What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-14 compared with 2025-08-14 · 274 added, 247 removed, 265 unchanged (66% of the section changed)

44 unchanged sentences

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

to successfully manage cybersecurity, including generative artificial intelligence risks;

the effects of cyber incidents or other failures, disruptions or breaches of

our operational or security systems, or those of our third-party vendors or other service providers, including as a result of cyber threats

to assist in managing third party fraud against customer accounts including but not limited to check, credit and debit card, and electronic

25 unchanged sentences

Quarter-to-date highlights

income for the three months ended June 30, 2025 was $2.5 million, or $0.11 per share, an

increase of $848,000, or 50.36%, from the $1.7 million or $0.07 per share reported for the

same period in 2024.

on average assets and equity of 1.15% and 13.91% for the second quarter of 2025, compared

to 0.79% and 10.56% for the second quarter of 2024, respectively;

interest margin was 3.86% for the second quarter of 2025 compared to 3.41% for the second

quarter of 2024;

interest income was $8.2 million for the second quarter of 2025, an increase of $1.2 million

or 17.85%, compared to the second quarter of 2024;

income for the three months ended September 30, 2025 was $2.8 million, or $0.12 per share,

an increase of $650,000, or 30.83%, from the $2.1 million or $0.09 per share reported for

the same period in 2024.

on average assets and equity of 1.21% and 14.28% for the third quarter of 2025 compared to

0.97% and 12.35% for the third quarter of 2024, respectively;

interest margin was 3.93% for the third quarter of 2025 compared to 3.43% for the third quarter

interest income was $8.6 million for the third quarter of 2025, an increase of $1.5 million

or 20.28%, compared to the third quarter of 2024;

· Noninterest

income was $2.4 million, a decrease of $96,000, or 3.79%, during the second quarter of 2025

compared to the second quarter of 2024;

income was $2.5 million, an increase of $73,000, or 3.01%, during the third quarter of 2025

compared to the third quarter of 2024;

· Noninterest

expense was $7.2 million, an increase of $375,000, or 5.48%, for the second quarter of 2025

compared to the second quarter of 2024.

expense was $7.4 million, an increase of $548,000, or 8.02%, for the third quarter of 2025

compared to the third quarter of 2024.

Comparison of

the Three Months ended June 30, 2025 and 2024

the Three Months ended September 30, 2025, and 2024

Net interest income

for the quarter ended June 30, 2025 was $8.2 million, an increase of $1.2 million, or 17.85%, when compared to the quarter ended June

During the second quarter of 2025, interest income increased $947,000 to $12.0 million due to the combination of an increase

of 23 basis points (“bps”) in the yield on earning assets to 5.61% and a $31.7 million increase in the average balance of

earning assets when compared to 2024.

The loan portfolio was the primary driver of both increases, as the yield rose 31 bps to 6.20%,

while the average balance increased $41.9 million compared to the quarter ended June 30, 2024.

Investment securities contributed $125,000

as the average balance, excluding the unrealized loss, increased $4.2 million and the yield rose 37 bps, as we reinvest cash flows and

grow the portfolio in a higher interest rate environment.

Combined with the increased interest income, interest expense decreased $297,000

to $3.7 million during the second quarter of 2025 as compared to $4.0 million reported for the same period in 2024.

The reduced interest

expense is principally attributed to the cost of borrowed funds, which decreased 55 bps to 5.28%, as the related interest expense decreased

The decline was due to 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.

These principal payments reduced the average balance of borrowed funds by $14.1 million

or 39.09% for the comparative quarters ended June 30, 2025 and 2024.

In addition, 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 28 bps to 2.66% during the second quarter of 2025 as compared to the second quarter of 2024.

The net interest margin

increased 45 bps to 3.86% for the quarter ending June 30, 2025, as compared to 3.41% for the same period in 2024 due to the increase

in the yield on earning assets outpacing the cost of funds.

for the quarter ended September 30, 2025 was $8.6 million, an increase of $1.5 million, or 20.28%, when compared to the third quarter

Interest income increased $1.1 million to $12.6 million due to the combination of an increase of 22 basis points (“bps”)

in the yield on earning assets to 5.73% and a $39.4 million increase in the average balance of earning assets when compared to 2024.

