What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-05-15 compared with 2024-11-14 · 241 added, 337 removed, 207 unchanged (74% of the section changed)

40 unchanged sentences

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.

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;

conditions, including trade restrictions and tariffs, and acts or threats of terrorism, international hostilities, or actions taken by

or other governments in response 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.

utilized by us, including the successful core operating system conversion in 2025;

to successfully manage cybersecurity, including generative artificial intelligence risks;

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;

on third-party vendors and correspondent banks;

23 unchanged sentences

Net income for the

three months ended September 30, 2024 was $2.1 million, an increase of $218,000, or 11.53%, from the same period in 2023.

income increased 1.99%, or $140,000, from $7.0 million for the quarter ended September 30, 2023 to $7.2 million for the quarter ended

September 30, 2024.

The increase was primarily due to an increase in interest income of $2.0 million to $11.5 million due to the combination

of an increase of 57 basis points (“bps”) in the yield on earning assets to 5.51%, and a $65.5 million increase in the average

balance of earning assets.

three months ended March 31, 2025 was $1.9 million, an increase of $122,000, or 6.83%, from the same period in 2024.

Net interest income

increased 9.81%, or $680,000, from $6.9 million for the quarter ended March 31, 2024 to $7.6 million for the quarter ended March 31,

The increase was primarily due to an increase in the yield and average balance of earning assets, specifically loans which increased

27 basis points (”bps”) and $23.5 million when comparing the first three months of 2025 to 2024.

The balance sheet

grew to $880.3 million in total assets as of September 30, 2024, from $826.3 million as of December 31, 2023.

grew to $880.7 million in total assets as of March 31, 2025, from $854.9 million as of December 31, 2024.

Gross loans increased $13.2

million to $646.4 million as of September 30, 2024.

million to $670.7 million as of March 31, 2025.

Additionally, interest-bearing deposits in other banks increased $12.3 million to $66.6

$90.6 million as of September 30, 2024.

Total deposit liabilities as of September 30, 2024 increased $47.1 million to $763.6 million

from December 31, 2023.

On September 27,

2024 Hurricane Helene passed through western North Carolina, southwest Virginia and northeast Tennessee, causing flood and wind damage

We are assessing the impact of this event on our customers and any collateral securing outstanding loans.

At this time,

we are not aware of any widespread impairment of collateral, but we continue to monitor the effects of this event and will address any

situations as needed, including providing payment relief to affected borrowers.

million as of March 31, 2025.

During the first three months of 2025 total deposits increased $26.9 million or 14.53% annualized to $776.9

A dividend of $0.08

per share was paid to shareholders during the first quarter of 2025, a 14.3% increase over the dividend paid in 2024.

During the first

quarter of 2025, we extended a previously announced stock repurchase program, to continue through March 31, 2026.

During the third quarter

of 2024, 23,989 shares were repurchased at an average price of $2.67 per share.

Since the inception

of the program through March 31, 2025, the Company has repurchased 308,139 shares at an average price of $2.46 per share.

Comparison of

the Three Months ended September 30, 2024 and 2023

the Three Months ended March 31, 2025 and 2024

Quarter-to-date highlights

on average assets and equity of 0.97% and 12.35% for the third quarter of 2024, compared

to 0.94% and 12.38% for the third quarter of 2023, respectively;

interest income was $7.2 million for the third quarter of 2024, an increase of $140,000,

or 1.99%, compared to the third quarter of 2023;

provision for credit losses was $49,000 for the three months ended September 30, 2024 compared

to a provision of $155,000 for the three months ended September 30, 2023;

on average assets and equity of 0.90% and 10.78% for the first quarter of 2025, compared

to 0.86% and 11.11% for the first quarter of 2024, respectively;

interest margin was 3.69% for the first quarter of 2025 compared to 3.48% for the first quarter

interest income was $7.6 million for the first quarter of 2025, an increase of $680,000,

or 9.81%, compared to the first quarter of 2024;

· Noninterest

income was $2.4 million, a $10,000 decrease during the third quarter of 2024 compared to

the third quarter of 2023;

income was $2.4 million, an increase of $92,000, or 3.96%, during the first quarter of 2025

compared to the first quarter of 2024;

· Noninterest

expense was $6.8 million, a decrease of $54,000, or 0.78%, for the third quarter of 2024

compared to the third quarter of 2023.

