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Item 7. Management’s Discussion and Analysis

2025-03-31 compared with 2024-04-01 · 739 added, 793 removed, 140 unchanged (92% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking

statements in this annual report on Form 10-K that are subject to risks and uncertainties.

These forward-looking statements include statements

regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit losses,

interest rate sensitivity, market risk, growth strategy, and financial and other goals.

The words “believes,” “expects,”

“may,” “will,” “should,” “projects,” “contemplates,” “anticipates,”

“forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

These forward-looking statements are based on various factors and were derived using numerous assumptions as of the date of this Form

10-K and are subject to significant risks.

factors that may cause actual results to differ from projections include:

or failure of our efforts to implement our business plan;

increase in our regulatory capital ratios;

other regulatory requirements that may arise from examinations, changes in the law and other similar factors;

deterioration

of asset quality;

the level of our nonperforming assets and charge-offs;

of real estate values in our markets;

to attract and retain talent;

demographical

changes in our markets which negatively impact the local economy;

the uncertain

outcome of current or future legislation or regulations or policies of state and federal regulators;

the successful

management of interest rate risk;

the successful

management of liquidity;

general economic and business conditions in our market area and the United States in general;

inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;

with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies

that have substantially greater access to capital and other resources;

demand, development

and acceptance of new products and services we have offered or may offer;

deposit flows

and competition for deposits;

of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation,

interest rate, market and monetary fluctuations;

the occurrence

of significant natural disasters, including severe weather conditions, floods, health related issues and other catastrophic events;

conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S.

We make forward looking statements in this annual report

on Form 10-K that are subject to risks and uncertainties.

These forward-looking statements include statements regarding expectations,

intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit losses, interest rate sensitivity,

market risk, growth strategy, and financial and other goals.

The words “believes,” “expects,” “may,”

“will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,”

“intends,” or other similar words or terms are intended to identify forward looking statements.

These forward-looking statements

are based on various factors and were derived using numerous assumptions as of the date of this Form 10-K and are subject to significant

The following important factors, among others, that

may cause actual results to differ from that expressed in such forward-looking statements include:

the success or failure of our efforts to implement

our business plan;

any required increase in our regulatory capital

satisfying other regulatory requirements that

may arise from examinations, changes in the law and other similar factors;

deterioration of asset quality;

changes in the level of our nonperforming

assets and charge-offs;

fluctuations of real estate values in our

our ability to attract and retain talent;

demographical changes in our markets which

negatively impact the local economy;

the uncertain outcome of current or future

legislation or regulations or policies of state and federal regulators;

the successful management of interest rate

the successful management of liquidity;

changes in general economic and business conditions

in our market area and the United States in general;

credit risks inherent in making loans such

as changes in a borrower’s ability to repay and our management of such risks;

competition with other banks and financial

institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater

access to capital and other resources;

demand, development and acceptance of new

products and services we have offered or may offer;

deposit flows and competition for deposits;

the effects of, and changes in, trade, monetary

and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;

the occurrence of significant natural disasters,

including severe weather conditions, floods, health related issues and other catastrophic events;

geopolitical conditions, including trade restrictions

and tariffs, and acts or threats of terrorism, international hostilities, or actions taken by the U.S.

or other governments in response

to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S.

utilized by us;

to successfully manage cybersecurity;

on third-party vendors and correspondent banks;

generally accepted accounting principles;

governmental regulations, tax rates and similar matters;

which may be described, from time to time, in our filings with the SEC.

Because of these

uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

In addition, our past results of operations do not necessarily indicate our future results.

We expressly disclaim any obligation to update

or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following commentary

discusses major components of our business and presents an overview of our consolidated financial position as of December 31, 2023 and

2022, as well as results of operations for the years ended December 31, 2023 and 2022.

This discussion should be reviewed in conjunction

with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form

New Peoples generates

a significant amount of its income from the net interest income earned by the Bank.

Net interest income is the difference between interest

income and interest expense.

Interest income depends on the volume of interest-earning assets outstanding during the period and the interest

rates earned thereon.

The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money

outstanding during the period and the interest rates paid thereon.

The quality of the assets further influences the amount of interest

income lost on nonaccruing loans and the amount of provision expense added to the allowance for credit losses.

The Bank also generates

noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance

and investment products sold.

Critical Accounting

Certain critical

accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

critical accounting estimates relate to our allowance for credit losses.

The allowance for

credit losses reflects the estimated losses resulting from the inability of our customers to make required payments.

If the financial

condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be

updated, and additional provisions could be required.

For further discussion of the estimates used in determining the allowance for credit

losses, we refer you to the section on “Allowance for Credit Losses” in this discussion.

For further discussion

of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements,

contained in Item 8 of this Form 10-K.

Cybersecurity

The Company, primarily

through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer,

public and regulatory expectations regarding operational and information security have increased over time.

Accordingly, the Company’s

and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures,

disruptions and breakdowns.

Although the Company has business continuity plans and other safeguards in place, disruptions or failures

in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches

of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s

and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational

damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect

the Company’s results of operations or financial condition.

Although to date

the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no

assurance that it or its subsidiaries will not suffer such losses in the future.

On June 15, 2022, we experienced a cybersecurity incident

that temporarily interrupted the operability of our computer systems.

Limited operations were restored June 17, 2022, and full operations

were restored June 21, 2022.

Since that date, restoration efforts have been completed and normal operations have resumed.

The Company’s

risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans

to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to

serve our customers when and how they want to be served.

As a result, cybersecurity and the continued development and enhancement of

the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software,

data and networks from attack, damage or unauthorized access, remain a priority for the Company.

As cyber threats continue to evolve,

the Company has expended resources and may be required to expend significant additional resources to continue to modify or enhance its

protective measures or to investigate and remediate any information security vulnerabilities.

As discussed under

the heading “Cybersecurity” in Item 1.C of this Form 10-K, the federal banking agencies have issued a joint rule that requires

banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after any cybersecurity incident

has occurred, and the SEC has outlined rules for public disclosure.

For the year ended

December 31, 2023, net income was $7.2 million, or basic and diluted net income per share of $0.30, compared to a net income of $8.1

million, or basic and diluted net income per share of $0.34, for the year ended December 31, 2022, a decrease of $0.9 million, or 11.1%.

Retained earnings increased to $14.5 million as of December 31, 2023 from $8.9 million as of December 31, 2022, an increase of $5.6 million

As discussed in “Net

Interest Income and Net Interest Margin” net interest income for the year ended December 31, 2023 was $28.0 million compared to

$28.3 million for the year ended December 31, 2022.

The decrease was primarily due to an increase in the cost of interest-bearing liabilities

of 125 basis points (“bps”;

1 basis point is equal to 1/100 th of 1 percent) to 1.88% during the year ended December

31, 2023 compared to 0.63% during the year ended December 31, 2022.

Noninterest income

increased $709,000 to $9.9 million for the year ended December 31, 2023 from $9.2 million for the comparable period in 2022.

drivers of the increase were the sales of a former operations facility and branch location resulting in a combined gain of $130,000;

an increase in financial services revenue of $168,000;

and income resulting from an insurance claim payment in the amount of $257,000.

This was offset by decreases in service charge income and card processing fees totaling a combined $122,000 during the period.

charge income decreased due to changes made in 2022 in assessing certain charges that reduced the number of transactions subject to such

Additional changes to our service charge structure took effect during the fourth quarter of 2023, which eliminated charges for

certain representment items, and certain funds transfer fees.

Fees from debit card activity declined as customer deposit balances have

reverted to pre-pandemic levels and customer spending habits have also begun to normalize.

Noninterest expense

was $28.0 million for the year ended December 31, 2023 compared to $26.5 million for the year ended December 31, 2022.

The $1.5 million

increase was impacted by increases in salaries and employee benefits of $891,000 data processing and telecommunications costs of $112,000,

legal and professional fees of $273,000, cards rewards program expense of $115,000 and deposit insurance of $143,000.

These increases

were partially offset by decreases in occupancy expenses of $192,000, and data processing and telecommunication costs of $171,000, in

comparison to the year ended December 31, 2022.

During the first quarter of 2024 changes will be made to our branch network, with the

consolidation of our two offices in Bristol, VA along with the opening of a full-service branch office in Boone, NC.

It is expected that

personnel and occupancy costs will incur modest increases resulting from these changes.

Total assets as of

December 31, 2023 were $826.3 million, an increase of $51.0 million, or 6.6%, from $775.4 million as of December 31, 2022.

increased $53.5 million, or 9.2%, during 2023 due to continuing strong loan demand.

Investment securities decreased $6.3 million during

2023 primarily due to principal repayments of amortizing investments and other security maturities of $9.4 million, combined with a decrease

of $2.9 million in the unrealized loss position, partially offset by $500,000 in purchases.

All of the Company's investments are designated

as available-for-sale.

Deposits totaled

$716.5 million as of December 31, 2023 compared to $692.7 million as of December 31, 2022.

The increase of $23.8 million, or 3.4%, was

due to efforts to attract and retain deposits, specifically time deposits, combined with cyclical funds inflows.

As a result of these

efforts, total time deposits increased $64.1 million during the year ended December 31, 2023.

