Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution About Forward-Looking Statements
We make forward-looking
statements in this annual report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include statements
regarding expectations, intentions, projections, and beliefs concerning our profitability, liquidity, and allowance for credit losses,
interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,”
“may,” “will,” “should,” “projects,” “contemplates,” “anticipates,”
“forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.
These forward-looking statements are based on various factors and were derived using numerous assumptions as of the date of this Form
10-K and are subject to significant risks.
The following important
factors, among others, that may cause actual results to differ from that expressed in such forward-looking statements include:
·
the
success or failure of our efforts to implement our business plan;
·
any
required increase in our regulatory capital ratios;
·
satisfying
other regulatory requirements that may arise from examinations, changes in the law and other similar factors;
·
deterioration
of asset quality;
·
changes
in the level of our nonperforming assets and charge-offs;
·
fluctuations
of real estate values in our markets;
·
our
ability to attract and retain talent;
·
demographic
changes in our markets which negatively impact the local economy;
·
the
uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;
·
the
successful management of interest rate risk;
·
the
successful management of liquidity;
·
changes
in general economic and business conditions in our market area and the United States in general;
·
credit
risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;
·
competition
with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies
that have substantially greater access to capital and other resources;
·
advances
and changes in technology, including artificial intelligence, and the Company’s ability to develop timely and competitive products
and services and effectively manage related risks;
20
·
customer
acceptance of new products and services we have offered or may offer;
·
deposit
flows and competition for deposits;
·
the
effects of, and changes in, trade, monetary and fiscal policies, and laws, including interest rate policies of the Federal Reserve,
inflation, interest rate, market, and monetary fluctuations;
·
the
occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic
events;
·
geopolitical
conditions, including trade restrictions and tariffs, and acts or threats of terrorism, international hostilities, military conflicts
or actions taken by the U.S. or other governments in response thereto, which could impact business and economic conditions in the
U.S. and abroad;
·
the
continued effective operation of our information technology systems and third-party service providers, including the stabilization
and ongoing performance of our core processing platform following the system conversion completed during the fourth quarter of 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 or attacks;
·
our
ability to assist in managing third party fraud against customer accounts including but not limited to check, credit and debit card,
and electronic funds transfer fraud;
·
our
reliance on third-party vendors and correspondent banks;
·
changes
in generally accepted accounting principles;
·
changes
in governmental regulations, tax rates, and similar matters; and,
·
other
risks which may be described, from time to time, in our filings with the SEC.
Because of these
uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
General
The following commentary
discusses major components of our business and presents an overview of our consolidated financial position as of December 31, 2025 and
2024, as well as results of operations for the years ended December 31, 2025 and 2024. This discussion should be reviewed in conjunction
with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form
10-K.
New Peoples generates
a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest
income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest
rates earned thereon. The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money
outstanding during the period and the interest rates paid thereon. The quality of our assets further influences the amount of interest
income lost on nonaccruing loans and the amount of provision expense added to the allowance for credit losses. The Bank also generates
noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance
and investment products sold.
21
Critical Accounting
Policies
Certain critical
accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most
critical accounting estimates relate to our allowance for credit losses.
The allowance for
credit losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial
condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be
updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for credit
losses, we refer you to the section on “Allowance for Credit Losses” in this discussion.
For further discussion
of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements,
contained in Item 8 of this Form 10-K.
Overview
Results for the year
ended December 31, 2025 reflect continued growth in interest-earning assets and improved net interest margin, partially offset by
increases in expenses primarily due to annual employee reviews, incentive accruals based on Company performance and contractual and inflationary
increases for third party services. Loan demand remained solid throughout the year, supporting balance sheet growth, while management
continued to emphasize disciplined pricing, credit quality, and expense management. Capital and liquidity levels remained strong at year
end, providing flexibility to support ongoing operations and future growth while continuing to exceed regulatory requirements.
For the year ended
December 31, 2025, the Company reported net income of $10.1 million, or $0.43 per diluted share, compared to $8.2 million, or $0.35 per
diluted share, for the year ended December 31, 2024. The increase was primarily driven by growth in average interest-earning assets
and an improvement in net interest margin, reflecting higher loan yields, lower funding costs and disciplined pricing.
In 2024, the Bank
provided notice of termination of the contract with our core systems provider. As a result of this decision, termination charges and
certain conversion costs were recorded in 2024, totaling an estimated $850,000. Additionally, during the fourth quarter of 2024, we completed
two transactions in our bank owned life insurance (“BOLI”) portfolio. One policy was cancelled and redeemed, resulting in
a loss of approximately $49,000, while a benefit claim was filed on the second policy, resulting in a gain of $1.6 million. After consideration
of the tax impact, these non-recurring items increased 2024 earnings by approximately $756,000, or $0.03 per basic and diluted share.
The conversion to the new core systems provider was completed in the fourth quarter of 2025. After consideration of the tax impact, additional
conversion-related costs decreased earnings for 2025 by approximately $221,000, or $0.01 per basic and diluted share.
22
The following non-GAAP
table summarizes the impact of these non-recurring events:
2025
2024
(Dollars
in thousands)
Amount
Per
Share
Amount
Per
Share
As reported
Net
income (GAAP)
$ 10,098
$ 0.43
$ 8,204
$ 0.35
Adjust for non-recurring items:
BOLI benefit
—
(1,565 )
BOLI redemption
—
49
Core
system conversion
288
850
Total
non-recurring items
288
(666 )
Applicable
tax effect
67
(90 )
Non-recurring
items net of tax
221
(756 )
Adjusted
net income (non-GAAP)
$ 10,319
$ 0.44
$ 7,448
$ 0.32
Adjusted net income
and net income per share are non-GAAP financial measures that management uses to supplement the evaluation of New Peoples’s operating
results and believes is beneficial to the users of its financial statements in evaluating New Peoples’s current operating results
in relation to past periods.