During the three

months ended September 30, 2024, interest income increased $2.0 million to $11.5 million due to the combination of an increase of 57

basis points (“bps”) in the yield on earning assets to 5.51%, and a $65.5 million increase in the average balance of earning

The loan portfolio was the primary driver of both increases, as the yield rose 62 bps to 6.05%, while the average balance increased

$21.7 million for the comparative quarters ending September 30, 2024 and 2023.

The increased interest income was offset by increased

interest expense which rose $1.8 million to $4.4 million during the third quarter of 2024 as compared to $2.5 million reported for the

same period in 2023.

Interest-bearing deposits accounted for $1.7 million of the increase as the average rate increased 110 bps and the

average balance increased $59.7 million for the comparative quarters ending September 30, 2024 and 2023.

Additionally, while the average

cost of borrowed funds decreased 64 bps to 5.77%, the related interest expense increased $100,000

due to the increased average balance related to a $10.0 million borrowing from the Federal Reserve Bank under the Bank Term Funding Program

taken in the fourth quarter of 2023, which increased the overall outstanding average balance by $9.7 million.

The net interest margin

decreased 20 bps, to 3.43% for the quarter ending September 30, 2024, as compared to the 3.63% net interest margin for the same period

in 2023 due to the increase in funding costs outpacing improvements in the yield on earning assets;

however, growth in earning assets

offset the impact of a smaller net interest margin, resulting in the $140,000 increase in net interest income.

On September 18,

2024 the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board lowered the targeted federal funds rate by 50

bps in response to easing inflation and softening employment numbers.

This was the first rate cut since the FOMC began increasing rates

in March of 2022.

On November 7, 2024 the FOMC reduced the federal funds rate another 25 bps.

As a result of these actions, interest

earned on immediately repriceable loans tied to the prime interest rate and interest-earning funds held with other financial institutions,

including the Federal Reserve Bank, have decreased 75 bps.

The Bank has responded by lowering the rates on some deposit products.

there are indications of more rate cuts to follow, future actions by the FOMC cannot be reasonably estimated, due to a number of factors

including future economic and unemployment data.

We continually monitor our rate sensitive assets and liabilities and assess opportunities

to manage these assets and liabilities to maximize returns and mitigate downside risks.

expense was $7.3 million, an increase of $295,000, or 4.23%, for the first quarter of 2025

compared to the first quarter of 2024.

During the first

quarter of 2025, interest income increased $737,000 to $11.4 million due to the combination of an increase of 19 bps in the yield on

earning assets to 5.51% and a $32.7 million increase in the average balance of earning assets.

The loan portfolio was the primary driver

of both increases, as the yield rose 27 bps to 6.10%, while the average balance increased $23.5 million for the comparative quarters

ending March 31, 2025 and 2024.

Investment securities contributed $172,000 as the average balance, excluding the unrealized loss, increased

$6.7 million and the yield rose 52 bps, as we reinvest cash flows and grow the portfolio in a higher interest rate environment.

The increased

interest income was partially offset by increased interest expense which rose $57,000 to $3.7 million during the first quarter of 2025

as compared to $3.7 million reported for the same period in 2024.

Interest-bearing deposits accounted for $298,000 of the increase as

the average rate increased 7 bps and the average balance increased $37.0 million for the comparative quarters ending March 31, 2025 and

The increase attributable to interest-bearing deposits was partially offset by a decrease in the cost of borrowed funds, which

decreased 57 bps to 5.26%, as the related interest expense decreased $241,000.

The decline was also impacted by the decreased average

balance related to a $10 million borrowing from the Federal Reserve Bank under the Bank Term Funding Program that was repaid in October

2024, combined with $4.2 million in principal payments made on trust preferred securities in October 2024 and January 2025.

the variable rate paid on the trust preferred securities decreased as overnight and short-term borrowing rates declined during the last

half of 2024.

As a result, the cost of total interest-bearing liabilities decreased 4 bps to 2.73% during the first quarter of 2025 as

compared to the first quarter of 2024.

As a result, net interest income for the quarter ended March 31, 2025 increased $680,000, or 9.81%,

when compared to the quarter ended March 31, 2024, while the net interest margin increased 21 bps to 3.69% for the quarter ending March

31, 2025, as compared to 3.48% for the same period in 2024 due to the increase in the yield on earning assets outpacing the cost of funds.

The following table

4 unchanged sentences

Three Months Ended

September 30,

are in thousands)

2 unchanged sentences

earning assets

Allowance for credit losses

for credit losses

AND SHAREHOLDERS’ EQUITY

17 unchanged sentences

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

to rates and volume for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023.

and Rate Analysis

Three Months Ended September 30,

to rates and volume for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024.

Volume and Rate Analysis

Increase (decrease)

Months Ended 2025 Compared to 2024

in thousands)

11 unchanged sentences

The provision for

credit losses charged to the income statement for the three months ended September 30, 2024 was $49,000 compared to a provision of $155,000

for the three months ended September 30, 2023.

The provision for credit losses in the third quarter of 2024 was impacted by the resolution

of a loan relationship that had resulted in a $263,000 specific allowance allocation during the second quarter of 2024.

For a discussion

of the factors affecting the allowance for credit losses, including provision expense, refer to Note 7, Allowance for Credit Losses for

Loans, in Item 1 of this Form 10-Q and Asset Quality, below.

credit losses charged to the income statement for the quarter ended March 31, 2025 was $259,000 compared to a net reversal of $43,000

for the three months ended March 31, 2024.

The March 2025 provision reflects the impact of valuation allowances for two specifically

assessed borrower relationships, while the reversal recorded in 2024, was due to the resolution of a loan relationship for which a specific

allowance allocation had been assigned, along with net recoveries on previously charged-off loans recorded during the first quarter of

Also, the provision for credit losses on unfunded commitments was $92,000 for the first quarter of 2025 due to growth in construction

loans which are expected to be drawn over the next 12-18 months.

For a discussion of the factors affecting the allowance for credit losses,

including provision expense, refer to Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q.

Noninterest income

was largely unchanged for the comparative three month periods, decreasing $10,000 to $2.4 million for the quarter ended September 30,

2024 from $2.4 million for the comparable quarter in 2023.

Modest decreases in earnings from service charges of $25,000, card processing

activities of $5,000 and other noninterest income of $23,000, were largely offset by increased revenue from financial services which

increased $36,000.

expense was $6.8 million for the three months ended September 30, 2024 compared to $6.9 million for the quarter ended September 30,

The $54,000 improvement resulted from modest decreases in salaries and benefits of $40,000, and occupancy expenses of $3,000.

In addition, legal and professional fees, loan and loan related expenses, included in other operating expenses, decreased by a

combined $90,000.

These decreases offset increases in data processing and telecommunication expenses and other noninterest expenses

of $10,000 and $59,000, respectively.

increased $92,000 to $2.4 million for the quarter ended March 31, 2025 from $2.3 million for the comparable quarter in 2024.

Modest decreases

in earnings from service charges and card processing activities totaling $68,000 were offset by a branded card incentive payment of $141,000.

Modest decreases in service charges and card processing revenues over the past several quarters result from changes in customer spending

Noninterest expense

was $7.3 million for the quarter ended March 31, 2025 compared to $7.0 million for the quarter ended March 31, 2024.

The $295,000 dollar

increase resulted from increases in salaries and benefits, and occupancy costs, which combined for an increase of $266,000, and increases

in advertising and ATM network expenses which combined for an increase of $66,000.

The increase in salaries and benefits is attributed

to normal recurring salary adjustments and staffing costs for the recently opened loan production office.

Occupancy costs were impacted

by $47,000 in costs incurred in “refreshing” a branch office and $42,000 in costs for snow and ice removal to keep our branch

locations open and safe during the winter storms.

ATM and card processing expense increases of $52,000 related to normal recurring cost

increases, while advertising increases were due to product and service marketing efforts and costs incurred for a brand update.

increases were partially offset by a combined decrease of $31,000 in loan and loan related expenses and other operating expenses.

The conversion of

our core operating system is scheduled for the fourth quarter of 2025.

While estimated deconversion costs of approximately $850,000 were

accrued for in 2024, we cannot be certain that all costs associated with this transition were captured and that there may be non-capitalized

costs incurred and charged to expense during 2025.

The efficiency ratio,

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased to 72.55% during

the third quarter of 2024 from 72.62% for the third quarter of 2023.

the first quarter of 2025 from 75.42% for the first quarter of 2024.

We continue to assess our operational procedures and structure to

1 unchanged sentence

Income tax expense

for the third quarter of 2024 totaled $621,000, an increase of $72,000, or 13.11%, from $549,000 recorded during the same period in 2023.

The effective tax rate for the three months ended September 30, 2024, was 22.76%, compared to 22.51% for the same period in 2023.

A contributor

to the increase to the effective tax rate is the increase in revenue generated in states which assess income tax.

