Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2025 (the "2025 Form 10-K"). Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

Executive Overview

First Community Bankshares, Inc. (the "Company") is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the "Bank"), a Virginia-chartered banking institution. As of March 31, 2026, the Bank operated 61 branches in Virginia, West Virginia, North Carolina and Tennessee. As of March 31, 2026, full-time equivalent employees, calculated using the number of hours worked, totaled 610. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. ("FCWM"). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of March 31, 2026, the Trust Division and FCWM managed and administered $1.77 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Recent Developments

On January 23, 2026, the Company completed its previously announced merger (the "Merger") with Hometown Bancshares, Inc. a West Virginia corporation headquartered in Middlebourne, West Virginia ("Hometown"), pursuant to an Agreement and Plan of Merger (the "Agreement") dated July 19, 2025, by and between the company and Hometown. At the Effective Time, Hometown merged with and into the Company, with the Company as the surviving corporation in the Merger.

Immediately following the Merger, Union Bank, Inc., a wholly-owned subsidiary of Hometown, merged with and into First Community Bank, a wholly-owned subsidiary of the Company (the "Bank Merger"), with First Community Bank as the surviving bank in the Bank Merger.

Pursuant to the Agreement, each outstanding share of common stock of Hometown was converted into the right to receive 11.706 shares (the "Exchange Ratio") of the Company's common stock, par value $1.00 per share, plus cash, without interest, in lieu of fractional shares. In connection with the transaction, the Company issued 1,029,314 common shares.

Under the terms of the Agreement, all Hometown stock appreciation rights under a stock appreciation award (except certain stock appreciation rights that were unvested as of January 1, 2025) and all Hometown dividend equivalent rights granted under the Hometown Dividend Equivalent Incentive Plan that were outstanding immediately prior to the Effective Time, to the extent not vested, became fully vested, and were canceled. The holders of stock appreciation rights received a cash payment equal to the number determined by multiplying (i) the excess, if any of (A) Average Closing Price (as defined in the Agreement) multiplied by (B) the Exchange Ratio over the applicable exercise price of the stock appreciation right, by (ii) the number of shares of Hometown common stock subject to the applicable stock appreciation right. The holders of dividend equivalent rights received a cash payment equal to the account value of the applicable dividend rights award. The stock appreciation rights that are unvested as of January 1, 2025, were assumed by the Company.

Acquisition details are described in Note 2, "Acquisitions and Divestitures" of Part I, of this Quarterly Report on Form 10Q.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management's assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, "Financial Statements," of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, "Basis of Presentation and Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2025 Form 10-K. Our critical accounting estimates are detailed in the "Critical Accounting Policies" section in Part II, Item 7 of our 2025 Form 10-K.

Performance Overview

Highlights of our results of operations for the three months ended March 31, 2026, and financial condition as of March 31, 2026, include the following:

	●	Net income of $12.03 million for the first quarter of 2026, was an increase of $209 thousand, or 1.77%, from the same quarter of 2025.
	●	When adjusted for merger and non-recurring expenses, net income of $13.83 million was an increase of $2.01 million, or 17.02%, from the same period in 2025.
	●	Net interest margin remained strong at 4.37% in the first quarter of 2026, up 3 basis points from the first quarter of 2025. Net interest rate spread increased 11 basis points to 4.05%, driving a $3.05 million, or 10.02%, increase in tax-equivalent net interest income. The improvement was primarily driven by an increase in the average balance of interest earnings assets and lower funding cost yields. Average earnings assets increased $263.04 million, or 9.26%, contributing $2.67 million in additional interest income, while the yield of interest-bearing deposits declined 19 basis points, reducing interest expense by $393 thousand, or 8.07%.
	●	Net interest income after provision for loan losses increased $2.94 million, or 9.80%, compared to March 31, 2025. The increase is attributable to an increase in average earnings assets and decreased funding costs.
	●	Noninterest income increased approximately $1.23 million, or 12.00%, when compared to the same quarter of 2025. The increase is attributable primarily to an increase in other service charges and fees of $603 thousand, or 18.05%, and service charges on deposits of $349 thousand, or 9.10%. Noninterest expense increased $3.79 million, or 15.21%, when compared to the same period of 2025. The increase is attributable to merger expenses of $2.31 million and an increase in salaries and benefits of $1.03 million, or 7.74%. The merger expense is related to the recent acquisition of Hometown Bancshares, Inc. ("Hometown").

