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

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.

Executive Overview

First Community Bankshares, Inc. 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 151 year-old Virginia-chartered banking institution. 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. As of December 31, 2025, the Bank operated 52 branches in Virginia, West Virginia, North Carolina and Tennessee. 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 supplemented by retail and wholesale repurchase agreements and Federal Home Loan Bank ("FHLB") borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management ("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 commissions on assets under management and investment advisory fees. As of December 31, 2025, the Trust Division and FCWM managed and administered $1.79 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with generally accepted accounting principles ("GAAP") in the U.S. and prevailing practices in the banking industry. Our accounting policies, as presented in Note 1, "Basis of Presentation and Significant Accounting Policies," to the Consolidated Financial Statements in Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, "Financial Statements and Supplementary Data," of this report. Management may be required 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. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates used, we have identified the allowance for loan losses and goodwill as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.

Allowance for Credit Losses or "ACL"

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. 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. See Note 1 - "Basis of Presentation - Significant Accounting Policies" in this Annual Report on Form 10-K for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 - "Allowance for Credit Losses" in this Annual Report on Form 10-K, "Allowance for Credit Losses" in this MD&A.

Goodwill

Goodwill is tested for impairment annually, on October 31^st, with additional reviews performed quarterly or more frequently if events or circumstances indicate there may be impairment. We have one reporting unit, Community Banking. If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2025, which resulted in no goodwill impairment. For additional information, see Note 8, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements in Item 8 of this report.

Non-GAAP Financial Measures

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent ("FTE") basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

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. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21%. 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:

Performance Overview

Highlights of our results of operations in 2025, and financial condition as of December 31, 2025, include the following:

Results ofOperations

Net Income

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

2025 Compared to 2024. Pre-tax income declined $2.57 million, or 3.91%, compared to 2024. The decline was primarily driven by a $7.74 million increase in noninterest expense and a $1.86 million reduction in net interest income. These pressures were partially offset by a $3.52 million decrease in the provision for credit losses and a $3.50 million increase in noninterest income. The increase of noninterest expense was largely attributable to higher salaries and employee benefits of $4.73 million, along with a $2.91 million in merger-related costs associated with the Hometown acquisition. The lower provision for credit losses reflected a smaller loan portfolio and continued favorable credit performance. Growth in noninterest income was primarily due to a $3.39 million increase in service charges on deposits and other service fees.

2024 Compared to 2023. Pre-tax income increased $3.72 million, or 6.00% compared to 2023. The increase was primarily attributable to a decrease in provision for credit losses of $4.39 million, or 54.95% offset by a decrease in net interest income of $1.22 million, or 0.95%. Provision for credit losses totaled $3.60 million for 2024 compared to $7.99 million in 2023. The provision for credit losses in 2023 included $1.61 million recorded for the day two provision for the acquisition of the Surrey loan portfolio. Net interest income totaled $126.47 million for 2024 compared to $127.68 million in 2023. The decrease in net interest income is primarily attributable to an increase in deposit interest expense due to increased rates on interest-bearing deposits. Non interest income increased $1.94 million, or 5.17% offset by an increase in non interest expense of $1.39 million, or 1.46%.

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" above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

The following table presents the impact to net interest income on a FTE basis due to changes in volume (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:

2025 Compared to 2024. Net interest income represented 74.40% of total net interest and noninterest income in 2025, compared to 76.25% in 2024. The 1.85 percentage-point decline reflects a $1.85 million, or 1.47%, decrease in net interest income and a $3.50 million, or 8.88%, increase in noninterest income. On an FTE basis, net interest income decreased $1.86 million, or 1.46%. Net interest margin and net interest spread experienced modest changes year over year. Net interest margin declined 2 basis points to 4.42%, while net interest spread increased 1 basis point to 4.04%.

