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

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

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, growth strategy, and the impact of the Company's acquisition (the Merger) of Touchstone Bankshares, Inc. (Touchstone), 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:

	•	the ability of the Company and the Bank to realize the anticipated benefits of the Merger;
	•	expected revenue synergies and cost savings from the Merger that may not be fully realized or realized within the expected time frame;
	•	revenues following the Merger that may be lower than expected;
	•	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);

•

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;
	•	demand for loan products;
	•	deposit flows;

•

the level of net charge-offs on loans and the adequacy of the allowance for credit losses;

•

the concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets;

•

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;

•

the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company's or the industry's reputation were to become damaged;

•

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 trade barriers and the economic impacts, volatility and uncertainty resulting therefrom, and geopolitical instability;
	•	the economic impact of duties, tariffs, or other barriers or restrictions on trade, any retaliatory counter measures, or the volatility and uncertainty arising therefrom;
	•	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; and

•

other factors identified in Item 1A. Risk Factors of the Company's Form 10-K for the year ending December 31, 2024.

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 June 30, 2025 and statements of income of the Company for the three and six months ended June 30, 2025 and 2024should 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 the three and six months ended June 30, 2025 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 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.

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 70% and 90% 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 50% of noninterest expenses for the six months ended June 30, 2025, 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.

Net interest income increased by $7.1 million as total interest income increased by $8.1 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 $523.1 million, or 38.2%, increase in average earning assets which was offset by a $371.1 million, or 40.0%, increase in interest bearing liabilities. Net interest income was also positively impacted by a 55-basis point increase in the net interest margin to 3.95%.

Provision for credit losses increased by $511 thousand. For the secondquarter of 2025, provision for credit losses totaled $911 thousand and was comprised of a $900 thousand provision for credit losses on loans, a $1 thousand provision for credit losses on unfunded commitments, and a $10 thousand provision for credit losses on securities held-to-maturity. For the same period of 2024, the provision for credit losses totaled $400 thousand.

Noninterest income increased by $1.2 million in the secondquarter of 2025 primarily from increases in services charges, ATM and check card fees, brokered mortgage fees, and other operating income.

Noninterest expenses increased by $4.5 million and were primarily attributable to a $2.2 million increase in salaries and employee benefits, a $1.1 million in other operating expense, a $436 thousand increase in amortization expense, a $396 thousand increase in occupancy expense, a $366 thousand increase in equipment expense, and a $341 thousand increase in data processing expense. The increases are primarily driven by the Touchstone merger resulting in increased operating expenses due to operating additional branches, increased data processing expenses with increased customer transactions as well as some duplicative expenses from operating two systems, and amortization expense due to core deposit intangible accretion on deposits acquired from Touchstone.

Comparing the Six-Month Periods Ending June 30, 2025and June 30, 2024

Net income increased $998 thousand to $6.6 million, or $0.74 per diluted share, for the sixmonths ended June 30, 2025, compared to $5.7 million, or $0.90 per diluted share, for the same period in 2024. Return on average assets was 0.66% and return on average equity was 7.90% for the sixmonths ended June 30, 2025, compared to 0.79% and 9.68%, respectively, for the same period in 2024.

The $998 thousand increase in net income resulted primarily from a $13.3 million increase in net interest income after provision, offset by $13.0 million increase in noninterest expenses. Noninterest expense increased due to merger expenses of $2.0 million and additional operating expenses resulting from operating and staffing additional branches and duplicative expenses for data processing that were incurred until the system integration in February.

Net interest income increased by $13.7 million as total interest income increased by $15.8 million and was partially offset by a $2.1 million increase in total interest expense. Primarily as a result of the Touchstone merger, net interest income was positively impacted by a $528.1 million, or 38.8%, increase in average earning assets which was offset by a $377.0 million, or 40.5%, increase in average interest bearing liabilities. Net interest income was also positively impacted by a 55-basis point increase in the net interest margin to 3.86%.

