Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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

F & M Bank Corp. (the "Company"), incorporated in Virginia in 1983, is a one-bank holding company registered under the Bank Holding Company Act of 1956 that has elected to become a financial holding company. The Company owns 100% of the outstanding stock of its banking subsidiary and VST. During the second quarter of 2025, the operations, assets, and liabilities of F&M Mortgage were transferred to the Bank.

The Company, through its subsidiary Bank, operates under a charter issued by the Commonwealth of Virginia and provides financial products and services to consumers and businesses. As a state-chartered bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the FRB. The Bank provides services at fourteen branch offices and at mortgage and dealer finance loan production offices. The Company offers title insurance through its subsidiary VST. The Company's primary trade area services customers in the counties of Rockingham, Shenandoah, Augusta and Frederick, and the cities of Harrisonburg, Staunton, Waynesboro, and Winchester.

Management's discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, footnotes, and other financial data presented. The discussion highlights material changes from prior reporting periods and any identifiable trends which may affect the Company. Amounts have been rounded for presentation purposes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part 1, Item 1 of this Form 10-Q and in conjunction with the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 (the "2024 Form 10-K").

Forward-Looking Statements

Certain statements in this report may contain "forward-looking statements" as defined by federal securities laws, which are subject to significant risks and uncertainties. These include statements regarding future plans, strategies, results, or expectations that are not historical facts, and are generally identified by the use of words such as "believe," "expect," "intend," "anticipate," "will," "estimate," "project," "plan" or similar expressions or other statements concerning opinions or judgments of the Company and its management about future events. These statements are based on estimates and assumptions, and our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Our actual results could differ materially from those contemplated by these forward-looking statements.

Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in local and national economies or market conditions; changes in interest rates; regulations and accounting principles; changes in policies or guidelines; loan demand and asset quality, including values of real estate and other collateral; deposit flow; the impact of competition from traditional or new sources; and other factors. Readers should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on such statements.

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company's critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

The Company's critical accounting policies used in the preparation of the Consolidated Financial Statements as of September 30, 2025 were unchanged from the policies disclosed in the 2024 Form 10-K within the section "Management's Discussion and Analysis of Financial Condition and Results of Operations." See Note 1 to the Consolidated Financial Statements in Part I, Item 1 for additional information.

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Results of Operations

Overview

Comparing the Three-Month Periods Ending September 30, 2025 and September 30, 2024

Net income increased $2.1 million to $2.92 million, or $0.82 per share, for the three months ended September 30, 2025, compared to $792,000, or $0.23 per share, for the same period in 2024. Return on average assets was 0.87% and return on average equity was 11.99% for the third quarter of 2025, compared to 0.24% and 3.66%, respectively, for the same period in 2024.

The $2.1 million increase in net income resulted from a $2.0 million increase in net interest income, a $363,000 decrease in provision for credit losses, a $14,000 decrease in noninterest income, and a $336,000 decrease in noninterest expenses.

Net interest income increased by $2.0 million as total interest income increased by $762,000 and interest expense decreased by $1.2 million. Net interest income was positively impacted by a $15.0 million decrease in short-term debt, which was partially offset by a $17.0 million increase in deposits. The net interest margin increased 61-basis points to 3.36%.

Provision for credit losses decreased by $363,000. For the third quarter of 2025, provision for credit losses totaled $539,000 and consisted of a $595,000 provision for credit losses on loans and a $56,000 recovery of provision for credit losses on unfunded commitments. For the same period of 2024, the provision for credit losses totaled $902,000.

Noninterest income decreased by $14,000 in the third quarter of 2025 due to a decrease in mortgage banking income that was offset by increases in card services and interchange income and title insurance income.

Noninterest expenses decreased by $336,000, which was primarily attributable to an external fraud event in third quarter 2024. The resulting decrease in other operating expenses of $526,000 was partially offset by an increase in legal and professional fees of $244,000.