	●	Annualized return on average assets ("ROA") was 1.39% for the first quarter of 2026 compared to 1.49% for the same period of 2025. Annualized return on average common equity ("ROE") was 9.29% for the first quarter of 2026 compared to 9.49% for the same period of 2025.
	●	When adjusted for merger and non-recurring expenses, ROA was 1.60% for the first quarter of 2026 and ROE was 10.69%. Return on average tangible common equity continues to remain strong at 15.48% for the first quarter of 2026.
	●	The Company completed the strategic acquisition of Hometown on January 23, 2026. Total assets of $393.81 million were acquired in the transaction increasing the Company's consolidated assets to $3.64 billion on March 31, 2026. In addition, the Company issued 1.03 million common shares in the purchase resulting in an increase in capital of $35.07 million. The purchase transaction created $1.73 million goodwill and $8.59 million in other intangible assets. Other major balance sheet components increased in the transaction with $171.04 million acquired loans and $357.72 million in deposits.
	●	The Company's loan portfolio increased $141.27 million, or 6.10%, from year end 2025. Excluding the Hometown transaction, the loan portfolio decreased approximately $29.77 million, or 1.29%. Loan production for the first quarter of 2026 was $105.07 million, an increase of $27.16 million over first quarter of 2025.
	●	Deposits increased $379.06 million, or 14.21%, from December 31, 2025. Excluding the Hometown transaction, deposits increased $21.33 million, or 0.79%.
	●	The Company repurchased 504,652 common shares for a total cost of $20.33 million during the first quarter of 2026. Shares repurchase activity was suspended in the third quarter of 2025 in anticipation of the acquisition of Hometown Bancshares, Inc. and resumed upon its completion in the first quarter of 2026.
	●	Non-performing loans to total loans decreased to 0.72%, a 0.12% reduction when compared with the same quarter of 2025. The company experienced net charge-offs for the first quarter of 2026 or $731 thousand, or 0.12%, of annualized average loans, compared to net charge-offs of $1.39 million, or 0.24%, of annualized average loans for the same period in 2025.
	●	The allowance for credit losses increased $2.78 million, primarily driven by the $3.21 million impact of the Hometown transaction. The allowance for credit losses to total loans was 1.37% on March 31, 2026, compared to 1.42% on March 31,2025.
	●	Book value per share on March 31, 2026, was $27.64, an increase of $0.34 from year-end 2025.

Results of Operations

Net Income

The following table presents the changes in net income and related information for the periods indicated:

		Three Months Ended
(Amounts in thousands, except per		March 31,								Increase
share data)		2026				2025				(Decrease)				% Change
Net income		$	12,027			$	11,818			$	209				1.77	%
Basic earnings per common share			0.64				0.64				-				0.00	%
Diluted earnings per common share			0.63				0.64				(0.01	)			-1.56	%
Return on average assets			1.39	%			1.49	%			-0.10	%			-6.71	%
Return on average common equity			9.29	%			9.49	%			-0.20	%			-2.11	%

Three-Month Comparison.

Net income increased $209 thousand, or 1.77%, in the first quarter of 2026 compared to the same period in 2025. The increase is primarily attributable to a $2.94 million, or 9.80%, increase in net interest income after provision for loan losses and a $1.23 million, or 12%, increase in noninterest income. These increases were partially offset by a $3.79 million, or 15.21%, increase in noninterest expense. The increase in noninterest expense was primarily driven by $2.31 million of merger-related expenses associated with the completed Hometown acquisition and a $1.03 million increase in salaries and employee benefits.

