What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-17 compared with 2023-05-16 · 396 added, 327 removed, 143 unchanged (83% of the section changed)

39 unchanged sentences

the occurrence

of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing novel coronavirus

(COVID-19) outbreak and the associated efforts to limit the spread of the disease), 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;

to successfully manage cyber security;

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

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;

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

funds transfer fraud;

on third-party vendors and correspondent banks;

generally accepted accounting principles;

the allowance for credit losses resulting from the adoption and implementation of the CECL methodology;

the transition

from the use of the LIBOR index;

governmental regulations, tax rates and similar matters;

which may be described, from time to time, in our filings with the Securities and Exchange Commission.

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

Because of these

3 unchanged sentences

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

Critical Accounting Policies

Critical Accounting

For discussion of

4 unchanged sentences

Our most critical accounting policies relate to our allowance for credit losses.

The allowance represents

an amount that, in the Company's judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio.

judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration

such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio,

current, reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral,

overall portfolio quality and review of specific potential losses.

This evaluation is inherently subjective because it requires estimates

that are susceptible to significant revision as more information becomes available.

The allowance for

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

If the financial

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

updated, and additional provisions could be required.

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

losses, we refer you to the section on “Asset Quality” in this discussion.

Overview and Highlights

Net income for the

three months ended March 31, 2023 was $2.0 million, an increase of $100,000, or 5.2%, from the same period in 2022.

The increase was

primarily due to improvement in the net interest margin to 3.83% for the first quarter of 2023 compared to 3.53% for the first quarter

of 2022 due to the increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022

The primary driver for the improved earnings was an increase in net interest income of $447,000 and a reduction of the provision

for credit losses of $100,000, offset by an increase in total noninterest expense of $431,000.

The increase in total non-interest expense

is related to increases in salaries and employee benefits as well as data processing and telecommunications expenses.

The increase in

salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made in the first quarter

The balance sheet

grew to $793.6 million as of March 31, 2023, from $775.4 million as of December 31, 2022, funded by deposits which increased $16.1 million

to $708.8 million as of March 31, 2023 from $692.7 million as of December 31, 2022.

These deposits funded an increase of $10.3 million

in interest bearing deposits in other banks and an increase of $5.88 million in gross loans.

The increase in gross loans is due to a

moderate increase in loan demand and less prepayment activity due to the higher interest rate environment.

During the second

quarter of 2022, we initiated a previously announced stock repurchase program.

Through March 31, 2023, 93,527 shares have been repurchased

at an average price of $2.32 per share.

Comparison of

the Three Months ended March 31, 2023 and 2022

Quarter-to-date highlights

on average assets and equity of 1.07% and 14.05 % for the first quarter of 2023, compared

to 0.97% and 12.35% for the first quarter of 2022, respectively;

interest income was $7.0 million for the first quarter of 2023, an increase of $447,000,

or 6.8%, compared to the first quarter of 2022;

provision for credit losses for the first quarter of 2023 compared to $100,000 for the first

quarter of 2022;

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, an increase of $30,000, or 1.3%, during the first quarter of 2023

compared to the first quarter of 2022;

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 $6.9 million, an increase of $430,000, or 6.7%, for the first quarter of 2023

compared to the first quarter of 2022.

The Company’s

primary source of income is net interest income, which increased by $447,000, or 6.8%, to $7.0 million for the first quarter of 2023

compared to $6.6 million for the first quarter of 2022.

Interest income increased $1.4 million due to increased interest earning deposits

with banks and higher yielding loans resulting from the increase in fed funds rate.

Total interest expense increased $918,000 driven

primarily by the increase in the cost of interest-bearing liabilities, which rose 81 bps to 1.27% from 0.46% for comparative three months

ended March 31, 2023 and 2022.

The increase in interest rates more than offset the modest decrease of $9.4 million, or 1.98% in average

interest-bearing liabilities for the comparative three-month period.

Overall there was a 53 basis-point (“bp”) increase in

the cost of funds to 83 bps while the net interest margin increased 30 bps to 3.83%.

During the first quarter of 2023, the Federal Reserve’s

Open Market Committee (FOMC) increased the discount rate two times for a total of 50 bps, bringing the number of rate increases to eight

since the quarter ended March 31, 2022.

The Company experienced benefits of the rate increases during the first quarter, but the full

impact will be somewhat lagging as certain loans, investments, and borrowings through trust preferred securities will not reprice until

the individual instruments next interest rate repricing date.

Deposit rates have been impacted by the rate increases, but not yet to

the extent of new loan rates and rates earned on overnight funds.

The Company continues to evaluate rate adjustments for factors, including

competitive pressure within the local markets, funding needs to support growth and other needs.

