First National Corp: Form 10-Q for the period ended Mar 31, 2026

Cautionary Statement Regarding Forward-Looking Statements

First National Corporation (the Company) makes forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding profitability, liquidity, adequacy of capital, allowance for credit losses, interest rate sensitivity, market risk, and growth strategy, as well as certain financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

• general business conditions, as well as conditions within the financial markets;
• general economic conditions, including unemployment levels, inflation and slowdowns in economic growth;
• the Company’s branch and market expansions, technology initiatives and other strategic initiatives;
• the impact of competition from banks and non-banks, including financial technology companies (Fintech);
• advances and changes in technology, including artificial intelligence, and the Company’s ability to develop timely and competitive products and services and effectively manage related risks;
• the composition of the loan and deposit portfolio, including the types of accounts and customers, may change, which could impact the amount of net interest income and noninterest income in future periods, including revenue from service charges on deposits;
• limited availability of financing or inability to raise capital;
• reliance on third parties for key services;
• the Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses;
• the quality of the loan portfolio and the value of the collateral securing those loans;
• prepayments of loans and securities could materially impact earnings through a reduction in interest income and fees on loans and interest income on securities;
• the level of net charge-offs on loans and the adequacy of the allowance for credit losses on loans;
• the concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets;
• demand for loan products;
• deposit flows;
• the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s, or industry's, reputation become damaged;
• the value of securities held in the Company's investment portfolio;
• legislative or regulatory changes or actions, including the effects of changes in tax laws;
• changes in accounting principles, policies and guidelines and elections made by the Company thereunder;
• cyber threats, attacks or events;
• monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of those policies on interest rates and business in the Company's markets;
• changes in interest rates could have a negative impact on the value of the Company’s securities portfolio and its net interest income and an unfavorable impact on the Company’s customers’ ability to repay loans;
• U.S. and global trade policies and tensions, including change in, or the imposition of, tariffs and/or other barriers or restrictions on trade and/or any retaliatory counter measures, and the economic impacts, volatility and uncertainty resulting therefrom, and geopolitical instability;
• 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 emergence of digital assets and payment stablecoins, and evolving legislative or regulatory frameworks, which could alter deposit flows, competition, and credit intermediation and, in turn, adversely affect the Company’s funding, liquidity, or overall financial performance;
• political developments, including government shutdowns and other significant disruptions and changes in the funding, size, scope, and effectiveness of the federal government, its agencies and services; and
• other factors identified in Item 1A. Risk Factors of the Company’s Form 10-K for the year ending December 31, 2025.

Because of these and other uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results. The following discussion and analysis of the financial condition at March 31, 2026 and statements of income of the Company for the three months ended March 31, 2026 and 2025 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, 2025. The statements of income for the three months ended March 31, 2026 may not be indicative of the results to be achieved for the year.

Executive Overview

The Company

First National Corporation (the Company) is the bank holding company of:

• First Bank (the Bank). The Bank owns:
• First Bank Financial Services, Inc.
• Shen-Valley Land Holdings, LLC
• McKenney Group, LLC
• First National (VA) Statutory Trust II (Trust II)
• First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts)

First Bank Financial Services, Inc. owns an interest in an entity that provides title insurance services. Shen-Valley Land Holdings, LLC was formed to hold other real estate owned and future office sites. McKenney Group, LLC owns an interest in an entity that provides insurance services. The Trusts were formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities and are not included in the Company’s consolidated financial statements in accordance with authoritative accounting guidance because management has determined that the Trusts qualify as variable interest entities.

In March of 2025 two previously held subsidiaries of the Company, Bank of Fincastle Services, Inc. and ESF, LLC, were closed with no material impact to the financials related to the closures.

Products, Services, Customers and Locations

The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations. The Bank’s office locations are well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, south-central regions of Virginia, the Richmond MSA, and northern North Carolina. Within this market area, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, government, hospitality, and higher education. The Bank’s products and services are delivered through 33 bank offices, one loan production offices, and one customer service center in a retirement community. For the location and general character of each of these offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2025. Many of the Bank’s services are also delivered through the Bank’s mobile banking platforms and a network of ATMs located throughout its market area.