Comparing the Nine-Month Periods Ending September 30, 2025 and September 30, 2024

Net income increased $3.3 million to $8.3 million, or $2.35 per share, for the nine months ended September 30, 2025, compared to $5.0 million, or $1.44 per share, for the same period in 2024. Return on average assets was 0.85% and return on average equity was 12.04% for the nine months ended September 30, 2025, compared to 0.51% and 8.37%, respectively, for the same period in 2024.

The $3.3 million increase in net income resulted from a $5.6 million increase in net interest income and a $281,000 increase in noninterest income, which was partially offset by a $354,000 increase in provision for credit losses, a $1.3 million increase in noninterest expenses, and a $955,000 increase in income tax expense.

Net interest income increased $5.6 million resulting from a $2.5 million increase in total interest income and a $3.1 million decrease in interest expense. Net interest income was positively impacted by a $41.2 million decrease in average borrowings coupled with an $8.0 million increase in average earning assets. Net interest margin increased 60-basis points to 3.33% at September 30, 2025, from 2.73% for the same period in 2024.

Provision for credit losses increased by $354,000 for the first nine months of 2025 as compared to the same period in 2024. For the nine months ended September 30, 2025, provision for credit losses totaled $1.6 million and consisted of a $1.5 million provision for credit losses on loans and a $125,000 provision for credit losses on unfunded commitments. For the same period in 2024, the provision for credit losses totaled $1.3 million.

Noninterest income increased by $281,000 primarily from an increase in title insurance income, card services and interchange income, income on bank-owned life insurance, and service charges on deposit accounts. The increases were partially offset by a decrease in mortgage banking income.

Noninterest expenses increased by $1.3 million and were primarily attributable to an increase in salaries and employee benefits, legal and professional fees, and data processing expense. Expenses related to the Company's pension plan increased $749,000 due to an increase in net periodic pension cost and pension settlement gains of $580,000 received in 2024. Other expenses decreased due to an external fraud loss of $731,000 in 2024.

Net Interest Income

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, and subordinated debt. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing net interest income by average earning assets. The provision for credit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consist of income from service charges on deposit accounts, revenue from wealth management services, mortgage banking income, title insurance income, ATM and check card income, income from bank-owned life insurance, and general and administrative expenses.

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Three Month Period Ended September 30, 2025

Net interest income increased by $2.0 million, or 24%, to $10.5 million for the three months ended September 30, 2025, as compared to the same period in the prior year. Total interest income increased by $762,000 and interest expense decreased by $1.2 million.

The increase in total interest income was attributed to a $574,000 increase in interest from securities available for sale and a $297,000 increase in interest and fees on loans held for investment. The increase in interest income from securities available for sale was attributable to an 83-basis point increase in yield compared to the same period in the prior year. The increase in interest income on loans held for investment was attributable to a $36.3 million, or 4%, increase in average balance offsetting a 17-basis point decrease in yield.

The decrease in total interest expense was attributable to a $1.0 million decrease in interest expense on deposits and a $241,000 decrease in interest expense on short-term debt. The lower interest expense on deposits resulted from a 47-basis point decrease in the cost of interest-bearing deposits and a decrease in average time deposit balances replaced with an increase in lower cost saving deposits. The decrease in cost of deposits was impacted by a decrease in rates paid on deposits and a change in the composition of the deposit portfolio as lower cost demand and savings deposit balances increased, while higher cost time deposit balances decreased. The lower interest expense on borrowings resulted from a $17.3 million decrease in the average balance of short-term borrowings.

The net interest margin was 3.36% for the third quarter of 2025 compared to 2.75% for the same period in the prior year as the yield on earning assets increased 17-basis points and the cost of funds decreased 40-basis points.

Nine Month Period Ended September 30, 2025

Net interest income increased $5.6 million, or 23%, to $30.5 million for the first nine months of 2025 compared to $24.8 million for the same period in the prior year. Total interest income increased by $2.5 million and total interest expense decreased by $3.1 million.