As discussed in “Net
Interest Income and Net Interest Margin,” net interest income for the year ended December 31, 2025 was $33.2 million compared to
$28.5 million for the year ended December 31, 2024. The increase was primarily due to a $41.0 million increase in average earning assets
and a 37 basis point improvement in the net interest margin. Average interest-bearing liabilities increased $26.2 million to $575.7 million
during the comparative twelve-month periods.
For the year ended
December 31, 2025, noninterest income was $9.9 million, a decrease of $1.3 million from $11.3 million in 2024. Excluding the non-recurring
items totaling $1.5 million in 2024, noninterest income increased approximately $172,000 primarily due to a branded card incentive and
other miscellaneous revenue items.
For the year ended
December 31, 2025, noninterest expense was $29.1 million, an increase of approximately $318,000 from $28.8 million in 2024. Excluding
non-recurring items, noninterest expense increased approximately $880,000 during 2025 primarily due to increases in employee compensation,
incentive compensation based on performance, health insurance coverage, and data processing costs.
Total assets as of
December 31, 2025 were $909.7 million, an increase of $54.8 million, or 6.41%, from $854.9 million as of December 31, 2024. Gross loans
increased $52.1 million, or 7.92%, during 2025 due to continuing loan demand. Investment securities increased approximately $449,000
during 2025 primarily due to a $5.2 million improvement in the unrealized loss on investment securities and purchases executed throughout
the year largely offset by maturities, calls, payments, and amortization. All of New Peoples's investments are designated as available-for-sale.
Deposits totaled
$798.3 million as of December 31, 2025 compared to $750.0 million as of December 31, 2024. The increase of $48.3 million, or 6.44%, was
due to efforts to attract and retain deposits, specifically time deposits through targeted promotional rates and terms and money market
accounts through disciplined pricing. As a result of these efforts, total time deposits increased $23.1 million and money market and
saving accounts increased $28.2 million during the year ended December 31, 2025.
New Peoples Bank
remains well-capitalized as of December 31, 2025 and had a leverage ratio of 10.93% compared to 10.70% as of December 31, 2024.
New Peoples’s
key performance indicators are as follows:
Year ended December 31,
2025
2024
Return on average assets
1.13%
0.96%
Return on average shareholders' equity
13.33%
12.28%
Average shareholders' equity to average assets
8.47%
7.81%
In the fourth quarter
of 2025, the Bank completed the conversion of its core banking systems. Due to the timing of the conversion late in the year, management
had limited time to address routine post-conversion matters associated with implementation and reporting. As is typical with a core
systems conversion, management encountered certain matters during and immediately following implementation; however, management is not
aware of any issues that resulted in material operational disruptions, customer impacts, or financial reporting deficiencies.
Net Interest Income
and Net Interest Margin
New Peoples’s
primary source of income is net interest income, which increased $4.6 million, or 16.25%, in 2025 compared to 2024. The increase
in net interest income was primarily due to growth in average interest-earning assets, specifically loans, and an increase in net
interest margin. The improvement in net interest margin reflected higher loan yields driven by loan growth and pricing actions taken
during the year as well as repricing of maturing time deposits in a lower interest rate environment following reductions in the target
range for the federal funds rate totaling approximately 100 basis points during the latter part of 2024 and an additional 75 basis points
during 2025. Management continued to focus on balance sheet mix and disciplined pricing in a competitive funding environment.
23
The following table shows the rates paid
on earning assets and interest-bearing liabilities for the periods indicated.
Net Interest Margin
Analysis
Average Balances,
Income and Expense, and Yields and Rates
2025
2024
(Dollars
are in thousands)
Average
Balance
Income/
Expense
Yields/
Rates
Average
Balance
Income/
Expense
Yields/
Rates
ASSETS
Loans (1)(2)
$ 689,104
$ 42,844
6.22 %
$ 641,022
$ 38,208
5.96 %
Federal
funds sold
288
12
4.27 %
115
6
5.18 %
Interest-bearing
deposits in other banks
65,277
2,752
4.22 %
74,524
3,875
5.20 %
Investment
securities (2)
109,271
2,979
2.73 %
107,278
2,544
2.37 %
Total
earning assets
863,940
48,587
5.62 %
822,939
44,633
5.42 %
Less: Allowance
for credit losses
(7,957 )
(7,628 )
Non-earning
assets
38,082
40,103
Total
assets
$ 894,065
$ 855,414
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing
demand deposits
$ 73,638
$ 526
0.71 %
$ 72,936
$ 605
0.83 %
Savings
and money market deposits
196,168
3,418
1.74 %
171,311
2,833
1.65 %
Time
deposits
284,122
10,328
3.64 %
271,835
10,707
3.94 %
Total
interest-bearing deposits
553,928
14,272
2.58 %
516,082
14,145
2.74 %
Other borrowings
9,710
345
3.51 %
17,486
719
4.04 %
Trust
preferred securities
12,035
814
6.67 %
15,904
1,248
7.72 %
Total
borrowed funds
21,745
1,159
5.26 %
33,390
1,967
5.79 %
Total
interest-bearing liabilities
575,673
15,431
2.68 %
549,472
16,112
2.93 %
Non interest-bearing
deposits
232,831
229,717
Other
liabilities
9,809
9,431
Total
liabilities
818,313
788,620
Shareholders'
equity
75,752
66,794
Total
liabilities and shareholders' equity
$ 894,065
$ 855,414
Net
interest income
$ 33,156
$ 28,521
Net
interest margin
3.84 %
3.47 %
Net
interest spread
2.94 %
2.49 %
(1)
Nonaccrual loans and loans held for sale have been included in average loan balances.