The loan portfolio was the primary driver of both increases as the yield rose 26 bps to 6.31% while the average balance increased $66.1

million compared to the quarter ending September 30, 2024.

Also contributing to the improvement in net interest income was the $394,000

decrease in interest expense to $4.0 million during the third quarter of 2025 as compared to $4.4 million in 2024.

The reduction in interest

expense is due to a number of factors including a 31 bp decrease in the cost of interest-bearing deposits to 2.59% due to maturing time

deposits and money market accounts repricing in a lower interest-rate environment and declines

in both the cost and average balance of borrowed funds.

The decline in the average balance of borrowed funds was due to the decrease

in the 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

In addition, 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 40 bps to 2.69% during the third

quarter of 2025 as compared to the third quarter of 2024.

The net interest margin increased 50 bps to 3.93% for the quarter ending September

30, 2025 as compared to 3.43% for the same period in 2024 due to the increase in the yield on earning assets and the decline in the cost

The following table

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Three Months Ended

September 30,

are in thousands)

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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 June 30, 2025, as compared to the three months ended June 30, 2024.

Volume and Rate Analysis

Increase (decrease)

Three Months Ended June 30, 2025 Versus 2024

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

to rates and volume for the three months ended September 30, 2025 as compared to the three months ended September 30, 2024.

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

Federal funds sold

Interest bearing deposits in other banks

Investment securities

Total earning assets

Interest expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Other borrowings

Trust preferred securities

Total interest-bearing liabilities

Change in net interest income

The provision for

credit losses charged to the income statement for the quarter ended June 30, 2025 was $154,000 compared to $472,000 for the three months

ended June 30, 2024.

The second quarter 2025 provision reflects the impact of the loan growth while the provision recorded in 2024 was

due to an increase in past due and nonperforming loans during the second quarter of 2024.

The provision for credit losses on unfunded

commitments was $0 for the second quarter of 2025 due to a reduction in the growth rate in commitments for 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.

credit losses charged to the income statement for the quarter ended September 30, 2025, was $189,000 compared to $49,000 for the three

months ended September 30, 2024.

The third quarter 2025 provision reflects the impact of the loan growth while the provision recorded

in 2024 was impacted by the resolution of a loan relationship that had resulted in a $262,000 specific allowance allocation during the

second quarter of 2024.

The provision for credit losses on unfunded commitments was $0 for the third quarter of 2025 due to a slight

reduction in commitments on construction loans offset by a small increase in the expected loss rate.

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

totaling $2.4 million for the quarter ended June 30, 2025 decreased $96,000 compared to the quarter ended June 30, 2024.

Modest decreases

in earnings from service charges and financial services revenue totaling $68,000 and $16,000, respectively, and a gain on disposal of

premises and equipment of $53,000 in 2024 that was not repeated in 2025 were partially offset by a $17,000 increase in card processing

totaling $2.5 million for the quarter ended September 30, 2025 increased $73,000 compared to the quarter ended September 30, 2024.

increases in earnings from service charges, card processing, financial services revenue, and other miscellaneous income totaling $8,000,

$21,000, $31,000, and $35,000, respectively, were partially offset by the $20,000 decrease in income from bank-owned life insurance policies

which were either surrendered or paid out due to death in the fourth quarter of 2024.

Noninterest expense

was $7.2 million for the quarter ended June 30, 2025 compared to $6.8 million for the quarter ended June 30, 2024.

The $375,000 dollar

increase resulted from increases in salaries and benefits, occupancy, and data processing costs, which combined for an increase of $119,000,

and increases in advertising, ATM network, loan processing, and other expenses which combined for an increase of $196,000.

in salaries and benefits is attributed to normal recurring salary adjustments and staffing costs for the recently opened loan production

Occupancy costs were impacted by costs for the new loan production office.

Advertising included costs for a program to refresh

the bank branding, while loan costs were impacted by costs associated with a loan promotion.

As we progress with

our planned core conversion, it is expected that additional costs related to overtime, meals and other expenses related to the installation,

testing and training on the new system will be incurred during the remainder of 2025.

was $7.4 million for the quarter ended September 30, 2025 compared to $6.8 million for the quarter ended September 30, 2024.

increase primarily resulted from increases in salaries and benefits of $209,000, other expenses related to the core conversion of $104,000,

data processing costs of $38,000, ATM network expenses of $42,000, and loan-related expenses of $104,000.