Provision for credit losses increased by $343 thousand for the sixmonths ended June 30, 2025. For the sixmonths ended June 30, 2025, provision for credit losses totaled $1.7 million and was comprised of a $1.6 provision for credit losses on loans, a $105 thousand provision for credit losses on unfunded commitments, and a $3 thousand provision for credit losses on securities held-to-maturity. For the same period of 2024, the provision for credit losses totaled $1.4 million.

Noninterest income increased by $767 thousand in the sixmonths ended June 30, 2025 from increases in services charges, ATM and check card fees, and brokered mortgage fees, offset by a decrease in other operating income related to a loan recovery of a previously acquired loan recognized in 2024.

Noninterest expenses increased by $13.0 million and were primarily attributable to a $5.0 million increase in salaries and employee benefits, a $1.6 million increase in merger expense, a $1.8 million increase in other operating expense, a $930 thousand increase in occupancy expense, a $857 thousand increase in data processing expense, a $874 thousand increase in amortization expense, and a $800 thousand increase in equipment expense. The increase is primarily driven by the Touchstone merger resulting in increased operating expenses due to operating additional branches, duplicative expenses incurred prior to system integration, and amortization expense due to core deposit intangible accretion on deposits acquired from Touchstone.

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).

		Efficiency Ratio
		Three Months Ended								Six Months Ended
		June 30, 2025				June 30, 2024				June 30, 2025				June 30, 2024
Noninterest expense		$	15,191			$	10,659			$	33,526			$	20,546
Add: other real estate owned income, net			-				-				7				-
Subtract: amortization of intangibles			(441	)			(5	)			(883	)			(9	)
Subtract: loss on disposal of premises and equipment, net			(7	)			0				(7	)			(49	)
Subtract: merger related expenses			(92	)			(571	)			(2,032	)			(571	)
		$	14,651			$	10,083			$	30,611			$	19,917
Tax-equivalent net interest income		$	18,639			$	11,587			$	36,186			$	22,518
Noninterest income			3,889				2,686				7,500				6,733
		$	22,528			$	14,273			$	43,686			$	29,251
Efficiency ratio			65.03	%			70.64	%			70.07	%			68.09	%

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 then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both 2025and 2024 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).

		Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
		Three Months Ended								Six Months Ended
		June 30, 2025				June 30, 2024				June 30, 2025				June 30, 2024
GAAP measures:
Interest income - loans		$	21,594			$	14,004			$	42,231			$	27,488
Interest income - investments and other			3,571				3,051				6,955				5,901
Interest expense - deposits			(6,080	)			(4,820	)			(12,117	)			(9,591	)
Interest expense - subordinated debt			(468	)			(69	)			(935	)			(138	)
Interest expense - junior subordinated debt			(66	)			(66	)			(132	)			(134	)
Interest expense - other borrowings			(3	)			(606	)			(3	)			(1,182	)
Total net interest income		$	18,548			$	11,494			$	35,999			$	22,344
Non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans		$	12			$	12			$	28			$	12
Tax benefit realized on non-taxable interest income - municipal securities			79				81				159				162
Total tax benefit realized on non-taxable interest income		$	91			$	93			$	187			$	174
Total tax-equivalent net interest income		$	18,639			$	11,587			$	36,186			$	22,518

		Net Interest Margin
		Three Months Ended								Six Months Ended
		June 30, 2025				June 30, 2024				June 30, 2025				June 30, 2024
Tax-equivalent net interest income		$	18,639			$	11,587			$	36,186			$	22,518
Average earnings assets		$	1,893,133			$	1,370,072			$	1,890,749			$	1,362,687
Net Interest Margin			3.95	%			3.40	%			3.86	%			3.31	%

Net Income

Three Month Period Ended June 30, 2025

Net income increased $2.6 million to $5.1 million, or $0.56 per diluted share, for the three months ended June 30, 2025, compared to $2.4 million, $0.39 per diluted share, for the same period in 2024. Return on average assets was 1.00% and return on average equity was 11.85% for the second quarter of 2025, compared to 0.68% and 8.31%, respectively, for the same period in 2024.