The increase in time deposits contributed

to the increase in our cost of funds, as previously discussed, due to the rising interest rate environment experienced over the past

New Peoples Bank

remains well-capitalized.

The leverage ratio improved to 11.11% as of December 31, 2023, compared to 10.40% as of December 31, 2022.

The Company’s

key performance indicators are as follows:

ended December 31,

on average assets

on average shareholders’ equity

shareholders’ equity to average assets ratio

Interest Income and Net Interest Margin

The Company’s

primary source of income is net interest income, which decreased $0.3 million, or 0.9%, in 2023 compared to 2022 due primarily to

an increase in the cost of interest-bearing liabilities of 125 bps to 1.88% during the year ended December 31, 2023 compared to 0.63%

during the year ended December 31, 2022.

Time deposits were the primary contributor to the decline in net interest income, due to an

increase of 176 bps in the cost of time deposits to 2.57% and a $33.3 million increase in the average balance due to a shift in the deposit

mix from lower cost products.

Additionally, the cost of borrowed funds increased, as trust preferred securities costs rose 323 bps to

7.65% and other borrowings cost rose 114 bps to 3.60%.

The impact of other borrowings cost increase was partially offset by a reduction

of $13.2 million in the average outstanding balance.

The increase in cost of funds was offset by an increase of 85 bps in the yield on

earning assets.

The yield on loans increased 66 bps to 5.35%, helping to offset the increased cost of funding during the year ended December

These rate and volume activities combined to result in a decrease in net interest income of $266,000, while the net interest

margin rose slightly to 3.67% for the year ended December 31, 2023, from 3.62% for 2022.

to trade restrictions and tariffs, and acts or threats of terrorism and/or military conflicts, which could impact business and economic

conditions in the U.S.

technology utilized by us, including the successful

core operating system conversion in 2025;

our ability to successfully manage cybersecurity,

including generative artificial intelligence risks;

our ability to assist in managing third party

fraud against customer accounts including but not limited to check, credit and debit card, and electronic funds transfer fraud;

our reliance on third-party vendors and correspondent

changes in generally accepted accounting principles;

changes in governmental regulations, tax rates

and similar matters;

other risks, which may be described, from

time to time, in our filings with the SEC.

Because of these uncertainties, our actual future

results may be materially different from the results indicated by these forward-looking statements.

In addition, our past results of operations

do not necessarily indicate our future results.

We expressly disclaim any obligation to update or revise any forward-looking statements,

whether as a result of new information, future events or otherwise, except as required by law.

The following commentary discusses major components

of our business and presents an overview of our consolidated financial position as of December 31, 2024 and 2023, as well as results of

operations for the years ended December 31, 2024 and 2023.

This discussion should be reviewed in conjunction with the consolidated financial

statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.

New Peoples generates a significant amount of its income

from the net interest income earned by the Bank.

Net interest income is the difference between interest income and interest expense.

income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon.

interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and

the interest rates paid thereon.

The quality of the assets further influences the amount of interest income lost on nonaccruing loans

and the amount of provision expense added to the allowance for credit losses.

The Bank also generates noninterest income from service

charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold.

Critical Accounting Policies

Certain critical accounting policies affect the more

significant judgments and estimates used in the preparation of our financial statements.

Our most critical accounting estimates relate

to our allowance for credit losses.

The allowance for credit losses reflects the estimated

losses resulting from the inability of our customers to make required payments.

If the financial condition of our borrowers were to deteriorate,

resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.

For further discussion of the estimates used in determining the

allowance for credit losses, we refer you to the section on “Allowance for Credit Losses” in this discussion.

For further discussion of our other critical accounting

policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements, contained in Item 8 of this

For the year ended December 31, 2024, net income was

$8.2 million, or basic and diluted net income per share of $0.35, compared to a net income of $7.2 million, or basic and diluted net income

per share of $0.30, for the year ended December 31, 2023, an increase of $1.0 million, or 14.20%.

Retained earnings increased $6.5 million,

or 45.26%, to $21.0 million as of December 31, 2024 from $14.5 million as of December 31, 2023.

Results for the year ended December 31, 2024 were impacted

by several non-recurring events.

On December 31, 2024 the Bank provided notice of termination of the contract with our core systems provider.

We plan to complete the conversion to a new core systems provider in the fourth quarter of 2025.

As a result of the termination notice,

we recorded termination charges and certain conversion costs estimated to be $850,000.

During the fourth quarter of 2024, we had two transactions

in our bank owned life insurance portfolio (“BOLI”) that disposed of the entire portfolio.

One policy was cancelled and redeemed,

resulting in a loss of $49,000;

and a benefit claim was filed on the second policy resulting in a gain of $1.6 million.

After consideration

of the tax impact, these non-recurring items increased earnings by $756,000 or $0.03 per basic and diluted share.

In 2023, other noninterest

income included $257,000 in insurance proceeds recovery related to costs incurred during the cybersecurity incident in 2022.

The following

table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated.

Interest Margin Analysis

Average Balances,

Income and Expense, and Yields and Rates

non-GAAP table summarizes the impact of these nonrecurring events:

in thousands)

the year ended

income (GAAP)

for nonrecurring items:

system conversion

nonrecurring items

items net of tax

adjusted for nonrecurring items (non-GAAP)

Adjusted net income and net income per share are non-GAAP

financial measures that management uses to supplement the evaluation of the Company’s operating results and believes is beneficial

to the users of its financial statements in evaluating the Company’s current operating results in relation to past periods.

As discussed in “Net Interest Income and Net

Interest Margin”, net interest income for the year ended December 31, 2024 was $28.5 million compared to $28.0 million for the year

ended December 31, 2023.

The increase was primarily due to a $59.6 million increase in average earning assets.

Average interest-bearing

liabilities increased $65.3 million to $549.5 million during the comparative twelve-month periods.

For the year ended December 31, 2024, noninterest income

was $11.3 million, an increase of $1.3 million from the $9.9 million in 2023.

Excluding non-recurring items, noninterest income was unchanged

at $9.7 million for 2024 and 2023, due to nonrecurring income of $1.6 million and $257,000 recorded in 2024 and 2023, respectively

For the year ended December 31, 2024, noninterest expense

was $28.8 million, an increase of $800,000 from $28.0 million in 2023.

Excluding non-recurring items, noninterest expense decreased $90,000

to $27.9 million compared to $28.0 million for the year ended December 31, 2023.

Total assets as of December 31, 2024 were $854.9 million,

an increase of $28.6 million, or 3.46%, from $826.3 million as of December 31, 2023.

Gross loans increased $19.4 million, or 3.04%, during

2024 due to continuing loan demand.

Investment securities increased $6.2 million during 2024 primarily due to securities purchases executed

throughout the year.

All of the Company's investments are designated as available-for-sale.

Deposits totaled $750.0 million as of December 31,

2024 compared to $716.5 million as of December 31, 2023.

The increase of $33.5 million, or 4.68%, was due to efforts to attract and retain

deposits, specifically time deposits through targeted promotional rates and terms and money market accounts through more aggressive pricing

of rates, combined with cyclical funds inflows.

As a result of these efforts, total time deposits increased $16.4 million during the year

ended December 31, 2024.

New Peoples Bank remains well-capitalized.

ratio is 10.70% as of December 31, 2024, compared to 11.11% as of December 31, 2023.

The Company’s key performance indicators are

ended December 31,

Return on average assets

Return on average shareholders’ equity

Average shareholders’ equity to average assets ratio

Income and Net Interest Margin

The Company’s primary source of income is net

interest income, which increased $502,000, or 1.79%, in 2024 compared to 2023 due primarily to an increase in average earning assets

which increased $59.6 million or 7.8% in 2024.

Loans and interest bearing deposits in other banks were the principal drivers of this growth

increasing $32.3 million and $29.7 million, respectively.

Combined with the increase in the volume of earning assets, the yield on these

assets increased 55 basis points (bps;

1 basis point is equal to 1/100th of 1 percent) to 5.42%.

The yield on loans increased 61 bps to

The increase in interest income was partially offset by the cost of interest-bearing liabilities which increased 105 bps to 2.93%

during the year ended December 31, 2024 compared to 1.88% during the year ended December 31, 2023.

Time deposits were the primary contributor

to the increase in interest expense due to an increase of 137 bps in the cost of time deposits to 3.94% and a $50.6 million increase in

the average balance due to a strategy to attract and retain time deposits.

Additionally, the cost of borrowed funds decreased 64 bps to

5.79%, as the cost of other borrowings increased 44 bps to 4.04% while trust preferred securities costs rose 7 bps to 7.72%.

the rate increases in borrowed funds, the total average balance increased $9.8 million due primarily to the Bank Term Funding Program

borrowing taken in December 2023 and repaid during the fourth quarter of 2024.

These rate and volume activities combined to result in

an increase in net interest income of $502,000, while the net interest margin decreased to 3.47% for the year ended December 31, 2024,

from 3.67% for 2023.

The following table shows the rates

paid on earning assets and interest-bearing liabilities for the periods indicated.

Margin Analysis

Average Balances,

Income and Expense, and Yields and Yields and Rates

are in thousands)

bearing deposits in other banks

1 unchanged sentence

earning assets

for credit losses

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

4 unchanged sentences

preferred securities

borrowed funds

interest-bearing liabilities

Noninterest-bearing

Non-interest-bearing

Shareholders’

3 unchanged sentences

interest spread

(1) Nonaccrual

loans have been included in average loan balances.