The increase in salaries and

benefits is attributable to normal recurring salary adjustments, increases in incentive accruals based on the Company’s year-to-date

performance and production, higher health insurance expenses, staffing costs for the Wytheville loan production office, and overtime

associated with the core conversion.

Other expenses related to the core conversion include professional and ancillary costs for other

applications and systems impacted by the conversion as well as internal and external travel costs associated with testing and data validation.

The increase in loan-related expenses is due to expenses associated with a home equity loan promotion during the second and third quarters

Subsequent to quarter-end,

there has been, and will be, additional costs associated with the core system conversion including additional costs related to overtime,

meals and other expenses related to the installation, testing and training on the new system and the other ancillary systems impacted

by the core conversion.

The efficiency ratio,

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased to 66.24% during

the second quarter of 2025 from 71.96% for the second quarter of 2024.

We continue to assess our operational procedures and structure

to improve efficiencies and contain costs.

the third quarter of 2025 from 71.10% for the third quarter of 2024.

We continue to assess our operational procedures and structure to

improve efficiencies and contain costs.

Income tax expense

for the second quarter of 2025 totaled $751,000, an increase of $243,000, or 47.83%, from $508,000 recorded during the same period in

This increase was in line with the increase in pre-tax income which increased $1.1 million or 49.77% for the comparative three

months ended June 30, 2025 and 2024.

The effective tax rate for the three months ended June 30, 2025, was 22.88%, compared to 23.18%

for the third quarter of 2025 totaled $812,000, an increase of $191,000, or 30.76%, from $621,000 recorded during the same period in

This increase was in line with the increase in pre-tax income which increased $841,000 or 30.82% for the comparative three months

ended September 30, 2025 and 2024.

The effective tax rate for the three months ended September 30, 2025 was 22.75%,compared to 22.76%

for the same period in 2024.

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the 21% corporate tax rate, and the reinstatement of bonus depreciation, it also put in place modifications to reduce or limit certain

fringe benefits and charitable contribution deductions and modified information reporting

rules by requiring increased compliance processes by businesses.

Pending the release of final regulations later in 2025, a full assessment

of the impact of this legislation on the Company cannot yet be determined.

fringe benefits and charitable contribution deductions and modified information reporting rules by requiring increased compliance processes

by businesses.

Pending the release of final regulations later in 2025, a full assessment of the impact of this legislation on the Company

cannot yet be determined.

Comparison of

the Six Months ended June 30, 2025 and 2024

the Nine Months ended September 30, 2025 and 2024

Year-to-date highlights

income for the six months ended June 30, 2025 was $4.4 million, or $0.19 per share, an increase

of $970,000, or 27.95%, from the $3.5 million or $0.15 per share reported for the same period

on average assets and equity of 1.02% and 12.37% for the first half of 2025, compared to

0.83% and 10.83% for the first six months of 2024, respectively;

For the six months

ended June 30, 2025, net interest income totaled $15.8 million, an increase of $1.9 million, or 13.84%, as compared to the six months

ended June 30, 2024.

income for the nine months ended September 30, 2025 was $7.2 million, or $0.30 per share,

an increase of $1.6 million, or 29.04%, from the $5.6 million or $0.24 per share reported

for the same period in 2024.

on average assets and equity of 1.09% and 13.03% for the first nine months of 2025, compared

to 0.87% and 11.36% for the first nine months of 2024, respectively;

For the nine months

ended September 30, 2025, net interest income totaled $24.5 million, an increase of $3.4 million, or 16.03%, as compared to the nine

months ended September 30, 2024.

The net interest margin increased 39 bps to 3.83% as compared to 3.44% for the same period in 2024.

income improved due to increased average earning assets, which increased $32.2 million, or 3.97%, to $844.7 million.

In addition, the

yield on earning assets improved 21 bps to 5.56% during the comparative six-month periods.

Interest expense for the six months ended

June 30, 2025, totaled $7.5 million, a decrease of $239,000, or 3.09%, from the same period in 2024.

The decrease in interest expense

is due primarily to borrowed funds as discussed above.