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 September 30, 2025, and 2024

Net interest income

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

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

Interest Margin Analysis

Net Interest Margin

Average Balances,

Income and Expense, and Yields and Rates

in thousands)

Months Ended March 31,

Three Months Ended

September 30,

are in thousands)

bearing deposits in other banks

investment securities

securities (2)

earning assets

for credit losses

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

4 unchanged sentences

preferred securities

borrowed funds

interest-bearing liabilities

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

3 unchanged sentences

interest spread

(1) Nonaccrual

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

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

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

(3) Includes mortgage loans held for

Net interest income

1 unchanged sentence

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 March 31, 2023, as compared to the three months ended March 31, 2022.

and Rate Analysis

Months Ended March 31, 2023 versus

in thousands)

in Interest Income/ Expense

bearing deposits in other banks

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 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 $2.5 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 $7.4 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 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 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.

While the signing

of the One Big Beautiful Bill Act on July 4, 2025, made many of the provisions of the 2017 Tax Cut and Jobs Act permanent, including

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.

Comparison of

the Nine Months ended September 30, 2025 and 2024

Year-to-date highlights

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.

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

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

securities (2)

earning assets

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

Interest-bearing

1 unchanged sentence

and money market deposits

interest-bearing deposits

preferred securities

borrowed funds

interest-bearing liabilities

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, there was no provision for credit losses made in the first quarter

of 2023, compared to $100,000 for the first quarter of 2022.

Subsequent to adoption of ASU 2016-13 on January 1, 2023, based on management's

analysis since the implementation date through March 31, 2023, no further provision for credit losses was required for the first quarter.

The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.13% as of March 31, 2023.

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.

Non-interest income

increased $30,000 to $2.4 million for the quarter ended March 31, 2023 from $2.4 million for the comparable quarter in 2022.

driver of the increase was the sale of the former call center building in Bristol, Virginia, and a former branch office in Big Stone

Gap, Virginia, which resulted in a combined gain of $130,000.

This was offset by decreases in service charge income and card processing

fees totaling a combined $107,000 during the period.

Service charge income decreased due to changes made in 2022 in assessing certain

charges, that reduced the number of transactions subject to such fees.

Fees from debit card activity declined, as stimulus funds payments

resulting from tax credits and direct payments have been curtailed.

Non-interest expense

was $6.9 million for the quarter ended March 31, 2023 compared to $6.4 million for the quarter ended March 31, 2022.

The $431,000 increase

was impacted by increases in salaries and employee benefits as well as data processing and telecommunications expenses.

in salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made during the first quarter

As previously reported, the Company approved a Long-Term Cash Incentive Plan (the “Plan”), effective February 27,

2023, for cash incentive awards to Plan participants based on quarterly earnings per share of common stock.

The efficiency ratio,

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

to 72.56% for first three months of 2023 from 71.59% for the first quarter of 2022.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

Income tax expense

for the first quarter of 2023 totaled $576,000, an increase of $46,000, or 8.68% from the $530,000 recorded during the same period in

The effective tax rate for the three months ended March 31, 2023, was 22.2%, compared to 21.6% for the same period in 2022.

year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.

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, 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.

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

March 31, 2023 were $793.6 million, an increase of $18.3 million, or 2.4%, from $775.4 million as of December 31, 2022.

Gross loans increased

$5.9 million, or 1.0%, during 2023, due to a moderate increase in loan demand, combined with less incentive for prepayments, by borrowers,

due to the higher interest rate environment.

Investment securities increased $646,000 during 2023 primarily due to a decrease of $2.7

million in the unrealized loss position offset by a decrease in mortgage-backed securities, agencies, and collateralized mortgage obligations

of $2.1 million, collectively, due to principal repayments of amortizing investments.

Gross loans increased

$5.9 million, or 1.0% during the first three months of 2023.

The increase is primarily related to multifamily and residential 1-4 family

real estate secured loans.

Multifamily real estate loans increased $4.5 million, or 15%, from $29.7 as of December 31, 2022 to $34.2

million as of March 31, 2023.

Residential 1-4 family real estate increased $1.5 million, or 0.7% from $227.2 million as of December 31,

2022 to $228.7 million as of March 31, 2023.

Loan originations, specifically commercial real estate and multi-family loans, continue

to be positively impacted by our Boone, NC, loan production office, as well as originations in the Kingsport and Johnson City, Tennessee

Deposits were $708.8

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

The increase of the $16.1 million, or 2.3%, was due

to efforts to attract and retain time deposits, combined with cyclical funds inflows primarily attributed to tax refunds, and pension

and social security deposits, received by customers.

Trust preferred securities

of $16.5 million at March 31, 2023 were unchanged compared to December 31, 2022.