(2)
Tax exempt income is not significant and has been treated as fully taxable.
24
The following tables
set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination
of rates and volume, for the periods indicated.
Volume
and Rate Analysis
Increase (decrease)
Year
2025 Compared to 2024
(Dollars
in thousands)
Volume
Effect
Rate
Effect
Rate
and
Volume Effect
Change
in Interest Income/Expense
Interest income:
Loans
$ 2,866
$ 1,667
$ 103
$ 4,636
Federal
funds sold
9
(1 )
(2 )
6
Interest-bearing deposits in other banks
(481 )
(730 )
88
(1,123 )
Investment securities
47
386
2
435
Total earning
assets
2,441
1,322
191
3,954
Interest expense:
Interest-bearing
demand deposits
1
(88 )
5
(82 )
Savings
and money market deposits
422
137
29
588
Time deposits
484
(816 )
(47 )
(379 )
Other borrowings
(319 )
(94 )
39
(374 )
Trust
preferred securities
(303 )
(169 )
38
(434 )
Total
interest-bearing liabilities
285
(1,030 )
64
(681 )
Change
in net interest income
$ 2,156
$ 2,352
$ 127
$ 4,635
Year
2024 Compared to 2023
(Dollars
in thousands)
Volume
Effect
Rate
Effect
Rate
and
Volume Effect
Change
in Interest Income/Expense
Interest income:
Loans
$ 1,728
$ 3,730
$ 198
$ 5,656
Federal
funds sold
(16 )
1
(1 )
(16 )
Interest-bearing deposits in other banks
1,480
94
62
1,636
Investment securities
(43 )
270
(5 )
222
Total
earning assets
3,149
4,095
254
7,498
Interest expense:
Interest-bearing
demand deposits
(12 )
163
(5 )
146
Savings
and money market deposits
60
1277
54
1,391
Time deposits
1,298
3035
693
5,026
Other borrowings
373
32
54
459
Trust
preferred securities
(40 )
11
3
(26 )
Total
interest-bearing liabilities
1,679
4,518
799
6,996
Change
in net interest income
$ 1,470
$ (423 )
$ (545 )
$ 502
As illustrated in
the rate/volume analysis above, the increase in net interest income during 2025 was primarily attributable to growth in average earning
asset balances and improved asset yields, and lower interest expense mainly due to the repricing of maturing time deposits, general declines
in short-term interest rates, repayments of borrowings, and principal reductions on trust preferred securities.
Loans
Our primary source
of income is interest earned on loans. Total gross loans increased $52.1 million during 2025, or 7.92%, to $709.6 million as of December
31, 2025 as compared to $657.5 million as of December 31, 2024. The primary drivers of this increase in total loans were increases in
commercial, residential 1-4 family, and multifamily real estate loans of $12.1 million to $255.7 million, $17.8 million to $252.6 million,
and $13.6 million to $46.0 million, respectively. These increases resulted from customer relationship development and continued demand
for commercial and consumer lending products, and the opening of a loan production office in Wytheville, Virginia during 2025. For more
detail on loan balances, refer to Note 7 of the consolidated financial statements contained in Item 8 of this Form 10-K.
25
Nonaccrual loans
increased approximately $325,000 from $3.3 million as of December 31, 2024 to $3.6 million as of December 31, 2025. Nonaccrual loans
negatively affect interest income as these loans are nonearning assets. When doubt about the collectability of a loan exists, it is the
Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the
borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest
can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process
of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest
income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued
but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until
qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.
For more detail on nonaccrual loans, refer to Note 7 of the consolidated financial statements in Item 8 of this Form 10-K.
Individually evaluated
loans increased during 2025 to $2.2 million as of December 31, 2025, from $1.7 million as of December 31, 2024. Interest income and cash
receipts on individually evaluated loans are handled differently depending on whether or not the loan is on nonaccrual status. If the
individually evaluated loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method.
For more detail on individually evaluated loan balances, refer to Note 7 of the consolidated financial statements in Item 8 of this Form
10-K.