Net interest income improved due to increased average earning assets, which increased $34.7 million, or 4.23%, to $854.5 million.

addition, the yield on earning assets improved 22 bps to 5.62% during the nine months ended September 30, 2025 compared to the same period

Interest expense for the nine months ended September 30, 2025 totaled $11.5 million, a decrease of $634,000, or 5.24%, from

the same period in 2024.

The decrease in interest expense is due primarily to the lower costs of interest-bearing deposits and borrowed

funds as discussed above.

The following table

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Income and Expense, and Yields and Rates

Six Months Ended

Nine Months Ended

September 30,

are in thousands)

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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 six months ended June 30, 2025, as compared to the six months ended June 30, 2024.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2025 Versus 2024

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

For the six months

ended June 30, 2025, the provision for credit losses totaled $413,000 as compared to $429,000 recorded for the same period in 2024.

For the six months

ended June 30, 2025 noninterest income decreased $4,000 to $4.8 compared to the same period in 2024, as combined decreases in service

charges, card processing fees and financial services revenue totaling $139,000 were offset by a branded card incentive payment of $141,000.

For the six months

ended June 30, 2025, noninterest expense totaled $14.5 million compared to $13.8 million for the same period in 2024, an increase of

$670,000 or 4.85%.

to rates and volume for the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024.

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

Federal funds sold

Interest bearing deposits in other banks

Investment securities

Total earning assets

Interest expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Other borrowings

Trust preferred securities

Total interest-bearing liabilities

Change in net interest income

For the nine months

ended September 30, 2025, the provision for credit losses totaled $602,000 as compared to $478,000 recorded for the same period in 2024.

For the nine months

ended September 30, 2025, noninterest income increased $69,000 to $7.3 million compared to the same period in 2024, mainly due to a branded

card incentive payment of $141,000 in 2025 which was partially offset by a $98,000 decrease in service charges.

For the nine months

ended September 30, 2025, noninterest expense totaled $21.9 million, an increase of $1.2 million, or 5.90%, over the same period in 2024.

The components of the year-over-year increase are largely similar to those discussed for the current quarter.

items include $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 incurred during the first quarter of 2025.

Additional items include

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

our branch locations open and safe during the winter storms in the first quarter of 2025.

Balance Sheet

Total assets as of

June 30, 2025 were $892.9 million, an increase of $38.0 million, or 8.96% annualized, from $854.9 million as of December 31, 2024.

loans of $695.8 million as of June 30, 2025 reflected an increase of $38.3 million from $657.5 million as of December 31, 2024.

assets in the form of cash and cash equivalents increased $4.5 million, or 13.38% annualized, during the first six months of 2025.

securities increased $765,000 during the first six months of 2025 due to purchases of $4.8 million and a decrease in the unrealized loss

on available-for-sale securities of $2.1 million which more than offset maturities, payments and amortization of $6.1 million.

Gross loans receivable

increased $38.3 million, or 11.74% annualized to $695.8 million as of June 30, 2025 from $657.5 million as of December 31, 2024.

and residential real estate loans increased $7.3 million and $14.4 million, respectively, from December 31, 2024 to June 30, 2025.

loans increased $3.0 million, which included the purchase of $2.8 million of individual loans during the six months ended June 30, 2025.

Farmland and Agriculture loans increased $3.8 million and $1.2 million, respectively, during the first six months of 2025.

September 30, 2025 were $910.7 million, an increase of $55.8 million, or 8.73% annualized, from $854.9 million as of December 31, 2024.

Gross loans of $707.3 million as of September 30, 2025 reflected an increase of $49.7 million, or 10.11% annualized, from $657.5 million

as of December 31, 2024.

Liquid assets in the form of cash and cash equivalents increased $13.0 million, or 25.77% annualized, during

the first nine months of 2025.

Investment securities increased $169,000 during the first nine months of 2025 due to purchases of $5.3

million and a decrease in the unrealized loss on available-for-sale securities of $4.6 million which more than offset maturities, calls,

payments and amortization of $9.7 million.

There have been no sales of loans or investments during 2025 other than normal sales of mortgage

loans originated for sale.

Commercial and residential

real estate loans, the two largest categories of loans, increased $9.1 million and $16.7 million, respectively, from December 31, 2024

to September 30, 2025.