Net Interest Income

Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent ("FTE") basis, a non-GAAP financial measure. For additional information, see "Non-GAAP Financial Measures" below. The following tables present the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

		Three Months Ended March 31,
		2026												2025
		Average								Average Yield/				Average								Average Yield/
(Amounts in thousands)		Balance				Interest(1)				Rate(1)				Balance				Interest(1)				Rate(1)
Assets
Earning assets
Loans(2)(3)		$	2,434,351			$	31,854				5.31	%		$	2,395,068			$	30,757				5.21	%
Securities available-for-sale			258,621				2,224				3.49	%			149,266				1,261				3.43	%
Interest-bearing deposits			410,338				3,865				3.82	%			295,939				3,262				4.47	%
Total earning assets			3,103,310				37,943				4.96	%			2,840,273				35,280				5.04	%
Other assets			413,222												373,791
Total assets		$	3,516,532											$	3,214,064
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits		$	780,138			$	417				0.22	%		$	658,651			$	180				0.11	%
Savings deposits			997,222				3,097				1.26	%			891,148				3,311				1.51	%
Time deposits			216,089				964				1.81	%			238,254				1,380				2.35	%
Total interest-bearing deposits			1,993,449				4,478				0.91	%			1,788,053				4,871				1.10	%
Borrowings
Retail repurchase agreements			2,565				9				1.44	%			1,071				-				0.06	%
Total borrowings			2,565				9				1.44	%			1,071				-				0.06	%
Total interest-bearing liabilities			1,996,014				4,487				0.91	%			1,789,124				4,871				1.10	%
Noninterest-bearing demand deposits			933,084												859,988
Other liabilities			62,507												60,167
Total liabilities			2,991,605												2,709,279
Stockholders' equity			524,927												504,785
Total liabilities and stockholders' equity		$	3,516,532											$	3,214,064
Net interest income, FTE(1)						$	33,456											$	30,409
Net interest rate spread											4.05	%											3.94	%
Net interest margin, FTE(1)											4.37	%											4.34	%

(1)	Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.
(2)	Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $490 thousand and $556 thousand for the three months ended March 31, 2026 and 2025, respectively.

The following table presents the impact to net interest income on an FTE basis due to changes in volume (change in average volume times the prior year's average rate), rate (average rate times the prior year's average volume), and rate/volume (average volume times the change in average rate), for the periods indicated:

		Three Months Ended
		March 31, 2026 Compared to 2025
		Dollar Increase (Decrease) due to
										Rate/
(Amounts in thousands)		Volume				Rate				Volume				Total
Interest earned on (1)
Loans		$	504			$	583			$	10			$	1,097
Securities available-for-sale			924				23				16				963
Interest-bearing deposits with other banks			1,261				(475	)			(183	)			603
Total interest earning assets			2,689				131				(157	)			2,663
Interest paid on
Demand deposits			33				172				32				237
Savings deposits			394				(544	)			(64	)			(214	)
Time deposits			(128	)			(317	)			29				(416	)
Retail repurchase agreements			-				4				5				9
Total interest-bearing liabilities			299				(685	)			2				(384	)
Change in net interest income (1)		$	2,390			$	816			$	(159	)		$	3,047

(1)	FTE basis based on the federal statutory rate of 21%.

Three-Month Comparison. Net interest income represented 74.40% of total net interest and noninterest income in the first quarter of 2026, compared to 74.76% in the same quarter of 2025. On a GAAP basis, net interest income increased $3.00 million, or 9.89%, while on a fully taxable equivalent ("FTE") basis, it increased $3.05 million, or 10.02%. The FTE net interest margin increased 3 basis points, and the net interest spread increased 11 basis points, or 2.79%. These improvements were primarily driven by growth in average interest- earning assets and lower funding costs.

Average earning assets increased by $263.04 million, or 9.26%, driven by increases of $114.40 million in interest-bearing deposits, $109.35 million in securities available-for-sale and $39.28 million in loans. Although the average yield on earning assets declined 8 basis points, interest income increased $2.66 million, or 7.55%, reflecting higher asset volumes. The average loan to deposit ratio decreased from 90.45% to 83.18%, compared to the first quarter of 2025. Non-cash accretion income totaled $490 thousand compared to $556 thousand in the prior-year period.

Average interest-bearing liabilities, consisting of interest-bearing deposits and borrowings, increased $206.89 million, or 11.56%. However, due to a 19-basis point, or 17.27%, decline in cost of funds, interest expense decreased $384 thousand, compared to the same quarter in 2025. The largest driver of interest expense savings was time deposits which declined $416 thousand, or 30.14%, due to a $22.16 million decrease in average balance and a 54-basis point decline in yield.