Total equity as of

March 31, 2023 was $59.7 million, an increase of $2.5 million, or 4.3%, compared to $57.2 million as of December 31, 2022.

previously and in the Capital Resources section below, the primary driver of the increase was related to the decrease of $2.1 million

in the net unrealized loss on available-for-sale investment securities combined with the quarter-to-date earnings of $2.0 million, offset

by a cash dividend payment of $1.4 million, and the repurchase of common stock totaling $46,000.

Additionally, the implementation of

the CECL methodology, resulted in a onetime net of tax, direct charge to retained earnings of $212,000.

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

$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,

was due to efforts to attract and retain time deposits and money market account relationships, including replacing a large, high-rate

account with lower-cost brokered time deposits, combined with cyclical funds inflows.

As a result of these efforts and seasonality, total

time deposits increased $23.7 million, money market

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

Since the commencement of

the repurchase plan in 2022, 344,893 shares have been repurchased at an average price of $2.52 per share.

Asset Quality

Nonperforming assets

include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest.

policy is to place loans on nonaccrual status once they reach 90 days past due.

The makeup of the nonaccrual loans is primarily those

secured by residential mortgages and commercial real estate.

OREO is primarily made up of residential and commercial lots.

The allowance for

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 0.04% 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,

decreased $586,000, or 15.9%, during the first three months of 2023, driven by a decrease of $586,000 in nonaccrual loans.

in nonaccrual loans is attributed to a general improvement in the performance of nonaccrual loans, resulting in several accounts being

returned to accruing status.

No loans 90 days or more past due are accruing interest.

As a result, the ratio of nonperforming assets

to total assets decreased to 0.39% at March 31, 2023 compared to 0.47% at December 31, 2022.

As of March 31, 2023,

OREO is primarily made up of residential and commercial lots acquired through foreclosure.

It remained consistent with a balance of $261,000

as of March 31, 2023 and December 31, 2022.

Expenses associated with OREO were $6,000 for the quarter ended March 31, 2023, compared

to $130,000 during the quarter ended March 31, 2022, due to costs associated with the sale of other real estate owned during the first

three months of 2022.

We continue to work to reduce nonperforming and under-performing assets.

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 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

for nonaccrual loans and other real estate owned as of March 31, 2023, and December 31, 2022, refer to Note 6 Loans and Note 9 Other

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 $2.8 million as of March 31, 2023, a decrease of $586,000 from $3.4 million at December 31, 2022.

Total past due loans

decreased $2.9 million, to $2.6 million at March 31, 2023 from $5.5 million at December 31, 2022.

As discussed in Note

2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted CECL effective January 1, 2023.

The transition

adjustment for the adoption of CECL resulted in a decrease to the allowance for credit losses on loans of $80,000.

Our allowance for

credit losses for loans as of March 31, 2023 was $6.7 million, or 1.13% of total loans, as compared to $6.7 million, or 1.15% of total

loans, at December 31, 2022.

Individually evaluated loans totaled $715,000 with an estimated related specific allowance of $64,000 at

March 31, 2023, as compared to $2.7 million as of December 31, 2022 with an estimated related specific allowance of $86,000 of impaired

loans at the end of 2022.

There was no provision for credit losses recorded during the three months ended March 31, 2023, compared to

a provision for loan losses of $100,000 recorded in the three months ended March 31, 2022, which was under the incurred loss model.

the three-months ended March 31, 2023, the net provision for credit losses of zero, was comprised of a provision of $24,000 to the allowance

for credit losses for loans and reversal of $24,000 from the allowance for unfunded loan commitments.

In the first three

months of 2023, net charge-offs totaled $10,000, or 0.01% of average loans, annualized, as compared to $76,000, or 0.05% of average loans,

for the same period in 2022.

The allowance for credit losses is maintained at a level that management deems appropriate to absorb any

potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized.

our quarterly assessment, we continue to adjust the CECL model to best reflect the characteristics in the portfolio.

However, future

provisions may be deemed necessary.

During the first three months of 2023, we made modest adjustments to our qualitative factors as part

of our CECL implementation.

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

resulted in a net provision for credit losses of zero, with offsetting adjustments to the loan and loan commitment components recorded

during the first three months of 2023.

The following table summarizes components of the allowance for credit losses and related loans

as of March 31, 2023 and December 31, 2022:

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 $4.6 million as of September 30, 2025 from

$6.2 million as of December 31, 2024.

The allowance for

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

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

Through our quarterly assessment, we continue to adjust

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

However, future provisions may be deemed necessary.

During the 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

in thousands)

for credit losses

for credit losses - loans

for credit losses to total loans

loans to total loans

of allowance for credit losses to nonaccrual loans

of allowance for credit losses loans to nonaccrual loans

net of recoveries

net charge-offs to average loans

charge-offs to average loans 1

Deferred Tax Asset

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Due to timing differences

between book and tax treatment 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 $4.1 thousand and $4.6 million existed as of March 31, 2023 and December 31, 2022,

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.