Nonaccrual loans and loans held for sale have been included in average loan balances.

Tax exempt income is not significant and has been treated as fully taxable.

Yields and rates calculated

based on whole dollars.

Net interest income

is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following tables set forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates, volume and a combination of rates and volume, for the periods indicated.

Net interest income is affected by changes in both

average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities.

The following tables

set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination

of rates and volume, for the periods indicated.

and Rate Analysis

26 unchanged sentences

in net interest income

The increases in

interest income and interest expense during 2023 were driven mainly by increased interest rates, as short-term assets and liabilities

tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset yields outpacing

increases in funding costs in the rising interest rate environment.

Overall, our net interest margin increased five basis points to 3.67%

in 2023 compared to 3.62% in 2022.

The increase in interest

income is primarily attributed to an increase in yields on loans, which was mainly driven by higher market rates, combined with higher

rates on interest bearing deposits in other banks.

Overall, loan interest income, including fees, increased $4.8 million during the year

ended December 31, 2023 compared to December 31, 2022.

Interest expense

increased $6.0 million, due primarily to an increase in the average balance and yield on time deposits, as noted above, combined with

increased market rates on interest-bearing demand deposits, savings and money market deposits, and trust preferred securities.

offset by a decrease in interest expense on other borrowings due to a reduction in volume.

Our interest rate

structure was impacted by the end of the use of LIBOR, which phased-out in 2023.

We used LIBOR in pricing a limited number of our interest

earning assets and liabilities, including our trust preferred securities.

Most of these contracts were replaced with the secured overnight

funding rate (“SOFR”).

Our primary source

of income is interest earned on loans.

Total gross loans increased $53.5 million during 2023, or 9.15%, to $638.1 million as of December

31, 2023 as compared to $584.6 million as of December 31, 2022.

The primary driver of this increase in total loans was an increase of

$43.1 million in commercial real estate loans to $240.2 million as of December 31, 2023 compared to $197.1 million as of December 31,

Additionally, residential 1-4 family, multifamily, commercial, and consumer installment loans increased $11.0 million, $4.9 million,

$6.5 million, and $3.3 million, respectively.

This was offset by decreases of $13.6 million in construction and land development loans;

$1.3 million in farmland loans;

$248,000 in agricultural loans;

and $114,000 in all other loans.

For more detail on loan balances, refer

to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K.

Nonaccrual loans

increased approximately $0.1 million during 2023 from $3.4 million as of December 31, 2022 to $3.5 million as of December 31, 2023.

loans negatively affect interest income as these loans are nonearning assets.

When doubt about

the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following

circumstances:

(a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when

conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent

for 90 days and is not both well secured and in the process of collection.

All interest accrued but not collected on loans that are placed

on nonaccrual is charged off and reversed against interest income in the current period.

In the case of a nonaccrual loan that is well

secured and in the process of collection, the interest accrued but not collected is not reversed.

Interest received on these loans is

accounted for on the cash basis or cost-recovery method until qualifying for return to accrual.

Generally, loans are returned to accrual

status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and

prospects for future contractual payments are reasonably assured.

For more detail on nonaccrual loans, refer to Note 6 of the consolidated

financial statements in Item 8 of this Form 10-K.

Individually evaluated

loans, previously known as impaired loans under the incurred loss methodology, decreased during 2023, to $1.1 million as of December

31, 2023, from $2.7 million as of December 31, 2022.

I nterest income and cash receipts on individually

evaluated loans are handled differently depending on whether or not the loan is on nonaccrual status.

If the individually evaluated loan

is not on nonaccrual status, the interest income on the loan is computed using the effective interest method.

For more detail

on individually evaluated loan balances, refer to Note 6 of the consolidated financial statements

in Item 8 of this Form 10-K.

The following table

presents the dollar composition and percentage of our loan portfolio as of December 31:

The increases in interest income and interest expense

during 2024 were driven by a combination of increased interest rates and increased volumes of interest earning assets and liabilities.

Overall, our net interest margin decreased 20 bps to 3.47% in 2024 compared to 3.67% in 2023.

The increase in interest income is attributed to an

increase in the average balance and yield on earning assets.

Average earning assets increased $59.6 million.

Specifically average loans

increased $32.3 million or 5.31%, and average interest-bearing deposits in other banks increased $29.7 million, or 66.1%.

the yield on average earning assets improved 55 bps to 5.42% for the year ended December 31, 2024 compared to 4.87% for the year ended

December 31, 2023.

Overall, loan interest income, including fees, increased $5.7 million during the year ended December 31, 2024 compared

to December 31, 2023.

Interest expense increased $7.0 million, due primarily

to an increase in the average balance and yield on interest bearing liabilities.

Average time deposits and, money market and savings deposits

increased $50.6 million and $6.9 million, respectively.

These increases were largely due to aggressive pricing on these deposit products

as the cost of interest-bearing deposits increased 109 bps to 2.74%.

The increase in yield on interest bearing deposits was partially

offset by a decrease in cost of borrowed funds which fell 64 bps to 5.79% due to principal payments made on trust preferred securities

and the relatively lower cost for the Bank Term Funding Program borrowing that was outstanding throughout most of 2024.

Our primary source of income is interest earned on

Total gross loans increased $19.4 million during 2024, or 3.04%, to $657.5 million as of December 31, 2024 as compared to $638.1

million as of December 31, 2023.

The primary drivers of this increase in total loans were increases in construction loans, commercial

real estate loans and commercial loans which increased $7.3 million to $36.1 million, $3.5 million to $243.6 million and $7.4 million

to $60.6 million, respectively.

These increases resulted from small business development efforts throughout 2024 and a commercial loan

promotion offered.

In addition, consumer installment and all other loans increased $5.9 million due to private student loan originations

of $1.8 million and the acquisition of $2.9 million in consumer loans.

These increases offset reductions in residential and multi-family

mortgage loans which decreased $3.4 million to $234.9 million and $2.2 million to $32.4 million during 2024.

For more detail on loan balances,

refer to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K.

Nonaccrual loans decreased approximately $261,000 during

2024 from $3.5 million as of December 31, 2023 to $3.3 million as of December 31, 2024.

Nonaccrual loans negatively affect interest income

as these loans are nonearning assets.

When doubt about the collectability of a loan exists, it is

the Bank’s policy to stop accruing interest on that loan under the following circumstances:

(a) whenever we are advised

by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal

and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and

in the process of collection.

All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed

against interest income in the current period.

In the case of a nonaccrual loan that is well secured and in the process of collection,

the interest accrued but not collected is not reversed.

Interest received on these loans is accounted for on the cash basis or cost-recovery

method until qualifying for return to accrual.

Generally, loans are returned to accrual status when all the principal and interest amounts

contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably

For more detail on nonaccrual loans, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.

Individually evaluated loans increased during 2024

to $1.7 million as of December 31, 2024, from $1.1 million as of December 31, 2023.

I nterest income

and cash receipts on individually evaluated loans are handled differently depending on whether or not the loan is on nonaccrual status.

If the individually evaluated loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest

For more detail on individually evaluated loan balances, refer to Note 6 of

the consolidated financial statements in Item 8 of this Form 10-K.

The following table presents the dollar composition

and percentage of our loan portfolio as of December 31:

in thousands)

2 unchanged sentences

real estate loans

installment loans

installment loans and all other loans

allowance for credit losses

Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022

are shown using the incurred loss methodology.

Our loan maturities,

and distribution between fixed and variable rate loans as of December 31, 2023 are shown in the following tables:

Our loan maturities, and distribution between

fixed and variable rate loans as of December 31, 2024 are shown in the following tables:

in thousands)

than One Year

to Five Years

4 unchanged sentences

real estate loans

installment loans

The following table

presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2023:

installment loans and all other loans

The following table presents the dollar amount of fixed

rate and variable rate loans with maturities greater than one year as of December 31, 2024:

in thousands)

2 unchanged sentences

real estate loans

installment loans

Contractual maturities

of loans do not reflect the actual term of our loan portfolio.

The average life of mortgage loans is substantially less than the contractual

life due to prepayments and enforcement of due on sale clauses.

Scheduled principal amortization also reduces the average life of the

loan portfolio.

The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates

on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.

Some variable rate

loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor

or may be more than the allowable rate increase under the terms of the loan.

In these instances, it may take several reset periods before

these loans are fully adjusted.

installment loans and all other loans

Contractual maturities of loans do not reflect the

actual term of our loan portfolio.

The average life of mortgage loans is substantially less than the contractual life due to prepayments

and enforcement of due on sale clauses.

Scheduled principal amortization also reduces the average life of the loan portfolio.

life of mortgage loans tends to increase when current market mortgage rates are substantially above rates on existing loans while the

average life decreases when rates on existing loans are substantially above current market rates.

Some variable rate loans may not reprice, or fully

reprice, at their next reset date due to instances where the reset rate may not be above the rate floor or may be more than the allowable

rate increase under the terms of the loan.

In these instances, it may take several reset periods before these loans are fully adjusted.