Comparison of

the Nine Months ended September 30, 2024 and 2023

Year-to-date highlights

on average assets and equity of 0.87% and 11.36% for the first nine months of 2024, compared

to 0.96% and 12.62% for the first nine months of 2023, respectively;

interest income decreased $27,000, or 0.13% to $21.1 million for the nine months ended September

30, 2024, compared to $21.1 million for the nine months ended September 30, 2023;

interest margin was 3.44% for the nine months ended September 30, 2024, a decrease of 29

bps compared to 3.73% for the same period of 2023;

for credit losses was $478,000 for the nine months ended September 30, 2024, an increase

of $174,000, or 57.24%, compared to the nine months ended September 30, 2023;

· Noninterest

income was $7.3 million, an increase of $42,000, or 0.58%, compared to the nine months ended

September 30, 2023;

noninterest expense was $20.6 million, a decrease of $141,000, or 0.68%, compared to the

nine months ended September 30, 2023.

For the nine months

ended September 30, 2024, net interest income decreased $27,000 to $21.1 million from $21.1 million for the nine months ended September

The yield on earning assets increased 61 bps to 5.40% for the comparative nine-month periods, while the average balance increased

$62.1 million to $819.9 million.

The cost of interest-bearing liabilities increased 126 bps to 2.94%, while the average balance increased

$71.1 million to $548.7 million during the comparative nine-month periods.

The following table

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

Net Interest Margin

Average Balances,

Income and Expense, and Yields and Rates

Nine Months Ended

September 30,

are in thousands)

bearing deposits in other banks

investment securities

earning assets

for credit losses

AND SHAREHOLDERS’ EQUITY

Interest-bearing

demand deposits

and money market deposits

interest-bearing deposits

preferred securities

borrowed funds

interest-bearing liabilities

Non-interest-bearing

Shareholders’

liabilities and shareholders’ equity

interest income

interest margin

interest spread

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.

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 table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

and Rate Analysis

Nine Months Ended September 30,

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

current assessment of the loan portfolio and related unfunded commitments, a provision of $478,000 was made for the nine months

ended September 30, 2024.

The allowance for credit losses as a percentage of loans increased from 1.14% at December 31, 2023 to

1.19% as of September 30, 2024.

For a discussion of the factors affecting the allowance for credit losses, including provision

expense, refer to Note 2, Summary of Significant Accounting Policies and Note 7, Allowance for Credit Losses, in Item 1 of this Form

10-Q, and Asset Quality, below.

For the nine months

ended September 30, 2024, noninterest income increased $42,000 to $7.3 million from $7.2 million for the same period in 2023.

is due largely to financial services revenue of $998,000, an increase of $168,000, or 20.24%, from the $830,000 recorded during the first

nine months of 2023.

Service charges and card processing revenue totaling $2.9 million and $2.8 million respectively were largely unchanged

These improvements were partially offset by the impact of the sales of bank properties in 2024 and 2023.

During the first

nine months of 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 $135,000.

For the nine months

ended September 30, 2024, noninterest expense decreased $141,000 to $20.6 million compared to $20.8 million for the nine months ended

September 30, 2023.

The decrease was impacted by reductions in occupancy costs of $26,000 combined with decreases in legal and professional

fees of $140,000, consulting fees of $57,000 and loan and other real estate owned expenses of $98,000, excluding net gains on sales of

other real estate owned.

The expense reductions were partially offset by increases in advertising of $19,000, ATM network expenses of

$25,000 and miscellaneous expenses of $131,000 which combined for an increase of $175,000.

for the first quarter of 2025 totaled $584,000, an increase of $53,000, or 9.98%, from $531,000 recorded during the same period in 2024.

The effective tax rate for the three months ended March 31, 2025, was 23.43%, compared to 22.92% for the same period in 2024.

in the effective tax rate is largely the result of earnings generated in states that assess an excise or income tax.

Balance Sheet

Total assets as of

September 30, 2024 were $880.3 million, an increase of $54.0 million, or 6.53%, from $826.3 million as of December 31, 2023.

of $646.4 million as of September 30, 2024 reflected an increase of $8.2 million from $638.1 million at December 31, 2023.

Liquid assets

in the form of cash and cash equivalents increased $38.8 million or 59.64% during the first nine months of 2024.

Investment securities

increased $6.8 million during the first nine months of 2024 due to purchases of $14.0 million, which more than offset sales of $2.1 million,

and maturities, payments and amortization of $8.2 million and a $3.3 million decrease in the unrealized loss on securities available

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.

Consumer loans increased $5.5 million, or 24.10% which included

the purchase of $2.5 million of individual loans, and the funding of $1.8 million of private student loans during the first nine months

Commercial real estate and commercial loans increased $5.3 million and $3.4 million, respectively, during the first nine months

Residential 1-4 family loans decreased $6.0 million from December 31, 2023 to September 30, 2024.

Loan originations during the

first nine months of 2024 were impacted by higher interest rates affecting borrower requests.

Total deposits were

$763.6 million as of September 30, 2024 compared to $716.5 million as of December 31, 2023.

The increase of $47.1 million, or 6.57%,

March 31, 2025 were $880.7 million, an increase of $25.8 million, or 12.25% annualized, from $854.9 million as of December 31, 2024.

Gross loans of $670.7 million as of March 31, 2025 reflected an increase of $13.2 million from $657.5 million as of December 31, 2024.

Liquid assets in the form of cash and cash equivalents increased $15.6 million, or 93.57% annualized, during the first quarter of 2025.

Investment securities increased $2.6 million during the first three months of 2025 due to purchases of $2.9 million, and a decrease in

the unrealized loss on available-for-sale securities of $2.4 million which more than offset maturities, payments and amortization of

$2.7 million.

Gross loans receivable

increased $13.2 million to $670.7 million as of March 31, 2025 from $657.5 million as of December 31, 2024.

Commercial and residential

real estate loans increased $5.5 million and $2.8 million, respectively, from December 31, 2024 to March 31, 2025.

Consumer loans increased

$1.9 million or 27.04% annualized, which included the purchase of $2.5 million of individual loans during the quarter.

Commercial and

agriculture loans increased $1.4 million and $979,000, respectively, during the first quarter of 2025.

Deposits totaled

$776.9 million as of March 31, 2025 compared to $750.0 million as of December 31, 2024.

The increase of $26.9 million, or 14.53% annualized,

was due to efforts to attract and retain time deposits and money market account relationships, combined with cyclical funds inflows.

As a result of these efforts, total time deposits increased $25.1 million, including $3.0 million of brokered time deposits, and money

market accounts increased $27.1 million during the first nine months of 2024, respectively.

As a result of these efforts and seasonality, total time deposits increased $3.9 million, money market accounts increased $10.0 million,

and noninterest bearing deposits increased $9.1 million during the first quarter of 2025.

The increase in time and money market deposits

contributed to the increase in our cost of funds, as previously discussed, due to the continuing repricing of maturing time deposits

in the higher interest rate environment combined with ongoing competition for deposits.

As of September 30,

2024, borrowed funds totaled $36.2 million, unchanged from December 31, 2023.

Since September 30, 2024, $10.0 million borrowed from the

Federal Reserve Bank under the Bank Term Funding Program has been repaid, and a $1.2 million principal reduction was paid toward outstanding

trust preferred securities.

These repayments made from available liquidity, will improve net interest income and the net interest margin

in future periods.

contributed to the increase in our cost of interest-bearing deposits, which increased 7 bps to 2.62% for the three months ended March

31, 2025, as compared to the same period in 2024, as previously discussed, due to the shift in the mix of the deposit portfolio as average

deposit growth over the last year has mainly occurred in the higher-rate products as depositors seek to maximize their return on these

As of March 31, 2025,

borrowed funds totaled $22.0 million, a decrease of $3.0 million from December 31, 2024.

Since December 31, 2024, a $3.0 million principal

reduction was paid toward outstanding trust preferred securities.

This repayment, made from available liquidity, will improve net interest

income and the net interest margin in future periods.

During the first

nine months of 2024, total shareholders’ equity increased $6.3 million to $71.1 million as of September 30, 2024, due to net income

of $5.6 million and a decrease in the net unrealized loss on available-for-sale investment securities of $2.6 million which was offset

by dividends paid to shareholders of $1.7 million and the repurchase of common stock totaling $239,000.

Additional discussion of shareholders’

equity is presented in the Capital Resources discussion below.

three months of 2025, total shareholders’ equity increased $1.8 million to $72.6 million as of March 31, 2025, due to net income

of $1.9 million and a decrease in the net unrealized loss on available-for-sale securities of $1.9 million.

These increases to capital

were offset by dividends paid to shareholders of $1.9 million, and the repurchase of common stock totaling $68,000.

Consequently, book

value per share increased to $3.07 as of March 31, 2025, compared to $2.99 as of December 31, 2024.

The Bank remains well capitalized

per regulatory guidance.

As previously announced,

on January 24, 2025, the Board of Directors extended the repurchase of up to 500,000 shares of the Company’s common stock through

March 31, 2026.