The increase in total interest income was attributable to a $1.3 million increase in interest income from securities available for sale, an $888,000 increase in interest income and fees on loans held for investment, and a $614,000 increase in interest income on federal funds sold. The increase in interest income from securities available for sale was attributable to a 74-basis point increase in yield. The increase in interest income on federal funds sold is attributable to a 110% increase in average balance. The increase in interest income on loans held for investment was attributable to a 2% increase in average balance.

The decrease in total interest expense was attributable to a $1.5 million decrease in interest expense on deposits and a $1.7 million decrease in interest expense on short-term debt. The lower interest expense on deposits resulted from a 30-basis point decrease in the cost of interest-bearing deposits. The decrease in the cost of interest-bearing deposits was the result of a decrease in rates paid on deposits and a change in composition of the deposit portfolio as higher cost time deposit balances decreased, while lower cost savings deposit balances increased. The lower interest expense on borrowings resulted from a $41.1 million decrease in average balances of borrowings.

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The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):

		Three Months ended
		September 30, 2025												September 30, 2024
		Average Balance4				Interest Income /Expense				Yield /Rate1				Average Balance4				Interest Income /Expense				Yield /Rate1
ASSETS
Loans held for investment2,3		$	861,788			$	14,130				6.50	%		$	825,511			$	13,833				6.67	%
Loans held for sale			2,512				(3	)			-0.47	%			3,796				60				6.29	%
Federal funds sold			42,236				468				4.40	%			38,425				518				5.36	%
Interest-bearing deposits in banks and other investments			3,226				59				7.26	%			3,880				55				5.64	%
Investment securities4
Taxable			314,428				2,214				2.79	%			339,701				1,645				1.93	%
Tax exempt			16,500				184				4.42	%			16,189				179				4.40	%
Total investment securities			330,928				2,398				2.87	%			355,890				1,824				2.04	%
Total earning assets			1,240,690				17,052				5.45	%			1,227,502				16,290				5.28	%
Allowance for credit losses			(8,201	)											(7,790	)
Nonearning assets			95,435												99,433
Total assets		$	1,327,924											$	1,319,145
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand-interest bearing		$	135,230			$	558				1.64	%		$	137,458			$	646				1.87	%
Savings			567,111				3,875				2.71	%			482,333				3,219				2.66	%
Time deposits			234,318				1,966				3.33	%			309,968				3,575				4.59	%
Total interest-bearing deposits			936,659				6,399				2.71	%			929,759				7,440				3.18	%
Short-term debt			-				-				-				17,283				241				5.55	%
Long-term debt			6,999				158				8.96	%			6,958				116				6.63	%
Total interest-bearing liabilities			943,658				6,557				2.76	%			954,000				7,797				3.25	%
Noninterest bearing deposits			273,338												265,188
Other liabilities			14,193												14,763
Total liabilities			1,231,189												1,223,951
Shareholders' equity			96,735												85,194
Total liabilities and shareholders' equity		$	1,327,924											$	1,319,145
Net interest income						$	10,495											$	8,493
Interest rate spread											3.31	%											2.74	%
Cost of funds											2.14	%											2.54	%
Net interest margin											3.36	%											2.75	%

_______________________

1	Annualized.
2	Interest income on loans includes loan fees.
3	Loans held for investment include nonaccrual loans.
4	Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

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		Nine months ended
		September 30, 2025												September 30, 2024
		Average Balance4				Interest Income /Expense				Yield /Rate1				Average Balance4				Interest Income /Expense				Yield /Rate1
ASSETS
Loans held for investment2,3		$	843,875			$	41,566				6.59	%		$	824,967			$	40,678				6.59	%
Loans held for sale			2,255				42				2.49	%			3,092				123				5.31	%
Federal funds sold			45,631				1,505				4.41	%			21,748				891				5.47	%
Interest-bearing deposits in banks and other investments			2,816				147				6.98	%			6,241				357				7.64	%
Investment securities4
Taxable			311,957				6,548				2.81	%			342,684				5,223				2.04	%
Tax exempt			16,396				321				2.62	%			16,226				314				2.58	%
Total investment securities			328,353				6,869				2.80	%			358,910				5,537				2.06	%
Total earning assets			1,222,930				50,129				5.48	%			1,214,958				47,586				5.23	%
Allowance for credit losses			(7,982	)											(8,242	)
Nonearning assets			97,320												100,978
Total assets		$	1,312,268											$	1,307,694
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand-interest bearing		$	134,770			$	1,665				1.65	%		$	135,463			$	1,807				1.78	%
Savings			543,665				10,892				2.68	%			487,910				9,690				2.65	%
Time deposits			250,856				6,713				3.58	%			278,868				9,231				4.42	%
Total interest-bearing deposits			929,291				19,270				2.77	%			902,241				20,728				3.07	%
Federal funds purchased			-				-				-				277				8				3.86	%
Short-term debt			-				4				-				40,894				1,683				5.50	%
Long-term debt			6,990				390				7.46	%			6,948				347				6.67	%
Total interest-bearing liabilities			936,281				19,664				2.81	%			950,360				22,766				3.20	%
Noninterest bearing deposits			269,458												262,293
Other liabilities			13,935												14,832
Total liabilities			1,219,674												1,227,485
Shareholders' equity			92,594												80,209
Total liabilities and shareholders' equity		$	1,312,268											$	1,307,694
Net interest income						$	30,465											$	24,820
Interest rate spread											3.30	%											2.72	%
Cost of funds											2.18	%											2.51	%
Net interest margin											3.33	%											2.73	%

________________________

1	Annualized.
2	Interest income on loans includes loan fees.
3	Loans held for investment include nonaccrual loans.
4	Average balance information is reflective of historical cost and has not been adjusted for changes in market value annualized.

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Provision for (Recovery of) Credit Losses

Three-Month Period Ended September 30, 2025

The provision for credit losses totaled $539,000 for the three-month period ended September 30, 2025, compared to a provision of $902,000 for the same period of the prior year. The provision consisted of $595,000 provision for credit losses on loans and $56,000 recovery of provision for credit losses on unfunded commitments. The decrease in the provision for credit losses on loans resulted primarily from net charge-offs totaling $1.1 million and partially offset by a decrease in the specific reserve component of the allowance for credit losses on loans.

Nine Month Period Ended September 30, 2025

The provision for credit losses totaled $1.6 million for the nine-month period ended September 30, 2025, compared to $1.3 million for the same period in the prior year. The provision consisted of $1.5 million provision for credit losses on loans and $125,000 provision for credit losses on unfunded commitments. The increase in the provision for credit losses on loans resulted primarily from net charge-offs totaling $1.8 million, a decrease in the specific reserve component of the allowance for credit losses, an increase in the general reserve component of the allowance during the period resulting from a change in a qualitative factors related to classified loans, loan review, and loan volume, which were partially offset by decreases in the qualitative factor related to economic conditions. The qualitative factor for classified loans increased in the commercial real estate, commercial and industrial loans, and automobile loan segments due to increases in nonaccrual and classified loans. The qualitative factor for loan review increased in other construction, loans secured by farmland, loans secured by first liens, commercial real estate, loans to finance agricultural production, and commercial and industrial loans due to the results of an external loan review. The qualitative factor for loan volume increased in loans secured by farmland, loans secured by first liens, and other commercial real estate segments due to increased year over year portfolio increases; this increase was partially offset by a decrease in the automobile segment due to strategic reduction in the portfolio balance. The decrease in economic conditions was due to an improvement in the forecast for real gross domestic product that affected the commercial real estate, commercial and industrial loans, and municipal loan segments.

Noninterest Income

Three-Month Period Ended September 30, 2025

Noninterest income decreased $14,000, or 1% compared to the same period of 2024. The decrease resulted from a $245,000 decrease in mortgage banking income due to a decrease in loans held for sale. The decrease in mortgage banking income was offset by a $97,000 increase in title insurance income due to increased title premium and loan closing volume, and a $111,000 increase in card services and interchange income.

Nine-Month Period Ended September 30, 2025

Total noninterest income increased $281,000, or 3%, to $8.4 million for the nine months ended September 30, 2025, compared $8.1 million for the same period in 2024. The increase resulted from a $307,000 increase in title insurance income due to increased title premiums and loan closing volume and a $223,000 increase in card services and interchange income due to renegotiated interchange contracts. These increases in title income and card services and interchange income were offset by a $435,000 decrease in mortgage banking income. The decrease in mortgage banking income was due to a decrease in originations of loans held for sale.

Noninterest Expense

Three-Month Period Ended September 30, 2025

Noninterest expenses decreased $336,000, or 3%, to $9.3 million for the three-month period ended September 30, 2025, compared to $9.7 million for the same period one year ago. The decrease was primarily attributable to a $526,000 decrease in other operating expenses coupled with a $244,000 increase in legal and professional fees. Other operating expenses decreased due to an external fraud event in 2024 that totaled $731,000. The increase in legal and professional fees, as compared to the same period in 2024, was due to increased audit costs and increased federal examination assessment fees, as well as a recovery in legal fees that occurred in 2024 due to the payoff of a nonperforming loan.

Nine-Month Period Ended September 30, 2025

Noninterest expenses increased $1.3 million, or 5%, to $27.6 million for the nine-month period ended September 30, 2025, compared to $26.3 million for the same period one year ago. The increase was primarily attributable to a $982,000 increase in combined salaries and employee benefits, a $293,000 increase in legal and professional fees, and a $280,000 increase in data processing expense. These increases were partially offset by a $220,000 decrease in other operating expenses. Salaries and employee benefits increased due to increased net periodic pension costs of $187,000, no pension settlement gains in 2025, and a lower refund (rebate) of health insurance expenses. The increase in legal and professional fees, as compared to the same period in 2024, was due to increased audit costs and increased federal examination assessment fees, as well as a recovery in legal fees in 2024 due to the payoff of a nonperforming loan. Data processing expenses increased due to new products provided by our core provider and additional software contracts process improvements. The decrease in other operating expenses is attributable to an external fraud loss in 2024 that totaled $731,000.

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Income Taxes

Three-Month Period Ended September 30, 2025

Income tax expense increased $555,000 for the third quarter of 2025, compared to the same period one year ago. The effective tax rate, before tax credits, for the third quarter of 2025 was 19.00% compared to 12.75% for the same period in 2024. The Company's income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended September 30, 2025, and 2024. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, income from bank owned life insurance, and low-income housing credits. A more detailed discussion of the Company's tax calculation is contained in Note 18 to the Consolidated Financial Statements included in the 2024 Form 10-K.

Nine-Month Period Ended September 30, 2025

Income tax expense, before tax credits, increased $955,000, or 265%, for the first nine months of 2025 compared with the same period in 2024. The effective tax rate, before tax credits, for the first nine months of 2025 was 19.50% compared with 17.65% for the same period in 2024. The increased effective tax rate for 2025 was the result of increased income in 2025 compared to 2024.

Balance Sheet Review

General

Assets totaled $1.4 billion at September 30, 2025, which was an increase of $56.1 million or 4%, from December 31, 2024. The asset composition changed during the first nine months of the year as loans held for investment, net of the allowance for credit losses, increased by $32.6 million and federal funds sold increased by $26.6 million.

Total liabilities increased $40.7 million during the nine-month period ended September 30, 2025 from December 31, 2024, due to an increase in deposits during the first nine months of 2025. Composition of deposits as of September 30, 2025, changed as non-interest bearing deposits increased $20.6 million, savings accounts increased $76.4 million, interest checking increased $7.2 million, and time deposits decreased $64.0 million.