Provision for Credit Losses

Three-Month Comparison. The provision charged to operations increased $57 thousand, or 17.76%, in the first quarter of 2026 compared to the same period of 2025. In the first quarter of 2026, the Company recorded a provision for credit losses for loans of $300 thousand and a provision for credit losses on loan commitments of $78 thousand. This compares to a provision for credit losses on loans of $350 thousand and a recovery of provision of $29 thousand on loan commitments recorded in the first quarter of 2025. The increase in the overall provision was primarily driven by growth in unfunded loan commitments.

Noninterest Income

The following table presents the components of, and changes in, noninterest income for the periods indicated:

		Three Months Ended
		March 31,								Increase
		2026				2025				(Decrease)				Change %
(Amounts in thousands)
Wealth management		$	1,299			$	1,162			$	137				11.79	%
Service charges on deposits			4,185				3,836				349				9.10	%
Other service charges and fees			3,943				3,340				603				18.05	%
Loss on sale of securities			(2	)			-				(2	)			-100	%
Other operating income			2,032				1,891				141				7.46	%
Total noninterest income		$	11,457			$	10,229			$	1,228				12.01	%

Three-Month Comparison. Noninterest income comprised 25.60% of total net interest and noninterest income in the first quarter of 2026 compared to 25.24% in the same quarter of 2025. Noninterest income increased $1.23 million or 12.00%, compared to the same period of 2025. The increase is primarily attributable to an increase in other service charges and fees of $603 thousand, or 18.05% and service charges on deposits of $349 thousand, or 9.10%.

Noninterest Expense

The following table presents the components of, and changes in, noninterest expense for the periods indicated:

		Three Months Ended
		March 31,								Increase
		2026				2025				(Decrease)				Change %
(Amounts in thousands)
Salaries and employee benefits		$	14,367			$	13,335			$	1,032				7.74	%
Occupancy expense			1,666				1,576				90				5.71	%
Furniture and equipment expense			1,573				1,575				(2	)			-0.13	%
Service fees			2,789				2,484				305				12.28	%
Advertising and public relations			873				1,055				(182	)			-17.25	%
Professional fees			238				372				(134	)			-36.02	%
Amortization of intangibles			846				524				322				61.45	%
FDIC premiums and assessments			415				362				53				14.64	%
Merger expense			2,310				-				2,310				100.00	%
Other operating expense			3,660				3,661				(1	)			-0.03	%
Total noninterest expense		$	28,737			$	24,944			$	3,793				15.21	%

Three-Month Comparison. Noninterest expense increased $3.79 million, or 15.21%, in the first quarter of 2026 compared to the same quarter of 2025. The increase was primarily due to an increase in merger expense of $2.31 and salaries and employee benefits of $1.03 million, or 7.74%. The merger expenses relate to the Hometown acquisition.

Income Tax Expense

The Company's effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company's most significant permanent differences generally include interest income on municipal securities, increase in the cash surrender value of life insurance policies and non-deductible acquisition costs.

Three-Month Comparison. Income tax expense increased $165 thousand, or 4.79%. The effective tax rate increased to 23.08% in the first quarter of 2026 from 22.57% in the same quarter of 2025.

Non-GAAP Financial Measures

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial measure presented in this report includes net interest income on a FTE basis and average tangible common equity. We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 21%. Average tangible common equity is calculated as GAAP total shareholders' equity minus total intangible assets. Tangible common equity can thus be considered a more conservative valuation of the company. When considering net income, a return on average tangible common equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of the Company's capital structure. This measure, along with others, is used by management to analyze capital adequacy and performance. While we believe certain non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:

		Three Months Ended March 31,
		2026				2025
(Amounts in thousands)
Net interest income, GAAP		$	33,294			$	30,298
FTE adjustment(1)			162				111
Net interest income, FTE		$	33,456			$	30,409
Net interest margin, GAAP			4.35	%			4.32	%
FTE adjustment(1)			0.02	%			0.02	%
Net interest margin, FTE			4.37	%			4.34	%

(1)	FTE basis based on the federal statutory rate of 21%.

The following table is a reconciliation of return on average tangible common equity, a non-GAAP financial measurement for the periods indicated:

		Three Months Ended March 31,
		2026				2025
(Amounts in thousands)
Net Income available to common shareholders, GAAP		$	12,027			$	11,818
Add: merger and non-recurring expenses, net of tax			1,803				-
Tangible net income available to common shareholders		$	13,830			$	11,818
Tangible net income available to common shareholders (annualized)		$	56,088			$	47,929
Average Common Equity		$	524,927			$	504,785
Less: Average Goodwill and Intangibles			162,617				156,693
Average Tangible Common Equity		$	362,310			$	348,092
Return on Average Tangible Common Equity			15.48	%			13.77	%

Financial Condition

Total assets as of March 31, 2026, increased $385.30 million, or 11.82%, from December 31, 2025. The primary driver of the change in the balance sheet components was the acquisition of Hometown on January 23, 2026. Total assets of $393.81 million were acquired in the transaction increasing the Company's consolidated assets to $3.64 billion. In addition, the Company issued 1.03 million common shares in the purchase resulting in an increase in capital of $35.07 million. The purchase transaction created $1.73 million in goodwill and $8.59 million in other intangible assets. Other major balance sheet components impacted by the transaction were an increase to loans of $171.04 million and an increase of $357.72 million in deposits.

Excluding the Hometown transaction, total assets decreased $105.21 million, or 3.23%, primarily due to decreases in cash equivalents of $37.11 million, securities available-for-sale of $35.55 million and loans of $29.77 million. Total liabilities increased $4.00 million excluding the Hometown transaction. The increase was driven by a $21.33 million increase in deposits offset by a decrease in other liabilities of $17.99 million.

Investment Securities

Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.

Available-for-sale debt securities as of March 31, 2026, increased $134.83 million, or 101.62%, compared to December 31, 2025. The net increase was primarily due to the purchase of U.S. Treasury securities.

The market value of debt securities available-for-sale as a percentage of amortized cost was 96.34% as of March 31, 2026, compared to 92.95% as of December 31, 2025.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available-for-sale in an unrealized loss position as of March 31, 2026 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

Loans Held for Investment

Loans held for investment, which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose.

The following table presents loans, net of unearned income, by loan class as of the dates indicated:

		March 31, 2026								December 31, 2025								March 31, 2025
(Amounts in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Loans held for investment
Commercial loans
Construction, development, and other land		$	52,938				2.16	%		$	63,901				2.76	%		$	70,205				2.95	%
Commercial and industrial			280,435				11.42	%			243,983				10.54	%			246,602				10.35	%
Multi-family residential			193,138				7.86	%			191,486				8.27	%			192,193				8.07	%
Single family non-owner occupied			200,895				8.18	%			171,918				7.43	%			191,531				8.04	%
Non-farm, non-residential			887,742				36.15	%			838,458				36.22	%			840,746				35.29	%
Agricultural			13,813				0.56	%			13,464				0.58	%			15,579				0.65	%
Farmland			12,702				0.52	%			10,725				0.46	%			11,794				0.49	%
Total commercial loans			1,641,663				66.84	%			1,533,935				66.27	%			1,568,650				65.84	%
Consumer real estate loans
Home equity lines			86,221				3.51	%			82,764				3.58	%			87,988				3.69	%
Single family owner occupied			665,087				27.08	%			632,348				27.32	%			640,669				26.89	%
Owner occupied construction			5,402				0.22	%			5,605				0.24	%			3,873				0.16	%
Total consumer real estate loans			756,710				30.81	%			720,717				31.14	%			732,530				30.74	%
Consumer and other loans
Consumer loans			55,328				2.25	%			58,453				2.53	%			79,503				3.34	%
Other			2,328				0.09	%			1,650				0.07	%			2,016				0.08	%
Total consumer and other loans			57,656				2.35	%			60,103				2.60	%			81,519				3.42	%
Total loans held for investment, net of unearned income			2,456,029				100.00	%			2,314,755				100.00	%			2,382,699				100.00	%
Less: allowance for credit losses			33,543								30,761								33,784
Total loans held for investment, net of unearned income and allowance		$	2,422,486							$	2,283,994							$	2,348,915

Total loans as of March 31, 2026, increased $141.27 million, or 6.10%, compared to December 31, 2025, and was primarily due to the Hometown acquisition with the fair value of loans acquired totaling $171.04 million.

Risk Elements

We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers' prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers' reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for credit losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company's loan review function performs an independent credit analysis on a risk-based sample of commercial loan relationships annually and performs a qualitative review of a sample of smaller commercial and retail loans.

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, and modified loans past due 90 days or more, and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts.

The following table presents the components of nonperforming assets and related information as of the periods indicated:

		March 31, 2026				December 31, 2025				March 31, 2025
(Amounts in thousands)
Nonperforming
Nonaccrual loans		$	17,672			$	13,941			$	19,974
Accruing loans past due 90 days or more			30				212				117
Modified loans past due 90 days or more not included in nonaccrual			-				-				-
Total nonperforming loans			17,702				14,153				20,091
OREO			-				-				298
Total nonperforming assets		$	17,702			$	14,153			$	20,389
Additional Information
Total modified loans		$	2,736			$	2,442			$	2,124
Asset Quality Ratios:
Nonperforming loans to total loans			0.72	%			0.61	%			0.84	%
Nonperforming assets to total assets			0.49	%			0.43	%			0.63	%
Allowance for credit losses to nonperforming loans			189.49	%			217.35	%			168.15	%
Allowance for credit losses to total loans			1.37	%			1.33	%			1.42	%

Nonperforming assets as of March 31, 2026, increased $3.55 million, or 25.08%, from December 31, 2025 and nonaccrual loans increased $3.73 million, or 26.76%. As of March 31, 2026, nonaccrual loans were largely attributed to single family owner occupied (50.10%), single family non-owner occupied (13.52%) and commercial and industrial of (12.26%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for credit losses based on management's estimate of loss at ultimate resolution.

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.13 million as of March 31, 2026, an increase of $7.28 million, or 26.15%, compared to $27.85 million as of December 31, 2025. Delinquent loans as a percent of total loans totaled 1.43% as of March 31, 2026, which includes past due loans (0.71%) and nonaccrual loans (0.72%).

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions with respect to interest rates, loan terms, or amortization terms. Total loans modified as of March 31, 2026, were $2.74 million. As of March 31, 2026, $278 thousand of these loans were 30-89 days past due. Modified loans past due 90 days or more totaled $62 thousand and are included in the total for nonaccrual loans.

OREO, which is carried at the lesser of estimated net realizable value or cost. As of March 31, 2026 and December 31, 2025, no OREO property was held by the Company. The following table presents the changes in OREO during the periods indicated:

		Three Months Ended March 31,
		2026				2025
(Amounts in thousands)
Beginning balance January 1		$	-			$	521
Additions			-				-
Disposals			-				(223	)
Valuation adjustments			-				-
Other adjustments			-				-
Ending balance		$	-			$	298

Allowance for Credit Losses

The ACL reflects management's estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgment; therefore, management's process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company's ACL recorded in the balance sheet reflects management's best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's measurement of credit losses policy adheres to GAAP as well as interagency guidance. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

​For collectively evaluated loans, the Company in general uses two modeling approaches to estimate expected credit losses. The Company projects the contractual run-off of its portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology.

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework. For further discussion of our Allowance for Credit Losses - See Note 1, "Basis of Presentation and Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2025 Form 10-K.

As of March 31, 2026, the balance of the ACL totaled $33.54 million, or 1.37%, of total loans. This compares to $30.76 million as of December 31, 2025, reflecting an increase of $2.78 million, or 9.04%. The increase in the ACL is primarily driven by the Hometown acquisition, which resulted in a $3.21 million addition for acquired loans. The increase was offset by net charge-offs of $731 thousand.

As of March 31, 2026, the Company also had an allowance for unfunded commitments of $433 thousand which was recorded in Other Liabilities on the Balance Sheet. During the first three months of 2026, the Company recorded a provision to provision for credit losses for loan commitments of $78 thousand. There was a recovery of provision of $29 thousand recorded in the same period of 2025.

Deposits

Total deposits as of March 31, 2026, increased $379.06 million, or 14.12%, compared to December 31, 2025. The largest increases occurred in interest bearing demand of $166.33 million, or 24.31%, and savings of $131.59 million, or 14.55%. The growth was primarily attributable to the acquisition of Hometown, which contributed $357.72 million in deposits. Excluding the Hometown acquisition, total deposits increased $21.33 million.