The following table
presents the dollar composition and percentage of our loan portfolio as of December 31:
Loan
Composition
2025
2024
(Dollars
in thousands)
Real estate secured:
Commercial
$ 255,707
36.0%
$ 243,646
37.1%
Construction and land development
42,826
6.0%
36,112
5.5%
Residential 1-4 family
252,624
35.6%
234,860
35.7%
Multifamily
45,964
6.5%
32,379
4.9%
Farmland
23,385
3.3%
16,921
2.6%
Total real estate loans
620,506
87.4%
563,918
85.8%
Commercial
53,175
7.5%
60,587
9.2%
Agriculture
4,384
0.6%
4,025
0.6%
Consumer installment loans and all other loans
31,522
4.5%
29,006
4.4%
Total
loans
709,587
100.0%
657,536
100.0%
Less: allowance for credit losses
8,107
7,684
Total
$ 701,480
$ 649,852
26
Our loan maturities,
and distribution between fixed and variable rate loans as of December 31, 2025 are shown in the following tables:
Maturities
of Loans
(Dollars
in thousands)
One
Year
or Less
One
to Five Years
Five
to Fifteen Years
After
Fifteen Years
Total
Real estate secured:
Commercial
$ 16,358
$ 42,504
$ 74,690
$ 122,155
$ 255,707
Construction
and land development
14,835
4,569
6,140
17,282
42,826
Residential
1-4 family
7,299
11,958
68,592
164,775
252,624
Multifamily
2,499
3,159
9,520
30,786
45,964
Farmland
3,626
3,101
6,567
10,091
23,385
Total
real estate loans
44,617
65,291
165,509
345,089
620,506
Commercial
15,562
27,300
8,720
1,593
53,175
Agriculture
2,255
1,759
228
142
4,384
Consumer
installment loans and all other loans
3,680
17,417
10,227
198
31,522
Total
$ 66,114
$ 111,767
$ 184,684
$ 347,022
$ 709,587
The following table
presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2025:
(Dollars in thousands)
Fixed
Rate
Variable
Rate
Real
estate secured:
Commercial
$ 63,946
$ 175,403
Construction
and land development
1,053
26,938
Residential
1-4 family
68,498
176,827
Multifamily
8,374
35,091
Farmland
2,818
16,941
Total
real estate loans
144,689
431,200
Commercial
33,538
4,075
Agriculture
1,987
142
Consumer
installment loans and all other loans
27,644
198
Total
$ 207,858
$ 435,615
Contractual maturities
of loans do not reflect the actual term of our loan portfolio. The average life of mortgage loans is substantially less than the contractual
life due to prepayments and enforcement of due on sale clauses. Scheduled principal amortization also reduces the average life of the
loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates
on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.
Some variable rate
loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor
or may be more than the allowable rate increase under the terms of the loan. In these instances, it may take several reset periods before
these loans are fully adjusted.
27
Allowance for
Credit Losses
New Peoples maintains
its allowance for credit losses based on the expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience,
current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including
loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend
credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance
for credit losses.
The allowance for
credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected
on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable
is excluded from the estimate of credit losses.
The allowance for
credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance
for credit losses is estimated by management using relevant available information, from both internal and external sources, relating
to past events, current conditions, and reasonable and supportable forecasts.
New Peoples primarily
utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of
current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the
quantitative component of the calculation, New Peoples may consider the following qualitative adjustment factors: changes to: lending
policies and procedures, national and local economic conditions, the experience and ability of management and staff, the volume and severity
of past due, rated and nonaccrual assets, loan review system, collateral values, concentrations of credit, and legal or regulatory requirements
and competition.
New Peoples measures
expected credit losses for loans on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics
are evaluated on an individual basis. New Peoples designates loan relationships of $250,000 or more that have been determined to meet
the regulatory definitions of “classified” as individually evaluated. The fair value of individually evaluated loans is measured
using the fair value of collateral (“collateral method”) or the discounted cash flow (“DCF”) method.
The allowance for
credit losses increased to $8.1 million as of December 31, 2025 from $7.7 million as of December 31, 2024. The allowance for credit losses
at the end of 2025 was approximately 1.14% of total loans as compared to 1.17% at the end of 2024. Provisions for credit losses for loans
receivable of approximately $739,000 and $506,000 were recorded during the years ended December 31, 2025 and 2024, respectively. Loans
charged off, net of recoveries, totaled approximately $316,000, or 0.05% of average loans, for the year ended December 31, 2025, compared
to approximately $78,000, or 0.01% of average loans, in 2024. The allowance for credit losses represents an amount that, in New Peoples's
judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio. The judgment in determining the level
of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies
and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current reasonable and supportable
forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality
and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible
to significant revision as more information becomes available.
Nonaccrual loans
increased approximately $325,000 from $3.3 million as of December 31, 2024 to $3.6 million as of December 31, 2025. The amount of interest
income that would have been recognized on these loans had they been accruing interest was approximately $49,000 for both of the years
ended December 31, 2025 and 2024. Loans past due 90 days or greater and still accruing interest totaled approximately $165,000 at December
31, 2025. There were no loans past due 90 days or greater and still accruing interest as of December 31, 2024. There are no commitments
to lend additional funds to non-performing borrowers.
28
A majority of our
loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize
exposure to losses in cases of default. Increasing real estate values in our area have reduced this exposure somewhat. However, while
we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining, and natural gas. As
a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries.
Commercial and commercial
real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower
and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee. Guidance
for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.
Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.
With regard to the
Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification
and Account Management Policy which affects our estimate of the allowance for credit losses. Under this approach, a consumer or consumer
real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past
due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and generally placed in nonaccrual status.
If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged off.
For non-1-4 family
residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared
to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency
exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged off against the allowance for credit losses.
In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, or at the time of foreclosure,
a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate
any deficiency. Subsequently, any noted deficiency is then charged off against the allowance for credit losses when the loan becomes
contractually 180 days past due, or at the time of foreclosure. If the customer has filed bankruptcy, then within 60 days of the bankruptcy
notice, any calculated deficiency is charged off against the allowance for credit losses. Collection efforts continue by means of repossessions
or foreclosures, and upon bank ownership, liquidation.
As discussed, the
allowance for credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known
credit losses within the loan portfolio, whether or not the losses are actually ever realized. Through our quarterly assessment, we continue
to adjust the CECL model to best reflect the risks in the portfolio. However, future provisions may be deemed necessary. During 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. During the third quarter of 2024,
customers residing in North Carolina, southwest Virginia, northeast Tennessee and southern West Virginia were impacted by Hurricane Helene.
We assessed the impact of the storm on our customers and any collateral securing outstanding loans and adjusted the allowance for credit
losses. Additionally, we worked with customers impacted by this natural disaster and provided short-term payment deferrals to affected
borrowers. These deferral periods have expired, and at this time, we are not aware of any widespread impairment of collateral other than
one property in which a $138,000 partial charge-off was taken during 2025. Accordingly, we eliminated the adjustment in the allowance
for credit losses for the potential impacts of the storm. 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 approximately $806,000, of which $739,000 was provided
for the loan portfolio and $67,000 was provided to the allowance for unfunded commitments.
29
The following table
summarizes components of the allowance for credit losses and related loans as of December 31, 2025 and 2024:
Selected
Credit Ratios
December
31,
(Dollars
in thousands)
2025
2024
Allowance
for credit losses
$ 8,107
$ 7,684
Total
loans
709,587
657,536
Allowance
for credit losses to total loans
1.14 %
1.17 %
Nonaccrual
loans
$ 3,598
$ 3,273
Nonaccrual
loans to total loans
0.51 %
0.50 %
Ratio
of allowance for credit losses to nonaccrual loans
2.25 X
2.35 X
Charge-offs
net of recoveries
$ 316
$ 78
Average
loans
$ 689,104
$ 641,022
Net charge-offs
to average loans
0.05 %
0.01 %
The following table
shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans
for the years ended December 31, 2025 and 2024:
Allocation of the
Allowance for Credit Losses
December
31,
2025
2024
(Dollars in
thousands)
Average
Balance
Net
Charge-offs (Recoveries)
Net
Charge-offs (Recoveries) as % of Average Loan Type
Average
Balance
Net
Charge-offs (Recoveries)
Net
Charge-offs (Recoveries) as % of Average Loan Type
Real estate secured:
Commercial
$ 249,751
$ 1
0.00%
$ 240,730
$ 74
0.03%
Construction and land development
38,686
(54)
-0.14%
30,063
(44)
-0.15%
Residential 1-4 family
244,425
79
0.03%
234,848
(25)
-0.01%
Multifamily
39,546
(12)
-0.03%
33,782
95
0.28%
Farmland
20,501
(3)
-0.01%
16,557
(297)
-1.79%
Total real estate loans
592,909
11
0.00%
555,980
(197)
-0.04%
Commercial
56,803
89
0.16%
54,669
153
0.28%
Agriculture
4,927
50
1.01%
3,611
-
0.00%
Consumer installment loans and all
other loans
34,465
166
0.48%
26,319
122
0.46%
Unallocated
-
-
0.00%
443
-
0.00%
Total loans
$ 689,104
$ 316
0.05%
$ 641,022
$ 78
0.01%
30
The following table
shows the balance and percentage of our allowance for credit losses allocated to each major category of loans.
December
31, 2025
December
31, 2024
(Dollars
in thousands)
Amount
%
of ACL
%
of Loans
Amount
%
of ACL
%
of Loans
Real estate secured:
Commercial
$ 2,856
35.2%
36.0%
$ 2,565
33.4%
37.1%
Construction
and land development
411
5.1%
6.0%
322
4.2%
5.5%
Residential
1-4 family
2,799
34.5%
35.6%
2,923
38.0%
35.7%
Multifamily
559
7.0%
6.6%
382
5.0%
4.9%
Farmland
166
2.0%
3.3%
149
1.9%
2.6%
Total
real estate loans
6,791
83.8%
87.5%
6,341
82.5%
85.8%
Commercial
602
7.4%
7.5%
751
9.8%
9.2%
Agriculture
79
1.0%
0.6%
36
0.5%
0.6%
Consumer installement loans and all other
loans
635
7.8%
4.4%
556
7.2%
4.4%
Total loans
$ 8,107
100.0%
100.0%
$ 7,684
100.0%
100.0%
We have allocated
the allowance according to the amount deemed to be reasonably necessary to provide for the expected credit losses within each of the
categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that credit
losses in future years will occur in the same proportions or that the allocation indicates future credit loss trends. Furthermore, the
portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since
the total allowance is a general allowance applicable to the entire portfolio.
As of December 31,
2025, the allowance for credit losses was primarily allocated to loan segments that represent the largest portions of the loan portfolio
and exhibit the most significant exposure to credit risk based on portfolio composition, credit performance, and economic sensitivity.
Commercial real estate
loans accounted for $2.9 million, or 35.2% of the allowance for credit losses, compared to 36.0% of total loans outstanding at December
31, 2025. The increase in allocation from the prior year reflects continued growth in commercial real estate balances and increased utilization
of variable-rate loan structures. These factors resulted in higher modeled expected credit losses and supported qualitative adjustments
related to borrower cash-flow dependence and sensitivity to economic conditions.
These loans are made
consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities.
Residential 1–4
family real estate loans represented 34.5% of the allowance for credit losses, compared to 35.6% of total loans outstanding at December
31, 2025. This allocation declined from the prior year primarily due to stable delinquency trends, portfolio seasoning, and a decline
in classified loans. Management also reduced certain qualitative risk factors previously applied to this segment as overall credit performance
remained stable.
Management believes
overall credit quality remained stable during 2025, and the allowance for credit losses was appropriate as of December 31, 2025.
Other Real Estate
Owned
Other real estate
owned totaled approximately $89,000 and $87,000 as of December 31, 2025 and December 31, 2024, respectively. During 2025, the sale of
one property was offset by the foreclosure of another property with a similar net book value.
31
While the levels
of problem credits and foreclosed properties have been reduced significantly over the past several years, we remain mindful of the impact
on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions
in the allowance for credit losses as we expedite the resolution of these problem assets.
Investment
Securities
Total investment
securities increased approximately $449,000 to $96.4 million as of December 31, 2025 from $96.0 million as of December 31, 2024. All
securities are classified as available-for-sale for liquidity purposes. The increase in investment securities during 2025 was due to
purchases of $9.3 million and a decrease in the unrealized loss on available-for-sale securities of $5.2 million which more than offset
maturities, calls, payments, and amortization of $14.0 million. Investment securities with a carrying value of $32.5 million and $35.2
million as of December 31, 2025 and 2024, respectively, were pledged to secure public deposits and for other purposes required, or permitted,
by law.
Our strategy is to
invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such
as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.
The fair value of
our investment portfolio is substantially affected by changes in interest rates. Losses could be realized if liquidity and/or business
strategy necessitate the sale of securities in a loss position due to Federal Reserve actions, U.S. fiscal policies or other factors
affecting market interest rates. As of December 31, 2025, we had a net unrealized loss in our investment portfolio totaling $10.0 million
as compared to a $15.2 million loss as of December 31, 2024. As market interest rates fluctuate, the level of unrealized losses could
change substantially. However, these changes would have no impact on earnings or regulatory capital unless the securities were sold at
a loss. We believe that all unrealized losses resulted from temporary changes in interest rates and current market conditions and are
not a result of credit deterioration. No allowance for credit losses on available-for-sale securities was recorded as of December 31,
2025 and 2024. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk, and enhance earnings.
The fair value and
weighted average yield of investment securities as of December 31, 2025 are shown in the following schedule by contractual maturity and
do not reflect principal paydowns for amortizing securities. Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are calculated
by dividing the contractual interest for each time period by the average amortized contractual cost
Less
Than One Year
One
to Five Years
Five
to Ten Years
After
Ten Years
Total
(Dollars in
thousands)
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair
Value
Average
Yield
Fair Value
Average
Yield
U.S. Treasuries
$ 2,960
1.02%
$ 1,483
1.04%
$ 1,017
4.12%
$ -
-%
$ 5,460
1.58%
U.S. Government agencies
-
-%
1,295
4.28%
5,606
4.10%
2,258
2.84%
9,159
3.79%
Corporate bonds
-
-%
1,909
2.93%
470
3.75%
-
-%
2,379
3.10%
Municipal securities
-
-%
1,689
2.02%
6,017
2.39%
12,291
2.59%
19,997
2.49%
Mortgage-backed securities
921
2.11%
3,423
4.37%
6,423
3.24%
35,312
1.92%
46,079
2.25%
Collateralized mortgage obligations - guaranteed
-
-%
1,375
4.78%
2,816
4.62%
9,168
3.68%
13,359
3.98%
$ 3,881
1.28%
$ 11,174
3.32%
$
22,349
3.42%
$ 59,029
2.35%
$96,433
2.65%
.
32
Bank
Owned Life Insurance
The Bank had no bank
owned life insurance policies as of December 31, 2025.
During 2024 one bank
owned life insurance policy was surrendered at market value resulting in a loss of approximately $49,000. In December 2024, a death benefit
receivable of $5.4 million was recorded, resulting in an income accrual of $1.6 million.
Deposits
Total deposits were
$798.3 million as of December 31, 2025, an increase of $48.3 million, or 6.44%, from $750.0 million as of December 31, 2024, 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 fund inflows. Most of the increase was driven by money market deposits which increased
$28.9 million, or 34.4%, to $113.0 million, and time deposits, which increased $23.1 million, or 8.5%, to $294.2 million as of December
31, 2025.
Information detailing
average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net
Interest Income and Net Interest Margin” section.
Core deposits are
considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings and money
market products. Noninterest-bearing demand deposits decreased $4.1 million in 2025, while interest-bearing demand deposits, savings
and money market deposits increased $32.4 million. Overall, we continue to maintain core deposits through attractive consumer and commercial
deposit products and strong ties with our customer base and communities.
As of December 31,
2025 and 2024, uninsured deposits are estimated to be $120.3 million and $91.9 million, respectively. Estimated uninsured deposits represented
15.1% and 12.3% of total deposits as of December 31, 2025 and 2024, respectively. Included in estimated uninsured deposits are $28.7
million and $22.9 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit
we have with the Federal Home Loan Bank of Atlanta (the “FHLB”).
The following table
shows maturities of all time deposits considered uninsured by the FDIC or otherwise.
Maturities
of Time Deposits Greater Than $250,000
(Dollars
in thousands)
December 31,
2025
Three
months or less
$ 21,759
Over
three months through six months
15,617
Over
six months through twelve months
14,617
Over
one year
5,108
Total
$ 57,101
As of December 31,
2025 and 2024, $32.5 million and $35.2 million of securities, respectively, were pledged to collateralize public deposits, including
time deposits, held in our Tennessee offices, and as collateral for credit facilities available through the Federal Reserve Bank (“FRB”).
Additionally, we held letters of credit from the FHLB for $14.0 million at both December 31, 2025 and 2024 to secure public deposits,
including time deposits, held in our Virginia offices.
We held $8.0 million
in brokered deposits at December 31, 2025, and $3.0 million as of December 31, 2024. While not a primary source of funding, brokered
deposits provide a means to efficiently manage funding and liquidity. Internet accounts are limited to customers located in our primary
market area and the surrounding geographical area. The average balance of and the average 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
Service (“CDARS”) time deposits were $7.0 million at December 31, 2025 and 2024.
33
Noninterest Income
For the year ended
December 31, 2025, noninterest income decreased $1.3 million to $9.9 million compared to $11.3 million for 2024 mainly due to the $1.6
million benefit claim on bank owned life insurance in 2024. A decrease of approximately $217,000, or 5.65%, in service charges and fees
offset an increase in card processing revenue of approximately $201,000.
Noninterest
Expense
For the year ended
December 31, 2025, noninterest expense totaled $29.1 million compared to $28.8 million for the year ended December 31, 2024. The increase
was primarily related to salaries and benefits of approximately $638,000, loan-related expenses of approximately $165,000, and data processing
costs of approximately $68,000. The increases were partially offset by a decrease of approximately $562,000 in the costs associated with
the core system conversion and an approximate $214,000 decrease in the expense for the cards reward program.
While we experienced
no significant losses resulting from fraud in 2025, we continued to experience an increase in the volume and sophistication of fraudulent
transaction attempts. These fraudulent transaction attempts ranged from unauthorized electronic transactions to check theft, forgery,
and what is commonly referred to as friendly fraud, which is the dispute of a valid, authorized transaction by the cardholder resulting
in a chargeback despite delivery of the underlying product or service. We work continuously with customers to educate them on identifying
potential fraud and the efforts they can take to reduce the risk of fraud. We expect increased fraudulent transaction attempts to continue
for the foreseeable future.
Our efficiency ratio,
a non-GAAP measure, is defined as noninterest expense divided by the sum of net interest income plus noninterest income and was 67.61%
in 2025 compared to 72.40% in 2024. The performance improvement in this ratio is a result of the increase in net interest income, as
discussed in the “Net Interest Income and Net Interest Margin” section earlier in this Item 7. After adjusting for non-recurring
items, the efficiency ratio improves slightly to 66.94%, as shown in the table below. We continue to seek opportunities to operate more
efficiently through the use of technology, improving processes, reducing nonperforming assets, and increasing productivity.
(Dollars
in thousands)
Net
Interest Income
Noninterest
Income
Total
Income
Noninterest
Expense
Efficiency
Ratio
As reported
(GAAP)
$ 33,156
$ 9,910
$ 43,066
$ 29,115
67.61 %
Adjust
for nonrecurring items:
Core
system conversion
—
—
—
(288 )
As
adjusted for nonrecurring items (non-GAAP)
$ 33,156
$ 9,910
$ 43,066
$ 28,827
66.94 %
Income Taxes and
Deferred Tax Assets
Income taxes were
$3.0 million for the year ended December 31, 2025, compared to $2.1 million for the same period in 2024. The effective tax rates were
23.18%, and 20.76% for 2025 and 2024, respectively. The effective tax rate for the periods differed from the federal statutory rate of
21.0% principally due to the lessened impact of tax preference items, along with the effect of certain state income taxes. The lower
effective tax rate in 2024 is the result of non-taxable income resulting from the BOLI insurance benefit accrual included in pre-tax
earnings.
Deferred tax assets
represent the future tax benefit of future deductible differences. If it is more likely than not that a tax asset will not be realized,
a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. New Peoples has evaluated positive
and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections,
New Peoples believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, New Peoples did not include
a valuation allowance against its deferred tax assets as of December 31, 2025 or 2024.
34
Tax positions are
evaluated in a two-step process. New Peoples first determines whether it is more likely than not that a position will be sustained upon
examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit
to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely
of being recognized. New Peoples classifies interest and penalties as a component of income tax expense.
Capital
Resources
During the year ended
December 31, 2025, total shareholders’ equity increased $12.1 million to $82.9 million due to earnings of $10.1 million and the
$4.1 million decrease in the net unrealized loss on available-for-sale investment securities, net of taxes which were partially offset
by a cash dividend payment of $1.9 million and the repurchase of common stock totaling approximately $212,000.
During 2025, New
Peoples repurchased 69,711 shares at an average price of $3.04 per share. Since commencement of the stock repurchase program, 355,073
shares have been repurchased at an average rate of $2.54.
New Peoples meets
the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding
Company Policy Statement and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements
administered by banking agencies.
The Bank is characterized
as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The
capital adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in
Note 23, Capital, to the consolidated financial statements in Item 8 of this Form 10-K.
The Bank is also
subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules
require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 (“CET1”) ratio of at least
4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier
1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier
1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation
buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of
Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases,
and compensation based on the amount of the shortfall. As of December 31, 2025, the Bank meets all capital adequacy requirements to which
it is subject. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.
New Peoples paid
a cash dividend of $0.08 per share in 2025. On February 23, 2026, the Board of Directors declared a dividend of $0.09 per share, to be
paid on March 31, 2026. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining
positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital
at the Bank to allow payment of dividends to the parent company.
Liquidity
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 $141.1 million as of December 31, 2025, up from $128.5 million as of December 31, 2024. The increase
is primarily due to the receipt of the insurance receivable, earnings, and cash flows from investment securities exceeding reinvestment
activity. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs.
35
The Bank’s
primary funding source is deposits from customers in the markets in which it provides banking services. As discussed previously, deposits
increased during 2025 but competition for deposits remains intense from both bank and non-bank institutions. New Peoples expects that
pressure on the rates paid on deposits will continue and that it may be required to pay higher rates than currently projected to retain
existing customers and attract new deposit relationships to fund loans and other activities. As discussed below, New Peoples has other
liquidity sources to manage its liquidity needs as they arise.
As of December 31,
2025, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $63.9
million, which is net of the $32.5 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 FRB. Although the unrealized loss on securities available-for-sale improved in 2025, selling
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 because of the immediate impact on regulatory capital; however, the majority of the portfolio consists
of high credit quality investments that could be pledged against borrowed funds. Total investment securities increased slightly from
$96.0 million as of December 31, 2024 to $96.4 million as of December 31, 2025. The Bank also has additional borrowing capacity on lines
for which investments and certain loans are currently pledged.
Our loan to deposit
ratio was 88.9% as of December 31, 2025 and 87.7% as of December 31, 2024.
Available third-party
sources of liquidity as of December 31, 2025 include the following: our line of credit with the FHLB totaling $273.3 million subject
to pledging requirements, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at
the FRB. We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of December
31, 2025.
We have used our
line of credit with FHLB to issue letters of credit totaling $14.0 million to the Treasury Board of Virginia for collateral on public
funds and a $7.0 million fixed rate borrowing maturing in May of 2028. No draws on the letters of credit have been issued. These letters
of credit are considered to be draws on our FHLB line of credit. An additional $252.3 million was available on December 31, 2025 on the
$273.3 million line of credit, of which $130.0 million is secured by a blanket lien on our residential real estate loans and certain
eligible commercial real estate loans. Full use of the FHLB borrowing capacity would require New Peoples to pledge additional assets.
We held $8.0 million
in brokered deposits as of December 31, 2025 compared to $3.0 million as of December 31, 2024 and $7.0 million in reciprocal CDARS time
deposits as of December 31, 2025 and December 31, 2024.
The Bank has access
to additional liquidity through the FRB’s Discount Window for overnight funding needs. We have collateralized this line with investment
securities. As part of the discount window capacity, the FRB offered borrowings through the Bank Term Funding Program, which was created
to support businesses and consumers by making additional funds available to eligible depository institutions
During the fourth
quarter of 2024, we made a voluntary principal payment of $1.2 million on one of the outstanding trust preferred securities, originally
issued in 2004. In January 2025, we made another voluntary principal payment of $3.0 million on the same trust preferred issue. We may
consider making future principal payments based on our available liquidity and considering other funding opportunities that may be available.
Based on the on-balance
sheet liquidity and available external sources of funding, management believes the Bank has adequate liquidity and capital resources
to meet its operating requirements and obligations for the foreseeable future. However, liquidity may be adversely affected by a number
of factors including counterparty willingness or ability to extend credit, regulatory actions, and changes in customer behavior, some
of which are beyond management’s control. In light of ongoing economic uncertainty, including inflationary pressures and geopolitical
conflicts, management continues to actively monitor the Bank’s liquidity position to ensure sufficient funding is available to
meet customer demands and operational needs. In addition, the Bank’s contingency funding plan is reviewed quarterly by the Asset
Liability Committee.
36
Financial
Instruments with Off-Balance Sheet Risk
The Bank is a party
to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contractual or notional amounts
of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary and discussion
of the contract amount of the Bank’s exposure to off-balance sheet risk as of December 31, 2025 and 2024 is presented in Note 20
to the consolidated financial statements in Item 8 of this Form 10-K. As of December 31, 2025 and 2024 the allowance for credit losses
on unfunded commitments totaled approximately $471,000 and $404,000, respectively.
Interest Rate
Risk and Sensitivity
Interest rate risk
represents the risk that changes in market interest rates may adversely affect the Company’s net interest income and the economic
value of equity. The Company manages interest rate risk as part of its overall asset and liability management process, with the objective
of supporting stable earnings and preserving capital across a range of interest rate environments.
Management evaluates
interest rate risk using simulation analyses that estimate the potential impact of immediate and sustained changes in market interest
rates on net interest income and the economic value of equity. These analyses are performed using a model provided and supported by an
independent third-party service provider and incorporate assumptions regarding balance sheet composition, interest rate behavior,
loan prepayments, deposit pricing, and other relevant factors. The results of these analyses are reviewed regularly by management and
the Board of Directors as part of the Company’s asset-liability management oversight.
As of December 31,
2025, the Company’s interest rate risk profile reflected a balance sheet that is modestly sensitive to changes in market interest
rates. In rising rate environments, results are influenced primarily by the timing and extent of deposit repricing relative to changes
in asset yields. In declining rate environments, interest rate sensitivity is affected by contractual loan repricing characteristics,
the presence of interest rate floors on certain assets and deposits, and expected customer behavior.
Based on management’s
analyses, the estimated impacts of changes in interest rates on both net interest income and the economic value of equity were within
board-approved policy limits at December 31, 2025. Management believes the Company is appropriately positioned to manage interest
rate risk given its current balance sheet structure, capital levels, and liquidity profile. The Company will continue to monitor interest
rate risk and may adjust asset mix, deposit pricing strategies, and funding sources as market conditions evolve.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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