What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-12 compared with 2026-05-13 · 408 added, 323 removed, 74 unchanged (91% of the section changed)

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

Discussion and Analysis of Financial Condition and Results of Operations

About Forward-Looking Statements

1 unchanged sentence

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.

The forward-looking information is based on various factors and was derived using numerous assumptions.

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

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.

“believes,” “expects,” “may,” “will,” “should,” “projects,”

“contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words

or terms are intended to identify forward looking statements.

The forward-looking information is based on various factors and

was derived using numerous assumptions.

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

success or failure of our efforts to implement our business plan;

required increase in our regulatory capital ratios;

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

similar factors;

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

other similar factors;

● deterioration

6 unchanged sentences

changes in our markets which negatively impact the local economy;

uncertain outcome of current or future legislation or regulations or policies of state and

federal regulators;

uncertain outcome of current or future legislation or regulations or policies of state

and federal regulators;

successful management of interest rate risk;

successful management of liquidity;

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

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

our management of such risks;

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

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;

including online lenders and those companies that have substantially greater access to

capital and other resources;

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

5 unchanged sentences

● 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.

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.

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;

providers, including the stabilization and ongoing performance of our core processing

platform following the system conversion completed during the fourth quarter of 2025;

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;

or security systems, or those of our third-party vendors or other service providers,

including as a result of cyber threats or attacks;

ability to successfully manage cybersecurity, including generative artificial intelligence

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;

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;

reliance on third-party vendors and correspondent banks;

2 unchanged sentences

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

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

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

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.

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.

Accounting Policies

discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2025, and Note

2 Summary of Significant Accounting Policies, in Item 1 of this Form 10-Q.

Certain critical accounting policies affect the more significant

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

Our most critical accounting policies relate to our allowance

for credit losses.

discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2025, and

Note 2 Summary of Significant Accounting Policies, in Item 1 of this Form 10-Q.

Certain critical accounting policies affect the

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

Our most critical accounting policies

relate to our allowance for credit losses.

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

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.

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.

and Highlights

income for the three months ended March 31, 2026 was $3.1 million, an increase of $1.2 million, or 60.48%, from the same period in 2025.

Net interest income increased 15.86%, or $1.2 million, from $7.6 million for the quarter ended March 31, 2025 to $8.8 million for the

quarter ended March 31, 2026.

The loan portfolio was the primary driver of both increases as the yield rose 25 basis points (”bps”)

while the average balance increased $57.8 million compared to the first quarter of 2025.

balance sheet grew to $939.6 million in total assets as of March 31, 2026, from $909.7 million as of December 31, 2025.

Gross loans increased

$13.7 million to $723.3 million as of March 31, 2026.

Additionally, interest-bearing deposits with banks increased $13.1 million to $76.2

million as of March 31, 2026.

During the first three months of 2026 total deposits increased $29.4 million or 3.68% to $827.7 million.

dividend of $0.09 per share was paid to shareholders during the first quarter of 2026, a 12.5% increase over the dividend paid in 2025.

the first quarter of 2026, we extended a previously announced stock repurchase program, to continue through March 31, 2027.

inception of the program through March 31, 2026, the Company has repurchased 366,569 shares at an average price of $2.57 per share.

of the Three Months ended March 31, 2026 and 2025

Quarter-to-date

highlights include:

on average assets and equity of 1.34% and 14.69% for the first quarter of 2026, compared

to 0.90% and 10.78% for the first quarter of 2025, respectively;

interest margin was 3.99% for the first quarter of 2026 compared to 3.69% for the first quarter

interest income was $8.8 million for the first quarter of 2026, an increase of $1.2 million,

or 15.86%, compared to the first quarter of 2025;

● Noninterest

income was $2.6 million, an increase of $217,000, or 8.99%, during the first quarter of 2026

compared to the first quarter of 2025;

● Noninterest

expense was $7.2 million, a decrease of $39,000, or 0.54%, for the first quarter of 2026

compared to the first quarter of 2025.

the first quarter of 2026, interest income increased $1.2 million to $12.6 million due to the combination of an increase of 18 bps in

the yield on earning assets to 5.69% and a $61.5 million increase in the average balance of earning assets when compared to the first

income for the second quarter of 2026 was $3.5 million, or $0.15 per share.

interest margin was 4.12% for the second quarter of 2026 compared to 3.86% for the second

quarter of 2025.

The loan portfolio was the primary driver of both increases as the yield rose 25 bps to 6.35% while the average balance

increased $57.8 million compared to the first quarter of 2025.

Also contributing to the improvement in net interest income was lower

funding costs.

While the average balance of interest-bearing liabilities increased $44.2 million, the costs decreased 18 bps to 2.55%,

and total interest expense only increased by $39,000 to $3.8 million during the first quarter of 2026 as compared to the first quarter

The reduction in the cost of interest-bearing liabilities is primarily due to maturing time deposits repricing in a lower interest-rate

environment and declines in both the cost and balance of borrowed funds.

The decrease in the average balance of borrowed funds was due

to a $3 million principal payment on a borrowing from the Federal Home Loan Bank of Atlanta during the fourth quarter of 2025 combined

with principal payments made on a trust preferred security in January 2025.

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 2025.

The net interest margin improved

30 bps to 3.99% for the quarter ending March 31, 2026, compared to 3.69% for the same period in 2025, due to the increase in the yield

on earning assets and the decline in the cost of funds.

The net interest spread, which is the difference between the yield on interest-earning

assets and the costs of interest-bearing liabilities, widened by 36 bps to 3.14% for the first quarter of 2026 from 2.78% for the comparable

period of 2025.

loans held for investment were $732.3 million as of June 30, 2026, an increase of $22.7

million, or 3.20%, from $709.6 million as of December 31, 2025.

deposits increased $29.2 million, or 3.66%, during the six months ended June 30, 2026

to $827.5 million.

annualized return on average assets for the quarter was 1.47%.

annualized return on average equity for the quarter was 16.28%.

Peoples Bank remains well-capitalized with a leverage ratio of 11.17%.

of the Three Months ended June 30, 2026 and 2025

interest income for the quarter ended June 30, 2026 was $9.4 million, an increase of $1.2 million, or 14.38%, compared to the

second quarter of 2025.

Interest and dividend income increased $1.2 million to $13.2 million due to the combination of an increase

of 17 basis points (“bps”) in the yield on earning assets to 5.78% and a $60.6 million increase in the average balance

of earning assets when compared to the second quarter of 2025.

The loan portfolio was the primary driver of both increases as

the yield rose 25 bps to 6.45% while the average balance increased $46.4 million compared to the second quarter of 2025.

contributing to the improvement in net interest income was lower funding costs.

While the average balance of interest-bearing

liabilities increased $40.2 million, the cost decreased 14 bps to 2.52%, and total interest expense increased only $49,000 to

$3.8 million during the second quarter of 2026 compared to the second quarter of 2025.

The reduction in the cost of interest-bearing

liabilities is primarily due to maturing time deposits repricing in a lower interest-rate environment and declines in both the

cost and balance of borrowed funds.

The decrease in the average balance of borrowed funds was due to a $3 million principal payment

on a borrowing from the Federal Home Loan Bank of Atlanta during the fourth quarter of 2025.

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 2025.

The net interest margin improved 26 bps to 4.12% for the quarter ended June 30, 2026, compared to 3.86% for the same period in

2025, due to the increase in the yield on earning assets and the decline in the cost of funds.

The net interest spread widened

by 31 bps to 3.26% for the second quarter of 2026 from 2.95% for the comparable period of 2025.

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

1 unchanged sentence

Balances, Income and Expense, and Yields and Rates

Months Ended March 31 ,

are in thousands)

bearing deposits in other banks

earning assets

for credit losses

LIABILITIES AND SHAREHOLDERS’

Interest-bearing

demand deposits

and money market deposits

interest-bearing deposits

preferred securities

borrowed funds

interest-bearing liabilities

Non-interest-bearing

Shareholders’

Months Ended June 30,

(Dollars are in thousands)

Loans (1) (2)

Federal funds sold

Interest-bearing deposits in other banks

Investment securities (2)

Total earning assets

Allowance for credit losses

Non-earning assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

interest income

interest margin

interest spread

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Total interest-bearing deposits

Other borrowings

Trust preferred securities

Total borrowed funds

Total interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Total liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

Net interest margin

Net interest spread

(1) Nonaccrual

1 unchanged sentence

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

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 three months ended March 31, 2026, as compared to the three months ended March 31, 2025.

and Rate Analysis

Months Ended March 31, 2026

in thousands)

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

and interest-bearing liabilities.

The following table sets forth the amounts of the total changes in interest income and interest

expense which can be attributed to rates and volume for the three months ended June 30, 2026, as compared to the three months

ended June 30, 2025.

Volume and Rate Analysis

Increase (decrease)

Three Months Ended June 30, 2026

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

bearing deposits in other banks

Federal funds sold

Interest-bearing deposits in other banks

Taxable 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

provision for credit losses charged to the income statement for the quarter ended June 30, 2026 was $63,000 compared to $154,000

for the three months ended June 30, 2025.

The provision expense for the second quarter of 2026 is primarily attributable to growth

in the loan portfolio and a modest adjustment to the qualitative factors in the calculation of the allowance for credit losses

on one-to-four-family residential mortgage loans and for geopolitical uncertainty related to the conflict in the Middle East and

was partially offset by a slight decrease in the overall historical loss rates.

The provision expense also benefited from the

net recoveries on loans previously charged off and a reduction in the allowance for credit losses on unfunded commitments resulting

from a decline in construction loan commitments.

A recovery of credit losses on unfunded commitments of $5,000 was recognized

for the second quarter of 2026 due to a $4.6 million reduction in commitments on construction loans.

The provision for credit

losses on unfunded commitments for the second quarter of 2025 was $0.

income, totaling $2.5 million for the second quarter of 2026, increased $84,000 compared to the quarter ended June 30, 2025.

improvement was driven primarily by a $100,000 increase in income from card processing and interchange income.

expense was $7.4 million for the quarter ended June 30, 2026, an increase of $168,000, or 2.33%, compared to the second quarter

The increase was primarily attributable to contractual and inflationary price increases, an increase in incentive accruals

and less costs deferred on loan originations, partially offset by reductions in other operating expense categories, including

expenses for the debit card rewards program which was discontinued in the fourth quarter of 2025.

efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income, on a tax-equivalent basis,

plus noninterest income, decreased to 61.93% during the second quarter of 2026 from 67.70% for the second quarter of 2025.

continue to assess our operational procedures and structure to improve efficiencies and contain costs.

tax expense for the second quarter of 2026 totaled $1,020,000, an increase of $269,000, or 35.82%, from $751,000 recorded during

the same period in 2025.

This increase was in line with the increase in pre-tax income which increased $1.2 million or 36.19%

for the comparative three months ended June 30, 2026 and 2025.

The effective tax rate for the three months ended June 30, 2026,

was 22.81%, compared to 22.88% for the same period in 2025.

of the Six Months ended June 30, 2026 and 2025

highlights include:

income for the six months ended June 30, 2026 was $6.5 million, or $0.28 per share, an

increase of $2.1 million, or 46.69%, from the $4.4 million or $0.19 per share reported

for the same period in 2025.

on average assets and equity of 1.41% and 15.49% for the first half of 2026, compared

to 1.02% and 12.37% for the first six months of 2025, respectively;

the six months ended June 30, 2026, net interest income totaled $18.2 million, an increase of $2.4 million, or 15.09%, as compared

to the six months ended June 30, 2025.

The net interest margin increased 27 bps to 4.05% as compared to 3.78% for the same period

Net interest income improved due to growth in average earning assets, which increased $61.0 million, or 7.2%, to $905.7

In addition, the yield on earning assets improved 18 bps to 5.74% during the six months ended June 30, 2026 compared

to the same period in 2025.

Interest expense for the six months ended June 30, 2026 totaled $7.6 million, an increase of $88,000,

or 1.18%, from the same period in 2025, as a 16 basis-point decline in the cost of interest-bearing liabilities to 2.53% was more

than offset by a $42.2 million increase in the average balance of interest-bearing liabilities.

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

Interest Margin Analysis

Balances, Income and Expense, and Yields and Rates

Months Ended June 30,

(Dollars are in thousands)

Loans (1) (2)

Federal funds sold

Interest-bearing deposits in other banks

Investment securities (2)

earning assets

Total earning assets

Allowance for credit losses

Non-earning assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Total interest-bearing deposits

Other borrowings

Trust preferred securities

Total borrowed funds

Total interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Total liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

Net interest margin

Net interest spread

(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.

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

and interest-bearing liabilities.

The following table sets forth the amounts of the total changes in interest income and interest

expense which can be attributed to rates and volume for the six months ended June 30, 2026, as compared to the six months ended

June 30, 2025.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2026

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest income:

Federal funds sold

Interest-bearing deposits in other banks

Taxable investment securities

Total earning assets

Interest expense:

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

provision for credit losses charged to the income statement for the quarter ended March 31, 2026 was $240,000 compared to $259,000 for

the three months ended March 31, 2025.

The provision expense for the first quarter of 2026 is mainly attributable to growth in the loan

portfolio and a modest adjustment to certain qualitative factors in the calculation of the allowance for loan losses to reflect geopolitical

uncertainty related to the conflict in the Middle East.

The provision for credit losses during the first quarter of 2025 is attributable

to loan growth and the impact of valuation allowances for two specifically assessed borrower relationships.

A recovery of credit losses

on unfunded commitments of $11,000 was recognized for the first quarter of 2026 due to a $2.1 million reduction in commitments on construction

The provision for credit losses on unfunded commitments for the first quarter of 2025 was $92,000, reflecting an $11.6 million,

or 31.84%, increase in unfunded commitments on construction loans.

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.

income, totaling $2.6 million for the first quarter of 2026, increased $217,000 compared to the quarter ended March 31, 2025.

The improvement

was driven by a $101,000 increase in income from financial and investment services and a $121,000 increase in income from card processing.

expense was $7.2 million for the quarter ended March 31, 2026, which was a $39,000 decrease compared to the first quarter of 2025.

costs decreased $93,000 due to costs incurred in “refreshing” a branch office in the first quarter of 2025 and a decrease

in costs for snow and ice removal to keep our branch locations open and safe during the winter storms in 2026 compared to 2025.

categories experiencing reductions include professional and consulting fees, card processing costs, and the expense for the debit card

rewards program which was discontinued in the fourth quarter of 2025.

The reductions in expenses were partially offset by an $85,000

increase in salaries and benefits attributable to annual merit increases and an uptick in losses due to fraudulent activity.

efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased

to 63.17% during the first quarter of 2026 from 72.55% for the first quarter of 2025.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

tax expense for the first quarter of 2026 totaled $912,000, an increase of $328,000, or 56.16%, from $584,000 recorded during the same

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 six months ended June 30, 2026, the provision for credit losses totaled $303,000 as compared to $413,000 recorded for the

same period in 2025.

the six months ended June 30, 2026, noninterest income totaled $5.2 million, an increase of $301,000 compared to the same period

in 2025, driven primarily by a $221,000 increase in card processing and interchange income and a $74,000 increase in financial

and investment services income.

the six months ended June 30, 2026, noninterest expense totaled $14.6 million, an increase of $129,000, or 0.89%, over the same

period in 2025.

The effective tax rate for the three months ended March 31, 2026, was 22.95%, compared to 23.43% for the same period

assets as of March 31, 2026, were $939.6 million, an increase of $29.9 million, or 3.28%, from $909.7 million as of December 31, 2025.

Gross loans of $723.3 million as of March 31, 2026 reflected an increase of $13.7 million, or 1.93%, from $709.6 million as of December

Liquid assets in the form of cash and cash equivalents increased $15.7 million, or 20.31%, during the first quarter of 2026

mainly due to the seasonal increase in deposits.

Investment securities increased $427,000 during the first quarter of 2026 due to purchases

of $4.2 million offset by maturities, calls, payments and amortization of $2.9 million and an $808,000 increase in the unrealized loss

on securities available-for-sale.

totaled $827.7 million as of March 31, 2026, compared to $798.3 million as of December 31, 2025.

The increase of $29.4 million, or 3.68%,

was due to continued efforts to attract money market account relationships combined with seasonal and cyclical funds inflows.

money market and savings accounts increased $14.8 million, and noninterest-bearing demand and interest-bearing demand deposits combined

for an increase of $18.9 million during the first quarter of 2026.

Over this same period, time deposits decreased $5.0 million largely

due to the maturity of a public funds deposit with no other deposit relationship, for which the Bank did not aggressively bid.

of March 31, 2026 and December 31, 2025, borrowed funds totaled $19.0 million.

the quarter ended March 31, 2026, total shareholders’ equity increased $262,000 to $83.1 million due to net income of $3.1 million

which was offset by dividends paid to shareholders of $2.1 million, the repurchase of common stock totaling $41,000, and an increase

in the unrealized loss on securities available for sale, net of the tax effects, of $639,000.

Consequently, book value per share increased

to $3.53 as of March 31, 2026 compared to $3.52 as of December 31, 2025.

The Bank remains well-capitalized per regulatory guidance.

previously announced, the Board of Directors extended the repurchase of up to 500,000 shares of the Company’s common stock through

March 31, 2027.

During the first quarter of 2026, the Company repurchased 11,496 shares at an average price of $3.55 per share.

the commencement of the repurchase plan in 2022, 366,569 shares have been repurchased at an average price of $2.57 per share.

allowance for credit losses on loans was $8.1 million, or 1.12% as a percentage of total loans, as of March 31, 2026, and $8.1 million,

or 1.14%, as of December 31, 2025.

The decrease in the allowance as a percentage of loans was primarily attributable to charging off

the year-end specific reserves on two borrower relationships during the first quarter of 2026.

One of these relationships had two pieces

of collateral – the residential property was foreclosed and reclassified into other real estate owned during the quarter, and the

commercial property was sold at auction and the sales proceeds were received subsequent to March 31, 2026.

The charge-off on the other

relationship was largely driven by the amount of time that it had been in its classified status.

The $9,000 increase in the allowance

for credit losses on loans was attributable to provision expense associated with a larger loan portfolio and a modest adjustment to a

qualitative factor for geopolitical uncertainty related to the conflict in the Middle East partially offset by the charge-off of the

specific reserves discussed above.

allowance for credit losses on unfunded commitments was $460,000 as of March 31, 2026, as compared to $471,000 as of December 31, 2025.

The decrease in the allowance for credit losses on unfunded commitments was due to a decrease in loan commitments, specifically residential

and commercial real estate construction loan commitments.

net charge-offs as a percentage of average loans were 0.14% during the first 3 months of 2026 compared to 0.05% during the fourth quarter

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

The increase was due to the charge-off of the specific reserves discussed above.

The increase primarily resulted from higher salaries and employee benefits, partially offset by lower occupancy

costs and discontinuance of the debit card rewards program.

assets as of June 30, 2026 were $942.2 million, an increase of $32.5 million, or 3.57%, from $909.7 million as of December 31,

Loans held for investment of $732.3 million as of June 30, 2026 reflected an increase of $22.7 million, or 3.20%, from $709.6

million as of December 31, 2025.

During the second quarter of 2026, the Company transferred its $1.3 million credit card portfolio

from loans held for investment to loans held for sale based on management’s decision to sell the portfolio.

the portfolio is not expected to be finalized until 2027.

Liquid assets in the form of cash and cash equivalents increased $7.1

million, or 9.20%, during the first six months of 2026.

Investment securities available for sale increased $2.2 million during

the first six months of 2026 due to purchases of $9.9 million offset by maturities, calls, payments and amortization of $6.7 million

and a $1.0 million increase in the unrealized loss on securities available for sale.

loans receivable increased $22.7 million, or 3.19%, to $732.3 million at June 30, 2026, compared with $709.6 million at December

Construction and land development loans increased $10.8 million, or 25.26%, to $53.6 million during the first six months

The increase was partly attributable to draws on construction lines originated in prior periods, which also contributed

to the decrease in unfunded commitments during the first half of 2026.

Lending collateralized by multifamily properties increased

$5.1 million, or 11.05%, to $51.0 million at June 30, 2026.

Non-real estate commercial loans increased $5.5 million, or 10.39%,

from December 31, 2025 to June 30, 2026.

totaled $827.5 million as of June 30, 2026, compared to $798.3 million as of December 31, 2025.

The increase of $29.2 million,

or 3.66%, was due to continued efforts to attract and retain money market account relationships combined with growth in noninterest-bearing

demand deposits.

Uninsured deposits as of June 30, 2026 were estimated at $136 million, or 16.4% of total deposits.

of June 30, 2026 and December 2025, borrowed funds totaled $19.0 million.

the six months ended June 30, 2026, total shareholders’ equity increased $3.5 million to $86.3 million, due to net income

of $6.5 million, which was partially offset by an increase in the net unrealized loss on available-for-sale securities of $805,000,

dividends paid to shareholders of $2.1 million, and the repurchase of common stock totaling $98,000.

Consequently, book value

per share increased to $3.67 as of June 30, 2026, compared to $3.52 as of December 31, 2025.

The Bank remains well capitalized

per regulatory guidance.

the first six months of 2026, the Company repurchased 27,701 shares of its common stock at an average price of $3.54 per share.

Since the commencement of the repurchase plan in 2022, 382,774 shares have been repurchased at an average price of $2.61 per share.

On July 20, 2026, the Board of Directors approved the termination of the Company's stock repurchase program.

As a result, the

Company will no longer repurchase shares of its common stock under the program.

allowance for credit losses on loans was $8.2 million, or 1.12% as a percentage of total loans, as of June 30, 2026, and $8.1

million, or 1.14%, as of December 31, 2025.

The decrease in the allowance as a percentage of loans was primarily attributable

to charge-offs recorded on two individually evaluated borrower relationships for which specific allowance allocations had been

established at year-end.

One of these relationships had two pieces of collateral – the residential property was foreclosed

and reclassified into other real estate owned and the commercial property was sold at auction during the first six months of 2026.

The charge-off on the other relationship was largely driven by the amount of time that it had been in its classified status.

$108,000 increase in the allowance for credit losses on loans was attributable to provision expense associated with a larger loan

portfolio and modest adjustments to qualitative factors for geopolitical uncertainty related to the conflict in the Middle East

and one-to-four-family residential mortgage loans.

allowance for credit losses on unfunded commitments was $455,000 as of June 30, 2026, as compared to $471,000 as of December 31,

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

residential and commercial real estate construction loan commitments.

net charge-offs (recoveries) as a percentage of average loans were (0.02%) during the second quarter of 2026 compared to 0.14%

during the first quarter of 2026 and 0.02% during the second quarter of 2025.

Annualized net charge-offs for the first six months

of 2026 and 2025 were 0.06% and 0.02%, respectively.

Nonperforming

assets, which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.3 million as

of March 31, 2026, a decrease of $537,000, or 13.94%, since year-end 2025.

Nonaccrual loans decreased $467,000 during the first three

months of 2026 primarily due to the charge-off of the specific reserves on individually evaluated loans and a loan that was removed from

nonaccrual status based on performance.

Nonperforming assets as a percentage of total assets were 0.35% as of March 31, 2026 and 0.42%

as of December 31, 2025.

real estate owned increased to $184,000 as of March 31, 2026 from $89,000 at December 31, 2025 due to the foreclosure on the residential

assets, which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.5 million

as of June 30, 2026, a decrease of $320,000, or 8.29%, since year-end 2025.

Nonaccrual loans decreased $285,000 during the first

six months of 2026 primarily due to the charge-off of the specific allowance allocations on the individually evaluated loans and

a loan that was removed from nonaccrual status based on performance.

Nonperforming assets as a percentage of total assets were

0.38% as of June 30, 2026 and 0.42% as of December 31, 2025.

real estate owned increased to $225,000 as of June 30, 2026 from $89,000 at December 31, 2025 due to the foreclosure on the residential

property discussed above.

Expenses associated with other real estate owned, including gains and losses on sales, were $3,000 and $1,000

for the three months ended March 31, 2026 and 2025, respectively.

detailed information on nonaccrual loans and other real estate owned as of March 31, 2026 and December 31, 2025, refer to Note 6 Loans

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

rated substandard or below totaled $3.7 million as of March 31, 2026, an increase of $1.1 million from $2.6 million as of December 31,

Total past due loans decreased to $6.1 million as of March 31, 2026 from $7.2 million as of December 31, 2025.

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.

During the second quarter of 2026, a residential property in other real estate owned was sold for a

$37,000 gain.

detailed information on nonaccrual loans and other real estate owned as of June 30, 2026 and December 31, 2025, refer to Note

6 Loans and Note 10 Other Real Estate Owned in Item 1 of this Form 10-Q.

rated substandard or below totaled $3.2 million as of June 30, 2026, an increase of $600,000 from $2.6 million as of December

Total past due loans decreased to $4.8 million as of June 30, 2026 from $7.2 million as of December 31, 2025.

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

three months of 2026, we maintained the adjustments to our qualitative factors initiated in 2024 and carried forward into 2025, to consider

risk factors associated with commercial real estate and residential mortgage loans.

In addition, we made a slight adjustment of 3 bps

to consider the geopolitical uncertainty in the Middle East.

Those changes, along with growth in the loan portfolio and the assessment

of the historical and specific risks associated with the loan portfolio, resulted in a recovery of credit losses for credit losses of

$240,000, which included a $251,000 provision for the loan portfolio;

and a $11,000 negative provision for unfunded commitments due to

a decrease in unfunded commitments, particularly construction loans.

The following table summarizes components of the allowance for credit

losses and related loans as of March 31, 2026 and December 31, 2025:

Credit Ratios

in thousands)

Allowance for

credit losses - loans

for credit losses to total loans

loans to total loans

of allowance for credit losses loans to nonaccrual loans

During the first six months of 2026, we maintained the adjustments to our qualitative factors initiated in 2024 and carried forward

into 2025, to consider risk factors associated with commercial real estate and residential mortgage loans, including a modest

increase in 2026 in the risk factor for residential mortgage loans based on the past dues and increases in loans in the process

of foreclosure in that portfolio.

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 $303,000, which

included a $319,000 provision for the loan portfolio;

and a $16,000 recovery of credit losses on unfunded commitments.

following table summarizes components of the allowance for credit losses and related loans as of June 30, 2026 and December 31,

Selected Credit Ratios

(Dollars in thousands)

Allowance for credit losses - loans

Allowance for credit losses to total loans

Nonaccrual loans

Nonaccrual loans to total loans

Ratio of allowance for credit losses loans to nonaccrual loans

Charge-offs net of recoveries

Average loans

charge-offs to average loans1

Net charge-offs to average loans 1

Tax Asset and Income Taxes

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

deferred tax asset on the unrealized loss on securities available-for-sale of $2.3 million and $2.1 million, existed as of March 31,

2026 and December 31, 2025, 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 1.95%.

We have no significant nontaxable income or non-deductible expenses.

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

the deferred tax asset on the unrealized loss on securities available-for-sale of $2.3 million and $2.1 million existed as of

June 30, 2026 and December 31, 2025, 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 1.87%.

We have no significant nontaxable income or nondeductible expenses.

Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s

1 unchanged sentence

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

Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in

Item 1 of this Form 10-Q.

of March 31, 2026, the Bank remains well capitalized under the regulatory framework for prompt corrective action.

Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note

4 in Item 1 of this Form 10-Q.

of June 30, 2026, 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.

value per common share was $3.53 and $3.52 as of March 31, 2026 and December 31, 2025, respectively.

The increase in book value was due

to net income of $3.1 million which was offset by dividends paid to shareholders of $2.1 million, the repurchase of common stock totaling

$41,000, and an increase in the unrealized loss on securities available for sale, net of the tax effects, of $639,000.

value per common share was $3.67 and $3.52 as of June 30, 2026 and December 31, 2025, respectively.

The increase in the book value

was due largely to the $6.5 million, or $0.28 per share, of net income for the first six months of 2026, partially offset by the

net increase in the unrealized loss on available for sale investment securities of $805,000, the cash dividend payment of $0.09

per share and the repurchase of common shares for $98,000 during the first half of 2026.

key performance indicators are as follows:

Return on average assets 1

Return on average shareholders’

Return on average shareholders’ equity 1

Average equity to average assets

current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while

being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current

capital levels will be sufficient.

current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth

while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe

our current capital levels will be sufficient.

the first quarter of 2026, the Company paid a cash dividend of $0.09 per common share to our shareholders.

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 Company.

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, 2027.

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, 2026, the Company has repurchased 366,569 shares at an average price of $2.57 per

share since inception of the plan.

During the quarter ended March 31, 2026, the Company repurchased 11,496 shares at an average price

of $3.55 per share.

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

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 Company.

previously reported, the Company had approved a one-year stock repurchase program that authorized the repurchase of up to 500,000

of the Company’s common shares through March 31, 2027.

On July 20, 2026, the Board of Directors approved the termination

of the Company's stock repurchase program.

As a result, the Company will no longer repurchase shares of its common stock under

As of June 30, 2026, the Company had repurchased 382,774 shares at an average price of $2.61 per share since inception

During the quarter ended June 30, 2026, the Company repurchased 16,205 shares at an average price of $3.53 per share.

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

Collectively, those balances were $158.0 million as of March 31, 2026, up from $141.0 million as of December 31, 2025.

increase is primarily due to deposit growth exceeding funding needs for loan growth.

A surplus of short-term assets is maintained at

levels management deems adequate to meet potential liquidity needs

of March 31, 2026, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount

of $65.1 million, which is net of the $31.8 million of securities pledged as collateral.

Generally, the investment portfolio serves as

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

as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond (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 $427,000 during the first quarter of 2026 from $96.4 million as of December 31, 2025 to $96.9 million as of March

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

loan to deposit ratio was 87.39% and 88.89% as of March 31, 2026 and December 31, 2025, respectively.

third-party sources of liquidity as of March 31, 2026 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.

have used our 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 funds.