The implementation of the CECL methodology resulted in a onetime deferred tax charge of $56,000.

to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q

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 September 30, 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 2.4%.

We have no significant nontaxable income or nondeductible

Capital Resources

Total shareholders’

equity as of March 31, 2023 was $59.7 million compared to $57.2 million at December 31, 2022, an increase of $2.5 million, or 4.3%.

increase was driven by a decrease in net unrealized loss on available-for-sale investment securities of $2.1 million, which, when combined

with quarter-do-date earnings of $2.0 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common

stock totaling $46,000.

Additionally, the implementation of the CECL methodology resulted in a onetime net of tax, direct charge to retained

earnings of $212,000.

The Company meets

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to be subject to various capital requirements administered by banking agencies.

The Bank’s capital ratios along

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

As of March 31, 2023,

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 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 $2.50 as of March 31, 2023, and $2.40 at December 31, 2022.

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

indicators are as follows:

on average assets 1

on average equity 1

equity to average assets

Three months ended

September 30,

Nine months ended

September 30,

Return on average assets 1

Return on average shareholders’ equity 1

Average equity to average assets

Under current economic

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depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing

the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company.

During the second

quarter of 2022, 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, 2023.

the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the Company.

On April 28, 2022,

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

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 March 31, 2023, the Company has repurchased 93,527 shares

at an average price of $2.32 per share.

During the quarter ended March 31, 2023, the Company repurchased 19,932 shares at an average

price of $2.28 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 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.

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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 $143.7 million as of March 31, 2023, an increase of $13.2 million from $130.5 million as of December

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2023.

As of March 31, 2023,

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

These investments provide a source of liquidity in the amount

of $69.4 million, which is net of the $27.3 million of securities pledged to secure public funds and as collateral for advances against

the discount window.

Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other

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

Due to the unrealized

loss on securities available for sale, the sale of investments would not be considered a primary source of liquidity 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.

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,

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

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

however, the majority of the portfolio

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

Total investment securities increased

$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 83.3% as of March 31, 2023 and 84.4% at December 31, 2022.

We anticipate this ratio to remain at or below 90% for the foreseeable

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 March 31, 2023 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.

Additionally, in March 2023, the FRB, initiated a supplemental term funding

program offering borrowings, of up to one year, secured by securities valued at par rather than market value.

This program offers an

additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds

We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent

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

line of credit with FHLB to issue a letter of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public

No draws on the letter of credit have been issued.

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

An additional $186.8 million was available as of March 31, 2023 on the $193.8 million line of credit, of which $116.5 million is secured

by a blanket lien on our residential real estate loans.

We held no brokered

deposits as of March 31, 2023 and December 31, 2022.

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

table in the “Net Interest Income and Net Interest Margin” section.

Total Certificate of Deposit Registry Services (“CDARS”)

time deposits were $2.5 million and $1.4 million as of March 31, 2023 and December 31, 2022, respectively.

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 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;

and, in June 2025, we borrowed an additional

$5.0 million which was repaid in July 2025.

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 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 $7.9 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 Intrafi Cash Service (“ICS”).

At March 31, 2023 approximately $34.9 million were placed in this product as compared to $23.9 million at December 31, 2022.

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

insurance coverage.

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 $27.3 million were pledged at March 31, 2023.

In March and May,

2023, three regional banks, each with assets in excess of $100 billion, were taken into receivership through FDIC and were sold in-whole,

or in part to other financial institutions.

Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara,

California, and First Republic Bank (“FR”) headquartered in San Francisco, California, experienced significant outflows of

deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits

at both institutions.

These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined

with the long-term maturities of the investments and other earning assets held by SVB.

Concerns related to FR related to exposure to

long-term jumbo mortgages made to preferred deposit customers and the impact to net interest earnings and the value of those mortgages

in the rising rate environment.

While we, or any other financial institution, can be impacted by sudden changes in market conditions

or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound.

In addition, our deposit

customer base is diverse without significant exposure to uninsured deposit relationships.

Prior to receivership of SVB and FR our deposit

fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates.

the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully

test certain liquidity facilities in the event of any future deposit outflows.

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

Time deposits of

$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,

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 $460,000 in cash on deposit at the Bank as of March 31, 2023.

The holding company receives periodic dividend

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

to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust preferred securities.

As discussed in the

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

through March 31, 2024.

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 three months ended March 31, 2023, 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.

As discussed in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted

CECL effective January 1, 2023 to include an assessment of off-balance sheet credit exposures.

The transition adjustment for the adoption

of CECL included establishment of an allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other

and Qualitative Disclosures About Market Risk

1 unchanged sentence

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/A

Item 2. Management’s Discussion and Analysis