In February of 2026, the Company announced plans to sell two of its banking offices and consolidate three others into nearby locations. The transactions, which include the sale of two standalone banking offices in North Carolina located in Roanoke Rapids and Louisburg, and the consolidation of three offices in Virginia into proximate existing branches, are expected to close in the second half of 2026 following receipt of required regulatory approvals, customer notification and vendor conversion availability. This will reduce the number of banking offices from 33 to 28. These actions are designed to streamline operations, reduce overhead, and allow the Bank to better allocate resources toward delivering enhanced customer service, innovative digital banking solutions, and continued support for the communities it serves. For additional information, see the Company's Form 8-K dated February 11, 2026, referenced herein at Exhibit 2.

Revenue Sources and Expense Factors

The primary source of revenue is from net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense and typically represents between 75% and 85% of the Company’s total revenue. Interest income is determined by the amount of interest-earning assets outstanding during the period and the interest rates earned on those assets. The Bank’s interest expense is a function of the amount of interest-bearing liabilities outstanding during the period and the interest rates paid. In addition to net interest income, noninterest income is the other source of revenue for the Company. Noninterest income is derived primarily from service charges on deposits, fee income from wealth management services, and ATM and check card fees.

Primary expense categories are salaries and employee benefits, which comprised 56% of noninterest expenses for the three months ended March 31, 2026, followed by other operating expense, which comprised 10% of noninterest expenses. The provision for credit losses is also typically a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for credit losses.

Overview of Quarterly Financial Performance

Comparing the Three-Month Periods Ending March 31, 2026 and March 31, 2025

Net income increased $3.3 million to $4.9 million, or $0.54 per diluted share, for the three months ended March 31, 2026 , compared to $1.6 million, or $0.18 per diluted share, for the same period in 2025 . Return on average assets was 0.98% and return on average equity was 10.51% for the first quarter of 2026 , compared to 0.32% and 3.85%, respectively, for the same period in 2025 .

The increase in net income resulted primarily from a $1.2 million increase in net interest income after provision and a decrease in noninterest expenses of $2.4 million primarily related to the Touchstone acquisition.

Net interest income increased by $1.2 million as total interest expense decreased by $918 thousand and total interest income increased by $307 thousand. Net interest income was positively impacted by a $17.0 million, or 0.9%, increase in average earning assets with a 2-basis point increase in yield and an $8.9 million, or 0.7%, increase in interest bearing liabilities with a 30-basis point decrease in yield. Net interest income was positively impacted by a 22-basis point increase in the net interest margin to 3.99%.

Our provision for credit losses decreased by $382 thousand for the first quarter of 2026. The provision for credit losses totaled $450 thousand and was comprised of a $521 thousand provision for credit losses on loans, a $56 thousand reduction in provision for credit losses on unfunded commitments, and a $15 thousand reduction in the credit losses on securities held-to-maturity. For the same period of 2025, the provision for credit losses totaled $832 thousand.

Noninterest income increased by $213 thousand in the first quarter of 2026 primarily from increases in other operating income and ATM and check card fees, offset by a decrease in services charges on deposit accounts. The other operating income increase was driven by income from limited partnership investments in SBIC.

Noninterest expenses decreased by $2.4 million and were primarily attributable to a $1.9 million decrease in merger expenses, a $368 thousand decrease in data processing expense, and a $298 thousand decrease in internet banking expense. The decreases are primarily driven by fewer merger related expenses following the operational merger of Touchstone in the first quarter of prior year. The decreases in noninterest expenses were partially offset by a $293 thousand increase in salaries and employee benefits.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains (loss) on disposal of premises and equipment, other real estate owned (income) expense, net, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for or more important than GAAP. The methodology for determining this measurement may differ among companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands).

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This report also refers to net interest margin, which is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income and then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both 2026 and 2025 is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands).

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. The Company provides additional information on its critical accounting policies and estimates under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in its 2025 Form 10-K and in Note 1 “Significant Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report.

Lending Policies

There have been no material changes in the Company’s lending policies disclosed in the Annual Report on Form 10-K for the year ended December 31, 2025 .

Results of Operations

General

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, subordinated debt, and junior 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 tax-equivalent 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, ATM and check card income, revenue from other customer services, income from bank owned life insurance, and general and administrative expenses.

Net Income

Three Month Period Ended March 31, 2026

Net income increased $3.3 million to $4.9 million, or $0.54 per diluted share, for the three months ended March 31, 2026, compared to $1.6 million, or $0.18 per diluted share, for the same period in 2025. Return on average assets was 0.98% and return on average equity was 10.51% for the first quarter of 2026, compared to 0.32% and 3.85%, respectively, for the same period in 2025. The increase in net income resulted primarily from a $1.6 million increase in net interest income after provision and a $2.4 million decrease in noninterest expenses, primarily related to the Touchstone acquisition.

Net Interest Income

Three Month Period Ended March 31, 2026

Net interest income increased $1.2 million, or 7.0%, to $18.7 million for the first quarter of 2026 compared to the same period in the prior year. Total interest expense decreased by $918 thousand, and interest income increased by $307 thousand. Net interest income was positively impacted by a 22-basis point increase in the net interest margin and a $17.0 million, or 0.9%, increase in average earning assets which was offset by an $8.9 million, or 0.7%, increase in average interest-bearing liabilities.

The increase in total interest income was attributable to a $378 thousand, or 1.8%, increase in interest income and fees on loans and a $472 thousand, or 35.9%, increase in taxable interest on securities, offset by a $501 thousand, or 30.0%, decrease in interest on deposits in banks. The increase in interest income on loans was impacted by net accretion income related to acquisition accounting of $211 thousand in the first quarter of 2026 compared to net amortization expense of $36 thousand in the first quarter of 2025. Interest income on securities increased consistent with purchases since prior year.

The decrease in total interest expense was attributable to a $624 thousand, or 10.3%, decrease in interest expense on deposits and a $299 thousand, or 64.0%, decrease on interest expense on subordinated debt. The net interest margin was positively impacted by a 23-basis point decrease in the cost of interest-bearing deposits. The decrease in subordinated debt and related interest expense was due to redemptions of subordinated debt during the fourth quarter of prior year.

The net interest margin was 3.99% for the first quarter of 2026 compared to 3.77% for the same period in the prior year. When compared to the first quarter of 2025, the net interest margin increased by 22-basis points with the cost of funds decrease consistent with the federal funds rate cuts in late 2025. The yield on earning assets was impacted by net accretion income related to acquisition accounting of $211 thousand in the first quarter for a 4-basis point increase to the net interest margin.

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):

Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)

(1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $88 and $96 thousand for the three months ended March 31, 2026 and 2025, respectively.

(2) Loans on non-accrual status are reflected in the average balances.

(3) Yields and rates are annualized.

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Provision for Credit Losses

Three-Month Period Ended March 31, 2026

The provision for credit losses totaled $450 thousand for the three-month period ended March 31, 2026, compared to $832 thousand for the same period of the prior year. The provision was comprised of a $521 thousand provision for credit losses on loans, a $15 thousand reduction in provision of credit losses on held-to-maturity securities, and a $56 thousand reduction in provision of credit losses on unfunded commitments. As compared to the same period of the prior year, the decrease in provision for credit losses is driven by a decrease in the specific reserves on loans during the quarter. The decrease in provision resulted in a lower allowance to total loans of 1.00% at March 31, 2026 compared to 1.02% at March 31, 2025.

Noninterest Income

Three-Month Period Ended March 31, 2026

Noninterest income increased $213 thousand, or 5.9%, to $3.8 million for the first quarter of 2026, compared to the same period of 2025. The increase resulted from increases in other operating income of $191 thousand and ATM and check card fees of $51 thousand, offset by a decrease in services charges of $89 thousand. The other operating income increase was driven by income from limited partnership investments in SBIC.

Noninterest Expense

Three-Month Period Ended March 31, 2026

Noninterest expenses decreased $2.4 million, or 12.8%, to $16.0 million for the three-month period ended March 31, 2026, compared to the same period one year ago. The decrease was primarily attributable to a $1.9 million, or 100%, decrease in merger expenses, a $368 thousand, or 48.3%, decrease in data processing expense, and a $298 thousand, or 84.9%, decrease in internet banking expense, and $187 thousand, or 45.2%, decrease in FDIC expense. The decreases in merger expenses, data processing expense, and interest banking expenses were driven by the Touchstone merger and operating two core systems until operational merger in the first quarter of 2025. The decrease in FDIC expense was due to changes to financial ratios in the assessment calculation driven by the dividend distributed to the Company during the second quarter of 2025. The decreases in noninterest expenses were partially offset by a $293 thousand increase in salaries and employee benefits.

Income Taxes

Three-Month Period Ended March 31, 2026

Income tax expense increased $884 thousand to $1.2 million for the first quarter of 2026, compared to the same period one year ago. The effective tax rate for the first quarter of 2026 was 19.5% compared to 15.7% for the same period in 2025. 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 March 31, 2026 and 2025. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, income from bank owned life insurance, and nondeductible merger expenses. A more detailed discussion of the Company’s tax calculation is contained in Note 12 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Financial Condition

General

Assets totaled $2.076 billion at March 31, 2026, which was an increase of $37.8 million or 7.4% (annualized) from December 31, 2025. The asset composition did not significantly change during the first three months of the year as interest-bearing deposits in banks increased by $25.1 million and loans, net of the allowance for credit losses, increased by $14.7 million, while total securities decreased by $1.5 million.

Total liabilities increased by $35.5 million during the three-month period ended March 31, 2026, primarily from changes in customer deposits. Deposit balances and the composition of deposits as of March 31, 2026 changed as noninterest-bearing deposits increased $14.4 million, savings and interest-bearing deposits increased $26.8 million, and time deposits decreased $3.5 million from December 31, 2025.

Total shareholders’ equity increased by $2.4 million during the first three months of 2026, primarily from a $3.4 million increase in retained earnings and a $1.2 million reduction in accumulated other comprehensive loss. The decrease in accumulated other comprehensive loss was attributable to unrealized holding 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 totaled $1.450 billion at March 31, 2026, which was a $14.7 million or 4.1% (annualized) increase from December 31, 2025, and a $14.5 million, or 4.0% (annualized), increase over March 31, 2025.The change in loans over the periods did not have a significant impact on the composition of the loan portfolio. The loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, and commercial and industrial loans, which totaled 36%, 49%, and 8% of the loan portfolio, respectively, at March 31, 2026, and 36%, 48%, and 8% of the loan portfolio, respectively, at December 31, 2025.

The loan portfolio includes loans that were acquired through business combinations and loans that were purchased through a third-party loan originator. Loans acquired through business combinations included unaccreted discounts, net of unamortized premiums totaling $12.9 million and $13.2 million, as of March 31, 2026 and December 31, 2025, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $12.7 million as of March 31, 2026, which included unamortized premiums totaling $3.7 million, compared to loans totaling $14.1 million as of December 31, 2025, which included unamortized premiums totaling $4.1 million.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for credit losses, any deferred fees or costs on originated loans, and any premiums or discounts on acquired and purchased loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of premiums and accretion of discounts on purchased loans, recognized over the life of the loans.

Asset Quality

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $4.4 million and $4.7 million at March 31, 2026 and December 31, 2025, representing approximately 0.21% and 0.23% of total assets, respectively. Nonaccrual loans totaled $4.4 million and $4.7 million at March 31, 2026 and December 31, 2025, respectively. There was no OREO at March 31, 2026 and December 31, 2025. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of March 31, 2026. There were no loans past due 90 days or more and accruing interest at March 31, 2026 and December 31, 2025.

On March 31, 2026 commercial and industrial loans and residential real estate loans comprised 52% and 47% of non-performing assets, respectively. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $2.8 million and $6.4 million at March 31, 2026 and December 31, 2025 , respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.

The Company purchased commercial and industrial loans between October 2021 and October 2023 from a third-party finance company that originated and serviced loans to health care professionals. The finance company operated a program that historically provided credit support to the Company through, among other things, the repurchase of their loans and unamortized loan premiums when loans did not pay according to the loan agreements. The finance company no longer offers this credit support. On March 31, 2026 , loans purchased from the finance company totaled $12.7 million, which was comprised of $9.0 million of loan balances and unamortized premiums totaling $3.7 million. As of March 31, 2026 , $1.8 million of these loans were non-accrual including premiums totaling $638 thousand and thus were individually evaluated. Specific reserves on these individually evaluated loans totaled $1.2 million and were included in the Company’s allowance for credit losses on loans. The remaining $10.9 million of loans with premiums totaling $3.0 million were considered performing and were included in the calculation of the collectively evaluated component of the allowance for credit losses. Premiums are amortized over the life of the loans using the effective interest method. On March 31, 2026 , there was a total of 123 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 5.1 years.

Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover expected 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, internally generated loan quality reports, prepayment speeds, curtailment rates for each loan category and other relevant factors when evaluating the loan portfolio. The allowance for credit losses on loans totaled $14.7 million, or 1.00% of total loans on March 31, 2026, compared to $14.7 million, or 1.02% of total loans on December 31, 2025. The decrease in allowance for credit losses to total loans from the prior period is primarily driven by lower individually analyzed loans balances following charge-offs recorded during the quarter. 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

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 public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value with any unrealized gain (or loss) in the value of the investment reported within the stockholders’ equity. Restricted securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.

On March 31, 2026 securities totaled $324.6 million, a decrease of $1.4 million, or 1.8% (annualized), from $326.0 million at December 31, 2025. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of March 31, 2026, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio totaled $120 thousand and $363 thousand at March 31, 2026 and December 31, 2025, respectively. Gross unrealized losses in the available for sale portfolio totaled $16.3 million and $14.8 million at March 31, 2026 and December 31, 2025, respectively. Gross unrealized gains in the held to maturity portfolio totaled $10 thousand and $98 thousand at March 31, 2026 and December 31, 2025, respectively. Gross unrealized losses in the held to maturity portfolio totaled $7.2 million and $6.8 million at March 31, 2026 and December 31, 2025, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2025 to March 31, 2026 was related to changes in market interest rates and was not related to credit concerns of the issuers.

Deposits

Deposits totaled $1.837 billion on March 31, 2026, which was a $37.7 million, or 8.4% (annualized), increase from December 31, 2025, and a $12.3 million, or 2.7% (annualized), increase from March 31, 2025. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 28%, 52%, and 20%, of total deposits, respectively on March 31, 2026, compared to 28%, 52%, and 20%, on December 31, 2025, and 30%, 50%, and 20%, on March 31, 2025. The composition of the deposit portfolio remained largely consistent with the prior period.

Subordinated Debt

The Company has one issuance of subordinated debt at March 31, 2026 that consists of $9.5 million outstanding of 4.00% fixed-to-floating rate subordinated notes due 2032. The original issuance of $10 million was assumed during the acquisition of Touchstone, and the Company repurchased $500 thousand of the notes during the second quarter of 2025 when the noteholder bank was acquired.

Liquidity

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, and available lines of credit totaled $764.2 million on March 31, 2026, $819.0 million on December 31, 2025, and $800.2 million on March 31, 2025.

The Bank maintains liquidity to fund loan growth and to meet potential demand from deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $558.9 million on March 31, 2026, $538.2 million on December 31, 2025, and $549.3 million on March 31, 2025. Excluding municipal deposits that have collateral pledged, the estimated amount of uninsured customer deposits totaled $461.3 million on March 31, 2026, $448.8 million on December 31, 2025, and $458.7 million on March 31, 2025.

Capital Resources

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the Company’s asset and liability levels and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement and is not obligated to report consolidated regulatory capital.

The Bank is subject to capital rules adopted by federal bank regulators that implemented the Basel III regulatory capital reforms adopted by the Basel Committee on Banking Supervision (the Basel Committee), and certain changes required by the Dodd-Frank Act.

The minimum capital level requirements applicable to the Bank under the final rules are as follows: a common equity Tier 1 capital ratio of 4.5%; a Tier 1 capital ratio of 6%; a total capital ratio of 8%; and a Tier 1 leverage ratio of 4% for all institutions. There is also a capital conservation buffer, which is 2.5% above the regulatory minimum capital requirements. If capital levels fall below the required minimum ratios plus the buffer, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. This results in the following minimum capital ratios required to exceed the buffer: a common equity Tier 1 capital ratio of 7.0%, a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. Management believes, as of March 31, 2026 and December 31, 2025, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.

The following table shows the Bank’s regulatory capital ratios at March 31, 2026:

The following table shows the Company's regulatory capital ratios at March 31, 2026:

(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital. The lowest of the three measures represents the capital conservation buffer ratio.

The prompt corrective action framework is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized:” a common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8%; a total capital ratio of 10%; and a Tier 1 leverage ratio of 5%. The Bank met the requirements to qualify as "well capitalized" as of March 31, 2026 and December 31, 2025.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Off-Balance Sheet Arrangements

The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

Commitments to extend credit, which amounted to $295.9 million at March 31, 2026, and $289.9 million at March 31, 2025, 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. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized as deemed necessary and may or may not be drawn upon to the total extent to which the Bank is committed.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. At March 31, 2026 and December 31, 2025, the Bank had $2.9 million and $3.1 million in outstanding standby letters of credit, respectively.

On April 21, 2020, the Company entered into interest rate swap agreements related to its outstanding junior subordinated debt. The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.

The interest rate swaps qualified and are designated as cash flow hedges. The Company’s cash flow hedges effectively modify the Company’s exposure to interest rate risk by converting variable rates of interest on $9.0 million of the Company’s junior subordinated debt to fixed rates of interest. The cash flow hedges end and the junior subordinated debt matures between June 2034 and October 2036. The cash flow hedges’ total notional amount is $9.0 million. At March 31, 2026, the cash flow hedges had a fair value of $2.3 million, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive (loss) income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 10 to the Consolidated Financial Statements.

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2026 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

There were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2025.