Net Interest Income

Three Month Period Ended June 30, 2025

Net interest income increased $7.1 million, or 61.4%, to $18.5 million for the secondquarter of 2025compared to the same period in the prior year. Total interest income increased by $8.1 million, which was partially offset by interest expense, which increased by $1.1 million. Net interest income was positively impacted by a 55-basis point increase in the net interest margin and a $523.1 million, or 38.2%, increase in average earning assets which was offset by a $371.1 million, or 40.0%, increase in average interest bearing liabilities.

The increase in total interest income was attributable to a $7.6 million, or 54.1%, increase in interest income and fees on loans. The increase in interest income on loans was attributable to a 25-basis point increase in yield and a 47.2% increase in average balances compared to the same period in the prior year due to the merger with Touchstone.

The increase in total interest expense was attributable to a $1.3 million increase in interest expense on deposits and a $399 thousand increase on interest on subordinated debt, offset by a $603 thousand decrease in interest expense on other borrowings. Net interest margin was positively impacted by a 32-basis point decrease in the cost of interest-bearing deposits. The higher interest expense resulted from a 46.8% increase in average interest-bearing deposit balances. 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.

The net interest margin was 3.95% for the secondquarter of 2025compared to 3.40% for the same period in the prior year. When compared to the second quarter of 2025, the net interest margin increased by 55-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. The yield on earning assets was also positively impacted by net accretion income related to acquisition accounting of $930 thousand, or a 20-basis point incremental increase to the net interest margin.

Six Month Period Ended June 30, 2025

Net interest income increased $13.7 million, or 61.1%, to $36.0 million for the sixmonths ended June 30, 2025, compared to the same period in the prior year. Total interest income increased by $15.8 million, which was partially offset by interest expense, which increased by $2.1 million. Net interest income was positively impacted by a 55-basis point increase in the net interest margin and a $528.1 million, or 38.8%, increase in average earning assets which was offset by a $377.0 million, or 40.5%, million increase in average interest bearing liabilities.

The increase in total interest income was attributable to a $14.7 million, or 53.6%, increase in interest income and fees on loans. The increase in interest income on loans was attributable to a 21-basis point increase in yield and a 48.8% increase in average balances compared to the same period in the prior year due to the merger with Touchstone.

The increase in total interest expense was attributable to a $2.1 million increase in interest expense on deposits and a $797 thousand increase on interest on subordinated debt, offset by a $1.2 million decrease in interest expense on other borrowings. Although net interest margin was positively impacted by a 32-basis point decrease in the cost of interest-bearing deposits, the higher interest expense resulted from a 47.2% increase in average interest-bearing deposit balances. 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.

The net interest margin was 3.86% for the sixmonths ended June 30, 2025, compared to 3.31% for the same period in the prior year. When compared to the sixmonths ended June 30, 2024, the net interest margin increased by 55-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. The yield on earning assets was also positively impacted by net accretion income related to acquisition accounting of $736 thousand, or a 8-basis point incremental 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)

		Three Months Ended
		June 30, 2025												June 30, 2024
		Average Balance				Interest Income/Expense				Yield/Rate				Average Balance				Interest Income/Expense				Yield/Rate
Assets
Securities:
Taxable		$	220,100			$	1,313				2.39	%		$	216,079			$	1,134				2.11	%
Tax-exempt (1)			50,871				377				2.98	%			53,162				387				2.93	%
Restricted			4,449				69				6.27	%			2,112				32				6.18	%
Total securities		$	275,420			$	1,759				2.56	%		$	271,353			$	1,553				2.30	%
Loans: (2)
Taxable		$	1,441,800			$	21,552				6.00	%		$	980,226			$	13,959				5.73	%
Tax-exempt (1)			4,095				54				5.26	%			1,730				57				13.32	%
Total loans		$	1,445,895			$	21,606				5.99	%		$	981,956			$	14,016				5.74	%
Federal funds sold			1				-				4.51	%			1				-				5.58	%
Interest-bearing deposits with other institutions			171,817				1,891				4.41	%			116,762				1,579				5.44	%
Total earning assets		$	1,893,133			$	25,256				5.35	%		$	1,370,072			$	17,148				5.03	%
Less: allowance for credit losses on loans			(14,888	)											(12,588	)
Total non-earning assets			141,099												90,995
Total assets		$	2,019,344											$	1,448,479
Liabilities and Shareholders' Equity
Interest bearing deposits:
Checking		$	364,686			$	1,208				1.33	%		$	225,967			$	1,133				2.02	%
Regular savings			212,433				191				0.36	%			143,588				40				0.11	%
Money market accounts			329,273				1,869				2.28	%			293,137				2,005				2.75	%
Time deposits			361,571				2,812				3.12	%			200,756				1,642				3.29	%
Total interest-bearing deposits		$	1,267,963			$	6,080				1.92	%		$	863,448			$	4,820				2.24	%
Federal funds purchased			2				-				4.89	%			2				-				5.84	%
Subordinated debt			21,304				468				8.80	%			4,998				69				5.57	%
Junior subordinated debt			9,279				66				2.86	%			9,279				66				2.88	%
Other borrowings			275				3				4.63	%			50,000				606				4.88	%
Total interest-bearing liabilities		$	1,298,823			$	6,617				2.04	%		$	927,727			$	5,561				2.41	%
Non-interest bearing liabilities
Demand deposits			540,377												396,014
Other liabilities			9,224												6,483
Total liabilities		$	1,848,424											$	1,330,224
Shareholders' equity			170,920												118,255
Total liabilities and Shareholders' equity		$	2,019,344											$	1,448,479
Net interest income						$	18,639											$	11,587
Interest rate spread											3.31	%											2.62	%
Cost of funds											1.44	%											1.69	%
Interest expense as a percent of average earning assets											1.40	%											1.63	%
Net interest margin											3.95	%											3.40	%

(1)	Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $91 and $93 thousand for the three months ended June 30, 2025 and 2024, respectively.

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

		Six Months Ended
		June 30, 2025												June 30, 2024
		Average Balance				Interest Income/Expense				Yield/Rate				Average Balance				Interest Income/Expense				Yield/Rate
Assets
Securities:
Taxable		$	219,990			$	2,627				2.41	%		$	224,656			$	2,358				2.11	%
Tax-exempt (1)			51,323				757				2.98	%			53,634				773				2.90	%
Restricted			4,311				129				6.04	%			2,098				65				6.23	%
Total securities		$	275,624			$	3,513				2.57	%		$	280,388			$	3,196				2.29	%
Loans: (2)
Taxable		$	1,448,191			$	42,127				5.87	%		$	975,420			$	27,443				5.66	%
Tax-exempt (1)			4,445				132				5.99	%			865				57				13.32	%
Total loans		$	1,452,636			$	42,259				5.87	%		$	976,285			$	27,500				5.66	%
Federal funds sold			1,755				39				4.53	%			5				-				5.49	%
Interest-bearing deposits with other institutions			160,734				3,562				4.47	%			106,009				2,867				5.44	%
Total earning assets		$	1,890,749			$	49,373				5.27	%		$	1,362,687			$	33,563				4.95	%
Less: allowance for credit losses on loans			(15,749	)											(12,284	)
Total non-earning assets			145,425												87,816
Total assets		$	2,020,425											$	1,438,219
Liabilities and Shareholders' Equity
Interest bearing deposits:
Checking		$	366,843			$	2,439				1.34	%		$	254,248			$	2,455				1.94	%
Regular savings			212,513				366				0.35	%			145,763				82				0.11	%
Money market accounts			334,261				3,831				2.31	%			267,797				3,847				2.89	%
Time deposits			362,431				5,481				3.05	%			198,910				3,207				3.24	%
Total interest-bearing deposits		$	1,276,048			$	12,117				1.91	%		$	866,718			$	9,591				2.23	%
Federal funds purchased			1				-				4.91	%			1				-				5.92	%
Subordinated debt			22,500				935				8.38	%			4,998				138				5.57	%
Junior subordinated debt			9,279				132				2.87	%			9,279				134				2.90	%
Other borrowings			138				3				4.63	%			50,000				1,182				4.75	%
Total interest-bearing liabilities		$	1,307,966			$	13,187				2.03	%		$	930,996			$	11,045				2.39	%
Non-interest bearing liabilities
Demand deposits			533,596												383,956
Other liabilities			9,150												5,879
Total liabilities		$	1,850,712											$	1,320,831
Shareholders' equity			169,713												117,388
Total liabilities and Shareholders' equity		$	2,020,425											$	1,438,219
Net interest income						$	36,186											$	22,518
Interest rate spread											3.23	%											2.55	%
Cost of funds											1.44	%											1.69	%
Interest expense as a percent of average earning assets											1.41	%											1.62	%
Net interest margin											3.86	%											3.31	%

(1)	Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $187 and $174 thousand for the six months ended June 30, 2025 and 2024, respectively.

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

Provision for Credit Losses

Three-Month Period Ended June 30, 2025

The provision for credit losses totaled $911 thousand for the three-month period ended June 30, 2025, compared to $400 thousand for the same period of the prior year. The provision was comprised of a $900 thousand provision for credit losses on loans, a $10 thousand provision for credit losses on held-to-maturity securities and a $1 thousand provision for credit losses on unfunded commitments. As compared to the same period prior year, the increase in provision for credit losses reflects the impact of higher pool loan balances acquired in the Touchstone merger as well as an increase in the allowance to total loans from 1.02% at March 31, 2025 to 1.05% at June 30, 2025. In the second quarter of 2024 the allowance to total loans decreased from 1.30% at March 31, 2024 to 1.27% at June 30, 2024.

Six-Month Period Ended June 30, 2025

The provision for credit losses totaled $1.7 million for the six-month period ended June 30, 2025, compared to $1.4 million for the same period of the prior year. The provision was comprised of a $1.6 million provision for credit losses on loans, which was partially offset by a $3 thousand provision for credit losses on held-to-maturity securities and a $105 thousand provision for credit losses on unfunded commitments. As compared to the same period prior year, the increase in provision for credit losses reflects the impact of higher pool loan balances acquired in the Touchstone merger as well as an increase in provision for credit losses due to an increase in the level of net-charge offs. Net charge-offs for the first six months of 2025 totaled $2.8 million compared to $844 thousand for the first six months of 2024. The increase in the level of net-charge offs has resulted in a decline in the ratio of allowance to total loans from 1.27% at June 30, 2024 to 1.05% at June 30, 2025. The loss model has been updated in 2025 to reflect the most recent bank and peer group loss rates, economic forecasts, prepayment speeds and curtailment rates for each loan category. With these updates to the model, we saw an increase in the allowance for secured by 1-4 family residential loans and decrease in other real estate. Commercial and industrial loans also saw an increase in provision, largely driven by loss rates and charge offs in the current year.

Noninterest Income

Three-Month Period Ended June 30, 2025

Noninterest income increased $1.2 million, or 44.8%, to $3.9 million for the secondquarter of 2025, compared to the same period of 2024. The increase resulted from increases in service charges of $408 thousand, ATM and check card fees of $319 thousand, brokered mortgage fees of $151 thousand, and other operating income of $123 thousand.

Six-Month Period Ended June 30, 2025

Noninterest income increased $767 thousand, or 11.4%, to $7.5 million for the six months ended June 30, 2025, compared to the same period of 2024. The increase resulted from increases in service charges of $767 thousand, ATM and check card fees of $545 thousand, brokered mortgage fees of $223 thousand, and income from bank owned life insurance of $177 thousand. The increases in noninterest income were offset by a decrease in other operating income of $1.1 million from a recovery recognized in 2024 on a loan that was acquired through a business combination in 2021.

Noninterest Expense

Three-Month Period Ended June 30, 2025

Noninterest expenses increased $4.5 million, or 42.5%, to $15.2 million for the three-month period ended June 30, 2025, compared to the same period one year ago. The increase was primarily attributable to $2.2 million, or 37.6%, increase in salaries and employee benefits, a $1.2 million, or 223.0%, increase in other operating expense, $396 thousand, or 72.3%, increase in occupancy expense, a $341 thousand, or 209.2%, increase in data processing expense, and a $436 thousand increase in amortization expense. The increases in salary and benefits, other operating expenses, occupancy expense, and data processing expense were primarily driven by the Touchstone merger resulting in increased operating expenses due to an increase in the number of employees, operating additional branches, increased data processing expenses with increased customer transactions and some duplicative expenses from operating two systems. Amortization expense increased due to core deposit intangible accretion on deposits acquired from Touchstone. These increases were offset by decreases of $530 thousand, or 47.2%, in legal and professional fees and $395 thousand, or 80.7%, in merger expenses compared to the same period in the prior year. Legal and merger fees were higher in the prior year for this period to facilitate the Touchstone acquisition.

Six-Month Period Ended June 30, 2025

Noninterest expenses increased $13.0 million, or 63.2%, to $33.5 million for the six-month period ended June 30, 2025, compared to the same period one year ago. The increase was primarily attributable to a $5.0 million, or 42.8%, increase in salaries and employee benefits, a $2.2 million, or 143.8%, increase in other operating expense, a $1.6 million increase in merger expenses, a $930 thousand, or 85.9%, increase in occupancy expense, a $874 thousand increase in amortization expense, a $857 thousand, or 209.5%, increase in data processing expense, and a $800 thousand, or 62.4%, increase in equipment expense. The increase in salaries and benefits reflects additional expenses due to an increase in the number of employees, increase in incentives, stock compensation expense, and salary and benefit increases from the prior year. The increase in merger expenses was primarily driven by expenses incurred in the first quarter of 2025 to facilitate system integration through conversion expenses and contract terminations. Other operating expenses, occupancy expense, data processing expense, and equipment expense primarily increased due to operating additional branches, increased data processing expenses with increased customer transactions, and duplicative expenses incurred prior to system integration. Amortization expense increased due to core deposit intangible accretion on deposits acquired from Touchstone.

Income Taxes

Three-Month Period Ended June 30, 2025

Income tax expense increased$605 thousand to $1.3 million for the secondquarter of 2025, compared to the same period one year ago. The effective tax rate for the secondquarter of 2025was 20.3% compared to 21.8% for the same period in 2024. The Company's income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended June 30, 2025 and 2024. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, income from bank owned life insurance, and 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, 2024.

Financial Condition

General

Assets totaled $2.041 billion at June 30, 2025, which was an increase of $31.2 million or 3.1% (annualized) from December 31, 2024. The asset composition changed during the first sixmonths of the year as interest-bearing deposits in banks increased by $21.9 million and loans, net of the allowance for credit losses, decreased by $22.4 million, while total securities increased by $22.3 million.

Total liabilities increasedby $24.2 million during the six-month period ended June 30, 2025, primarily from a $25.0 million increase in other borrowings from December 31, 2024. Deposit balances and the composition of deposits as of June 30, 2025did not change significantly as noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits increased $21.1 million, decreased $23.1 million, and increased $1.4 million, respectively from December 31, 2024.

Total shareholders' equity increased by $7.0 million during the first sixmonths of 2025, primarily from a $3.9 million increase in retained earnings and a $2.6 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.

Loans

Loans totaled $1.428 billion at June 30, 2025, which was a $22.4 million or 3.1% (annualized) decrease from December 31, 2024, and a $450.8 million, or 46.1%, increase over June 30, 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%, 47%, and 8% of the loan portfolio, respectively, at June 30, 2025, and 37%, 46%, and 10% of the loan portfolio, respectively, at December 31, 2024.

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 $13.5 million and $14.3 million, as of June 30, 2025and December 31, 2024, respectively. Loans purchased from a third-party that originated and serviced loans to health care professionals totaled $17.0 million as of June 30, 2025, which included unamortized premiums totaling $5.2 million, compared to loans totaling $19.0 million as of December 31, 2024, which included unamortized premiums totaling $5.8 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 $6.8 million and $7.0 million at June 30, 2025and December 31, 2024, representing approximately 0.33% and 0.35% of total assets, respectively. Nonaccrual loans totaled $6.8 million and $7.1 million at June 30, 2025 and December 31, 2024, respectively. There was no OREO at June 30, 2025 and $53 thousand at December 31, 2024. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of June 30, 2025. Loans past due 90 days or more and accruing interest totaled $0 and $0 at June 30, 2025and December 31, 2024, respectively.

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. 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 June 30, 2025 securities totaled $299.6 million, an increase of $22.3 million, or 8%, from $277.3 million at 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 June 30, 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 $163 thousand and $62 thousand at June 30, 2025and December 31, 2024, respectively. Gross unrealized losses in the available for sale portfolio totaled $19.1 million and $22.1 million at June 30, 2025 and December 31, 2024, respectively. Gross unrealized gains in the held to maturity portfolio totaled $2 thousand and $8 thousand at June 30, 2025and December 31, 2024, respectively. Gross unrealized losses in the held to maturity portfolio totaled $8.8 million and $11.0 million at June 30, 2025and December 31, 2024, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2024 to June 30, 2025was related to changes in market interest rates and was not related to credit concerns of the issuers.

Deposits

Deposits totaled $1.803 billion on June 30, 2025, whichwas a $612 thousand, or 0.03%, decrease from December 31, 2024, and a $537.4 million, or 42.5%, increase from June 30, 2024. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 30%, 50%, and 20%, of total deposits, respectively on June 30, 2025, compared to 29%, 51%, and 20%, on December 31, 2024, and 31%, 53%, and 16%, on June 30, 2024. The composition of the deposit portfolio remained largely consistent with the prior period.

Subordinated Debt

The Company assumed two subordinated debt issuances from the acquisition of Touchstone. The subordinated debt assumed consisted of a $8.0 million issuance at a 6.00% fixed-to-floating rate subordinated note callable due 2030. The floating rate period for this subordinated note begins August 15, 2025, accordingly the related interest expense could increase during the floating rate period. The subordinated debt assumed also consisted of a $10.0 million issuance at a 4.00% fixed-to-floating rate subordinated note due 2032. During the second quarter of 2025, a $500 thousand tranche of the $10.0 million issuance became available to payoff early since the recipient bank was acquired. The Company paid off this portion of the debt for $420 thousand and recognized an $80 thousand gain on the redemption of the subordinated debt.

Liquidity

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 available lines of credit totaled $800.2 million on June 30, 2025, $758.0 million on December 31, 2024, and $553.3 million on June 30, 2024.

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 $545.7 million on June 30, 2025, $537.0 million on December 31, 2024, and $419.4 million on June 30, 2024. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $451.9 million on June 30, 2025, $445.5million on December 31, 2024, and $324.5 million on June 30, 2024.

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 June 30, 2025and December 31, 2024, 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 June 30, 2025:

		Minimum Capital Requirement				First Bank
Total capital to risk-weighted assets			8.00	%			12.89	%
Tier 1 capital to risk-weighted assets			6.00	%			11.81	%
Common equity Tier 1 capital to risk-weighted assets			4.50	%			11.81	%
Tier 1 capital to average assets			4.00	%			8.56	%
Capital conservation buffer ratio(1)							4.89	%

(1)	Calculated by subtracting the regulatory minimum capital ratio requirements from the Company's actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital. The lowest of the three measures represents the Bank's 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 June 30, 2025and December 31, 2024.

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, 2024.

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 $282.7 millionat June 30, 2025, and $212.3 million at June 30, 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.

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 June 30, 2025and December 31, 2024, the Bank had $12.5 million and $15.6 millionin 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 June 30, 2025, the cash flow hedges had a fair value of $2.4 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.