Total shareholders' equity increased $15.4 million during the first nine months of 2025, primarily from a $5.6 million increase in retained earnings and a $9.5 million decrease in accumulated other comprehensive loss. Retained earnings increased as $8.3 million of net income was partially offset by $2.8 million of cash dividends on common stock. The decrease in accumulated other comprehensive loss was attributable to lower unrealized losses in the available-for-sale securities portfolio. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Loans

Loans held for investment totaled $872.3 million at September 30, 2025, which was a $32.4 million, or 4% increase from December 31, 2024. The loan portfolio is primarily composed of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, loans secured by farmland, and indirect automobile loans. The growth of loans since December 31, 2024 has shifted the composition of the loan portfolio by decreasing indirect automobile loans and increasing loans secured by farmland and other commercial real estate.

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Following is a breakdown of the loan portfolio composition as of the periods indicated (dollars in thousands):

		September 30, 2025								December 31, 2024
Loan Segment		Balance				Percentage of Portfolio				Balance				Percentage of Portfolio
1-4 Family residential construction		$	31,805				3.64	%		$	25,102				2.99	%
Other construction, land development and land			42,281				4.84	%			58,208				6.92	%
Secured by farmland			111,163				12.74	%			86,016				10.23	%
Home equity - open end			50,401				5.77	%			49,542				5.89	%
Real estate			233,859				26.79	%			213,081				25.35	%
Home Equity - closed end			6,280				0.72	%			6,137				0.73	%
Multifamily			14,621				1.68	%			10,804				1.29	%
Owner-occupied commercial real estate			92,302				10.57	%			86,169				10.25	%
Other commercial real estate			114,375				13.10	%			98,189				11.68	%
Agricultural loans			18,562				2.13	%			17,928				2.13	%
Commercial and industrial			56,548				6.48	%			64,901				7.72	%
Credit Cards			3,193				0.37	%			3,524				0.42	%
Automobile loans			83,458				9.56	%			104,271				12.40	%
Other consumer loans			9,621				1.10	%			11,915				1.42	%
Municipal loans			4,410				0.51	%			4,901				0.58	%
Gross loans			872,879				100.00	%		$	840,688				100.00	%
Unamortized deferred net loan fees			(571	)							(739	)
Loans held for investment, net of deferred loan fees		$	872,308							$	839,949

Loans held for sale totaled $1.3 million at September 30, 2025 and $2.3 million at December 31, 2024. Loans held for sale consist of one-to-four family residential real estate loans to investors at pre-committed rates. The volume of loans held for sale originated are affected by interest rate changes, seasonal trends, and refinancing activity.

Asset Quality

Management classifies nonperforming loans as nonaccrual loans and loans that are 90 days or more past due. Nonaccrual loans are those on which interest accruals have been suspended or permanently discontinued. Nonperforming loans totaled $7.5 million and $7.1 million at September 30, 2025 and December 31, 2024. Nonaccrual loans totaled $7.5 million and $7.0 million representing 0.85% and 0.84% of total loans, at September 30, 2025 and December 31, 2024, respectively. There was no other real estate owned ("OREO") at September 30, 2025 compared to $77,000 in OREO at December 31, 2024. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through local realtors. The Bank had one consumer mortgage loan totaling $186,000 secured by real estate for which formal foreclosure proceedings were in process as of September 30, 2025.

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The following table summarizes the Company's non-performing loans and assets as of the periods indicated (in thousands):

		September 30, 2025				December 31, 2024
Nonaccrual loans		$	7,451			$	7,045
Loans past due 90 days and accruing interest			1				32
Total nonperforming loans			7,452				7,077
Other real estate owned			-				77
Total nonperforming assets		$	7,452			$	7,154
Allowance for credit losses		$	7,848			$	8,129
Total Loans		$	872,308			$	839,949
Ratios:
Allowance for credit losses to Total Loans			0.90	%			0.97	%
Allowance for credit losses to Total nonperforming assets			105.31	%			113.63	%
Allowance for credit losses to Nonaccrual loans			105.33	%			115.39	%
Nonaccrual Loans to Total Loans			0.85	%			0.84	%

Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio. For each period presented, the provision for credit losses charged to expense was based on management's judgment after taking into consideration all factors connected with the collectability of the existing portfolio. Management considers economic conditions, historical losses, past due percentages, externally generated loan quality reports, and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that an additional provision for credit losses will not be required in the future, including as a result of changes in the qualitative factors underlying management's estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company's market area, loan growth, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for credit losses, see "Critical Accounting Policies" above.

Securities Available for Sale ("AFS")

The securities portfolio plays a primary role in the management of the Company's interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure balances with the FRB. The Company's AFS portfolio is reported at fair value, based on market prices of comparable instruments. The portfolio consists primarily of U.S. Treasury securities, U.S. government agency and mortgage-backed securities issued by federal agencies, as well as municipal bonds and corporate debt securities.

On September 30, 2025, the AFS portfolio totaled $329.4 million, an increase of $1.8 million, or 1%, from $327.7 at December 31, 2024. The increase is primarily attributable to purchases of $40.9 million in AFS securities during the first nine months of 2025 and a $12.0 million decrease in unrealized losses in the investment securities portfolio. The change in the unrealized losses of investment securities from December 31, 2024 to September 30, 2025 was related to changes in market interest rates and maturities of lower yielding bonds. These increases were partially offset by maturities and calls of $32.3 million, paydowns on mortgage-backed securities of $18.3 million, and amortization of $500,000.

Other Investments

Restricted securities, including FHLB, FRB, and Community Bankers' Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and they are carried at cost. Other investments totaled $2.3 million and $2.2 million at September 30, 2025 and December 31, 2024, respectively.

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Deposits

Deposits totaled $1.2 billion on September 30, 2025, which was a $40.2 million increase from December 31, 2024. The composition of the deposit portfolio has shifted from time deposits to savings accounts. The following table shows the balance of each category of deposits as of the dates indicated (dollars in thousands):

		September 30, 2025								December 31, 2024
		Balance				% of total deposits				Balance				% of total deposits
Noninterest-bearing demand		$	280,937				22.8	%		$	260,301				21.8	%
Interest Checking			146,088				11.8	%			138,919				11.6	%
Savings Accounts			573,985				46.4	%			497,577				41.6	%
Time Deposits			234,332				19.0	%			298,308				25.0	%
Total deposits		$	1,235,341							$	1,195,105

Estimated uninsured deposits totaled approximately $163.2 million and $131.9 million at September 30, 2025, and December 31, 2024, respectively.

The following table shows the average balances of deposits and average interest rates paid as of the periods indicated (dollars in thousands):

		Three months ended September 30, 2025								Nine months ended September 30, 2025
		Average Balance				Rate				Average Balance				Rate
Noninterest-bearing		$	273,338				-			$	269,458				-
Interest-bearing:
Interest Checking		$	135,230				1.64	%		$	134,770				1.65	%
Savings Accounts			567,111				2.71	%			543,665				2.68	%
Time Deposits			234,318				3.33	%			250,856				3.58	%
Total interest-bearing deposits			936,659				2.71	%			929,291				2.77	%
Total average deposits		$	1,209,997				2.10	%		$	1,198,749				2.15	%

The following table sets forth maturity ranges of time deposits, as of September 30, 2025, that meet or exceed the FDIC insurance limit (in thousands):

Maturity period:
3 months or less		$	8,203
Over 3 months through 6 months			22,841
Over 6 months through 12 months			11,647
Over 12 months			893
Total		$	43,584

Long-term borrowings

Long-term debt totaled $7.0 million on September 30, 2025 and December 31, 2024, and consisted of one subordinated debt note. The note bore interest at 6.00% per annum through July 30, 2025, payable semi-annually in arrears. On August 1, 2025, the interest rate converted from a fixed interest rate of 6.00% to a floating interest rate of Secured Overnight Financing Rate (SOFR) plus 593 basis points, or 10.25. From August 1, 2025 through July 30, 2030, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 593 basis points, payable quarterly in arrears. Beginning on July 31, 2025 through maturity, the note may be redeemed, at the Company's option, on any scheduled interest payment date. On September 30, 2025, the Company gave notice of full redemption on October 31, 2025 to the holder of the subordinated note.

On October 24, 2025, the Company entered a subordinated note purchase agreement pursuant to which the Company issued and sold $10.0 million in aggregate principal amount of 7.55% fixed to floating rate subordinated notes due November 1, 2035. The note will initially bear interest at 7.55% per annum, beginning May 1, 2026 to but excluding November 1, 2030, payable semi-annually in arrears. From and including November 1, 2030 to but excluding November 1, 2035, or up to an early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Financing Rate plus 424.5 basis points, payable quarterly in arrears. Beginning on November 1, 2030 through maturity, the notes may be redeemed, at the Company's option, on any scheduled interest payment date. The notes will mature on November 1, 2035.

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Liquidity

Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, loans held for sale, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, credit availability at the FRB, the purchase of brokered certificates of deposit, a corporate line of credit with a large correspondent bank, and debt and capital issuances. Management believes the Company's current overall liquidity is sufficient to satisfy its depositors' requirements and to meet its customers' credit needs.

The Company closely monitors changes in the industry and market conditions that may impact the Company's liquidity. Deposits have remained a steady source of liquidity. The Company may use other means of borrowings or other liquidity sources to fund any liquidity needs based on declines in deposit balances. The Company is also closely tracking the potential impacts on the Company's liquidity due to declines in fair value of the Company's securities portfolio due to rising market interest rates.

As of September 30, 2025, liquid assets totaled $110.4 million, or 8.13% of total assets, and liquid earning assets totaled $91.6 million, or 6.74% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows.

At September 30, 2025, the Bank pledged investment securities with a par value totaling $135.6 million to the Federal Reserve System's Discount Window. The Discount Window provides access to funding to help depository institutions manage their liquidity risks. The Bank did not borrow from the Discount Window during the first nine months of 2025. In addition to the Discount Window, the Bank has access to off-balance sheet liquidity through unsecured Federal funds lines totaling $90.0 million, and a secured line of credit with the FHLB with $168.3 million in available credit at September 30, 2025. The FHLB line of credit is secured by a blanket lien on qualifying loans in the residential, commercial, agricultural real estate, and home equity portfolios.

Market Risk Management

Market risk is the sensitivity of a financial institution's earnings or capital to adverse changes in interest rates, exchange rates, and equity prices. The Company's primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority of its assets. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets.

The Company manages interest rate risk through an asset and liability committee ("ALCO") composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company's interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company's Board of Directors reviews and approves the guidelines established by ALCO.

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management's outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.

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The following table represents interest rate sensitivity on the Company's net interest income using different rate scenarios:

				As of September 30, 2025				As of December 31, 2024
Change in Interest Rates (in Basis Points)				Percent Change in Earnings				Percent Change in Earnings
	400				-6.74	%			-9.93	%
	300				-4.98	%			-7.38	%
	200				-3.20	%			-4.76	%
	100				-1.55	%			-2.28	%
	(100	)			1.02	%			1.89	%
	(200	)			1.51	%			3.14	%
	(300	)			1.06	%			3.79	%
	(400	)			-1.54	%			1.80	%

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net economic value is the market value of all assets minus the market value of all liabilities. The change in net economic value of equity ("EVE") over different rate environments is an indication of the longer- term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.

The following table reflects the change in net economic value over different rate environments:

				As of September 30, 2025				As of December 31, 2024
Change in Interest Rates (in Basis Points)				Percentage Change in EVE				Percentage Change in EVE
	400				-19.74	%			-20.65	%
	300				-15.26	%			-15.73	%
	200				-10.68	%			-10.40	%
	100				-6.37	%			-5.04	%
	(100	)			1.65	%			3.63	%
	(200	)			0.28	%			4.51	%
	(300	)			-4.17	%			2.87	%
	(400	)			-8.34	%			-2.32	%

Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance.

The Company uses a variety of traditional and on-balance sheet tools to manage our interest rate risk. Gap analysis, which monitors the "gap" between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components.

An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At September 30, 2025, the Company had $73.0 million more in liabilities repricing than assets subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.