Average earning assets decreased $27.32 million, or 0.96%, due to decreases in both the average balance of loans of $127.67 million, or 5.15%, and the average balance of securities available-for-sale of $31.80 million, or 18.59%. These decreases were offset by an increase in interest-bearing deposits with banks of $132.15 million, or 63.96%. The yield on earning assets decreased 8 basis points, or 1.56%, due to an asset balance shift from higher-yielding loans to lower-yielding interest-bearing deposit accounts held with banks. In addition, non-cash accretion decreased $813 thousand in 2025 to $2.08 million, compared to a 2024 balance of $2.90 million. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 8 basis points for 2025 compared to 10 basis points in 2024. The average loan to deposit ratio declined to 88.81% in 2025, compared to 92.93% in 2024.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $10.16 million, or 0.57%, primarily due to a decrease in interest-bearing deposits of $9.69 million, or 0.54%. Interest-bearing demand deposits decreased $1.77 million, or 0.27%, and time deposits decreased $25.49 million, or 10.36%. These decreases were offset by an increase in savings deposits of $17.58 million or 2.00%. The yield on interest-bearings liabilities decreased 9 basis points, or 8.18%, primarily due to an average balance shift from higher rate time deposits to lower rate savings deposits.

2024 Compared to 2023.

Provision for Credit Losses

2025 Compared to 2024. The provision charged to operations decreased $3.52 million compared to 2024. The provision expense of $72 thousand was comprised of $58 thousand related to provision expense for loans and $14 thousand related to provision expense for unfunded loan commitments. Provision for credit losses for loans of $58 thousand was recorded compared to the provision of $4.00 million recorded in 2024. The decrease in provision is due a loan portfolio balance decline of $101.33 million from 2024 to 2025, along with continued strong credit performance. As noted, a $14 thousand provision for loan commitments was recorded in 2025 compared to $405 thousand recovery of provision recorded in 2024.

2024 Compared to 2023. The provision charged to operations decreased $4.39 million compared to the prior year. The provision expense of $3.60 million was comprised of $4.00 million related to provision expense for loans and a recovery of provision of $405 thousand for unfunded loan commitments. Provision for credit losses for loans of $4.00 million was recorded compared to the provision of $8.44 million recorded in 2023. The decrease in provision is primarily due a much smaller required credit loss provision as the loan portfolio has experienced a decrease of $156.21 million. Additionally, $1.61 million of the provision in the prior year was attributable to day two provision for the Surrey portfolio. As noted above, a recovery of provision for loan commitments was recorded in 2024 of $405 thousand compared to a recovery of provision of $450 thousand in 2023.

Noninterest Income

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

2025 Compared to 2024. Noninterest income comprised 25.60% of total net interest and noninterest income in 2025 compared to 23.75% in 2024, with noninterest income increasing $3.50 million, or 8.88%, in 2025. The 2025 increase is driven mostly by a $3.39 million increase in service charges on deposits and other service charges and fees. The increase is primarily attributable to increases in non-sufficient funds fees of $2.45 million and interchange income of $854 thousand.

2024 Compared to 2023. Noninterest income comprised 23.75% of total net interest and noninterest income in 2024 compared to 22.68% in 2023. Noninterest income increased $1.94 million, or 5.17%. Other operating income increased $850 thousand, or 15.04%. Other operating income for 2024 included a gain of $825 thousand from the sale of two closed branch properties, while other operating income for the same period of 2023 included a gain of $204 thousand for the sale of one closed branch property. In addition, other operating income for 2024, included a holdback payment of $184 thousand related to a prior divestiture of an insurance agency. Other service charges and fees increased $745 thousand, or 5.46%. The increase is primarily attributable to an increase in net interchange income of $709 thousand.

Noninterest Expense

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

2025 Compared to 2024. Non interest expense increased $7.74 million, or 8.01%, in 2025 compared to 2024. The increase is attributed mostly to increases in salaries and employee benefits of $4.73 million, merger expense of $2.91 million and other operating expense of $1.00 million. The increase in salaries and employee benefits is driven by a $1.27 million increase in salary expense and a $3.24 million increase in incentive compensation. The increase in merger expense is related to the Hometown acquisition.

2024 Compared to 2023. Non interest expense increased $1.39 million, or 1.46%. Salaries and employee benefits increased $1.82 million, other operating expense increased $1.06 million, and service fees increased $734 thousand. The increases in non-interest expense is primarily due to the addition of the Surrey branches as well as inflationary increases. Non interest expense for 2023 included non-recurring expense of $2.39 million in merger charges related to the Surrey acquisition. 2024 included a non-recurring charge of $1.80 million to settle a putative class action lawsuit while 2023 included a non-recurring charge of $3.00 million to accrue for the settlement of the same lawsuit.