During the first quarter of 2025 the Company repurchased 22,777 shares at an average price of $3.00 per share.

the commencement of the repurchase plan in 2022, 308,139 shares have been repurchased at an average price of $2.46 per share.

Asset Quality

The allowance for

credit losses was $7.7 million, or 1.19% as a percentage of total loans, as of September 30, 2024, and $7.3 million, or 1.14%, as of

December 31, 2023.

The allowance for credit losses on unfunded commitments was $309,000 as of September 30, 2024 as compared to $285,000

at December 31, 2023.

credit losses was $7.8 million, or 1.17% as a percentage of total loans, as of March 31, 2025, and $7.7 million, or 1.17%, as of December

The allowance for credit losses on unfunded commitments was $496,000 as of March 31, 2025, as compared to $404,000 at December

The increase in the allowance for credit losses on unfunded commitments was due to an increase in loan commitments, specifically

residential and commercial real estate construction loan commitments.

Annualized net charge-offs

as a percentage of average loans was 0.01% during the first nine months of 2024 compared to 0.03% during the same period of 2023.

(recoveries) as a percentage of average loans were 0.01% during the first three months of 2025 compared to 0.02% during the fourth quarter

of 2024 and (0.09)% during the first quarter of 2024.

Nonperforming assets,

which include nonaccrual loans and other real estate owned, totaled $5.1 million as of September 30, 2024, an increase of $1.4 million,

or 39.34%, since year-end 2023.

Nonperforming assets as a percentage of total assets were 0.58% as of September 30, 2024 and 0.45% as

of December 31, 2023.

which include nonaccrual loans and other real estate owned, totaled $4.6 million as of March 31, 2025, an increase of $1.2 million, or

35.83%, since year-end 2024.

Nonaccrual loans increased $1.2 million during the first three months of 2025 due principally to a single

loan relationship totaling $802,000 being placed in nonaccrual status.

Nonperforming assets as a percentage of total assets were 0.52%

as of March 31, 2025, and 0.39% as of December 31, 2024.

Other real estate

owned increased $903,000 to $1.1 million as of September 30, 2024 compared to December 31, 2023.

The increase was due to the foreclosure

of a commercial property, which is anticipated to be sold during the fourth quarter of 2024.

Expenses associated with other real estate

owned were $13,000 for the nine months ended September 30, 2024, excluding the effects of the sales of foreclosed properties during the

second and third quarters of 2024 which resulted in a gain of $44,000, compared to expenses of $23,000 during the nine months ended September

Nonaccrual loans increased $550,000 to $4.1 million as of September 30, 2024 from $3.5 million at December 31, 2023, largely

due to a commercial real estate loan moving to nonaccrual status.

owned decreased $30,000 to $57,000 as of March 31, 2025, compared to December 31, 2024, due to the sale of a property during the first

quarter of 2025.

Expenses associated with other real estate owned were $1,000 for the three months ended March 31, 2025, compared to

expenses of $4,000 during the three months ended March 31, 2024.

For detailed information

on nonaccrual loans and other real estate owned as of September 30, 2024 and December 31, 2023, refer to Note 6 Loans and Note 10 Other

Real Estate Owned in Item 1 of this Form 10-Q.

on nonaccrual loans and other real estate owned as of March 31, 2025 and December 31, 2024, refer to Note 6 Loans and Note 10 Other Real

Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard

or below totaled $4.8 million as of September 30, 2024, an increase of $1.3 million from $3.5 million as of December 31, 2023.

past due loans increased to $7.3 million as of September 30, 2024 from $6.2 million as of

December 31, 2023.

The increase in past due loans is largely attributed to an increase in residential mortgage loans 30-59 days past

or below totaled $5.3 million as of March 31, 2025, an increase of $1.3 million from $4.0 million as of December 31, 2024, largely due

to a single loan relationship totaling $802,000 that was downgraded during the first quarter of 2025.

Total past due loans decreased

to $5.0 million as of March 31, 2025 from $6.2 million as of December 31, 2024.

The allowance for

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However, future provisions may be deemed necessary.

During the first nine

During the first three

months of 2025, we maintained the adjustments to our qualitative factors initiated in 2024, to consider risk factors associated with

commercial real estate and residential mortgage loans, however the qualitative adjustment for commercial real estate loans was reduced

as factors used in determining the adjustment have begun to be reflected in the portfolio as it seasons.

Additionally, in consideration

of the impact of Hurricane Helene on the financial performance of borrowers and the underlying loan collateral, a

qualitative factor adjustment was made for September 30, 2024.

Those changes, along with net charge-offs for the period and the assessment

commercial real estate and residential mortgage loans.

Those changes, along with recoveries of loans previously charged off and the assessment

of the historical and specific risks associated with the loan portfolio, resulted in a provision for credit losses of $259,000, of which

$167,000 was a provision for the loan portfolio;

and a provision for unfunded commitments of $25,000.

and $92,000 was a provision for unfunded commitments.

The following table summarizes

components of the allowance for credit losses and related loans as of September 30, 2024 and December 31, 2023:

components of the allowance for credit losses and related loans as of March 31, 2025 and December 31, 2024:

Credit Ratios

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of allowance for credit losses loans to nonaccrual loans

charge-offs to average loans 1

net of recoveries

(recoveries) charge-offs to average loans1

Deferred Tax Asset

and Income Taxes

Due to timing differences

between the book and tax treatments of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on

the unrealized loss on securities available-for-sale of $2.4 million and $3.1 million, existed as of September 30, 2024 and December

31, 2023, respectively.

Our income tax expense was computed at the corporate income tax rate of 21% of taxable income.

We have no significant

nontaxable income or nondeductible expenses.

Due to timing differences between the

book and tax treatments of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized

loss on securities available-for-sale of $2.7 million and $3.2 million, existed as of March 31, 2025 and December 31, 2024, respectively.

Our income tax expense was computed at the federal corporate income tax rate of 21% of taxable income and a blended state tax rate of

We have no significant nontaxable income or nondeductible expenses.

Capital Resources

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with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q.

As of September 30,

As of March 31, 2025,

the Bank remains well capitalized under the regulatory framework for prompt corrective action.

The ratios mentioned above for the

Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

The ratios mentioned above for the Bank

comply with the Federal Reserve rules to align with the Basel III Capital requirements.

Book value per common

share was $3.00 and $2.73 as of September 30, 2024 and December 31, 2023, respectively.

The increase in book value was due to the net

income of $5.6 million for the first nine months of 2024, which exceeded the dividend payment of $0.07 per share paid during the first

quarter of 2024, combined with the $2.6 million decrease in the unrealized loss on available for sale investment securities and the $239,000

repurchase of common shares during the first nine months of 2024.

share was $3.07 and $2.99 as of March 31, 2025 and December 31, 2024, respectively.

The increase in book value was due largely to a decrease

in the unrealized loss on available for sale investment securities earnings for the quarter of $1.9 million combined with net earnings

for the quarter of $1.9 million, which more than offset the dividend payment of $0.08 per share and the repurchase of common shares of

$68,000 during the first quarter of 2025.

Other key performance

indicators are as follows:

September 30,

on average assets 1

Return on average

on average shareholders’ equity1

equity to average assets

Average equity to average

Under current economic

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the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock

through March 31, 2025.

As previously reported, this plan was extended by the Board of Directors through March 31, 2026.

The actual means and timing of any purchases,

number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors,

including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory

requirements.

As of September 30, 2024, the Company has repurchased 270,018 shares at an average price of $2.40 per share since the inception

During the quarter ended September 30, 2024, the Company repurchased 23,989 shares at an average price of $2.67 per share.

The actual means

and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will

depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions,

and applicable legal and regulatory requirements.

As of March 31, 2025, the Company has repurchased 308,139 shares at an average price

of $2.46 per share since inception of the plan.

During the quarter ended March 31, 2025, the Company repurchased 22,777 shares at an

average price of $3.00 per share.

There is no assurance that the Company will purchase any additional shares under this program.

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 securities.

As of September 30,

2024, all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity in the

amount of $50.0 million, which is net of the $38.5 million of securities pledged as collateral.

Investment securities available-for-sale

serve as a source of liquidity and interest rate risk management while generally yielding a higher return versus other short-term investment

options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.

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 $145.8 million as of March 31, 2025, up from $128.5 million as of December 31, 2024.

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

As of March 31, 2025,

all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $62.5 million,

which is net of the $36.1 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 considered a primary source of liquidity due to the immediate impact on regulatory capital;

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 borrowings.

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

Total investment securities increased

$2.6 million, or 11.16%, annualized during the first quarter of 2025 from $96.0 million as of December 31, 2024 to $98.6 million as of

March 31, 2025.

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

Our loan to deposit

ratio was 84.65% and 89.06% as of September 30, 2024 and December 31, 2023, respectively.

Generally, our policy has been to manage this

ratio at or below 90.00%.

ratio was 86.34% and 87.67% as of March 31, 2025 and December 31, 2024, respectively.

Available third-party

sources of liquidity as of September 30, 2024 include the following:

a line of credit with the FHLB, access to brokered certificates

of deposit markets and the discount window at the Federal Reserve Bank.

We also have the ability to borrow $30.0 million in unsecured

federal funds through credit facilities extended by correspondent banks.

sources of liquidity as of March 31, 2025 include the following:

a line of credit with the FHLB, access to brokered certificates of deposit

markets and the discount window at the Federal Reserve Bank.

We also have the ability to borrow $30.0 million in unsecured federal funds

through credit facilities extended by correspondent banks.

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

line of credit with the FHLB to issue letters of credit totaling $14.0 million to the Treasury Board of Virginia for collateral on public

No draws on these letters of credit have been issued.

The letters of credit are considered to be draws on our FHLB line of credit.

In July 2024, we increased our letters of credit to $14.0 million.

In May 2023, we borrowed $10.0 million from FHLB, through a fixed

rate 5-year advance, to support loan fundings and other general liquidity needs.

An additional $190.7 million was available as of September

30, 2024 on the $212.7 million line of credit, of which $95.5 million is secured by a blanket lien on our residential real estate loans.

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

In December 2023 we borrowed $10.0 million

through the Federal Reserve Bank Bank Term Funding Program for one year, which was repaid using available liquid funds on October 1,

2024 without penalty.

As of September 30,

2024 total deposits included $3.0 million of brokered time deposits, acquired during the first quarter of 2024 to augment our balance

sheet liquidity.

We held no brokered deposits as of December 31, 2023.

Internet accounts are limited to customers located in our primary

market area and the surrounding geographical area.

The average balance of and the rate paid on deposits is shown in the net interest

margin analysis tables.

Total reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits were $7.2 million

and $6.3 million as of September 30, 2024 and December 31, 2023, respectively.

Aside from the availability of CDARS time deposits, we

also offer a similar deposit product for transaction account customers through Intrafi Cash Service (“ICS”).

As of September

In May 2023, we borrowed $10.0 million from the FHLB, through a fixed rate 5-year advance, to support loan fundings and other general

liquidity needs.

An additional $189.8 million was available as of March 31, 2025 on the $213.8 million line of credit.

Full use of the

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

As of March 31, 2025

we held brokered time deposits of $3.0 million, unchanged from December 31, 2024.

Internet accounts are limited to customers located

in our primary market area and the surrounding geographical area.

The average balance of and the rate paid on deposits is shown in the

net interest margin analysis tables.

Total reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits were

$7.3 million and $7.0 million as of March 31, 2025 and December 31, 2024, respectively.

Aside from the availability of CDARS time deposits,

we also offer a similar deposit product for transaction account customers through Intrafi Cash Service (“ICS”).

31, 2025 approximately $22.0 million were placed in this product as compared to $23.7 million at December 31, 2024.

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however, while we do not anticipate using this as a primary funding source, securities with an

estimated market value of $21.4 million were pledged as of September 30, 2024.

estimated market value of $28.8 million were pledged as of March 31, 2025.

Time deposits of

$250,000 or more were approximately 7.22% of total deposits at September 30, 2024 and 7.36% of total deposits at December 31, 2023.

$250,000 or more were approximately 7.23% of total deposits at March 31, 2025 and 6.84% of total deposits at December 31, 2024.

In January 2025,

we made a voluntary principal payment of $3.0 million on an outstanding trust preferred security.

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

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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, etc., some of which are beyond our control.

The bank holding

company has approximately $20,000 in cash on deposit at the Bank at September 30, 2024.

The holding company receives periodic dividend

payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments and discretionary principal

payments, to fund dividend payments to shareholders and to repurchase shares.

The Company makes quarterly interest payments on the trust

preferred securities.

As discussed in the

Capital Resources section, the Company is authorized to repurchase up to 500,000 shares of the Company’s outstanding common stock

through March 31, 2025.

Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank,

and are not expected to have a material impact on available liquidity.

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

With the current economic

uncertainty resulting from inflation, the impact of proposed tariffs 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.

Off Balance Sheet Items and Contractual

There have been no

material changes during the nine months ended September 30, 2024, to the off-balance sheet items and the contractual obligations disclosed

material changes during the three months ended March 31, 2025, to the off-balance sheet items and the contractual obligations disclosed

in our 2024 Form 10-K.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis