FIRST NATIONAL CORP /VA/

Previous wording

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 September 30, 2024 and statements of income of the Company for the three and nine months ended September 30, 2024 and 2023 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, 2023. The statements of income for the nine months ended September 30, 2024 may not be indicative of the results to be achieved for the year.

Current wording

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, 2025 and statements of income of the Company for thethree months ended March 31, 2025 and 2024 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, 2024. The statements of income for thethree months ended March 31, 2025 may not be indicative of the results to be achieved for the year.

Previous wording

First Bank Financial Services, Inc. owns an interest in an entity that provides title insurance services. Bank of Fincastle Services, Inc. is no longer an active operating entity. Shen-Valley Land Holdings, LLC and ESF, LLC were formed to hold other real estate owned and future office sites. 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.

Current wording

First Bank Financial Services, Inc. owns an interest in an entity that provides title insurance services. Bank of Fincastle Services, Inc. is no longer an active operating entity. 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.

Previous wording

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. As of September 30, 2024, the Bank’s office locations were well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, central regions of Virginia, and the city of Richmond. Within these markets, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education. The Bank’s products and services are delivered through 20 bank branch offices, a loan production office and customer service centers in two retirement villages. 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, 2023. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area. On October 1, 2024, the Company completed the acquisition of Touchstone with and into the Company, which expanded office locations in the greater Richmond market area, southside of Virginia, and northern North Carolina.

Current wording

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 branch offices, three loan production offices, and two customer service centers in retirement communities. 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, 2024. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area.

Previous wording

Primary expense categories are salaries and employee benefits, which comprised 57% of noninterest expenses for thenine months ended September 30, 2024, followed by other operating expense, which comprised 10% of noninte rest 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.

Current wording

Primary expense categories are salaries and employee benefits, which comprised 47% of noninterest expenses for thethree months ended March 31, 2025, followed by other operating expense, which comprised 12% of noninte rest 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.

Previous wording

Following the Merger, the former branches of Touchstone Bank assumed in the Merger continue to operate in Virginia as Touchstone Bank, a division of First Bank, and, in North Carolina, as Touchstone Bank, a division of First Bank, Strasburg, Virginia, until the systems integration is completed in February 2025. With the addition of Touchstone, the Company would have had approximately $2.1 billion in assets, $1.5 billion in loans and $1.8 billion in deposits on a combined pro-forma basis as of September 30, 2024. The combined company delivers banking services through thirty-three branch offices in Virginia and North Carolina and three loan production offices, in addition to a wide array of online banking services. The Company incurred pre-tax merger costs totaling $219 thousand for the three months ending September 30, 2024, and $790 thousand for the nine-months ending September 30,2024. The Company estimates that it will incur additional pre-tax merger related expenses of approximately $11.5 million during the fourth quarter of 2024 and first quarter of 2025.

Current wording

On October 1, 2024, the Company completed the acquisition of Touchstone. Immediately following the Merger with and into the Company, Touchstone Bank, the wholly owned subsidiary of Touchstone, was merged with and into First Bank. Following the Merger, the former branches of Touchstone Bank assumed in the Merger continued to operate in Virginia as Touchstone Bank, a division of First Bank, and, in North Carolina, as Touchstone Bank, a division of First Bank, Strasburg, Virginia, until the system integration was completed in February 2025. Following the system integration, the former branches of Touchstone Bank now operate in Virginia as First Bank and in North Carolina as First Bank of the Commonwealth. The combined company delivers banking services through thirty-three branch offices in Virginia and North Carolina and three loan production offices, in addition to a wide array of online banking services. The Company incurred merger costs totaling $1.9 million and $7.2 million for the three months ending March 31, 2025, and December 31, 2024, respectively.

Previous wording

Net interest income increased by $1.1 million as total interest income increased by $2.8 million and was partially offset by a $1.7 million increase in total interest expense. Net interest income was positively impacted by a $99.4 million, or 8%, increase in average earning assets and an 8-basis point increase in the net interest margin to 3.43%.

Current wording

Net interest income increased by $6.6 million as total interest income increased by $7.7 million and was partially offset by a $1.1 million increase in total interest expense. Primarily as a result of the Touchstone merger, net interest income was positively impacted by a $527.3 million, or 38.7%, increase in average earning assets which was offset by a $380.5 million, or 47.6%, increase in interest bearing liabilities. Net interest income was also positively impacted by a 53-basis point increase in the net interest margin to 3.77%.

Previous wording

Provision for credit losses increased by $1.6 million. For thethird quarter of 2024, provision for credit losses totaled $1.7 million and was comprised of a $1.7 million provision for credit losses on loans, which was partially offset by a $17 thousand recovery of credit losses on unfunded commitments, and a $5 thousand recovery of credit losses on securities held-to-maturity. For the same period of 2023, the provision for credit losses totaled $100 thousand.

Current wording

Provision for credit losses decreased by $168 thousand. For thefirst quarter of 2025, provision for credit losses totaled $832 thousand and was comprised of a $735 thousand provision for credit losses on loans, a $104 thousand provision for credit losses on unfunded commitments, and a $7 thousand recovery of credit losses on securities held-to-maturity. For the same period of 2024, the provision for credit losses totaled $1.0 million.

Previous wording

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, 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.

Current wording

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.

Previous wording

The $873 thousand decrease in net income resulted primarily from a $1.6 million increase in the provision for credit losses and a $675 thousand increase in noninterest expense. These increases were partially offset by a $1.1 million increase in net interest income, a $150 thousand increase in noninterest income, and a $186 thousand decrease in income tax expense. Merger-related costs totaling $219 thousand were included in noninterest expense.

Current wording

The $1.6 million decrease in net income resulted primarily from a $8.4 million increase in noninterest expenses. This increase was partially offset by a $6.6 million increase in net interest income, a $436 thousand decrease in noninterest income, and a $504 thousand decrease in income tax expense. Merger-related costs totaling $1.9 million were included in noninterest expense.

Previous wording

Net interest income increased $1.1 million, or 10%, to $11.7 million for thethird quarter of 2024 compared to the same period in the prior year. Total interest income increased by $2.8 million, which was partially offset by interest expense, which increased by $1.7 million. Net interest income was positively impacted by an 8-basis point increase in the net interest margin and a $99.4 million, or 8%, increase in average earning assets.

Current wording

Net interest income increased$6.6 million, or 61%, to $17.5 million for thefirst quarter of 2025 compared to the same period in the prior year. Total interest income increased by $7.7 million, which was partially offset by interest expense, which increased by $1.1 million. Net interest income was positively impacted by a 53-basis point increase in the net interest margin and a $527.3 million, or 38.7%, increase in average earning assets which was offset by a $380.5 million, or 47.6%, million increase in interest bearing liabilities.

Previous wording

The increase in total interest income was attributable to a $1.8 million, or 15%, increase in interest income and fees on loans and an $1.2 million increase in interest income on interest-bearing deposits in banks. The increase in interest income on loans was attributable to a 50-basis point increase in yield and a 5% increase in average balances compared to the same period in the prior year. The increase in interest income on interest-bearing deposits in other banks was attributable to a $88.9 million increase in average balances compared to the same period in the prior year.

Current wording

The increase in total interest income was attributable to a $7.2 million, or 53%, increase in interest income and fees on loans. The increase in interest income on loans was attributable to a 15-basis point increase in yield and a 50% increase in average balances compared to the same period in the prior year due to the merger with Touchstone.

Previous wording

The increase in total interest expense was attributable to a $1.1 million increase in interest expense on deposits and a $600 thousand increase in interest expense on other borrowings. The higher interest expense on deposits resulted from a 46-basis point increase in the cost of interest-bearing deposits and a 4% increase in average interest-bearing deposit balances. The increase in the cost of deposits was impacted by an increase in rates paid on deposits and a change in the composition of the deposit portfolio as lower cost deposit balances decreased, while higher cost deposit balances increased. The higher interest expense on other borrowings resulted from a $50.0 million increase in the average balance of borrowings from the Federal Reserve Bank through its Bank Term Funding Program.

Current wording

The increase in total interest expense was attributable to a $1.3 million increase in interest expense on deposits and a $398 thousand increase on interest on subordinated debt, offset by a $576 thousand decrease in interest expense on other borrowings. Although net interest margin was positively impacted by a 30-basis point decrease in the cost of interest-bearing deposits, the higher interest expense resulted from a 48% increase in average interest-bearing deposit balances. The decrease in the cost of deposits was impacted by a decrease in rates paid on deposits. The increase in deposits and subordinated debt was due to assumed liabilities from the Touchstone merger. The lower interest expense on other borrowings resulted from the payoff of $50.0 million of borrowings at the end of 2024.

Previous wording

The net interest margin was 3.43% for thethird quarter of 2024 compared to 3.35% for the same period in the prior year as the increase in the yield on earning assets exceeded the increase in the cost of funds. When compared to the linked second quarter of 2024, the net interest margin increased by 3-basis points as the yield on earning assets continued to increase at a similar pace as in prior quarters, while the increase in the cost of funds slowed when compared to prior quarterly periods. In December 2023, the Bank borrowed $50.0 million from the Federal Reserve Bank through its Bank Term Funding Program and invested the proceeds in interest-bearing deposit in other banks, which increased net interest income. Although net interest income increased by approximately $80 thousand for thethird quarter of 2024 because of the transaction, it negatively impacted net interest margin by 11-basis points in the third quarter of 2024.

Current wording

The net interest margin was 3.77% for thefirst quarter of 2025 compared to 3.24% for the same period in the prior year as the increase in the yield on earning assets exceeded the increase in the cost of funds. When compared to thefirst quarter of 2025, the net interest margin increased by 53-basis points as the yield on earning assets continued to increase at a similar pace as in prior quarters, while the cost of funds decreased when compared to prior quarterly periods consistent with the federal funds rate cuts in late 2024.

Previous wording

Noninterest income increased by $1.2 million primarily from a $378 thousand increase in wealth management fees and a $804 thousand increase in other operating income. The increase in other operating income was attributable to a recovery from a loan that was acquired through a business combination in 2021. The increases were partially offset by decreases in service charges on deposits, ATM and check card fees, and fees for other customer services.

Current wording

Noninterest income decreased $436 thousand, or 11%, to $3.6 million for thefirst quarter of 2025, compared to the same period of 2024. The decrease resulted primarily from a decrease in other operating income of $1.3 million from a recovery recognized in 2024 on a loan that was acquired through a business combination in 2021. The decrease in other operating income was offset by an increase in service charges of $359 thousand and ATM and check card fees of $226 thousand.

Previous wording

Income tax expense decreased $186 thousand for thethird quarter of 2024, compared to the same period one year ago. The effective tax rate for thethird quarter of 2024 was 19.5% compared to 19.0% for the same period in 2023. The increased effective tax rate for 2024 was the result of higher non-deductible expenses and lower nontaxable income in 2024 compared to 2023. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended September 30, 2024, and 2023. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Income tax expense decreased $504 thousand to $297 thousand for thefirst quarter of 2025, compared to the same period one year ago. The effective tax rate for thefirst quarter of 2025 was 15.7% compared to 20.0% for the same period in 2024. The decreased effective tax rate for 2025 was the result of higher nontaxable income in 2025 compared to 2024. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended March 31, 2025, and 2024. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. 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, 2024.

Previous wording

Assets totaled $1.5 billion at September 30, 2024, which was an increase of $31.4 million or 2% (annualized) from December 31, 2023. The asset composition changed during the first nine months of the year as interest-bearing deposits in banks increased by $38.4 million and loans, net of the allowance for credit losses, increased by $24.5 million, while total securities decreased by $33.4 million.

Current wording

Assets totaled $2.033 billion at March 31, 2025, which was an increase of $23.0 million or 4.6% (annualized) from December 31, 2024. The asset composition changed during the first three months of the year as interest-bearing deposits in banks increased by $40.6 million and loans, net of the allowance for credit losses, decreased by $15.0 million, while total securities decreased by $3.6 million.

Previous wording

Total liabilities increased by $22.6 million during thenine-month period ended September 30, 2024, primarily from a $19.5 million or 2% (annualized) increase in total deposits from December 31, 2023. Composition of deposits as of September 30, 2024 did not change significantly as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased $4.2 million, $1.8 million, and $13.6 million, respectively from December 31, 2023.

Current wording

Total liabilities increased by $20.9 million during thethree-month period ended March 31, 2025, primarily from a $21.2 million or 4.7% (annualized) increase in total deposits from December 31, 2024. Composition of deposits as of March 31, 2025 did not change significantly as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased$20.2 million, decreased $1.5 million, and increased $2.5 million, respectively from December 31, 2024.

Previous wording

Total shareholders’ equity increased by $8.8 million during the first nine months of 2024, primarily from a $5.1 million increase in retained earnings and a $3.3 million decrease in accumulated other comprehensive loss. The decrease in accumulated other comprehensive loss was attributable to lower unrealized losses in the available-for-sale securities portfolio. Retained earnings increased as $7.9 million of net income was partially offset by $2.2 million of cash dividends on common stock. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Current wording

Total shareholders’ equity increased by $2.1 million during the first three months of 2025, primarily from a $1.6 million reduction in accumulated other comprehensive loss. The decrease in accumulated other comprehensive loss was attributable to unrealized holding gains in the available-for-sale securities portfolio. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.

Previous wording

Loans totaled $994.7 million at September 30, 2024, which was a $25.3 million or 3% (annualized) increase from December 31, 2023, and a $42.69 million, or 4%, increase over September 30, 2024. The growth 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 35%, 45%, and 12% of the loan portfolio, respectively, at September 30, 2024.

Current wording

Loans totaled $1.435 billion at March 31, 2025, which was a $15.0 million or 4.1% (annualized) decrease from December 31, 2024, and a $475.5 million, or 49.5%, increase over March 31, 2024 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 38%, 46%, and 9% of the loan portfolio, respectively, at March 31, 2025.

Previous wording

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 unamortized discounts, net of unamortized premiums totaling $1.7 million and $1.9 million, as of September 30, 2024 and December 31, 2023, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $20.8 million as of September 30, 2024, which included unamortized premiums totaling $6.5 million, compared to loans totaling $24.6 million as of December 31, 2023, which included unamortized premiums totaling $7.9 million.

Current wording

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 $14.5 million and $14.3 million, as of March 31, 2025 and December 31, 2024, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $17.8 million as of March 31, 2025, which included unamortized premiums totaling $5.4 million, compared to loans totaling $19.0 million as of December 31, 2024, which included unamortized premiums totaling $5.8 million.

Previous wording

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 and any deferred fees or costs on originated 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 purchase premiums and discounts, recognized over the life of the loans.

Current wording

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 and any deferred fees or costs on originated 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.

Previous wording

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. There were no loans greater than 90 days past due and still accruing at September 30, 2024 compared to $370 thousand for the same period in 2023. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

Current wording

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. There were no loans greater than 90 days past due and still accruing at March 31, 2025 compared to $175 thousand for the same period in 2024. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

Previous wording

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $6.0 million and $6.8 million at September 30, 2024 and December 31, 2023, representing approximately 0.41% and 0.48% of total assets, respectively. Nonaccrual loans totaled $5.9 million and $6.8 million at September 30, 2024 and December 31, 2023, respectively. There was $56 thousand of OREO at September 30, 2024 There was no OREO at December 31, 2023. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in bank operations, but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of September 30, 2024

Current wording

Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $4.9 million and $7.1 million at March 31, 2025 and December 31, 2024, representing approximately 0.24% and 0.35% of total assets, respectively. Nonaccrual loans totaled $4.9 million and $7.1 million at March 31, 2025 and December 31, 2024, respectively. There was no OREO at March 31, 2025 and December 31, 2024. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in bank operations, but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. 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, 2025. Loans past due 90 days or more and accruing interest totaled$0 and $175 thousand at March 31, 2025 and December 31, 2024, respectively.

Previous wording

On September 30, 2024 commercial and industrial loans and residential real estate loans comprised 85% and 14% 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 $2.2 million and $287 thousand at September 30, 2024 and December 31, 2023, 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.

Current wording

On March 31, 2025 commercial and industrial loans and residential real estate loans comprised 55% and 44% 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 $9.4 million and $9.1 million at March 31, 2025 and December 31, 2024, 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.

Previous wording

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. On September 30, 2024, loans purchased from the finance company totaled $20.8 million, which was comprised of $14.3 million of loan balances and unamortized premiums totaling $6.5 million. As of September 30, 2024, $2.9 million of these loans were non-accrual including premiums totaling $970 thousand and thus were individually evaluated. Specific reserves on these individually evaluated loans totaled $2.1 million and were included in the Company’s allowance for credit losses on loans. The remaining $17.9 million of loans with premiums totaling $4.4 million were considered performing and were included in the calculation of the general reserve component of the allowance for credit losses. Premiums are amortized over the life of the loans using the effective interest method. On September 30, 2024, there was a total of 163 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 6.9 years.

Current wording

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, 2025, loans purchased from the finance company totaled $17.8 million, which was comprised of $12.4 million of loan balances and unamortized premiums totaling $5.4 million. As of March 31, 2025, $2.2 million of these loans were non-accrual including premiums totaling $773 thousand and thus were individually evaluated. Specific reserves on these individually evaluated loans totaled $1.6 million and were included in the Company’s allowance for credit losses on loans. The remaining $15.6 million of loans with premiums totaling $4.6 million were considered performing and were included in the calculation of the general reserve component of the allowance for credit losses. Premiums are amortized over the life of the loans using the effective interest method. On March 31, 2025, there was a total of 149 loans purchased from the finance company included in the Company’s loan portfolio with a weighted average maturity of 5.9 years.

Previous wording

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

Current wording

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, and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that an additional provision for credit losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for credit losses, see “Critical Accounting Policies” above.

Previous wording

On September 30, 2024 securities totaled $269.6 million, a decrease of $33.6 million, or 11% annualized, from $303.2 million at December 31, 2023. 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 September 30, 2024, 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 $65 thousand and $61 thousand at September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the available for sale portfolio totaled $17.3 million and $20.7 million at September 30, 2024 and December 31, 2023, respectively. Gross unrealized gains in the held to maturity portfolio totaled $108 thousand and $107 thousand at September 30, 2024 and December 31, 2023, respectively. Gross unrealized losses in the held to maturity portfolio totaled $7.8 million and $10.8 million at September 30, 2024 and December 31, 2023, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2023 to September 30, 2024 was related to changes in market interest rates and was not related to credit concerns of the issuers.

Current wording

On March 31, 2025 securities totaled$273.7 million, a decrease of $3.6 million, or 5% annualized, from $277.3 millionat December 31, 2024. 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, 2025, 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 $66 thousand and $62 thousand at March 31, 2025 and December 31, 2024, respectively. Gross unrealized losses in the available for sale portfolio totaled $20.1 million and $22.1 million at March 31, 2025 and December 31, 2024, respectively. Gross unrealized gains in the held to maturity portfolio totaled $5 thousand and $8 thousand at March 31, 2025 and December 31, 2024, respectively. Gross unrealized losses in the held to maturity portfolio totaled $9.4 million and $11.0 million at March 31, 2025 and December 31, 2024, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2024 to March 31, 2025 was related to changes in market interest rates and was not related to credit concerns of the issuers.

Previous wording

Deposits totaled $1.3 billion on September 30, 2024, which was a $20 million increase from December 31, 2023, and a $18.1 million, or 1%, increase from September 30, 2023. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 31%, 53%, and 16%, of total deposits, respe ctively on September 30, 2024, compared to 31%, 54%, and 15% on December 31, 2023, and 33%, 52%, and 15%, on September 30, 2023. The composition of the deposit portfolio remained largely consistent with the prior period.

Current wording

Deposits totaled $1.825 billion on March 31, 2025, which was a $21.2 million, or 4.7% (annualized), increase from December 31, 2024, and a $565.8 million, or 44.9%, increase from March 31, 2024. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 30%, 51%, and 20%, of total deposits, respe ctively on March 31, 2025, compared to 29%, 51%, and 20%, on December 31, 2024, and 31%, 54%, and 16%, on March 31, 2024. The composition of the deposit portfolio remained largely consistent with the prior period.

Previous wording

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program, and avai lable lines of credit totaled $499.1 million on September 30, 2024 and $532.1 million on September 30, 2023.

Current wording

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged, and avai lable lines of credit totaled $800.2 million on March 31, 2025, $758.0 million on December 31, 2024, and $554.8 million on March 31, 2024.

Previous wording

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 $400.1 on September 30, 2024, $368.2 million on December 31, 2023, and $346.9 million on September 30, 2023. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $322.6 on September 30, 2024, $293.7 million on December 31, 2023, and $268.4 million on September 30, 2023.

Current wording

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 $549.3 million on March 31, 2025, $537.0 million on December 31, 2024, and $391.9 million on March 31, 2024. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $458.7 million on March 31, 2025, $445.5 million on December 31, 2024, and $308.6 million on March 31, 2024.

Previous wording

Commitments to extend credit, which amounted to $212.9 million at September 30, 2024, and $171.9 million at September 30, 2023, 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.

Current wording

Commitments to extend credit, which amounted to $289.9 million at March 31, 2025, and $214.7 million at March 31, 2024, 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.

Previous wording

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 September 30, 2024 and December 31, 2023, the Bank had $15.3 million and$17.6 million in outstanding standby letters of credit, respectively.

Current wording

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, 2025 and December 31, 2024, the Bank had $15.7 million and $15.6 million in outstanding standby letters of credit, respectively.

Previous wording

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 September 30, 2024, 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.

Current wording

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, 2025, the cash flow hedges had a fair value of $2.5 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.