Multi-family real estate loans increased $12.5 million.

Consumer loans increased $3.5 million, which included

the purchase of $2.8 million of individual loans during the nine months ended September 30, 2025.

Farmland and Agriculture loans increased

$7.6 million and $847,000, respectively, during the first nine months of 2025.

Deposits totaled

$781.9 million as of June 30, 2025 compared to $750.0 million as of December 31, 2024.

$799.4 million as of September 30, 2025 compared to $750.0 million as of December 31, 2024.

The increase of $49.4 million, or 8.81% annualized,

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time deposits increased $23.7 million, money market

accounts increased $14.7 million, and noninterest bearing deposits increased $8.6 million during the first six months of 2025.

in time and money market deposits contributed to the decrease in our cost of interest-bearing deposits, which decreased 6 bps to 2.59%

for the six months ended June 30, 2025, as compared to the same period in 2024, due to the relatively lower cost of money market deposit

rates compared to time deposits, and the downward repricing of a portion of the time deposit portfolio as maturing deposits renew.

the second quarter of 2025, $15.0 million of brokered time deposits were added with maturities ranging from two months to two years.

These deposits supplemented liquidity and supported loan closings and advances, and to bolster on balance sheet liquidity.

As of June 30, 2025,

borrowed funds totaled $27.0 million, an increase of $2.0 million from December 31, 2024.

On June 30, 2025, we took a short-term Federal

Home Loan Bank advance of $5.0 million to bolster liquidity based on anticipated loan closings or advances.

This advance was repaid in

During the first quarter of 2025, a $3.0 million principal reduction was paid toward outstanding trust preferred securities.

repayment improved net interest income and the net interest margin during the current reporting periods and should positively impact

future periods.

During the six months

ended June 30, 2025, total shareholders’ equity increased $4.1 million to $74.8 million, due to net income of $4.4 million and

a decrease in the net unrealized loss on available-for-sale securities of $1.7 million.

These increases to capital were offset by dividends

paid to shareholders of $1.9 million, and the repurchase of common stock totaling $106,000.

Consequently, book value per share increased

to $3.17 as of June 30, 2025, compared to $2.99 as of December 31, 2024.

The Bank remains well capitalized per regulatory guidance.

accounts increased $23.7 million, and noninterest bearing deposits increased $3.9 million during the first nine months of 2025.

the second quarter of 2025, $15.0 million of brokered time deposits were issued with maturities ranging from two months to two years.

$10.0 million of these brokered time deposits matured in August and were not replaced.

These deposits supplement liquidity, support loan

closings and advances and bolster on-balance-sheet liquidity.

As of September 30,

2025, borrowed funds totaled $22.0 million, a decrease of $3.0 million from December 31, 2024.

During the first quarter of 2025, a $3.0

million principal reduction was paid toward outstanding trust preferred securities.

This repayment improved net interest income and the

net interest margin during the current reporting periods and should positively impact future periods.

On June 30, 2025, we took a short-term

Federal Home Loan Bank advance of $5.0 million to bolster liquidity based on anticipated loan closings or advances.

This advance was

repaid in July.

During the nine months

ended September 30, 2025, total shareholders’ equity increased $8.8 million to $79.5 million due to net income of $7.2 million

and a decrease in the net unrealized loss on available-for-sale securities of $3.7 million.

These increases to capital were offset by

dividends paid to shareholders of $1.9 million and the repurchase of common stock totaling $180,000.

Consequently, book value per share

increased to $3.37 as of September 30, 2025 compared to $2.99 as of December 31, 2024.

The Bank remains well capitalized per regulatory

As previously announced,

the Board of Directors extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2026.

the first six months of 2025, the Company repurchased 35,846 shares at an average price of $2.98 per share.

the first nine months of 2025, the Company repurchased 59,531 shares at an average price of $3.02 per share.

Since the commencement of

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The allowance for

credit losses was $7.9 million, or 1.14% as a percentage of total loans, as of June 30, 2025, and $7.7 million, or 1.17%, as of December

The allowance for credit losses on unfunded commitments was $496,000 as of June 30, 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.

credit losses was $8.0 million, or 1.13% as a percentage of total loans, as of September 30, 2025 and $7.7 million, or 1.17%, as of December

The allowance for credit losses on unfunded commitments was $496,000 as of September 30, 2025 as compared to $404,000 as of

December 31, 2024.

