

An allowance for credit risk will be recorded if analysis indicates the presence of credit risk.

As of December 31, 2025, there are no credit risk concerns with any of the Company’s securities.

Additional information about securities available for sale can be found in Note 3 of Notes to Consolidated Financial Statements.

The following table presents deposits by category as of the dates indicated:

As of December 31,

Noninterest-bearing demand deposits

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The Company’s deposits do not include any brokered deposits.

Competition for deposits began impacting the Company during the latter part of 2022 and continued during 2023.

Included in deposits as of December 31, 2024 are $113,605 acquired from FCB.

Average Amounts of Deposits and Average Rates Paid

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Of the Company’s non-municipal deposits, 19.75% are uninsured.

The following table presents time deposits that exceed $250 as of the date indicated.

The following table presents the maturity distribution of time deposits that exceed $250 as of the date indicated.

December 31, 2025

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Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits.

The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances.

As of December 31, 2025, the Company had borrowing capacity of $306,870 from the FHLB and $190,586 of borrowing capacity at the Federal Reserve discount window, with no amounts advanced against those lines.

The Company assumed FHLB borrowings from FCB, which it repaid during the week following acquisition.

Periodically during 2023, the Company accessed FHLB and Federal

Reserve discount window borrowings to reinforce liquidity.

The advances were fully repaid, due to the success of the Company’s deposit strategy.

As of December 31, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

During 2025, the Company accessed FHLB and Federal Reserve discount window borrowings as part of a leveraged securities purchase strategy.

The advances were fully repaid by the end of the year.

The Company did not engage in purchasing deposits during 2025 or 2024.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters.

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As of December 31, 2025, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity.

As of December 31, 2024, the Company has no material commitments for long-term debt or for capital expenditures, other than commitments for capital expenditures associated with building the Roanoke branch location.

As of December 31, 2025, the Company has no material commitments for long-term debt or for capital expenditures.

Capital Resources

The following table presents components of stockholders’ equity:

As of December 31,

Common stock and additional paid-in capital

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Total stockholders’ equity

Total stockholders’ equity increased when December 31, 2024 is compared with December 31, 2023, due to issuance of equity for the FCB acquisition and improvement in the value of assets held by the Company's retirement plan reflected in accumulated other comprehensive loss.

The largest component of stockholders’ equity, retained earnings, decreased slightly from December 31, 2023 to December 31, 2024.

While earnings were lower in 2024 when compared to 2023, the Company maintained its regular semiannual dividend.

Total stockholders’ equity increased when December 31, 2025 is compared with December 31, 2024, due primarily to improvement in the unrealized loss on securities and value of assets held by the Company's retirement plan.

The largest component of stockholders’ equity, retained earnings, increased from December 31, 2024 to December 31, 2025.

The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

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The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed.

The Company estimates a potential loss reserve for recourse provisions.

The amount is not material as of December 31, 2024.

To date, no recourse provisions have been invoked.

Operating leases are for buildings used in the Company’s day-to-day operations.

To date, no recourse provisions have ever been invoked.

If the Company identified a factor or trend that indicated recourse risk, a loss reserve would be recorded.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis