Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

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

Management's Discussion and Analysis of Operations

Overview

This Management's Discussion and Analysis is provided to assist in the understanding and evaluation of Skyline Bankshares, Inc's. financial condition and its results of operations. The following discussion should be read in conjunction with the Company's consolidated financial statements.

Skyline Bankshares, Inc. (the "Company") is a bank holding company headquartered in Floyd, Virginia. The Company offers a wide range of retail and commercial banking services through its wholly-owned bank subsidiary, Skyline National Bank (the "Bank"). On January 1, 2023, the Company changed its name from Parkway Acquisition Corp. to Skyline Bankshares, Inc. to align its brand across the entire organization.

The Company was incorporated as a Virginia corporation on November 2, 2015. The Company was formed as a business combination shell company for the purpose of completing a business combination transaction between Grayson Bankshares, Inc. ("Grayson") and Cardinal Bankshares Corporation ("Cardinal") in which Grayson and Cardinal merged with and into the Company, with the Company as the surviving corporation (the "Cardinal merger"), on July 1, 2016. Upon completion of the Cardinal merger, the Bank of Floyd, a wholly-owned subsidiary of Cardinal, was merged with and into the Bank (formerly Grayson National Bank), a wholly-owned subsidiary of Grayson. Effective March 13, 2017, the Bank changed its name to Skyline National Bank.

On July 1, 2018, the Company acquired Great State Bank ("Great State"), based in Wilkesboro, North Carolina, through the merger of Great State with and into the Bank, with the Bank as the surviving bank.

On April 16, 2024, the Company entered into a definitive agreement to acquire Johnson County Bank ("JCB"), based in Mountain City, Tennessee, in an all-cash transaction valued at $25.0 million, with the Bank as the surviving bank. The purpose of this acquisition was to facilitate the Bank's entry into Eastern Tennessee. The transaction closed and the merger of JCB with and into the Bank became effective on September 1, 2024. The Company was considered the acquiror and JCB was considered the acquiree in the transaction for accounting purposes. Pursuant to the JCB merger, the Company acquired $154.1 million of assets, including $87.2 million in loans and assumed $133.8 million in liabilities, including $125.3 million of deposits, on September 1, 2024.

The Bank was organized under the laws of the United States in 1900 and now serves the Virginia counties of Grayson, Floyd, Carroll, Wythe, Pulaski, Montgomery, Roanoke, Patrick and Washington, the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Davie, Iredell, Watauga, Wilkes, and Yadkin, and the Tennessee county of Johnson, and the surrounding areas, through twenty-eight full-service banking offices and two loan production offices. As a Federal Deposit Insurance Corporation ("FDIC") insured national banking association, the Bank is subject to regulation by the Comptroller of the Currency and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve").

For purposes of this annual report on Form 10-K, all information contained herein as of and for periods prior to September 1, 2024 reflects the operations of the Company prior to the JCB merger. Unless this report otherwise indicates or the context otherwise requires, all references to the "Company" as of and for periods subsequent to September 1, 2024 refer to the combined company and its subsidiary as a combined entity after the merger, and all references to the "Company" as of and for periods prior to September 1, 2024 are references to the Company and its subsidiary as a combined entity prior to the merger.

Management's Discussion and Analysis

Forward Looking Statements

From time to time, the Company and its senior managers have made and will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be contained in this report and in other documents that the Company files with the Securities and Exchange Commission. Such statements may also be made by the Company and its senior managers in oral or written presentations to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Also, forward-looking statements can generally be identified by words such as "may," "could," "should," "would," "believe," "anticipate," "estimate," "seek," "expect," "intend," "plan" and similar expressions.

Forward-looking statements provide management's expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. There are a number of factors, many of which are beyond the Company's control that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors, some of which are discussed elsewhere in this report, include:

●

any required increase in our regulatory capital ratios;

●

inflation, interest rate levels and market and monetary fluctuations;

●

the difficult market conditions in our industry;

●

trade, monetary and fiscal policies and laws, including interest rate policies of the federal government;

●

applicable laws and regulations and legislative or regulatory changes;

●

the timely development and acceptance of new products and services of the Company;

●

the willingness of customers to substitute competitors' products and services for the Company's products and services;

●

the financial condition of the Company's borrowers and lenders;

●

the Company's success in gaining regulatory approvals, when required;

●

technological and management changes;

●

the Company's ability to implement its growth and acquisition strategies;

●

the Company's critical accounting policies and the implementation of such policies;

●

lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions and branch expansion;

●

changes in consumer spending and saving habits;

●

deposit flows;

●

the strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations;

●

geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;

●

the Company's potential exposure to fraud, negligence, computer theft, and cyber-crime;

●

the Company's success at managing the risks involved in the foregoing; and

●

other factors identified in Item 1A. "Risk Factors" above.

Management's Discussion and Analysis

The Company had net earnings of $15.8 million for 2025 compared to $7.4 million for 2024. Our financial performance in 2025 can be attributed in part to our efforts that resulted in growth in the Bank's core loan portfolio of $74.2 million, or 7.55%, during 2025. Earnings for the year ended December 31, 2025 represented a return on average assets of 1.24% and a return on average equity of 16.16%, compared to 0.67% and 8.69%, respectively, for the year ended December 31, 2024. The net interest margin was 4.27% in 2025, compared to 3.82% in 2024. As we look to 2026, management anticipates that this core loan growth during 2025 will continue to have a positive impact on both earning assets and loan yields; however, continued competition for deposits will prevent interest expense from decreasing significantly, and higher operating costs will continue in the near term.

Critical Accounting Policies

The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The notes to the audited consolidated financial statements included in the Annual Report for the year ended December 31, 2025 contain a summary of its significant accounting policies. Management believes the policies with respect to the methodology for the determination of the allowance for credit losses, and asset impairment judgments, such as the recoverability of intangible assets and credit losses on investment securities, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the loan balance, or a portion thereof, is uncollectable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management's estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured. The Company has designated 5 year treasury yield, fed funds rates, and national unemployment as its forecast variables. These forecasts from reputable and independent third parties are sourced to inform the Company's reasonable and supportable forecasting of current expected credit losses.