Allowance for

Credit Losses

The Company maintains

its allowance for credit losses based on the expected loss methodology that is referred to as the current expected credit loss (“CECL”)

CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience,

current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including

loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend

Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance

for credit losses.

January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses

on Financial Instruments (ASC 326).

This standard replaced the incurred loss methodology with an expected loss methodology that is referred

to as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining

estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally

applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance

sheet credit exposures such as unfunded commitments to extend credit.

Financial assets measured at amortized cost will be presented at

the net amount expected to be collected by using an allowance for credit losses.

Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach

for all financial assets measured at amortized cost and off-balance sheet credit exposures.

The transition adjustment for the adoption

of CECL included a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding,

and an increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities.

The Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL,

which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded.

Results for reporting periods

beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously

applicable accounting standards (“Incurred Loss”).

The allowance for

credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected

on the loans.

Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Accrued interest receivable

is excluded from the estimate of credit losses.

The allowance for

credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date.

The allowance

for credit losses is estimated by management using relevant available information, from both internal and external sources, relating

to past events, current conditions, and reasonable and supportable forecasts.

The Company primarily

utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of

current expected credit losses.

To further adjust the allowance for credit losses for expected losses not already included within the

quantitative component of the calculation, the Company may consider the following qualitative adjustment factors:

policies and procedures, national and local economic conditions, the experience and ability of management and staff, the volume and severity

of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements

and competition.

The Company measures

expected credit losses for loans on a pooled basis when similar risk characteristics exist.

Loans that do not share risk characteristics

are evaluated on an individual basis.

The Company designates loan relationships of $250,000 or more that have been determined to meet

the regulatory definitions of “special mention” or “classified” (together known as “criticized”)

as individually evaluated.

The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral

method”) or the discounted cash flow (“DCF”) method.

The allowance for

credit losses increased to $7.3 million as of December 31, 2023 from $6.7 million as of December 31, 2022.

The allowance for credit losses

at the end of 2023 was approximately 1.14% of total loans as compared to 1.15% at the end of 2022.

Provisions for credit losses for loans

receivable of approximately $712,000 and $625,000 were recorded during the years ended December 31, 2023 and 2022, respectively.

charged off, net of recoveries, totaled approximately $103,000, or 0.02% of average loans, for the year ended December 31, 2023, compared

to approximately $633,000, or 0.11% of average loans, in 2022.

The allowance for credit losses represents an amount that, in the Company's

judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio.

The judgment in determining the level

of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies

and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current reasonable and supportable

forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality

and review of specific potential losses.

This evaluation is inherently subjective because it requires estimates that are susceptible

to significant revision as more information becomes available.

Nonaccrual loans

increased approximately $0.1 million during 2023 from $3.4 million as of December 31, 2022 to $3.5 million as of December 31, 2023.

amount of interest income that would have been recognized on these loans had they been accruing interest was approximately $61,000 and

$10,000 in the years ended December 31, 2023 and 2022, respectively.

There were no loans past due 90 days or greater and still accruing

interest at either December 31, 2023 or 2022.

The allowance for credit losses is a valuation

account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries do

not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Accrued interest receivable is excluded from

the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the balance sheet date.

The allowance for credit losses is estimated by management

using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable

and supportable forecasts.

The Company primarily utilizes the cohort and

the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit

To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of

the calculation, the Company may consider the following qualitative adjustment factors:

lending policies and procedures, national

and local economic conditions, the experience and ability of management and staff, the volume and severity of past due, rated and nonaccrual

assets, loan review system, collateral values, concentrations of credit, and legal or regulatory requirements and competition.

The Company measures expected credit losses

for loans on a pooled basis when similar risk characteristics exist.

Loans that do not share risk characteristics are evaluated on an

individual basis.

The Company designates loan relationships of $250,000 or more that have been determined to meet the regulatory definitions

of “classified” as individually evaluated.

The fair value of individually evaluated loans is measured using the fair value

of collateral (“collateral method”) or the discounted cash flow (“DCF”) method.

The allowance for credit losses increased to $7.7 million

as of December 31, 2024 from $7.3 million as of December 31, 2023.

The allowance for credit losses at the end of 2024 was approximately

1.17% of total loans as compared to 1.14% at the end of 2023.

Provisions for credit losses for loans receivable of approximately $506,000

and $712,000 were recorded during the years ended December 31, 2024 and 2023, respectively.

Loans charged off, net of recoveries, totaled

approximately $78,000, or 0.01% of average loans, for the year ended December 31, 2024, compared to approximately $103,000, or 0.02% of

average loans, in 2023.

The allowance for credit losses represents an amount that, in the Company's judgment, will be adequate to absorb

expected and estimable losses inherent in the loan portfolio.

The judgment in determining the level of the allowance is based on evaluations

of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods

of time, changes in the nature and volume of the loan portfolio, current reasonable and supportable forecasts of economic conditions that

may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses.

This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information

becomes available.

Nonaccrual loans decreased approximately $261,000 during

2024 from $3.5 million as of December 31, 2023 to $3.3 million as of December 31, 2024.

The amount of interest income that would have

been recognized on these loans had they been accruing interest was approximately $49,000 and $61,000 in the years ended December 31, 2024

and 2023, respectively.

There were no loans past due 90 days or greater and still accruing interest at either December 31, 2024 or 2023.

There are no commitments to lend additional funds to non-performing borrowers.

A majority of our

loans are collateralized by real estate located in our market area.

It is our policy to sufficiently collateralize loans to help minimize

exposure to losses in cases of default.

A majority of our loans are collateralized by real

estate located in our market area.

It is our policy to sufficiently collateralize loans to help minimize exposure to losses in cases of

Increasing real estate values in our area have reduced this exposure somewhat.

However, while

we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas.

a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries.

a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk.

Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely

impacted by the global and domestic economic slowdown coupled with rising inflation.

We are monitoring these industries and consider

these segments to be the primary higher risks in the loan portfolio.

Commercial and commercial

real estate loans are initially risk rated by the originating loan officer.

If deterioration in the financial condition of the borrower

and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee.

for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.

Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.

With regard to the

Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification

and Account Management Policy which affects our estimate of the allowance for credit losses.

Under this approach, a consumer or consumer

real estate loan must initially have a credit risk grade of Pass or better.

Subsequently, if the loan becomes contractually 90 days past

due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status.

is unsecured upon being deemed Substandard, the entire loan amount is charged-off.

For non-1-4 family

residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared

to the loan balance to calculate any potential deficiency.

However, while we consider our market area to

be somewhat diverse, certain areas are more reliant upon agriculture, coal mining

and natural gas.

As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural

gas industries.

Commercial and commercial real estate loans are initially

risk rated by the originating loan officer.

If deterioration in the financial condition of the borrower and/or their capacity to repay

the debt occurs, the loan may be downgraded by the loan officer or our watch list committee.

Guidance for risk rate grading is established

by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.

Classifications used by the Bank

are Pass, Special Mention, Substandard, Doubtful and Loss.

With regard to the Bank’s consumer and consumer

real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification and Account Management Policy which

affects our estimate of the allowance for credit losses.

Under this approach, a consumer or consumer real estate loan must initially have

a credit risk grade of Pass or better.

Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy

protection, the loan is downgraded to Substandard and placed in nonaccrual status.

If the loan is unsecured upon being deemed Substandard,

the entire loan amount is charged-off.

For non-1-4 family residential loans that are 90 days

or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared to the loan balance to calculate

any potential deficiency.

If the collateral is sufficient, then no charge-off is necessary.

If a deficiency

exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for credit losses.

In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and

after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency.

If a deficiency exists, then upon the loan

becoming contractually 120 days past due, the deficiency is charged-off against the allowance for credit losses.

In the case of 1-4 family

residential or home equity loans, upon the loan becoming 120 days past due, or at the time of foreclosure, a current value is obtained

and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency.

Subsequently,

any noted deficiency is then charged-off against the allowance for credit losses when the loan becomes contractually 180 days past due,

If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against

or at the time of foreclosure.

If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency

is charged-off against the allowance for credit losses.

Collection efforts continue by means of repossessions or foreclosures, and upon

bank ownership, liquidation ensues.

Annualized net charge-offs, as a percentage of average

loans, was 0.01% during the year ended December 31, 2024, compared to 0.02% for the same period of 2023.

The allowance for credit losses

Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation

Prior to the adoption

of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable

to collect all amounts due in accordance with the original contractual terms of the loan agreements.

Impaired loans included loans on

nonaccrual status and accruing troubled debt restructurings.

When determining if the Company would be unable to collect all principal

and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s

capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient

to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether

or not currently classified as such.

The tables below include all loans deemed impaired, whether or not individually assessed for impairment.

If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the

present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was

expected solely from the collateral.

Interest payments on impaired loans were typically applied to principal unless collectability of

the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

Annualized net charge-offs,

as a percentage of average loans, was 0.02% during the year ended December 31, 2023, compared to 0.11% for the same period of 2022.

allowance for credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known

credit losses within the loan portfolio, whether or not the losses are actually ever realized.

Through our quarterly assessment, we continue

to adjust the CECL model to best reflect the risks in the portfolio.

is maintained at a level that management deems appropriate to absorb any potential future losses and known credit losses within the loan

portfolio, whether or not the losses are actually ever realized.