Total borrowings in the form of retail repurchase agreements as of March 31, 2026, increased $2.00 million, or 162.03%, compared to December 31, 2025. The increase is primarily attributable to the Hometown acquisition, which included $1.31 million in securities sold under agreements to repurchase.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to convert assets to cash or raise cash to meet financial obligations. We believe that liquidity management should encompass an overall balance sheet approach that draws together all sources and uses of liquidity. Poor or inadequate liquidity risk management may result in a funding deficit that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy ("Liquidity Plan") to detect potential liquidity issues and protect our depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee ("ALCO") of the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management; ensures that systems and internal controls are consistent with liquidity policies; and provides accurate reports about liquidity needs, sources, and compliance. The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. The liquidity model incorporates various funding crisis scenarios and a specific action plan is formulated, and activated, when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities.

As a financial holding company, the Company's primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of March 31, 2026, the Company's cash reserves totaled $15.09 million. The Company's cash reserves provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank ("FRB") Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of March 31, 2026, our unencumbered cash totaled $600.30 million, unused borrowing capacity from the FHLB totaled $299.05 million, available credit from the FRB Discount Window totaled $7.02 million, available lines from correspondent banks totaled $100.00 million, and unpledged available-for-sale securities totaled $80.66 million.

Capital Resources

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders' equity as of March 31, 2026, increased $20.84 million, or 4.16%, to $521.39 million from $500.55 million as of December 31, 2025. The increase was primarily attributable to the acquisition of Hometown, in connection with which the company issued 1.03 million shares of common stock, resulting in a $35.07 million increase in capital. Equity was further increased by net income of $12.03 million. These increases were partially offset by $6.00 million of common stock dividends declared and $20.33 million of common stock repurchases. Book value per share increased to $27.64 on March 31, 2026, compared to $27.30 on December 31, 2025.

Capital Adequacy Requirements

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. A description of the Basel III capital rules is included in Part I, Item 1 of the 2025 Form 10-K. Our current required capital ratios are as follows:

●

4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)

●

6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)

●

8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)

●

4.0% Tier 1 capital to average consolidated assets ("Tier 1 leverage ratio")

The following table presents our capital ratios as of the dates indicated:

		March 31, 2026						December 31, 2025
		Company			Bank			Company			Bank
Common equity Tier 1 ratio		15.63%			14.73%			16.10%			14.46%
Tier 1 risk-based capital ratio		15.63%			14.73%			16.10%			14.46%
Total risk-based capital ratio		16.88%			15.99%			17.35%			15.71%
Tier 1 leverage ratio		10.89%			10.26%			11.44%			10.38%

The Company's risk-based capital ratios as of March 31, 2026, decreased from December 31, 2025, primarily due to a decrease in capital levels. The decrease in capital was primarily driven by the repurchase of common stock. While the Company's risk-based capital ratios decreased, the Bank's risk-based capital ratios increased. The increase in the Bank's risk-based capital ratios was primarily due to an increase in assets. As of March 31, 2026, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of March 31, 2026.

Off-Balance Sheet Arrangements

We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument. The following table presents our off-balance sheet arrangements as of the dates indicated:

		March 31, 2026				December 31, 2025
(Amounts in thousands)
Commitments to extend credit		$	288,346			$	263,912
Standby letters of credit and financial guarantees (1)			130,008				127,073
Total off-balance sheet risk		$	418,354			$	390,985

(1)	Includes FHLB letters of credit

Market Risk and Interest Rate Sensitivity

Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes.

In order to manage our exposure to interest rate risk, we periodically review internal simulation and third-party models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock.

As of March 31, 2026, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 350 to 375 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated:

		March 31, 2026								December 31, 2025
Increase (Decrease) in Basis Points		Change in Net Interest Income				Percent Change				Change in Net Interest Income				Percent Change
(Dollars in thousands)
200		$	2,902				2.1	%		$	4,432				3.5	%
100			1,476				1.0	%			2,232				1.9	%
(100)			(2,968	)			(2.1	)%			(3,888	)			(3.0	)%
(200)			(7,807	)			(5.5	)%			(8,748	)			(6.9	)%

Inflation and Changing Prices

Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management's opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions.

Astronomic federal government spending alongside labor shortages and supply chain complications have contributed to rising inflation. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.