The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheets. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these unfunded commitments share similar risk characteristics as its loan portfolio segments.

Management's Discussion and Analysis

Critical Accounting Policies, continued

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2025 and December 31, 2024, there was no allowance for credit loss related to the available for sale portfolio.

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected November 1 as the date to perform the annual impairment test. The test as of November 1, 2025 found no impairment on the goodwill. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit intangibles that represent the value of long-term deposit relationships acquired in a business combination. Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired. The core deposit intangible as a result of the Cardinal merger, is amortized over an estimated useful life of twenty years on an accelerated basis. For the core deposit intangible as a result of the Great State merger, we used an estimated useful life of seven years on an accelerated basis for the amortization. For the core deposit intangible as a result of the JCB merger, we used an estimated useful life of ten years on an accelerated basis for the amortization.

Management's Discussion and Analysis

Table 1. Net Interest Income and Average Balances (dollars in thousands)

		2025												2024
						Interest												Interest
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Cost				Balance				Expense				Cost
Interest-earning assets:
Interest-bearing deposits		$	15,551			$	667				4.29	%		$	7,834			$	390				4.98	%
Federal funds sold			424				18				4.25	%			504				37				7.34	%
Investment securities, at amortized cost			139,064				2,900				2.09	%			150,869				3,135				2.08	%
Loans 1, 2			1,024,516				62,164				6.07	%			874,349				49,974				5.72	%
Total			1,179,555				65,749								1,033,556				53,536
Yield on average interest-earning assets											5.57	%											5.18	%
Non interest-earning assets:
Cash and due from banks			20,451												18,713
Premises and equipment			37,667												32,437
Interest receivable and other			62,949												54,892
Allowance for credit losses			(8,329	)											(7,170	)
Unrealized gain/(loss) on securities			(18,778	)											(22,964	)
Total			93,960												75,908
Total assets		$	1,273,515											$	1,109,464
Interest-bearing liabilities:
Demand deposits		$	250,251				2,167				0.87	%		$	218,105				1,408				0.65	%
Savings deposits			172,456				223				0.13	%			157,141				178				0.11	%
Time deposits			360,806				11,740				3.25	%			301,554				11,064				3.67	%
Federal funds purchased			395				19				4.81	%			334				19				5.69	%
Borrowings			28,508				1,204				4.22	%			26,547				1,397				5.26	%
Total			812,416				15,353								703,681				14,066
Cost on average interest-bearing liabilities											1.89	%											2.00	%
Non interest-bearing liabilities:
Demand deposits			355,236												313,026
Interest payable and other			7,851												7,298
Total			363,087												320,324
Total liabilities			1,175,503												1,024,005
Stockholder's equity:			98,012												85,459
Total liabilities and stockholder's equity		$	1,273,515											$	1,109,464
Net interest income						$	50,396											$	39,470
Net yield on interest-earning assets											4.27	%											3.82	%

¹Includes nonaccural loans

²Interest income includes loan fees

Management's Discussion and Analysis

Table 2. Rate/Volume Variance Analysis (dollars in thousands)

		2025 Compared to 2024												2024 Compared to 2023
		Interest Income/				Variance Attributable To(1)								Interest Income/				Variance Attributable To(1)
		Expense Variance				Rate				Volume				Expense Variance				Rate				Volume
Interest-earning assets:
Interest bearing deposits		$	277			$	(45	)		$	322			$	111			$	5			$	106
Federal funds sold			(19	)			(14	)			(5	)			8				11				(3	)
Investment securities			(235	)			11				(246	)			(45	)			108				(153	)
Loans			12,190				3,218				8,972				10,097				5,120				4,977
Total			12,213				3,170				9,043				10,171				5,244				4,927
Interest-bearing liabilities:
Demand deposits			759				530				229				808				781				27
Savings deposits			45				27				18				9				19				(10	)
Time deposits			676				(918	)			1,594				5,216				3,068				2,148
Fed funds purchased			-				-				-				(43	)			(1	)			(42	)
Borrowings			(193	)			(308	)			115				309				(11	)			320
Total			1,287				(669	)			1,956				6,299				3,856				2,443
Net interest income		$	10,926			$	3,839			$	7,087			$	3,872			$	1,388			$	2,484

(1)	The variance in interest attributed to both volume and rate has been allocated to variance attributed to volume and variance attributed to rate in proportion to the absolute value of the change in each.

Net Interest Income

Net interest income, the principal source of the Company's earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits used to fund earning assets). Table 1 sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities at December 31, 2025 and 2024. We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. Nonaccrual loans are included in earning assets in the tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.

For the year ended December 31, 2025, total interest income increased by $12.2 million compared to the year ended December 31, 2024. The increase in interest income in 2025 was primarily due to an increase of $12.2 million in loan interest income in the year over year comparison. Interest income on loans increased primarily due to the core loan growth of $74.2 million during 2025 in addition to interest rate increases throughout the year. Total interest expense increased by $1.3 million in the year over year comparison. Interest expense on deposits increased by $1.5 million during 2025 compared to 2024. This increase was primarily due to the $52.9 million increase in interest-bearing deposits during 2025. Management anticipates that competitive pressures for deposits may prevent deposit costs from decreasing significantly in the near term. Interest on borrowings decreased by $193 thousand in the year-over-year comparison. The effects of changes in volumes and rates on net interest income in 2025 compared to 2024, and 2024 compared to 2023 are shown in Table 2 above.

Management's Discussion and Analysis

Net Interest Income, continued

The aforementioned factors led to an increase in net interest income of $10.9 million or 27.68% for 2025 as compared to 2024. The net yield on interest-earning assets increased by 45 basis points to 4.27% in 2025 compared to 3.82% in 2024.

Provision for Credit Losses

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the loan balance, or a portion thereof, is uncollectable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management's estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The provision for credit losses was $868 thousand for the year ended December 31, 2025, compared to $1.1 million for the year ended December 31, 2024. For December 31, 2025 the provision for credit losses consisted of a provision for credit losses on loans of $759 thousand and a provision for credit losses on unfunded commitments of $109 thousand. The provision for credit losses on loans for the year ended December 31, 2024 included $813 thousand to establish an allowance for credit losses on the non-PCD loans acquired in the JCB merger. Excluding this $813 thousand, the provision for credit losses increased by $565 thousand from 2024 to 2025 due to the growth in the loan portfolio during 2025.

The reserve for credit losses was approximately 0.82% of total loans as of December 31, 2025 and 2024. Management's estimate of probable credit losses inherent in the acquired JCB, Great State, and Cardinal loan portfolios was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As of December 31, 2025 and 2024, the remaining unaccreted discount on the acquired loan portfolios totaled $3.3 million and $4.3 million, respectively. Management believes the provision and the resulting allowance for credit losses are adequate. Additional information is contained in Tables 12 and 13, and is discussed in Nonperforming and Problem Assets.

Other Income

The major components of noninterest income for the past two years are illustrated in Table 3.

For the year ended December 31, 2025 and 2024, noninterest income was $7.8 million and $7.3 million, respectively. Included in noninterest income for the year 2025 was $60 thousand from life insurance contracts. Included in noninterest income for the year 2024 was $221 thousand from life insurance contracts and a net realized security loss of $141 thousand. The net security loss resulted from the recognition of unamortized premiums on a called bond. Excluding these items, noninterest income increased by $520 thousand in the year-over-year comparison, primarily as a result of increased income from service charges on deposit accounts of $189 thousand, and an increase of ATM, credit and debit card income of $340 thousand, offsetting a decrease of $39 thousand in mortgage origination fees. The mortgage department closed approximately $13.4 million of mortgage loans for the secondary market during 2025 compared to $15.1 million in 2024.

Management's Discussion and Analysis

Table 3. Sources of Noninterest Income (dollars in thousands)

		2025				2024
Service charges on deposit accounts		$	2,506			$	2,317
Increase in cash value of life insurance			694				643
Life insurance income			60				221
Mortgage originations fees			238				277
Safe deposit box rental			88				88
Gain (loss) on securities			-				(141	)
ATM, credit and debit card income			3,428				3,088
Merchant services income			313				285
Investment services income			74				72
Exchange income			278				311
Other income			106				124
Total noninterest income		$	7,785			$	7,285

Other Expense

The major components of noninterest expense for the past two years are illustrated in Table 4.

Total noninterest expenses increased by $1.0 million, or 2.76% for the year ended December 31, 2025, compared to the year ended December 31, 2024. Salary and benefit cost increased by $1.7 million due to the increase in employees resulting from the JCB acquisition combined with routine increases year-over-year. Occupancy and equipment expenses increased by $231 thousand, and data processing increased by $464 thousand in the year-over-year comparison. FDIC/OCC assessments increased by $228 thousand and the core deposit intangible amortization increased by $290 thousand. Professional fees increased by $228 thousand in the year-over-year comparison. Merger related expenses related to the acquisition of Johnson County Bank were $2.4 million for the year ended December 31, 2024.

Management's Discussion and Analysis

Table 4. Sources of Noninterest Expense (dollars in thousands)

		2025				2024
Salaries & wages		$	14,888			$	13,563
Share-based compensation			477				381
Payroll taxes			1,199				1,101
Employee benefits			2,881				2,725
Total personnel expense			19,445				17,770
Director fees			400				326
Occupancy expense			2,571				2,392
Other equipment expense			1,522				1,529
Data processing expense			3,483				3,019
FDIC/OCC assessments			1,098				870
Insurance			233				230
Professional fees			1,084				856
Advertising			1,071				965
Postage & freight			754				642
Supplies			277				253
Franchise tax			520				466
Telephone			475				473
Travel, dues & meetings			688				691
ATM/EFT expense			1,774				1,715
Other real estate owned expenses			31				7
Core deposit intangible amortization			772				482
Merger related expenses			-				2,423
Other expense			1,083				1,172
Total noninterest expense		$	37,281			$	36,281

The overhead efficiency ratio of noninterest expense to adjusted total revenue (net interest income plus noninterest income) was 64.08% in 2025 and 77.60% in 2024. The ratios for 2025 and 2024, without the effect of nonrecurring merger related costs, would have been 64.08% and 72.42%, respectively.

Income Taxes

Income tax expense is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The deferred tax assets and liabilities represent the future Federal income tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Income tax expense (substantially all Federal) was $4.2 million in 2025 and $1.9 million in 2024, resulting in effective tax rates of 20.9% and 20.7%, respectively. The increase in income tax expense of $2.3 million in 2025 was primarily due to the increase in income before taxes of $10.7 million in 2025 compared to 2024.

Management's Discussion and Analysis

Income Taxes, continued

Net deferred tax assets of $3.7 million, and $5.6 million existed at December 31, 2025 and 2024 respectively. At December 31, 2025, net deferred tax assets included $3.2 million of deferred tax assets applicable to unrealized losses on investment securities available for sale, and $217 thousand of deferred tax assets applicable to funded projected pension benefit obligations. Accordingly, these amounts were not charged to income but recorded directly to the related stockholders' equity account.

Analysis of Financial Condition

Average earning assets increased $146.0 million, or 14.13%, from 2025 to 2024 due to asset growth primarily reflected in an increase in loans during 2025. Total earning assets represented 92.62% of total average assets in 2025 and 93.16% in 2024. The mix of average earning assets changed from 2024 to 2025 as average loans increased by $150.2 million, or 17.17%, and average investment securities decreased by $11.8 million, or 7.82%. Average federal funds sold and average deposits in banks increased by $7.6 million, or 91.59%, from 2024 to 2025.