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

(recoveries) as a percentage of average loans were 0.02% during the first six months of 2025 compared to (0.01)% during the same period

of 2024 and 0.01% during the first quarter of 2025.

(recoveries) as a percentage of average loans were 0.04% during the first nine months of 2025 compared to 0.01% during the same period

of 2024 and 0.10% during the third quarter of 2025.

The higher charge-off rate during the third quarter was related to a partial charge-off

of $138,000 on a loan that had been specifically provided for in 2024.

Nonperforming assets,

which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.6 million as of June

30, 2025, an increase of $202,000, or 6.01%, since year-end 2024.

Nonaccrual loans increased $215,000 during the first six 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 0.40% as of June 30, 2025, and 0.39% as of December 31, 2024.

which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.2 million as of September

30, 2025, a decrease of $164,000, or 4.88%, since year-end 2024.

Nonaccrual loans decreased $321,000 during the first nine months of

2025 primarily due to the resolution of several large credits and a partial charge-off exceeding the impact of a single loan relationship

totaling $802,000 placed in nonaccrual status in 2025.

Nonperforming assets as a percentage of total assets were 0.35% as of September

30, 2025 and 0.39% as of December 31, 2024.

Other real estate

owned decreased $30,000 to $57,000 as of June 30, 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, including gains and losses on sales, were net recoveries of $3,000

for the three months ended June 30, 2025, compared to net recoveries of $32,000 during the three months ended June 30, 2024, due to gains

on sales of foreclosed properties recorded of $6,000 and $34,000, during the respective three month periods in 2025 and 2024.

owned increased $2,000 to $89,000 as of September 30, 2025 compared to December 31, 2024, due to the sale of a property during the first

quarter of 2025 and the foreclosure on one property during the third quarter of 2025.

Expenses associated with other real estate owned,

including gains and losses on sales, were $6,000 for the three months ended September 30, 2025 compared to net recoveries of $3,000 during

the three months ended September 30, 2024 due to gains on sales of foreclosed properties of $0 and $10,000 during the respective three-month

periods in 2025 and 2024.

For detailed information

on nonaccrual loans and other real estate owned as of June 30, 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.

on nonaccrual loans and other real estate owned as of September 30, 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 $5.7 million as of June 30, 2025, an increase of $1.7 million from $4.0 million as of December 31, 2024, due to two

loan relationships totaling $2.9 million that were downgraded during the first six months of 2025.

The Company is working with one of

these borrowers to bring the classified portion of the loan totaling $2.2 million into compliance with applicable loan covenants and

or below totaled $5.2 million as of September 30, 2025, an increase of $1.2 million from $4.0 million as of December 31, 2024 due to

two loan relationships totaling $2.9 million that were downgraded during the first nine months of 2025.

The Company is working with one

of these borrowers to bring the classified portion of the loan totaling $2.2 million into compliance with applicable loan covenants and

does not anticipate any loss will result from this loan.

Total past due loans decreased to $4.4 million as of June 30, 2025 from $6.2

Total past due loans decreased to $4.6 million as of September 30, 2025 from

$6.2 million as of December 31, 2024.

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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

During the first six 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.

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 $413,000, of which $321,000 was a provision for the loan portfolio and $92,000 was a provision for unfunded commitments.

following table summarizes components of the allowance for credit losses and related loans as of June 30, 2025 and December 31, 2024:

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 first nine

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, we removed the qualitative factor related to Hurricane Helene which occurred in

September 2024.

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 $602,000, of which $510,000 was a provision for

the loan portfolio 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, 2025 and December 31, 2024:

Credit Ratios

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Due to timing differences

between the book and tax treatments of several income and expense items, a net deferred tax asset of $1.6 million is recorded as of June

between the book and tax treatments of several income and expense items, a net deferred tax asset of $1.6 million is recorded as of September

30, 2025 and December 31, 2024, excluding the deferred tax asset on the unrealized loss on securities available-for-sale of $2.2 million

and $3.2 million, as of June 30, 2025 and December 31, 2024, respectively.

and $3.2 million, as of September 30, 2025 and December 31, 2024, respectively.