Through our quarterly assessment, we continue to adjust the CECL model

to best reflect the risks in the portfolio.

However, future provisions may be deemed necessary.

During the year

ended December 31, 2023, we made modest adjustments to our qualitative factors to consider risk factors associated with commercial real

estate and residential mortgage loans.

Those changes, along with the assessment of the historical and specific risks associated with

the loan portfolio, resulted in a net provision for credit losses of $649,000, of which $712,000 was provided for the loan portfolio;

offset by a reduction of the allowance for unfunded commitments of $63,000.

During the year ended December 31, 2024,

we made modest adjustments to our qualitative factors to consider risk factors associated with commercial real estate and residential

mortgage loans and the impacts of the hurricane Helene.

Those changes, along with the assessment of the historical and specific risks

associated with the loan portfolio, resulted in a net provision for credit losses of $625,000, of which $506,000 was provided for the

loan portfolio and $119,000 was provided to the allowance for unfunded commitments.

The following table summarizes components of the allowance

7 unchanged sentences

net of recoveries

Net charge-offs

to average loans

1 The Company

adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022 are shown

using the incurred loss methodology.

The following table

shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans

for the years ended December 31, 2023 and 2022:

Charge-offs (Recoveries)

Charge-offs (Recoveries) as % of Average Loan Type

Charge-offs (Recoveries)

Charge-offs (Recoveries) as % of Average Loan Type

Real estate secured:

charge-offs to average loans

The following table shows the average balance, net

charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans for the years ended December

31, 2024 and 2023:

Average Balance

Net Charge-offs (Recoveries)

Net Charge-offs (Recoveries) as % of Average Loan Type

Average Balance

Net Charge-offs (Recoveries)

Net Charge-offs (Recoveries) as % of Average Loan Type

Construction and land development

1 unchanged sentence

Total real estate loans

Consumer and all other loans

The following table

shows the balance and percentage of our allowance for credit losses allocated to each major category of loans.

Allocation of the

Allowance for Credit Losses 1

The following table shows the balance and percentage

of our allowance for credit losses allocated to each major category of loans.

Allocation of the Allowance for Credit Losses

in thousands)

3 unchanged sentences

and all other loans

1 The Company

adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.

Therefore, amounts as of December 31, 2022 are shown

using the incurred loss methodology.

We have allocated

the allowance according to the amount deemed to be reasonably necessary to provide for the expected credit losses within each of the

categories of loans.

The allocation of the allowance as shown in the table above should not be interpreted as an indication that credit

losses in future years will occur in the same proportions or that the allocation indicates future credit loss trends.

Furthermore, the

portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since

the total allowance is a general allowance applicable to the entire portfolio.

We have allocated the allowance according to the amount

deemed to be reasonably necessary to provide for the expected credit losses within each of the categories of loans.

The allocation of

the allowance for credit losses is based on our judgment of the relative risk associated with each type of loan.

the allowance as shown in the table above should not be interpreted as an indication that credit losses in future years will occur in

the same proportions or that the allocation indicates future credit loss trends.

Furthermore, the portion allocated to each loan category

is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance

applicable to the entire portfolio.

The allocation of the allowance for credit losses is

based on our judgment of the relative risk associated with each type of loan.

We have allocated 33.4% of the allowance to commercial real

estate loans, which constituted 37.1% of our loan portfolio at December 31, 2024.

This allocation decreased slightly compared to 34.7%

in 2023, due primarily to the slight decrease in nonaccrual and past due loans for this segment of the loan portfolio.

We have allocated

of the allowance to commercial real estate loans, which constituted 37.6% of our loan portfolio at December 31, 2023.

This allocation

decreased slightly compared to 35.1% in 2022, due primarily to the impact of the CECL methodology.

We have allocated 9.3% of the allowance

to commercial loans, which constituted 8.3% of our loan portfolio at December 31, 2023.

This allocation percentage increased compared

to December 31, 2022, due to the impact of the CECL methodology.

Both residential

and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable.

These loans are made consistent

with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

We allocated 4.1%

of the allowance to real estate construction loans, which constituted 4.5% of our loan portfolio as of December 31, 2023.

loans are secured by real estate with values that are dependent upon market and economic conditions.

Additionally, these credits are

generally shorter-term projects of eighteen months or less.

These loans are made consistent with appraisal policies and real estate lending

policies which detail maximum loan-to-value ratios and maturities.

We allocated 36.7%

of the allowance to residential real estate loans, which constituted 37.3% of our loan portfolio as of December 31, 2023.

We allocated 5.5%

of the allowance to consumer and all other loans, which constituted 3.8% of our loan portfolio as of December 31, 2023.

Our allocation

generally remained consistent with the allocation as of December 31, 2022.

Other Real Estate

Other real estate

owned decreased $104,000, or 39.9%, to approximately $157,000 as of December 31, 2023 from $261,000 as of December 31, 2022.

All properties

are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division.

2023, four properties were sold in the amount of $132,000 and three properties were acquired in the amount of $124,000.

While the levels

of problem credits and foreclosed properties have been reduced significantly over the past several years, we remain mindful of the impact

on earnings and capital as we work to achieve our goal to reduce nonperforming assets.

However, we may recognize some losses and reductions

in the allowance for credit losses as we expedite the resolution of these problem assets.

Total investment

securities decreased $6.3 million, or 6.5%, to $89.8 million as of December 31, 2023 from $96.1 million as of December 31, 2022.

securities are classified as available-for-sale for liquidity purposes.

There were no sales of securities during 2023 and 2022.

2023 and 2022, there were maturities, calls and paydowns of $9.4 million and $14.0 million, respectively.

The Company purchased $0.5

million and $19.8 million in investment securities during 2023 and 2022, respectively.

Investment securities with a carrying value of

$36.8 million and $27.3 million as of December 31, 2023 and 2022, respectively, were pledged to secure public deposits and for other

purposes required, or permitted, by law.

Our strategy is to

invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such

as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.

The fair value of

our investment portfolio is substantially affected by changes in interest rates.

Losses could be realized if liquidity and/or business

strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S.

fiscal policies or other factors

affecting market interest rates.

As of December 31, 2023, we had a net unrealized loss in our investment portfolio totaling $14.8 million

as compared to a $17.6 million loss as of December 31, 2022.

As market interest rates increase, the level of unrealized losses could

change substantially.

However, these changes would have no impact on earnings or regulatory capital, unless the securities were sold

We believe that all unrealized losses resulted from temporary changes in interest rates and current market conditions and

are not a result of credit deterioration.

No allowance for credit losses on available-for-sale securities was recorded as of December

We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.

The fair value and

weighted average yield of investment securities as of December 31, 2023 are shown in the following schedule by contractual maturity and

do not reflect principal paydowns for amortizing securities.

Expected maturities will differ from contractual maturities because issuers

may have the right to call or prepay obligations with or without call or prepayment penalties.

Weighted average yields are calculated

by dividing the contractual interest for each time period by the average amortized contractual cost.

9.8% of the allowance to commercial loans, which constituted 9.2% of our loan portfolio at December 31, 2024.

This allocation percentage

increased compared to December 31, 2023, due to the increase in this component of the loan portfolio.

Both residential and commercial real estate loans are

secured by real estate whose value tends to be easily ascertainable.

These loans are made consistent with appraisal policies and real

estate lending policies, which detail maximum loan-to-value ratios and maturities.

We allocated 4.2% of the allowance to real estate construction

loans, which constituted 5.5% of our loan portfolio as of December 31, 2024.

Construction loans are secured by real estate with values

that are dependent upon market and economic conditions.

Additionally, these credits are generally shorter-term projects of eighteen months

These loans are made consistent with appraisal policies

and real estate lending policies which detail maximum loan-to-value ratios and maturities.

We allocated 38.0% of the allowance to residential

real estate loans, which constituted 35.7% of our loan portfolio as of December 31, 2024.

We allocated 7.2% of the allowance to consumer and

all other loans, which constituted 4.4% of our loan portfolio as of December 31, 2024.

Our allocation increased compared to the allocation

as of December 31, 2023, due to the impact of activity on overdrawn deposit accounts.

Other Real Estate Owned

Other real estate owned decreased $70,000, or 44.59%,

to approximately $87,000 as of December 31, 2024 from $157,000 as of December 31, 2023.

During 2024, five properties were sold in the

amount of $1.5 million and four properties were acquired in the amount of $1.3 million.

While the levels of problem credits and foreclosed

properties have been reduced significantly over the past several years, we remain mindful of the impact on earnings and capital as we

work to achieve our goal to reduce nonperforming assets.

However, we may recognize some losses and reductions in the allowance for credit

losses as we expedite the resolution of these problem assets.

Investment Securities

Total investment securities increased $6.2 million,

or 6.88%, to $96.0 million as of December 31, 2024 from $89.8 million as of December 31, 2023.

All securities are classified as available-for-sale

for liquidity purposes.

The increase in investment securities during 2024 was due to purchases of $23.3 million, which more than offset

sales of $2.1 million, and maturities, payments and amortization of $14.6 million and a $419,000 increase in the unrealized loss on securities

available-for-sale.

During the third quarter of 2024, odd lot investment securities totaling $2.1 million were sold, and the proceeds

were used to reinvest in other securities.

These sales generated a net gain of $4,000.There were no sales of securities during 2023.

2023, there were maturities, calls and paydowns of $9.4 million, and the Company purchased $0.5 million in investment securities.

securities with a carrying value of $35.2 million and $36.8 million as of December 31, 2024 and 2023, respectively, were pledged to secure

public deposits and for other purposes required, or permitted, by law.

Our strategy is to invest excess funds in investment

securities, which typically yield more interest income than other short-term investment options, such as federal funds sold and overnight

deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.

The fair value of our investment portfolio is substantially

affected by changes in interest rates.

Losses could be realized if liquidity and/or business strategy necessitate the sale of securities

in a loss position, due to Federal Reserve actions, U.S.

fiscal policies or other factors affecting market interest rates.

As of December

31, 2024, we had a net unrealized loss in our investment portfolio totaling $15.2 million as compared to a $14.8 million loss as of December

As market interest rates increase, the level of unrealized losses could change substantially.

However, these changes would have

no impact on earnings or regulatory capital, unless the securities were sold at a loss.

We believe that all unrealized losses resulted

from temporary changes in interest rates and current market conditions and are not a result of credit deterioration.

No allowance for

credit losses on available-for-sale securities was recorded as of December 31, 2024 and 2023.

We monitor our portfolio regularly and use

it to maintain liquidity, manage interest rate risk and enhance earnings.

The fair value and weighted average yield of investment

securities as of December 31, 2024 are shown in the following schedule by contractual maturity and do not reflect principal paydowns for

amortizing securities.

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay

obligations with or without call or prepayment penalties.

Weighted average yields are calculated by dividing the contractual interest

for each time period by the average amortized contractual cost.

than One Year

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(Dollars in thousands)

U.S Treasuries

Government Agencies

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Mortgage backed securities

Bank Owned Life

As of December 31,

2023 and 2022, the Bank had an aggregate total cash surrender value of $4.6 million and $4.5 million, respectively, on life insurance

policies covering former key officers.

The Company recognized

income of approximately $40,000 during the year ended December 31, 2023.

The Company recorded a loss of $136,000 due to a write-down

of approximately $158,000, partially offset by earnings of $22,000, during the year ended December 31, 2022.

The write-down was due to

the impact of rising interest rates on the value of the underlying assets supporting the policies.

Total deposits were

$716.5 million as of December 31, 2023, an increase of $23.8 million, or 3.4%, from $692.7 million as of December 31, 2022, due to efforts

to attract and retain deposits, specifically time deposits, combined with cyclical fund inflows.

Most of the increase was driven by time

deposits, which increased $64.1 million, or 34.0%, to $252.3 million as of December 31, 2023.

Information detailing

average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net

Interest Income and Net Interest Margin” section.

Core deposits are

considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings products,

all of which decreased in 2023.

Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products

and strong ties with our customer base and communities.

Time deposits of

$250,000 or more equaled approximately 7.36% of deposits at the end of 2023 and 3.87% of deposits at the end of 2022.

As of December 31,

2023 and 2022, uninsured deposits are estimated to be $93.8 million and $87.5 million, respectively.

Estimated uninsured deposits represented

13.1% and 12.6% of total deposits as of December 31, 2023 and 2022, respectively.

Included in estimated uninsured deposits are $27.9

million and $14.4 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit

we have with the FHLB.

The following table

shows maturities of all time deposits considered uninsured by the FDIC or otherwise.

of Uninsured Time Deposits

Bank Owned Life Insurance

As of December 31, 2024 and 2023, the Bank had

an aggregate total cash surrender value of $0 and $4.6 million, respectively, on life insurance policies covering former key

During 2024, one policy was surrendered at market value resulting in a loss of $49,000.

In December 2024, a death benefit

receivable of $5.4 million was recorded, resulting in an income accrual of $1.6 million.

Excluding the loss on surrender and the income accrued

on the death benefit, the Company recognized income of approximately $73,000 and $40,000 during the years ended December 31, 2024 and

Total deposits were $750.0 million as of December 31,

2024, an increase of $33.5 million, or 4.68%, from $716.5 million as of December 31, 2023, due to efforts to attract and retain deposits,

specifically time deposits, combined with more aggressive pricing on money market accounts and cyclical fund inflows.

Most of the increase

was driven by money market deposits which increased $30.2 million, or 55.9%, to $84.1 million, and time deposits, which increased $16.4

million, or 6.51%, to $268.7 million as of December 31, 2024 and 2023.

These increases more than offset a reduction in noninterest bearing

demand deposits of $8.9 million.

The increases in time and money market deposits resulted from small business development efforts throughout

2024, revamping certain accounts to better suit customer needs and offering periodic rate promotions.

Information detailing average deposit balances and

average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net Interest Income and

Net Interest Margin” section.

Core deposits are considered to include demand deposits

and other types of transaction accounts, such as commercial relationships and savings and money market products.

Noninterest bearing

demand deposits decreased $8.9 million in 2024, while interest bearing demand deposits, savings and money market deposits increased $26.0

Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with

our customer base and communities.

Time deposits of $250,000 or more equaled approximately

6.84% of deposits at the end of 2024 and 7.36% of deposits at the end of 2023.

As of December 31, 2024 and 2023, uninsured deposits

are estimated to be $91.9 million and $93.8 million, respectively.

Estimated uninsured deposits represented 12.3% and 13.1% of total

deposits as of December 31, 2024 and 2023, respectively.

Included in estimated uninsured deposits are $22.9 million and $27.9 million

of public funds, for such respective periods, considered secured via pledged securities or letters of credit we have with the Federal

Home Loan Bank of Atlanta (the FHLB).

The following table shows maturities of all time

deposits considered uninsured by the FDIC or otherwise.

of Time Deposits of Greater Than $250,000

in thousands)

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six months through twelve months

As of December 31,

2023 and 2022, $36.8 million and $27.3 million of securities, respectively, were pledged to collateralize public deposits, including

time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB.

Additionally, we held letters

of credit from the FHLB for $12.0 million and $7.0 million at December 31, 2023 and 2022, respectively, to secure public deposits, including

time deposits, held in our Virginia offices.

We held no brokered

deposits at December 31, 2023 or 2022.

As of December 31, 2024 and 2023, $35.2 million and

$36.8 million of securities, respectively, were pledged to collateralize public deposits, including time deposits, held in our Tennessee

offices, and as collateral for credit facilities available through FRB.

Additionally, we held letters of credit from the FHLB for $14.0

million and $12.0 million at December 31, 2024 and 2023, respectively, to secure public deposits, including time deposits, held in our

Virginia offices.

We held $3.0 million in brokered deposits at December

31, 2024, and no brokered deposits as of December 31, 2023.

While not a primary source of funding, brokered deposits provide a means to

efficiently manage funding and liquidity.

Internet accounts are limited to customers located in our primary market area and the surrounding

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Noninterest Income

Noninterest income

increased $709,000 to $9.9 million for the year ended December 31, 2023 from $9.2 million for the comparable period in 2022.

drivers of the increase were the sales of a former operations facility and branch location resulting in a combined gain of $130,0000;

an increase in financial services revenue of $168,000;

and income resulting from an insurance claim payment from the cybersecurity incident

in the amount of $257,000.

This was offset by decreases in service charge income and card processing fees totaling a combined $122,000

during the period.

Service charge income decreased due to changes made in 2022 in assessing certain charges that reduced the number of

transactions subject to such fees.

Additional changes to our service charge structure took effect during the fourth quarter of 2023,

which eliminated charges for certain representment items, and certain funds transfer fees.

Fees from debit card activity declined as

customer deposit balances have reverted to pre-pandemic levels and customer spending habits have also begun to normalize.

For the year ended December 31, 2024, noninterest income

totaled $11.3 million.

After excluding non-recurring items, as shown in the table below, which is a non-GAAP measure, noninterest income

was $9.7 million for 2024 compared to $9.9 million for 2023.

A $244,000, or 22.51%, increase in financial services revenue to $1.3 million

from the $1.1 million recorded during 2023 offset modest decreases in service charges and card processing revenue of $48,000 and $28,000,

respectively.

In addition, noninterest income was impacted by the sales of bank properties in 2024 and 2023.

During 2024, a former branch

office and a lot were sold, along with the sale of furniture, resulting in a net gain of $23,000.

During the same period of 2023, two

former office facilities and a vehicle were sold resulting in a net gain of $130,000.

In 2023, other noninterest income included $257,000

in insurance proceeds recovery related to costs incurred during the cybersecurity incident in 2022, that was not repeated in 2024.

this item noninterest income for 2023 and the nonrecurring items in 2024, noninterest income would have been unchanged at $9.7 million.

Noninterest Expense

was $28.0 million for the year ended December 31, 2023 compared to $26.5 million for the year ended December 31, 2022.

The $1.5 million

increase was impacted by increases in salaries and employee benefits of $891,000, data processing and telecommunications costs of $112,000,

legal and professional fees of $273,000, cards rewards program expense of $115,000 and deposit insurance of $143,000.

These increases

were partially offset by decreases in occupancy expenses of $192,0000, and data processing and telecommunication costs of $171,000, in

comparison to the year ended December 31, 2022.

Our efficiency ratio,

a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 73.7%

in 2023 compared to 70.6% in 2022.

The modest performance decline in this ratio is a result of the decline in net interest income and

increased noninterest expenses, as discussed above and in the “Net Interest Income and Net Interest Margin” section earlier

in this Item 7.

We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing

nonperforming assets and increasing productivity.

Income Taxes and

For the year ended December 31, 2024, noninterest expense

totaled $28.8 million.

After excluding non-recurring items, as shown in the table below, noninterest expense decreased $90,000 to $27.9

million compared to $28.0 million for the year ended December 31, 2023.

The decrease was impacted by reductions in legal and professional

fees, consulting, printing and supplies and loan expenses totaling $450,000.

The expense reductions were partially offset by increases

in advertising, ATM network and deposit insurance expenses, which combined for an increase of $111,000.

While we experienced no significant losses resulting

from fraud in 2024, we experienced an increase in the volume and sophistication of fraudulent transaction attempts.

These fraudulent transaction

attempts ranged from unauthorized electronic transactions to check theft and forgery.

We work continuously with customers to educate them

on identifying potential fraud and the efforts they can take to reduce the risk of fraud.

We expect increased fraudulent transaction attempts

to continue for the foreseeable future.

Our efficiency ratio, a non-GAAP measure, is defined

as noninterest expense divided by the sum of net interest income plus noninterest income and was 72.40% in 2024 compared to 73.71% in

The performance improvement in this ratio is a result of the increase in net interest income, as discussed in the “Net Interest

Income and Net Interest Margin” section earlier in this Item 7.

After adjusting for non-recurring items, the efficiency ratio increases

slightly to 73.01%, as shown in the table below.

We continue to seek opportunities to operate more efficiently through the use of technology,

improving processes, reducing nonperforming assets and increasing productivity.

in thousands)

Interest Income

reported (GAAP)

for nonrecurring items:

system conversion

adjusted for nonrecurring items (non-GAAP)

Income Taxes and Deferred Tax Assets

Income taxes were $2.1 million for the year ended December

31, 2024, compared to $2.1 million for the same period in 2023.

The effective tax rates were 20.76%, and 23.01% for 2024 and 2023, respectively.

The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally due to the lessened impact of tax

preference items, along with the effect of certain state income taxes.

The lower effective tax rate in 2024 is the result of non-taxable

income resulting from the BOLI insurance benefit accrual included in pre-tax earnings.

Deferred tax assets

Income taxes were

$2.1 million for the year ended December 31, 2023, compared to $2.3 million for the same period in 2022.

The effective tax rates were

23.0%, and 22.2% for 2023 and 2022, respectively.

The effective tax rate for the periods differed from the federal statutory rate of

21.0% principally due to the lessened impact of tax preference items, along with the effect of certain state income taxes.

effective tax rate in 2023 is the result of an increase in pre-tax earnings in relation to the various tax preference items, and increased

income in states that maintain a tax structure based on allocated income.

tax assets represent the future tax benefit of future deductible differences.

If it is more likely than not that a tax asset will not

be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value.

The Company has evaluated

positive and negative evidence to assess the realizability of its deferred taxes.

represent the future tax benefit of future deductible differences.

If it is more likely than not that a tax asset will not be realized,

a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value.

The Company has evaluated positive

and negative evidence to assess the realizability of its deferred taxes.

Based on the evidence, including taxable income projections,

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a valuation allowance against its deferred tax assets as of December 31, 2024 or 2023.

positions are evaluated in a two-step process.

The Company first determines whether it is more likely than not that a position will be

sustained upon examination.

If a tax position meets the more likely than not recognition threshold, it is then measured to determine

the amount of benefit to recognize in the financial statements.

The tax position is measured as the largest amount of benefit that is

greater than 50% likely of being recognized.

Tax positions

are evaluated in a two-step process.

The Company first determines whether it is more likely than not that a position will be sustained

upon examination.

If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount

of benefit to recognize in the financial statements.

The tax position is measured as the largest amount of benefit that is greater than

50% likely of being recognized.

The Company classifies interest and penalties as a component of income tax expense.

During the year ended

December 31, 2023, total shareholders’ equity increased $7.6 million to $64.8 million due to the earnings of $7.2 million and the

$2.3 million decrease in the net unrealized loss on available-for-sale investment securities, which was partially offset by a cash dividend

payment of $1.4 million and the repurchase of common stock totaling $237,000.

Additionally, the implementation of the current expected

credit loss (“CECL”) methodology resulted in a one-time net of tax, direct charge to retained earnings of $212,000.

Consequently,

book value per share increased to $2.73 as of December 31, 2023 compared to $2.40 as of December 31, 2022.

The Bank remains well capitalized

per regulatory guidance.

As previously reported,

the Board extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2024.

During 2023, the

Company repurchased 100,875 shares at an average price of $2.31 per share.

Since commencement of the repurchase plan, 174,470 shares

have been repurchased at an average rate of $2.32.

The Company meets

the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding

Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital.

The Bank continues to be subject

to various capital requirements administered by banking agencies.

The Bank is characterized

as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA.

adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in Note 22,

Capital, to the consolidated financial statements in Item 8 of this Form 10-K.

The Bank is also

subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act.

The final rules

require the Bank to comply with the following minimum capital ratios:

(i) a Common Equity Tier 1 (“CET1”) ratio of at least

4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier

1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier

1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation

buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of

Tier 1 capital to average assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress.

institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases,

and compensation based on the amount of the shortfall.

As of December 31, 2023, the Bank meets all capital adequacy requirements to which

it is subject.

Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.

The Company paid

a cash dividend of $0.06 per share in 2023.

On February 28, 2024, the Board of Directors declared a dividend of $0.07 per share, to be

paid on March 29, 2024.

Future payments of cash dividends will depend on a number of factors including but not limited to maintaining

positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital

at the Bank to allow payment of dividends to the parent company.

We closely monitor

our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments.

Collectively, those balances were $118.0 million as of December 31, 2023, down from $130.5 million as of December 31, 2022.

is primarily due to loan growth exceeding funding growth through deposits and other borrowings.

A surplus of short-term assets is maintained

at levels management deems adequate to meet potential liquidity needs.

primary funding source is deposits from customers in the markets in which it provides banking services.

As discussed previously, deposits

increased during 2023 but competition for deposits remains intense from both bank and non-bank institutions.

The Company expects that

pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid on its deposit products,

possibly faster and to a higher degree not currently projected, to retain existing customers and attract new deposit relationships to

fund loans and other activities.

As discussed below, the Company has other liquidity sources to manage its liquidity needs as they arise.

As of December 31,

2023, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $53.0

million, which is net of the $36.8 million of securities pledged as collateral.

Generally, the investment portfolio serves as a source

of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such as federal

funds sold and overnight deposits with the Federal Reserve Bank of Richmond.

Total investment securities decreased $6.3 million, or 6.5%,

during 2023 from $96.1 million as of December 31, 2022 to $89.8 million as of December 31, 2023.

The Bank also has additional borrowing

capacity on lines for which investments are currently pledged.

Our loan to deposit

ratio was 89.1% as of December 31, 2023 and 84.4% as of December 31, 2022.

Available third-party

sources of liquidity remain intact as of December 31, 2023 which includes the following:

our line of credit with the FHLB totaling $200.1

million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve

Bank of Richmond.

We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of

December 31, 2023.

We have used our

line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public

No draws on the letter of credit have been issued.

This letter of credit is considered to be a draw on our FHLB line of credit.

An additional $178.1 million was available on December 31, 2023 on the $200.1 million line of credit, of which $118.9 million is secured

by a blanket lien on our residential real estate loans.

While we have access

to the brokered deposits market, we held no brokered deposits as of December 31, 2023 or 2022.

As of December 31, 2023, we had $6.3 million

in reciprocal CDARS time deposits, compared to $1.4 million as of December 31, 2022.

The Bank has access

to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs.

We have collateralized

this line with investment securities.

As part of the discount window capacity the FRB, starting in March 2023, offered borrowings through

the Bank Term Funding Program which was created to support businesses and consumers by making additional funds available to eligible

depository institutions.

This program, which expired in March 2024, provided loans of up to one year in length, at a fixed rate, with

no prepayment penalties.

Collateral guidelines for this program valued eligible collateral at par value with the margin of 100% of par

We participated in this program in December 2023, through a $10 million borrowing for one year at a rate of 4.83%.

This borrowing

supplemented loan fundings during the month.

During the fourth

quarter of 2023 we made a voluntary principal payment of $310,000 on one of the outstanding trust preferred securities, originally issued

We may consider making future principal payments based on our available liquidity and considering other funding opportunities

that may be available.

With the on-balance

sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements

and needs for the foreseeable future.

However, liquidity can be further affected by a number of factors such as counterparty willingness

or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control.

With the current economic

uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the wars in Ukraine and Gaza,

we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands.

Additionally, our contingency

funding plan is reviewed quarterly with our Asset Liability Committee.

Capital Resources

During the year ended December 31, 2024, total shareholders’

equity increased $5.9 million to $70.7 million due to the earnings of $8.2 million which was partially offset by a cash dividend payment

of $1.7 million, the repurchase of common stock totaling $282,000 and the $331,000 increase in the net unrealized loss on available-for-sale

investment securities, net of taxes.

As previously reported, the Board extended the repurchase

of up to 500,000 shares of the Company’s common stock through March 31, 2025.

During 2024, the Company repurchased 109,176 shares

at an average price of $2.58 per share.

Since commencement of the stock repurchase program, 285,362 shares have been repurchased at an

average rate of $2.42.

The Company meets the eligibility criteria to be considered

a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement and does not report

consolidated regulatory capital.

The Bank continues to be subject to various capital requirements administered by banking agencies.

The Bank is characterized as "well capitalized"

under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA.

The capital adequacy ratios for the Bank,

including the minimum ratios to be considered “well capitalized,” are set forth in Note 22, Capital, to the consolidated financial

statements in Item 8 of this Form 10-K.

The Bank is also subject to the rules implementing

the Basel III capital framework and certain related provisions of the Dodd-Frank Act.

The final rules require the Bank to comply with

the following minimum capital ratios:

(i) a Common Equity Tier 1 (“CET1”) ratio of at least 4.5%, plus a 2.5% “capital

conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets

of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a

ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a

minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a CET1 ratio above

the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount

of the shortfall.

As of December 31, 2024, the Bank meets all capital adequacy requirements to which it is subject.

Based upon projections,

we believe our earnings will be sufficient to support the Bank’s planned asset growth.

The Company paid a cash dividend of $0.07 per share

On February 24, 2025, the Board of Directors declared a dividend of $0.08 per share, to be paid on March 31, 2025.

Future payments

of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with

regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends

to the parent company.

We closely monitor our liquidity and our liquid assets

in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments.

Collectively, those balances were

$128.5 million as of December 31, 2024, up from $118.0 million as of December 31, 2023.

The increase is primarily due to deposit growth

exceeding funding needs for loan growth.

A surplus of short-term assets is maintained at levels management deems adequate to meet potential

liquidity needs.

The Bank’s primary funding source is deposits

from customers in the markets in which it provides banking services.

As discussed previously, deposits increased during 2024 but competition

for deposits remains intense from both bank and non-bank institutions.

The Company expects that pressure on the rates paid on deposits

will continue and that it may be required to pay higher rates than currently projected to retain existing customers and attract new deposit

relationships to fund loans and other activities.

As discussed below, the Company has other liquidity sources to manage its liquidity

needs as they arise.

As of December 31, 2024, all of our investments are

classified as available-for-sale, providing an additional source of liquidity in the amount of $60.8 million, which is net of the $35.2

million of securities pledged as collateral.

Generally, the investment portfolio serves as a source of liquidity while yielding a higher

return at the purchase date when compared to other short-term investment options, such as federal funds sold and overnight deposits with

the Federal Reserve Bank of Richmond (the FRB).

Due to the unrealized loss on securities

available-for-sale, the sale of investments, other than shorter-term investments with minimal unrealized losses or more recently purchased

investments, would not be a main source of liquidity at this time due to the immediate impact on regulatory capital;

however, the majority

of the portfolio is considered high credit quality investments and would be available to pledge against borrowed funds.

Total investment

securities increased $6.2 million, or 6.88%, during 2024 from $89.8 million as of December 31, 2023 to $96.0 million as of December 31,

The Bank also has additional borrowing capacity on lines for which investments are currently pledged.

Our loan to deposit ratio was 87.7% as of December

31, 2024 and 89.1% as of December 31, 2023.

Available third-party sources of liquidity remain intact

as of December 31, 2024 which includes the following:

our line of credit with the FHLB totaling $220.1 million subject to pledging requirements,

the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the FRB.

We also have $30.0

million in unsecured federal funds lines of credit available from three correspondent banks as of December 31, 2024.

We have used our line of credit with FHLB to issue

letters of credit totaling $14.0 million to the Treasury Board of Virginia for collateral on public funds and a $10.0 million fixed rate

borrowing maturing in May of 2028.

No draws on the letters of credit have been issued.

These letters of credit are considered to be draws

on our FHLB line of credit.

An additional $196.1 million was available on December 31, 2024 on the $220.1 million line of credit, of which

$110.6 million is secured by a blanket lien on our residential real estate loans.

use of the FHLB borrowing capacity would require the Company to pledge additional assets.

We held $3.0 million in brokered deposits as of December

No brokered deposits were held as of December 31, 2023.

As of December 31, 2024, we had $7.0 million in reciprocal CDARS time

deposits, compared to $6.3 million as of December 31, 2023.

The Bank has access to additional liquidity through

the FRB’s Discount Window for overnight funding needs.

We have collateralized this line with investment securities.

As part of the

discount window capacity, the FRB offered borrowings through the Bank Term Funding Program, which was created to support businesses and

consumers by making additional funds available to eligible depository institutions.

We participated in this program in December 2023,

through a $10 million borrowing for one year at a rate of 4.83%, which was repaid during the fourth quarter of 2024.

During the fourth quarter of 2024, we made a voluntary

principal payment of $1.2 million on one of the outstanding trust preferred securities, originally issued in 2004.

In January 2025, we

made another voluntary principal payment of $3.0 million on the same trust preferred issue.

We may consider making future principal payments

based on our available liquidity and considering other funding opportunities that may be available.

With the on-balance sheet liquidity and other external

sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable

However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit,

regulatory actions and customer preferences, some of which are beyond our control.

With the current economic uncertainty resulting from

recovering from the lingering effects of the COVID-19 pandemic, inflation and the wars in Ukraine and Gaza, we continue monitoring our liquidity position, specifically

cash on hand in order to meet customer demands.

Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability

Instruments with Off-Balance-Sheet Risk

Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of

its customers.

Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its

These financial instruments include commitments to extend credit and standby letters of credit.

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notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit

and standby letters of credit is represented by the contractual amount of those instruments.

The Bank uses the same credit policies in

making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary and discussion

of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2023 and 2022 is presented at “Consolidated

Financial Statements and Notes” “Note 20 Financial Instruments with Off-Balance Sheet Risk”.

With the implementation

of CECL in 2023, we established an allowance for credit losses on unfunded commitments, which totaled $285,000 at December 31, 2023.

Unfunded commitments

under lines of credit are commitments for possible future extensions of credit to existing customers.

Those lines of credit may not actually

be drawn upon to the total extent to which the Bank is committed.

In response to two bank failures in March 2023, and resulting liquidity

concerns for other super-regional banks, we drew a short-term advance from FHLB as precaution against any significant unusual activity

by borrowers drawing against their lines of credit.

We did not experience any significant draws by borrowers during that period nor do

we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.

The Bank’s exposure to credit loss in the event

of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented

by the contractual amount of those instruments.

The Bank uses the same credit policies in making commitments and conditional obligations

as it does for on-balance-sheet instruments.

A summary and discussion of the contract amount of

the Bank’s exposure to off-balance-sheet risk as of December 31, 2024 and 2023 is presented in Note 20 to the consolidated financial

statements in Item 8 of this Form 10-K.

As of December 31, 2024 and 2023 the allowance for credit losses on unfunded commitments totaled

$404,000 and $285,000, respectively.

Interest Sensitivity

As of December 31,

2023, we had a negative cumulative gap rate sensitivity ratio of 21.59% for the one-year re-pricing period, compared to 17.89% as of

December 31, 2022.

A negative cumulative gap generally indicates that net interest income would decline in a rising interest rate environment

as liabilities re-price more quickly than assets.

Conversely, net interest income would likely increase in periods during which interest

rates are decreasing.

The below table is based on contractual maturities and next repricing date and does not take into consideration

prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits.

When considering these

prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit

portfolio, we are in a position to increase interest income in a rising interest rate environment;

however, the ability to control the

repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access to and availability

of other funding sources.

With indications that the period of rate increases has tapered and consensus is that at least some modest rate

decreases can be anticipated in the near- to mid-term, we are implementing strategies to moderate any potential adverse impact to our

current interest rate risk profile, from what could be a period of flat to decreasing interest rates.

As of December 31, 2024, we had a negative cumulative

gap rate sensitivity ratio of 25.11% for the one-year re-pricing period, compared to 21.59% as of December 31, 2023.

A negative cumulative

gap generally indicates that net interest income would decline in a rising interest rate environment as liabilities re-price more quickly

Conversely, net interest income would likely increase in periods during which interest rates are decreasing.

The below table

is based on contractual maturities and next repricing date and does not take into consideration prepayment speeds of investment securities

and loans, nor does it consider decay rates for non-maturity deposits.

When considering these prepayment speed and decay rate assumptions,

along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest

income in a rising interest rate environment;

however, the ability to control the repricing of the deposit portfolio can be significantly

impacted by competitive pressures, liquidity needs and access to and availability of other funding sources.

With indications that the

period of rate increases has tapered and consensus is that at least some modest rate decreases can be anticipated in the near- to mid-term,

we are implementing strategies to moderate any potential adverse impact to our current interest rate risk profile, from what could be

a period of flat to decreasing interest rates.

Sensitivity Analysis

(In thousands

Uses of funds:

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What changed 10-K

Item 7. Management’s Discussion and Analysis