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 and increases in the cash surrender value of life insurance policies.

2025 Compared to 2024. Income tax expense increased $241 thousand, or 1.71%, due primarily to an increase in pre-tax income. The effective tax rate increased to 22.70% in 2025 compared to 21.45% in 2024.

2024 Compared to 2023. Income tax expense increased $136 thousand, or 0.97% and was primarily due to the increase in pre-tax income. The effective tax rate decreased to 21.45% in 2024 compared to 22.52% in 2023.

FinancialCondition

Total assets as of December 31, 2025, decreased $1.57 million, or 0.05%, to $3.26 billion. The decrease is attributable mostly to a decline in loans of $101.33 million, or 4.19%, and a decline in securities available for sale of $37.16 million, or 21.88%, which is offset by an increase in cash and cash equivalents of $134.79 million, or 35.71%. Total liabilities increased $24.27 million, or 0.89%, and is primarily attributable to an increase in interest, taxes and other liabilities of $29.88 million. Stockholders' equity decreased $25.84 million, or 4.91%. The equity decrease is primarily attributable to two special dividends being declared in 2025, in the amount of $3.07 per common share.

Investment Securities

Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. 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 December 31, 2025, decreased $37.16 million, or 21.88%, compared to December 31, 2024. The decrease was primarily due to the sale of $136.71 million in maturities, prepayments, and calls in securities available for sale; offset by purchases of $93.76 million. The market value of debt securities available for sale as a percentage of amortized cost was 92.95% as of December 31, 2025, compared to 91.97% as of December 31, 2024. There were no held-to-maturity debt securities as of December 31, 2025, or 2024.

The following table provides information about our investment portfolio as of the dates indicated:

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders' equity as of December 31, 2025 or 2024.

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. 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. Based on the application of the new standard, and that all debt securities available for sale in an unrealized loss position as of December 31, 2025, continue to perform as scheduled, we do not believe that a provision for credit losses is necessary in 2025. We recognized no impairment charges in earnings associated with debt securities in 2025. For additional information, see Note 1, "Basis of Presentation and Significant Accounting Policies," and Note 3, "Debt Securities," to the Consolidated Financial Statements in Item 8, of this report.

Loans Held for Investment

Loans held for investment, our 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 general characteristics of each loan segment are as follows:

Total loans held for investment, net of unearned income, as of December 31, 2025, decreased $101.33 million, or 4.19%, compared to December 31, 2024. We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 2025 or 2024. For additional information, see Note 4, "Loans," to the Consolidated Financial Statements in Item 8 of this report.

The following table presents the maturities and rate sensitivities of the loan portfolio as of December 31, 2025:

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 loan losses. The Company has a loan review function independent of credit administration that performs a risk-based review of a sample of loans and loan relationships in the Company's commercial portfolio and conducts analytical review of credit quality on the Company's non-commercial portfolios.

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, modified loans past due 90 days or more, and other real estate owned ("OREO"). Prior to the adoption of ASU 2022-02, unseasoned troubled debt restructurings ("TDRs") were included in nonperforming assets. 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. For additional information, see Note 5, "Credit Quality," to the Consolidated Financial Statements in Item 8 of this report.

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

Nonperforming assets as of December 31, 2025, decreased $6.39 million, or 31.09%, from December 31, 2024, with the largest decreases attributable to nonaccrual loans of $5.93 million, or 29.84%, and OREO of $521 thousand. As of December 31, 2025, nonaccrual loans were largely attributed to single family owner occupied $8.26 million, or 59.22%, non-farm, non-residential real estate $1.27 million, or 9.13%, and commercial and industrial loans $1.32 million, or 9.45%. 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 $27.85 million as of December 31, 2025, a decrease of $9.70 million, or 25.83%, compared to $37.55 million as of December 31, 2024. Delinquent loans as a percent of total loans decreased in 2025 to 1.20%, compared to 1.49% in 2024. The delinquent loans consist of past due loans, or 0.60%, of total loans, and nonaccrual loans, or 0.60%, of total loans.

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. As noted above, ASU 2022-02, eliminated and replaced the accounting guidance for borrowers experiencing financial difficulties previously applied under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors. ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, discloses loans for borrowers experiencing financial difficulty as modified loans. Total loans modified as of December 31, 2025, were $2.44 million as compared to $2.26 million reported as of December 31, 2024.

OREO property is carried at the lesser of estimated net realizable value or cost. As of December 31, 2025, no OREO property was held by the Company. The net loss on the sale of OREO was $193 thousand in 2025, $28 thousand in 2024, and $84 thousand in 2023. The following table presents the changes in OREO during the periods indicated:

Allowance for Credit Losses (ACL)

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 - Significant Accounting Policies".

As of December 31, 2025, the balance of the ACL for loans was $30.76 million, or 1.33% of total loans. The ACL at December 31, 2025, decreased $4.06 million from the balance of $34.83 million recorded December 31, 2024. This decrease included a provision of $58 thousand and net charge-offs for the twelve months of $4.12 million.

At December 31, 2025, the Company also had an allowance for unfunded commitments of $355 thousand compared to $341 thousand in 2024. The allowance for unfunded commitments is recorded in Other Liabilities on the balance sheet. During 2025, there was a provision for credit losses on unfunded commitments of $14 thousand. The provision for credit losses on unfunded commitments is recorded in provision expense on the Statement of Income.

Management considered the allowance adequate as of December 31, 2025; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see "Allowance for Credit Losses or ("ACL")" in the "Critical Accounting Policies" section above and Note 6, "Allowance for Credit Losses," to the Consolidated Financial Statements in Item 8 of this report.

The following table presents net charge-offs by loan class, and the ratio to average loans during the periods indicated:

The following table presents the allowance for loan losses by loan class, as of the dates indicated:

Deposits

Total deposits as of December 31, 2025, decreased $5.92 million, or 0.22%, compared to December 31, 2024. The decrease was driven by a decline in time deposits of $40.17 million, or 16.70%. The decline in time deposits was offset by increases in interest bearing deposits of $8.72 million, savings/MMA deposits of $12.78 million and noninterest-bearing accounts of $12.76 million. No deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits occurred as of December 31, 2025, or 2024.

The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2025:

Borrowings

Total borrowings as of December 31, 2025, increased $308 thousand, or 34.00%, compared to December 31, 2024. Total borrowings for 2025 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements. The weighted average rate of 0.06% as of December 31, 2025, increased one basis point from the weighted average rate of 0.05% as of December 31, 2024.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure that draws together all sources and uses of liquidity. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

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 of December 31, 2025, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Company.

In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to the Consolidated Financial Statements in Item 8 of this report for the expected timing of such payments as of December 31, 2025. These include payments related to (i) operating leases (Note - 7 Premises, Equipment, and Leases ), (ii) time deposits with stated maturity dates (Note 9 - Deposits), and (iii) commitments to extend credit and standby letters of credit (Note - 19 Litigation, Commitments, and Contingencies).

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 December 31, 2025, the Company's cash reserves and short-term investment securities totaled $36.95 million and $10.93 million, respectively. The Company's cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders 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 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 December 31, 2025, our unencumbered cash totaled $512.24 million, unused borrowing capacity from the FHLB totaled $301.81 million, available credit from the FRB Discount Window totaled $5.85 million, available lines from correspondent banks totaled $100.00 million, and unpledged available-for-sale securities totaled $102.83 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 December 31, 2025, decreased $25.84 million, or 4.91%, to $500.55 million from $526.39 million as of December 31, 2024. The decrease is primarily due to regular quarterly and two special dividends being declared in 2025 in the combined total amount of $4.31 per common share, totaling $78.92 million in payments. In addition, the Company repurchased 50,338 shares of our common stock totaling $1.85 million. As a result, our book value per common share decreased $1.43 to $27.30 as of December 31, 2025, from $28.73 as of December 31, 2024.

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. Our current minimum required capital ratios are as follows:

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

As of December 31, 2025, 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 since those notifications that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, as of December 31, 2025. For additional information, see "Capital Requirements" in Part I, Item 1 and Note 20, "Regulatory Requirements and Restrictions," to the Consolidated Financial Statements in Item 8 of this report.

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 and third-party simulation 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 December 31, 2025, the Federal Open Market Committee set the benchmark federal funds rate at a range of 3.50% - 3.75% 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.

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2025, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.