Table 5. Average Asset Mix (dollars in thousands)

		2025								2024
		Average Balance				%				Average Balance				%
Earning assets:
Loans		$	1,024,516				80.45	%		$	874,349				78.81	%
Investment securities			139,064				10.92	%			150,869				13.60	%
Federal funds sold			424				0.03	%			504				0.04	%
Deposits in other banks			15,551				1.22	%			7,834				0.71	%
Total earning assets			1,179,555				92.62	%			1,033,556				93.16	%
Nonearning assets:
Cash and due from banks			20,451				1.61	%			18,713				1.69	%
Premises and equipment			37,667				2.96	%			32,437				2.92	%
Other assets			62,949				4.94	%			54,892				4.95	%
Allowance for credit losses			(8,329	)			-0.65	%			(7,170	)			-0.65	%
Unrealized loss on securities			(18,778	)			-1.48	%			(22,964	)			-2.07	%
Total nonearning assets			93,960				7.38	%			75,908				6.84	%
Total assets		$	1,273,515				100.00	%		$	1,109,464				100.00	%

Average loans for 2025 represented 80.45% of total average assets compared to 78.81% in 2024. Average federal funds sold decreased from 0.04% to 0.03% of total average assets while deposits in other banks increased from 0.71% to 1.22% of total average assets over the same time period. Average investment securities decreased from 13.60% in 2024 to 10.92% of total average assets in 2025. The balances of nonearning assets to total average assets increased from 6.84% to 7.38% in the annual comparison.

Management's Discussion and Analysis

Loans

Average loans totaled $1.02 billion for the year ended December 31, 2025. This represents an increase of $150.2 million, or 17.17%, from the average of $874.3 million for 2024. This increase was primarily due to organic core loan growth of $74.2 million during 2025.

The loan portfolio consists primarily of real estate and commercial loans. These loans accounted for 98.30% of the total loan portfolio at December 31, 2025. This is comparable to the 97.67% that the categories maintained at December 31, 2024. The amount of loans outstanding by type at December 31, 2025 and 2024 and the maturity distribution for variable and fixed rate loans as of December 31, 2025 are presented in Tables 6 and 7, respectively.

Table 6. Loan Portfolio Summary (dollars in thousands)

		December 31, 2025								December 31, 2024
		Amount				%				Amount				%
Construction and development		$	64,851				6.13	%		$	68,650				6.97	%
Residential, 1-4 families			491,334				46.43	%			433,568				44.04	%
Residential, 5 or more families			104,984				9.92	%			84,554				8.59	%
Farmland			23,203				2.19	%			24,412				2.48	%
Nonfarm, nonresidential			302,696				28.61	%			293,151				29.78	%
Total real estate			987,068				93.28	%			904,335				91.86	%
Agricultural			3,833				0.36	%			4,036				0.41	%
Commercial			53,164				5.02	%			57,151				5.81	%
Consumer			9,598				0.91	%			10,971				1.11	%
Other			4,535				0.43	%			7,966				0.81	%
Total		$	1,058,198				100.00	%		$	984,459				100.00	%

Management's Discussion and Analysis

Table 7. Maturity Schedule of Loans, as of December 31, 2025 (dollars in thousands)

		One Year				Over One to				Over Five Years				Over
		or Less				Five Years				to Fifteen Years				Fifteen Years				Total
Fixed rate loans:
Real Estate Secured:
Construction & development		$	5,759			$	2,789			$	5,857			$	43			$	14,448
Farmland			596				420				382				-				1,398
Residential			8,190				7,615				17,794				773				34,372
Commercial mortgage			8,463				13,540				4,325				237				26,565
Non-Real Estate Secured:
Commercial & Agricultural			4,587				26,112				4,771				293				35,763
Consumer & Other			1,517				8,365				1,427				8				11,317
Total fixed rate loans		$	29,112			$	58,841			$	34,556			$	1,354			$	123,863
Variable rate loans:
Real Estate Secured:
Construction & development		$	7,963			$	1,129			$	17,352			$	23,959			$	50,403
Farmland			1,491				590				8,938				10,786				21,805
Residential			16,344				6,672				70,723				468,207				561,946
Commercial mortgage			4,796				3,447				76,394				191,494				276,131
Non-Real Estate Secured:
Commercial & Agricultural			11,845				1,694				7,481				214				21,234
Consumer & Other			694				66				2,056				-				2,816
Total variable rate loans		$	43,133			$	13,598			$	182,944			$	694,660			$	934,335
Total loans:
Real Estate Secured:
Construction & development		$	13,722			$	3,918			$	23,209			$	24,002			$	64,851
Farmland			2,087				1,010				9,320				10,786				23,203
Residential			24,534				14,287				88,517				468,980				596,318
Commercial mortgage			13,259				16,987				80,719				191,731				302,696
Non-Real Estate Secured:
Commercial & Agricultural			16,432				27,806				12,252				507				56,997
Consumer & Other			2,211				8,431				3,483				8				14,133
Total loans		$	72,245			$	72,439			$	217,500			$	696,014			$	1,058,198

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulations also influence interest rates. On average, loans yielded 6.07% in 2025 compared to an average yield of 5.72% in 2024. The increase in yield during 2025 was primarily due to core loan growth of $74.2 million in 2025 and an increase in interest rates during the year. Management anticipates that this loan growth, in addition to higher rates in the current year, will have a positive impact on both earning assets and loan yields.

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. As of December 31, 2025 approximately 44.45% of our commercial mortgage loans are owner occupied and 55.55% are non-owner occupied.

Management's Discussion and Analysis

We generally originate adjustable-rate commercial real estate loans with maximum terms of up to 25 years. From time to time, we will also originate fixed-rate loans. We generally limit loan-to-value ratios to 80% of the appraised value or purchase price, whichever is lower. All of our commercial real estate loans are subject to our underwriting procedures and guidelines. Although our commercial real estate are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in our market area could have an adverse impact on this portfolio of loans and the Company's income and financial position.

The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The Board of Directors has established internal maximum limits on commercial real estate loans to better manage and control the exposure to property classes during periods of changing economic conditions.

Our risk management process begins with a robust underwriting program. The underwriting and risk rating of all loans is completed by an underwriting team that is independent of the originating lender(s). The underwriting analysis of commercial real estate loans includes pre-origination sensitivity analysis utilizing portfolio stress testing methods to fully understand the potential exposure before we originate the credit. Once originated, each loan receives ongoing quarterly stress tests to evaluate the risk profile over the life of the credit.

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with us and other financial institutions. In evaluating the property securing the loan, among other factors, we consider the net operating income of the mortgaged property before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that, subject to certain exceptions, it is at least 1.25x for commercial real estate loans, and the ratio of the loan amount to the appraised value of the mortgaged property. Our commercial real estate loans are appraised by outside independent and qualified appraisers that are duly approved in accordance with Bank policy. Per policy, personal guarantees are obtained from commercial real estate borrowers. Each borrower's financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.

We believe that our commercial real estate composition is relatively diversified in terms of industry sectors, property types and various lending specialties. As of December 31, 2025, the amortized cost balances of concentrations in our commercial real estate loan portfolio, were as follows:

		Owner				Non-Owner
		Occupied				Occupied				Total				%
Office		$	40,039			$	43,137			$	83,176				27.48	%
Hotel			-				52,127				52,127				17.22	%
Warehouse			29,584				8,675				38,259				12.64	%
Retail			19,416				17,102				36,518				12.06	%
Restaurants			11,444				4,630				16,074				5.31	%
Industrial			12,064				3,932				15,996				5.28	%
Mini-storage			2,279				13,308				15,587				5.15	%
Churches			8,933				719				9,652				3.19	%
Assisted living			189				7,438				7,627				2.52	%
Other			10,600				17,080				27,680				9.15	%
Total		$	134,548			$	168,148			$	302,696				100.00	%

Management's Discussion and Analysis

Investment Securities

The Company uses its investment portfolio to provide liquidity for unexpected deposit decreases or loan generation, to meet the Bank's interest rate sensitivity goals, and to generate income.

Management of the investment portfolio has always been conservative with the majority of investments taking the form of purchases of U.S. Treasury, U.S. Government Agencies, U.S. Government Sponsored Enterprises and State and Municipal bonds, as well as investment grade corporate bond issues. Management views the investment portfolio as a source of income, and purchases securities with the intent of retaining them until maturity. However, adjustments are necessary in the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to control interest rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at the end of 2025 by major types of investments and contractual maturity ranges. Investment securities in Table 8 may have repricing or call options that are earlier than the contractual maturity date.

The total amortized cost of investment securities decreased by approximately $11.3 million from December 31, 2024 to December 31, 2025, while the average balance of investment securities carried throughout the year decreased by approximately $11.8 million from 2024 to 2025. The average yield of the investment portfolio increased to 2.09% for the year ended December 31, 2025 compared to 2.08% for 2024.

Table 8. Investment Securities - Maturity/Yield Schedule (dollars in thousands)

		December 31, 2025
		In One Year or Less				After One Through Five Years				After Five Through Ten Years				After Ten Years				Market Value 12/31/25				Book Value 12/31/25
Investment securities:
U.S. Government agencies		$	4,979			$	3,385			$	14,649			$	-			$	23,013			$	25,457
Mortgage-backed securities			199				4,100				21,792				25,570				51,661				58,040
State and municipal securities			-				5,465				23,678				10,279				39,422				45,939
Total		$	5,178			$	12,950			$	60,119			$	35,849			$	114,096			$	129,436
Weighted average yields (1):
U.S. Government agencies			3.08	%			1.57	%			1.71	%			0.00	%			1.96	%
Mortgage-backed securities			2.01	%			1.64	%			2.33	%			1.49	%			1.84	%
State and municipal securities			0.00	%			1.47	%			2.13	%			2.48	%			2.15	%
Total			3.04	%			1.55	%			2.10	%			1.79	%			1.97	%

(1)

Weighted average yields on investment securities are based on amortized cost and are calculated on a tax equivalent basis.

Management's Discussion and Analysis

Deposits

The Company relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investments in liquid assets. More specifically, core deposits (total deposits less certificates of deposit in denominations of more than $250,000) are the primary funding source. The Company's balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. The Company's management must continuously monitor market pricing, competitor's rates, and the internal interest rate spreads to maintain the Company's growth and profitability. The Company attempts to structure rates so as to promote deposit and asset growth while at the same time increasing overall profitability of the Company.

Average total deposits for the year ended December 31, 2025 amounted to $1.14 billion, which was a increase of $148.9 million, or 15.05% from $989.8 million at December 31, 2024. Average core deposits totaled $1.02 billion in 2025 representing a 13.60% increase from the $901.7 million in 2024. The percentage of the Company's average deposits that are interest-bearing increased to 68.8% in 2025 compared to 68.4% in 2024. The percentage of the Company's average demand deposits, which earn no interest, decreased from 31.6% in 2024 to 31.2% in 2025. Average deposits for the periods ended December 31, 2025 and 2024 are summarized in Table 9.

Table 9. Deposit Mix (dollars in thousands)

		December 31, 2025												December 31, 2024
		Average Balance				% of Total Deposits				Average Rate Paid				Average Balance				% of Total Deposits				Average Rate Paid
Interest-bearing deposits:
Interest-bearing DDA accounts		$	153,129				13.5	%			0.15	%		$	138,160				14.0	%			0.13	%
Money market			97,122				8.5	%			2.00	%			79,945				8.1	%			1.53	%
Savings			172,456				15.1	%			0.13	%			157,141				15.9	%			0.11	%
Individual retirement accounts			50,175				4.4	%			2.38	%			43,047				4.3	%			2.40	%
CD's $250,000 or less			196,159				17.2	%			3.21	%			170,338				17.2	%			3.60	%
CD's greater than $250,000			114,472				10.1	%			3.73	%			88,169				8.9	%			4.43	%
Total interest-bearing deposits			783,513				68.8	%			1.80	%			676,800				68.4	%			1.87	%
Noninterest-bearing deposits			355,236				31.2	%			0.00	%			313,026				31.6	%			0.00	%
Total deposits		$	1,138,749				100.0	%			1.24	%		$	989,826				100.0	%			1.28	%

The average balance of certificates of deposit issued in denominations of more than $250,000 increased by $26.3 million, or 29.83%, for the year ended December 31, 2025 compared to December 31, 2024. The strategy of management has been to support loan growth with core deposits and not to aggressively solicit the more volatile, large denomination certificates of deposit. However, during 2025, increased interest rates and competition for deposits led to a shift in deposit balances as customers moved funds from lower cost deposits to higher cost certificates of deposit. During 2025 average balances in lower cost deposits increased by $89.7 million and higher cost individual retirement accounts and certificates of deposit increased by $59.2 million.

Management's Discussion and Analysis

Deposits, continued

Estimated uninsured deposits totaled $407.8 million and $332.2 million at December 31, 2025 and December 31, 2024, respectively. Uninsured amounts are estimated based on the portion of account balance in excess of FDIC insurance limits. Table 10 provides maturity information relating to uninsured time deposits at December 31, 2025.

Table 10. Estimated Uninsured Time Deposits Maturities (dollars in thousands)

Estimated Uninsured Time Deposits at December 31, 2025:
Remaining maturity of three months or less		$	46,353
Remaining maturity over three months through six months			61,062
Remaining maturity over six months through twelve months			15,372
Remaining maturity over twelve months			1,204
Total estimated uninsured time deposits		$	123,991

Management's Discussion and Analysis

Equity

Stockholders' equity totaled $107.7 million at December 31, 2025 compared to $88.7 million at December 31, 2024. The increase of $19.0 million, or 21.42%, was due to earnings of $15.8 million, $5.6 million in other comprehensive income, less dividend payments of $2.9 million, and share-based compensation of $477 thousand. Book value increased from $15.69 per share at December 31, 2024 to $19.00 per share at December 31, 2025.

Federal capital rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banks are now required to maintain levels that meet the required minimum plus the capital conservation buffer in order to make distributions, such as dividends, or discretionary bonus payments. The Banks's capital conservation buffer is 3.53% as of December 31, 2025.

Table 11. Bank's Year-end Risk-Based Capital (dollars in thousands)

		2025				2024
Tier 1 Capital		$	109,056			$	99,740
Qualifying allowance for credit losses (limited to 1.25% of risk-weighted assets)			9,091				8,201
Total regulatory capital		$	118,147			$	107,941
Total risk-weighted assets		$	1,024,664			$	964,993
Tier 1 capital as a percentage of risk-weighted assets			10.6	%			10.3	%
Common Equity Tier 1 capital as a percentage of risk-weighted assets			10.6	%			10.3	%
Total regulatory capital as a percentage of risk-weighted assets			11.5	%			11.2	%
Leverage ratio*			8.3	%			8.2	%

*

Tier 1 capital divided by average total assets for the quarter ended December 31 of each year.

Management's Discussion and Analysis

Nonperforming and Problem Assets

Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans and, although a portion of the loans have been made based upon the value of collateral, the underwriting decision is generally based on the cash flow of the borrower as the source of repayment rather than the value of the collateral. The Bank also attempts to reduce repayment risk by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies.

Table 12 provides information about the allowance for credit losses, nonperforming assets and loans past due 90 days or more and still accruing as of December 31, 2025 and 2024.

Table 12. Loan Loss Data (dollars in thousands)

		2025				2024
Allowance for credit losses		$	8,666			$	8,027
Total loans		$	1,058,198			$	984,459
Allowance for credit losses to total loans			0.82	%			0.82	%
Nonperforming loans:
Nonaccrual loans		$	4,810			$	2,563
Loans past due 90 days or more and still accruing			-				-
Total nonperforming loans			4,810				2,563
Other real estate owned			-				140
Total nonperforming assets		$	4,810			$	2,703
Total nonperforming loans as a percentage to total loans			0.45	%			0.26	%
Total allowance for credit losses to nonperforming loans			180.17	%			313.19	%
Total nonperforming assets as a percentage to total assets			0.37	%			0.22	%
Total nonaccrual loans as a percentage to total loans			0.45	%			0.26	%
Total allowance for credit losses to nonaccrual loans			180.17	%			313.19	%

Total nonperforming loans were 0.45% and 0.26% of total outstanding loans as of December 31, 2025 and 2024, respectively. The majority of the increase in nonaccrual loans from 2024 to 2025 came in the "residential real estate" category due to an increase of $2.7 million during 2025, which was primarily related to one loan relationship going into nonaccrual status. Based on discounted appraisal values, management does not expect any credit losses on the relationship at this time. Loans are placed in nonaccrual status when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. Management's ability to ultimately resolve these loans either with or without significant loss will be determined, to a great extent, by general economic and real estate market conditions.

Management's Discussion and Analysis

Nonperforming and Problem Assets, continued

For the years ended December 31, 2025 and 2024, interest income recognized on loans in nonaccrual status was approximately $19 thousand and $25 thousand, respectively. Had these credits been current in accordance with their original terms, the gross interest income for these credits would have been approximately $87 thousand and $75 thousand, respectively for the years ended December 31, 2025 and 2024.

As a result of the JCB merger, there was one property valued at $140 thousand in other real estate owned at December 31, 2024. The property was sold during the second quarter of 2025. There was no other real estate owned at December 31, 2025. More information on nonperforming assets and modifications to borrowers experiencing financial difficulty can be found in Note 5 of the "Notes to Consolidated Financial Statements" found in Item 8 of this annual report on Form 10-K.

As of December 31, 2025 and December 31, 2024, we had loans with a current principal balance of $13.7 million and $9.7 million rated "Watch" or "Special Mention". The "Watch" classification is utilized by us when we have an initial concern about the financial health of a borrower that indicates above average risk. We then gather current financial information about the borrower and evaluate our current risk in the credit. After this review we will either move the loan to a higher risk rating category or move it back to its original risk rating. Loans may be left rated "Watch" for a longer period of time if, in management's opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis. Assets that do not currently expose the Bank to sufficient risk to warrant a classification such as "Substandard" or "Doubtful" but otherwise possess weaknesses are designated "Special Mention". Loans rated as "Watch" or "Special Mention" are not considered "potential problem loans" until they are determined by management to be classified as "Substandard". As of December 31, 2025 and December 31, 2024, respectively, potential problem loans classified as "Substandard" totaled $8.7 million and $5.3 million, respectively. As of December 31, 2025 and December 31, 2024, respectively, the Bank had no loans graded "Doubtful" included in the balance of total loans outstanding.

Past due loans are often regarded as a precursor to further credit problems which would lead to future increases in nonaccrual loans or other real estate owned. As of December 31, 2025, loans past due 30-89 days and still accruing totaled $316 thousand compared to $416 thousand at December 31, 2024.

The allowance for credit losses is maintained at a level adequate to absorb potential losses. Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market area that the Bank serves. Bank regulators also periodically review the Bank's loans and other assets to assess their quality. Loans deemed uncollectible are charged to the allowance. Provisions for credit losses and recoveries on loans previously charged off are added to the allowance. The reserve for credit losses was approximately 0.82% of total loans at December 31, 2025 and 2024, respectively.

Management's Discussion and Analysis

Table 13 shows net charge-offs, average loan balances and the percentage of charge-offs to average loan balances. The allocation of the allowance for credit losses is detailed in Table 14.

Table 13. Analysis of Net Charge-Offs (dollars in thousands)

		December 31, 2025
										Percentage of Net
										(Charge-Offs)
		Net								Recoveries to
		(Charge-Offs)				Average				Average
		Recoveries				Loans				Loans
Construction & development		$	-			$	68,126				0.00	%
Farmland			-				23,668				0.00	%
Residential			1				558,135				0.00	%
Commercial mortgage			4				296,448				0.00	%
Commercial & agriculture			(4	)			60,964				(0.01%	)
Consumer & other			(121	)			17,175				(0.70%	)
Total		$	(120	)		$	1,024,516				(0.01%	)

		December 31, 2024
										Percentage of Net
										(Charge-Offs)
		Net								Recoveries to
		(Charge-Offs)				Average				Average
		Recoveries				Loans				Loans
Construction & development		$	-			$	57,397				0.00	%
Farmland			-				24,468				0.00	%
Residential			14				446,612				0.00	%
Commercial mortgage			4				275,560				0.00	%
Commercial & agriculture			13				53,491				0.02	%
Consumer & other			(87	)			16,821				(0.52%	)
Total		$	(56	)		$	874,349				(0.01%	)

Table 14. Allocation of the Allowance for Credit Losses (dollars in thousands)

		December 31, 2025												December 31, 2024
Balance at the end of the period applicable to:		Amount				% of ACL to Loans				% of Loans to Total Loans				Amount				% of ALL to Loans				% of Loans to Total Loans
Construction & development		$	924				1.42	%			6.13	%		$	1,012				1.47	%			6.97	%
Farmland			182				0.78	%			2.19	%			174				0.71	%			2.48	%
Residential			4,677				0.78	%			56.35	%			4,070				0.79	%			52.63	%
Commercial mortgage			2,192				0.72	%			28.61	%			1,941				0.66	%			29.78	%
Commercial & agriculture			530				0.93	%			5.38	%			504				0.82	%			6.22	%
Consumer and other			161				1.14	%			1.34	%			326				1.72	%			1.92	%
Total		$	8,666				0.82	%			100.00	%		$	8,027				0.82	%			100.00	%

Management's Discussion and Analysis

Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Bank's commitments at December 31, 2025 and 2024 is as follows:

		2025				2024
Commitments to extend credit		$	227,390			$	210,610
Standby letters of credit			3,091				1,398
		$	230,481			$	212,008

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

Quantitative and Qualitative Disclosure about Market Risk

The principal goals of the Bank's asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors' withdrawals or borrowers' loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income which could result from interest rate changes.

Management must ensure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal fund lines from correspondent banks, borrowings from the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.

The liquidity ratio (the level of liquid assets divided by total deposits plus short-term liabilities) was 7.2% at December 31, 2025 compared to 7.7% at December 31, 2024. These ratios are considered to be adequate by management.

The Bank uses cash and federal funds sold to meet its daily funding needs. If funding needs are met through holdings of excess cash and federal funds, then profits might be sacrificed as higher-yielding investments are foregone in the interest of liquidity. Therefore, management determines, based on such items as loan demand and deposit activity, an appropriate level of cash and federal funds and seeks to maintain that level.

Management's Discussion and Analysis

The primary goals of the investment portfolio are liquidity management and maturity gap management. As investment securities mature the proceeds are reinvested in federal funds sold if the federal funds level needs to be increased, otherwise the proceeds are reinvested in similar investment securities. The majority of investment security transactions consist of replacing securities that have been called or matured. The Bank keeps a portion of its investment portfolio in unpledged assets that are less than 60 months to maturity or next repricing date. These investments are a preferred source of funds in that they can be disposed of in most interest rate environments without causing significant damage to that quarter's profits.

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates. Table 15 shows the sensitivity of the Bank's balance sheet on December 31, 2025. This table reflects the sensitivity of the balance sheet as of that specific date and is not necessarily indicative of the position on other dates. At December 31, 2025 the Bank appeared to be cumulatively asset-sensitive (interest-earning assets subject to interest rate changes exceeding interest-bearing liabilities subject to changes in interest rates). However, in the one year window liabilities subject to changes in interest rates exceed assets subject to interest rate changes (nonasset-sensitive).

Matching sensitive positions alone does not ensure the Bank has no interest rate risk. The repricing characteristics of assets are different from the repricing characteristics of funding sources. Thus, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.

Table 15. Interest Rate Sensitivity (dollars in thousands)

		December 31, 2025 Maturities/Repricing
		1 to 3 Months				4 to 12 Months				13 to 60 Months				Over 60 Months				Total
Interest-Earning Assets:
Interest bearing deposits		$	3,125			$	-			$	-			$	-			$	3,125
Fed funds sold			343				-				-				-				343
Investments			4,979				199				14,466				94,452				114,096
Loans			179,450				102,472				624,300				151,976				1,058,198
Total		$	187,897			$	102,671			$	638,766			$	246,428			$	1,175,762
Interest-Bearing Liabilities:
Interest-bearing DDA accounts		$	157,872			$	-			$	-			$	-			$	157,872
Money market			116,600				-				-				-				116,600
Savings			169,627				-				-				-				169,627
Time deposits			135,658				206,970				20,437				-				363,065
Borrowings			-				-				-				-				-
Total		$	579,757			$	206,970			$	20,437			$	-			$	807,164
Interest sensitivity gap		$	(391,860	)		$	(104,299	)		$	618,329			$	246,428			$	368,598
Cumulative interest sensitivity gap		$	(391,860	)		$	(496,159	)		$	122,170			$	368,598			$	368,598
Ratio of sensitivity gap to total earning assets			-33.3	%			-8.9	%			52.6	%			21.0	%			31.4	%
Cumulative ratio of sensitivity gap to total earning assets			-33.3	%			-42.2	%			10.4	%			31.4	%			31.4	%

Management's Discussion and Analysis

The Company uses a number of tools to monitor its interest rate risk, including simulating net interest income under various scenarios, monitoring the present value change in equity under the same scenarios, and monitoring the difference or gap between rate sensitive assets and rate sensitive liabilities over various time periods (as displayed in Table 15).

The earnings simulation model forecasts annual net income under a variety of scenarios that incorporate changes in the absolute level of interest rates, changes in the shape of the yield curve, and changes in interest rate relationships. Management evaluates the effect on net interest income and present value equity from gradual changes in rates of up to 400 basis points up or down over a 12-month period. Table 16 presents the Bank's twelve-month forecasts for changes in net interest income and market value of equity resulting from changes in rates of up to 400 basis points up or down, as of December 31, 2025.

Table 16. Interest Rate Risk (dollars in thousands)

Rate Shocked Net Interest Income and Market Value of Equity
							Change				% Change
			Net				in Net				in Net				Market
Change in Interest Rates			Interest				Interest				Interest				Value
(Basis Points)			Income				Income				Income				of Equity
+400			$	57,184			$	1,667				3.00	%		$	189,488
+300				56,760				1,243				2.24	%			208,384
+200				56,347				830				1.50	%			224,540
+100				55,974				457				0.82	%			235,699
0				55,517				-				-				239,371
-100				53,222				(2,295	)			(4.13%	)			234,563
-200				51,097				(4,420	)			(7.96%	)			222,730
-300				49,518				(5,999	)			(10.81%	)			210,887
-400				48,638				(6,879	)			(12.39%	)			203,219

Impact of Inflation and Changing Prices

The consolidated financial statements and the accompanying notes presented elsewhere in this document have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all Company assets and liabilities are monetary in nature, therefore the impact of inflation is reflected primarily in the increased cost of operations. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Management's Discussion and Analysis

Table 17. Financial Highlights¹

		2025				2024				2023				2022				2021
Summary of Operations
Interest income		$	65,749			$	53,536			$	43,365			$	36,567			$	34,756
Interest expense			15,353				14,066				7,767				1,930				2,429
Net interest income			50,396				39,470				35,598				34,637				32,327
Provision for (Recovery of) credit losses			868				1,116				(50	)			606				723
Other income			7,785				7,285				6,970				6,257				6,568
Other expense			37,281				36,281				30,542				27,488				26,267
Income taxes			4,190				1,933				2,376				2,519				2,423
Net income		$	15,842			$	7,425			$	9,700			$	10,281			$	9,482
Per Share Data
Net income		$	2.84			$	1.34			$	1.74			$	1.84			$	1.59
Cash dividends declared			0.52				0.46				0.42				0.32				0.27
Book value			19.00				15.69				14.84				12.98				15.20
Year-end Balance Sheet Summary
Loans, net		$	1,049,532			$	976,432			$	810,965			$	748,624			$	677,855
Investment securities			114,096				118,287				127,389				135,151				129,715
Total assets			1,293,303				1,217,599				1,045,843				997,734				995,848
Deposits			1,178,165				1,092,203				928,742				920,327				898,226
Stockholders' equity			107,664				88,668				82,882				72,936				85,194
Selected Ratios
Return on average assets			1.24	%			0.67	%			0.96	%			1.01	%			1.01	%
Return on average equity			16.16	%			8.69	%			12.70	%			13.35	%			10.98	%
Dividend payout ratio			18.55	%			34.71	%			24.26	%			17.48	%			17.13	%
Average equity to average assets			7.70	%			7.70	%			7.55	%			7.59	%			9.19	%

1

In thousands of dollars, except per share data.