Our income tax expense was computed at the federal corporate

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capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this

As of June 30, 2025,

As of September 30,

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 $3.17 and $2.99 as of June 30, 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 year of $1.7 million combined with net earnings for

the year of $4.4 million, which more than offset the dividend payment of $0.08 per share and the repurchase of common shares of $106,000

during the first half of 2025.

share was $3.37 and $2.99 as of September 30, 2025 and December 31, 2024, respectively.

The increase in book value was due largely to

net earnings for the year of $7.2 million combined with a decrease in the unrealized loss on available for sale investment securities,

net of the tax effects, for the year of $3.7 million, which more than offset the dividend payment of $0.08 per share and the repurchase

of common shares of $180,000 during the first nine months of 2025.

Other key performance

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Three months ended

Six months ended

September 30,

Nine months ended

September 30,

Return on average assets 1

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requirements.

As of June 30, 2025, the Company has repurchased 321,208 shares at an average price of $2.48 per share since inception

During the quarter ended June 30, 2025, the Company repurchased 13,069 shares at an average price of $2.95 per share.

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

As of September 30, 2025, the Company has repurchased 344,893 shares at an average price of $2.52 per share since inception

During the quarter ended September 30, 2025, the Company repurchased 23,685 shares at an average price of $3.07 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 investments.

Collectively, those balances were $133.4 million as of June 30, 2025, up from $128.5 million as of December 31, 2024.

The increase is

primarily due to deposit growth, including brokered certificates of deposit and the short-term FHLB advance taken during June 2025.

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

As of June 30, 2025,

all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $61.3 million,

which is net of the $35.5 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).

Collectively, those balances were $141.1 million as of September 30, 2025, up from $128.5 million as of December 31, 2024.

is primarily due to deposit growth, including brokered certificates of deposit.

A surplus of short-term assets is maintained at levels

management deems adequate to meet potential liquidity needs

As of September 30,

2025, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $35.8

million, which is net of the $60.4 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,

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Total investment securities increased

$765,000, or 1.61%, annualized during the first half of 2025 from $96.0 million as of December 31, 2024 to $96.7 million as of June 30,

$169,000, or 0.24% annualized, during the first nine months of 2025 from $96.0 million as of December 31, 2024, to $96.2 million as of

September 30, 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 88.99% and 87.67% as of June 30, 2025 and December 31, 2024, respectively.

ratio was 88.48% and 87.67% as of September 30, 2025 and December 31, 2024, respectively.

Available third-party

sources of liquidity as of June 30, 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.

sources of liquidity as of September 30, 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

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$5.0 million which was repaid in July 2025.

An additional $191.3 million was available as of June 30, 2025 on the $220.3 million line of credit.

An additional $199.3 million was available as of September 30, 2025 on the $223.3 million

line of credit.

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

As of June 30, 2025

As of September 30,

2025, we held brokered time deposits of $8.0 million, an increase of $5.0 million from December 31, 2024.

These added brokered deposits supplemented

liquidity and supported loan closings and advances and bolstered on-balance-sheet liquidity.

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 $7.6 million and $7.0 million as of June 30, 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”).

As of June 30, 2025 approximately $17.9 million were placed in this product as compared to $23.7 million at December 31, 2024.

CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit

insurance coverage.

These added brokered deposits

supplemented liquidity and supported loan closings and advances and bolstered on-balance-sheet liquidity.

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 $7.9 million and $7.0 million as of September 30, 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”).

As of September 30, 2025, approximately $17.1 million were placed in this product as compared to $23.7 million at December 31, 2024.

Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal

deposit insurance coverage.

Additional liquidity

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

estimated market value of $28.2 million were pledged as of June 30, 2025.

estimated market value of $28.5 million were pledged as of September 30, 2025.

Time deposits of

$250,000 or more were approximately 5.52% of total deposits at June 30, 2025 and 6.84% of total deposits at December 31, 2024.

$250,000 or more were approximately 6.55% of total deposits at September 30, 2025 and 6.84% of total deposits at December 31, 2024.

In January 2025,

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There have been no

material changes during the six months ended June 30, 2025, to the off-balance sheet items and the contractual obligations disclosed

material changes during the nine months ended September 30, 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