Collectively, those balances were $153.1 million as of June 30, 2026, up from $141.0 million as of December 31, 2025.

The increase is primarily due to deposit growth exceeding funding needs for loan growth and cash provided by operations.

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

of June 30, 2026, all of our investments are classified as available-for-sale, providing an additional source of liquidity in

the amount of $68.8 million, which is net of the $29.8 million of securities pledged as collateral.

Generally, the investment

portfolio serves as a source of liquidity while yielding a higher return at the purchase date when compared to other short-term

investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond (the FRB).

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 $2.2 million, or 4.55%, annualized during the

first half of 2026 from $96.4 million as of December 31, 2025 to $98.6 million as of June 30, 2026.

The Bank also has additional

borrowing capacity on lines for which investments and certain loans are currently pledged.

loan to deposit ratio was 88.48% and 88.89% as of June 30, 2026 and December 31, 2025, respectively.

third-party sources of liquidity as of June 30, 2026 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.

have used our 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 funds.

No draws on these letters of credit have been issued.

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

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 prepaid $3 million of the outstanding balance in the fourth quarter of 2025;

and, in June 2025, we borrowed

an additional $5.0 million which was repaid in July 2025.

An additional $252.0 million was available as of March 31, 2026 on the $273.0

million line of credit.

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

of March 31, 2026 we held brokered time deposits of $8.0 million, unchanged from December 31, 2025.

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.

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 prepaid $3 million of the outstanding balance in the fourth quarter

and, in June 2025, we borrowed an additional $5.0 million which was repaid in July 2025.

An additional $261.0 million

was available as of June 30, 2026 on the $282.0 million line of credit.

Full use of the FHLB borrowing capacity would require

the Company to pledge additional assets.

of June 30, 2026 we held brokered time deposits of $8.0 million, unchanged from December 31, 2025.

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 $7.7 million and $7.0 million as of March 31, 2026 and December 31, 2025, respectively.

time deposits were $7.3 million and $7.0 million as of June 30, 2026 and December 31, 2025, respectively.

Aside from the availability

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

As of March 31, 2026 approximately $16.3 million were placed in this product as compared to $16.1 million at December 31, 2025.

the 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

As of June 30, 2026 approximately $11.4 million were placed in this product as compared to $16.1 million

at December 31, 2025.

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

funds retain federal deposit insurance coverage.

liquidity is available through the Federal Reserve Bank discount window for overnight funding needs.

We may collateralize this line with

investment securities and loans at our discretion;

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

with an estimated market value of $24.9 million were pledged as of March 31, 2026.

deposits of $250,000 or more were approximately 6.35% of total deposits at March 31, 2026 and 7.15% of total deposits at December 31,

We may collateralize this

line with investment securities and loans at our discretion;

however, while we do not anticipate using this as a primary funding

source, securities with an estimated market value of $24.6 million were pledged as of June 30, 2026.

deposits of $250,000 or more were approximately 6.21% of total deposits at June 30, 2026 and 7.15% of total deposits at December

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.

We may consider

making future principal payments based on our available liquidity and considering other funding opportunities that may be available.

the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources

to meet our requirements and needs for the foreseeable future.

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

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

Given continued economic uncertainty, the level of market interest rates, and potential impacts from proposed or enacted tariffs and

other trade restrictions, along with ongoing geopolitical conflicts than can contribute to energy price volatility and broader financial

market volatility, we continue monitoring our liquidity position, specifically cash on hand, and readily-available contingent funding

sources, in order to meet customer demands.

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

However, liquidity can be further affected by a number of factors

such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond

Given continued economic uncertainty, the level of market interest rates, and potential impacts from proposed or

enacted tariffs and other trade restrictions, along with ongoing geopolitical conflicts than can contribute to energy price volatility

and broader financial market volatility, we continue monitoring our liquidity position, specifically cash on hand, and readily-available

contingent funding sources, in order to meet customer demands.

Additionally, our contingency funding plan is reviewed quarterly

with our Asset Liability Committee.

Balance Sheet Items and Contractual Obligations

have been no material changes during the three months ended March 31, 2026, to the off-balance sheet items and the contractual obligations

have been no material changes during the six months ended June 30, 2026, to the off-balance sheet items and the contractual obligations

disclosed in our 2025 Form 10-K.

Quantitative and

Qualitative Disclosures About Market Risk

and Qualitative Disclosures About Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis