Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain information contained in this report may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. Such forward-looking statements are subject to known and unknown risks including, but not limited to:
Changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;
The strength of the economy in our market area, as well as general economic, market, or business conditions;
An insufficient allowance for credit losses as a result of inaccurate assumptions;
Our ability to maintain our “well-capitalized” regulatory status;
Changes in the interest rates affecting our deposits, loans and investment portfolio;
Changes in our competitive position, competitive actions by other financial institutions, financial technology firms and others, the competitive nature of the financial services industry and our ability to compete effectively in our banking markets;
Our ability to manage growth;
Our potential growth, including our entrance or expansion into new markets, the need for sufficient capital to support that growth, difficulties or disruptions expanding into new markets or integrating the operations of acquired branches or business, and the inability to obtain the expected benefits of such growth;
Changing trends in customer profiles and behavior;
Our exposure to operational risk;
Reliance on our management team including our ability to attract and retain key personnel;
Our ability to raise capital as needed by our business;
Changes in laws, regulations and the policies of federal or state regulators and agencies;
The effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB, or other accounting standards setting bodies;
Geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
The occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;
The Company’s potential exposure to fraud, negligence, computer theft, and cyber-crime;
Other factors identified in reports the Company files with the SEC from time to time; and
Other circumstances, many of which are beyond our control.
Although the Company believes that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of F&M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.
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Lending Policies
Credit Policies
The principal risk associated with each of the segments of loans in our portfolio is the creditworthiness of our borrowers. Within each segment, such risk is increased or decreased, depending on prevailing economic conditions. To manage the risk, the Bank’s Credit Administration Department ensures that the underwriting process follows the written policies and procedures approved by the Board of Directors. The loan policy gives loan amount approval limits to individual loan officers based on their position and level of experience and to our loan committees based on the size of the lending relationship. The risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market employment levels, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.
The Bank has a loan review process to monitor and manage the portfolio, identify concentrations and credit deterioration, establish loss exposure and assess compliance with the loan policy.
The Bank uses a management loan committee and a directors’ loan committee to approve loans. The management loan committee consists of members of senior management, credit administration and senior lenders; the directors’ loan committee consists of six directors appointed by the Board of Directors. Both committees approve new, renewed and or modified loans that exceed individual officer loan authorities. The directors’ loan committee also reviews any changes to the lending policies, which are then approved by the Board of Directors.
Construction and Development Lending
The Bank makes construction loans, primarily residential, and land acquisition and development loans. The residential construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The land acquisition and development loans are secured by the land for which the loan was obtained. The average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest changes. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, loan amounts are limited to 75% to 90% of appraised value, in addition to analyzing the creditworthiness of the borrower. In addition, a first lien on the property is obtained as security for construction loans and typically requires personal guarantees from the borrower’s principal owners. The Bank further mitigates risk by advancing funds for the construction in increments based on the progress of construction.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in our market area, including multi-family residential buildings, commercial buildings and offices, shopping centers and churches. Commercial real estate lending entails significant additional risks compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and reputation; as well as an evaluation of the location of the property securing the loan and personal guarantees or endorsements of the borrower’s principal owners.
Commercial & Industrial – Non-Real Estate
Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To manage these risks, the Bank obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of business borrowers. Residential mortgage loans generally are made based on the borrower’s ability to repay from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, business loans typically are made based on the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
The Bank offers various consumer loans, including personal loans, automobile loans, deposit account loans, installment and demand loans, and home equity loans.
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The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount. For home equity lines of credit and loans the Bank requires title insurance, hazard insurance and, if required, flood insurance.
Residential Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan-to-value limits generally ranging between 80% and 90% depending on the age of the property, the borrower’s income, and the borrower’s credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates that can change every one, three or five years, based on amortization periods of twenty to thirty years.
Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its mortgage division. These loans are funded by a line of credit at the Bank until sold to investors in the secondary market.
Dealer Finance Division
The Dealer Finance Division specializes in providing automobile financing through a network of automobile dealers in the Shenandoah Valley.
Critical Accounting Policies
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.
Allowance for Credit Losses
The allowance for credit losses represents our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and projections including reasonable and supportable forecasts. It is a valuation account that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial asset. Financial assets are charged-off against the allowance when management believes the uncollectibility of a financial asset is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The Company’s loan portfolio is the largest financial asset that is in scope of this critical accounting estimate. Determining the amount of the allowance for credit losses is considered a critical accounting estimate, because it is based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts, and prepayment experience as related to credit contractual terms. Management estimates the allowance balance using relevant available information from internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses; adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, and delinquency levels, as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. The model methodology used for funded credits, along with taking into consideration the probability of drawdowns or funding on unfunded commitments and whether such commitments are irrevocable or not by the Company, is how the Company determines the allowance for credit losses for unfunded commitments. These evaluations are conducted at least quarterly and more frequently, if deemed necessary.
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The Company’s allowance model uses a remaining life or weighted average remaining maturity method with the portfolio segmented by federal call codes. Management considers the national unemployment rate as the external economic variable in developing the allowance and utilizes economic projections published by The Federal Reserve Bank of St. Louis for reasonable and supportable forecasts. The Company uses a reasonable and supportable period forecast period of 12 months. The qualitative estimate of the allowance for credit losses on loans (“ACLL”) is sensitive to these forecasts as economic conditions are the most influential qualitative factor. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. See Note 1 “Nature of Banking Activities and Significant Accounting Policies” in Notes to the Consolidated Financial Statements for additional information concerning the determination of the allowance for credit losses on loans.
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
Selected Income Statement Data:
Interest and dividend income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Selected Performance Ratios:
Return on average assets 1
Return on average equity 1
Net interest spread
Net interest margin
Non-interest income to average assets
Non-interest expense to average assets
Per Common Share Data:
Net income (basic and diluted)
Book value per common share
Selected Balance Sheet Data:
Assets
Loans held for sale
Loans held for investment
Allowance for credit losses
Deposits
Borrowings
Shareholders’ equity
Average common shares outstanding (basic and diluted)
Asset Quality Ratios:
Nonperforming loans to total loans 3
Allowance for credit losses to loans 2
Allowance for credit losses to nonperforming loans
Nonperforming assets to total assets 4
Net charge-offs to average loans 3
Capital Ratios (Bank only):
Leverage
Risk-based capital ratios:
Total capital
Tier 1 capital
Common equity tier 1 capital
Ratios are primarily based on daily average balances.
Calculated based on Loans Held for Investment, excludes Loans Held for Sale.
Calculated based on 90 day past due loans and non-accrual loans to Total Loans.
Calculated based on 90 day past due loans, non-accrual loans and OREO to Total Assets.
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Results of Operations
Net Income
Net income for 2025 was $11.2 million, an increase of $3.9 million or 54.14% from 2024’s net income of $7.3 million. Basic and diluted earnings per share were $3.16 and $2.07 for 2025 and 2024, respectively. The increase in net income for 2025 was primarily the result of an increase in net interest income of $7.6 million partially offset by an increase in noninterest expenses of $2.6 million.
Return on average assets (“ROA”) measures how efficiently the Company uses its assets to produce net income. Some factors reflected within this measurement include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company was 0.85% and 0.55% for 2025 and 2024, respectively.
Return on average equity (“ROE”) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders. The ROE for the Company was 11.76% and 8.86% for 2025 and 2024, respectively.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income was $41.5 million for 2025 and $33.9 million for 2024, which represents an increase of $7.6 million or 22.39%. Total interest income was $67.8 million for 2025 and $64.5 million for 2024, which represents an increase of $3.3 million or 5.07% for 2025. Total interest expense was $26.2 million for 2025 and $30.6 million for 2024, which represents a decrease of $4.3 million or 14.16% in 2025.
The net interest margin increased by 58 basis points from 2.77% for 2024 to 3.35% for 2025. The net interest margin is calculated by dividing net interest income by total average earning assets. Higher loan balances and the repricing of adjustable-rate loans contributed to an increase of $1.1 million in loan interest income, and interest on federal funds sold increased by $0.8 million due to higher average balances of federal funds sold in 2025. In addition, interest income from investment securities increased by $1.6 million, due to higher yields on investments purchased during 2025. As a result, the yield on earning assets increased by 19 basis points to 5.46%.
A shift from time deposits to money market accounts was the primary driver of the decrease of $2.6 million in deposit interest expense. Interest expense on time deposits and interest bearing demand accounts decreased $4.1 million and $0.2 million, respectively, and were partially offset by an increase of $1.7 million in interest expense on savings accounts. Interest expense was further reduced by lower interest expense on short-term borrowings, which declined by $1.9 million, due to no short-term advances from the Federal Home Loan Bank (“FHLB”) during the year. The cost of funds, which is calculated as the interest expense on interest bearing liabilities plus noninterest bearing deposits divided by the total deposits, for the year was 2.15%, which was 36 basis points lower than 2024.
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The table titled “Consolidated Average Balances, Yields and Rates” displays the composition of interest earning assets and interest bearing liabilities and their respective yields and rates for the years ended December 31, 2025 and 2024.
Consolidated Average Balances, Yields and Rates (dollars in thousands) 1
Balance
Interest
Rate
Balance
Interest
Rate
ASSETS
Loans held for investment 2,4
Loans held for sale
Federal funds sold
Interest bearing deposits in banks and other investments
Investment securities 3
Taxable
Tax exempt
Total investment securities
Total earning assets
Allowance for credit losses
Nonearning assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Demand-interest bearing
Savings
Time deposits
Total interest-bearing deposits
Federal funds purchased
Short‑term debt
Long-term debt
Total interest-bearing liabilities
Noninterest bearing deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest earnings
Net yield on interest earning assets (NIM)
Tax exempt income is not significant and has been treated as fully taxable.
Interest income on loans includes loan fees.
Average balance information is reflective of historical cost and has not been adjusted for changes in market value.
Includes nonaccrual loans.
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Volume and Rate Analysis
Changes in the cost of funds attributable to rate and volume variances are reflected in the following table (dollars in thousands), which illustrates the effect of changes in interest income and interest expense, and distinguishes between the changes resulting from the increases or decreases in the outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes resulting from increases or decreases in average interest rates on such assets and liabilities (rate). Changes related to both volume and rate have been allocated proportionally.
2025 Compared to 2024
Increase (Decrease) Due to Change in:
Average Volume
Average Rate
Change
Interest income
Loans held for investment
Loans held for sale
Federal funds sold
Interest bearing deposits in banks and other investments
Investment securities:
Taxable
Tax exempt
Total Interest Income
Interest expense
Deposits:
Demand - interest bearing
Savings
Time deposits
Federal funds purchased
Short-term debt
Long-term debt
Total Interest Expense
Net Interest Income
Provision for Credit Losses
The provision for credit losses totaled $2.7 million in 2025, compared to a provision for credit losses of $2.3 million for 2024. The provision comprised a $2.6 million provision for credit losses on loans and a $117 thousand provision for credit losses on unfunded commitments. The provision for credit losses in 2025 increased primarily due to higher net charge-offs, continued loan growth, and an increase in reserves on individually analyzed loans.
Noninterest Income
The following table sets forth the various components of our non-interest income for the periods indicated (in thousands):
Years Ended December 31,
Increase (Decrease)
Amount
Percent
Service charges on deposit accounts
Wealth management income
Mortgage banking income
Title insurance income
Income on bank owned life insurance
Low-income housing partnership losses
ATM and check card fees
Gain on sale of limited partnership investment
Other operating income
Total
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Noninterest income increased by $405 thousand, or 3.76%, for the year ended December 31, 2025, compared to December 31, 2024. The increase was primarily driven by increases in title insurance income and ATM and check card fees. Title insurance income increased by $375 thousand due to increased title premium and loan closing volume. ATM and check card fees increased by $249 thousand due to renegotiated interchange contracts. These increases were partially offset by decreases in mortgage banking income of $553 thousand, due to a decrease in originations of loans held for sale.
Noninterest Expense
The following table sets forth the various components of our non-interest expense for the periods indicated (in thousands):
Years Ended December 31,
Increase (Decrease) 2025 vs. 2024
Amount
Percent
Salaries
Employee benefits
Occupancy expense
Equipment expense
FDIC assessment
Legal and professional fees
ATM and check card fees
Data processing fees
Other operating expenses
Total
Noninterest expense increased by $2.6 million, or 7.51%, for the year ended December 31, 2025, compared to December 31, 2024. The increase was primarily driven by salaries, employee benefits, legal and professional fees, and ATM and check card fees. Salaries increased $596 thousand, or 3.87%, for the year ended December 31, 2025, due to increases in salaries, bonuses and incentives, and commissions. Employee benefits also increased by $940 thousand, or 31.69%, for the year ended December 31, 2025, due to a lower refund (rebate) of health insurance, increased stock compensation expense, and no pension settlement gains in 2025. Legal and professional fees increased by $358 thousand, or 20.07%, for the year ended December 31, 2025, compared to December 31, 2024, due to increased audit costs and increased federal examination assessment fees, as well as a recovery in legal fees in 2024, due to the payoff of a nonperforming loan. ATM and check card fees increased by $219 thousand, or 19.38%, for the year ended December 31, 2025, compared to December 31, 2024, due to increased processing fees due to an increased number of accounts. Other operating expenses increased primarily due to increases in franchise taxes, collections expense, and higher administrative software expenses.
Income Tax Expense
Income tax expense was $1.7 million for the year ended December 31, 2025, an increase of $1.1 million from the income tax expense for the year ended December 31, 2024. These amounts correspond to an effective tax rate of 13.47% and 8.05% for 2025 and 2024, respectively. The effective tax rate is below the statutory rate of 21%, due primarily to tax credits on qualified affordable housing project investments as discussed in Note 7 “Other Assets” in Notes to the Consolidated Financial Statements. The effective tax rate is also impacted by tax-exempt income on investment securities and bank owned life insurance. Note 17 “Income Taxes” in Notes to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company’s actual income tax expense during 2025 and 2024.
Analysis of Financial Condition
Assets increased by $71.7 million to $1.37 billion as of December 31, 2025, compared to $1.30 billion as of December 31, 2024. The increase in assets was primarily due to increases in loans of $46.3 million, federal funds sold of $11.0 million, and securities of $17.7 million, which was offset by decreases in deferred tax assets of $2.5 million and other assets of $3.6 million. The securities portfolio totaled $345.3 million at December 31, 2025, compared to $327.7 million at December 31, 2024. Deposits increased by $50.1 million and totaled $1.25 billion at December 31, 2025, compared to $1.20 billion at December 31, 2024. Long-term debt increased by $2.94 million to $9.92 million as of December 31, 2025, compared to $6.98 million at December 31, 2024, due to the issuance of subordinated notes in 2025.
Investment Securities
Our investment policy is established and reviewed annually by the Board of Directors. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, subordinated debt of other financial institutions, equity securities, certain bankers’ acceptances and federal funds. Our securities are all classified as available-for-sale (“AFS”).
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Our investments provide a source of liquidity because we can pledge them to support borrowed funds or can liquidate them to generate cash proceeds. Our investment portfolio is also a resource in managing interest rate risk because the maturity and interest rate characteristics of this asset class can be modified to match changes in the loan and deposit portfolios. The majority of our AFS investment portfolio consists of obligations of states and municipalities and residential mortgage-backed securities.
For the year ended December 31, 2025, unrealized losses on our holdings declined by $14.2 million compared to December 31, 2024, resulting in an increase in the fair value of the portfolio. Note 2 “Securities” in Notes to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 2025 and 2024.
The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. The Company did not sell any securities within the investment portfolio for the years ended December 31, 2025 or 2024. For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.
Maturity Distribution and Yields of Securities
The investment maturity table below summarizes contractual maturities for our investment securities at December 31, 2025. The actual timing of principal payments may differ from remaining contractual maturities because obligors may have the right to repay certain obligations with or without penalties. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security (dollars in thousands). Interest on securities below excludes tax-equivalent adjustments.
One Year
One to
Five to
After
Or Less
Five Years
Ten Years
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Total
Yield
Securities AFS:
U.S. Treasuries
U.S. Government agencies
Municipal securities
Mortgage-backed securities
Corporate debt securities
Total
Loan Portfolio
The Bank is an active lender with a diverse loan portfolio that includes commercial and residential real estate loans, commercial loans, consumer loans, construction and land development loans, and home equity loans. The Bank’s lending activity is concentrated on individuals, and small and medium-sized businesses primarily in its market areas. Additional discussion on the segments of loans the Company originates and related risks is included in Note 1 “Nature of Banking Activities and Significant Accounting Policies,” Note 3 “Loans,” and Note 4 “Allowance for Credit Losses” in the Notes to the Consolidated Financial Statements.
Our primary source of income is derived from interest earned on loans. The loan portfolio, excluding the allowance for credit losses, or ACL, increased by $46.3 million, or 5.51%, from $839.9 million at December 31, 2024 to $886.3 million at December 31, 2025. Loan growth in 2025 was primarily driven by loans secured by farmland, residential mortgage loans, owner-occupied, and non-owner-occupied commercial real estate loans. The Bank continues to expand organically by serving customers within its market and has also strengthened its portfolio by purchasing consumer real estate loans originated by its mortgage subsidiary. This growth was partially offset by a decline in the automobile loan and construction and land development loan portfolios.
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The following table shows the maturity distribution for total loans outstanding as of December 31, 2025. The maturity distribution is grouped by remaining scheduled principal payments that are due in the following periods. The principal balances of loans are indicated by both fixed and floating rate categories in the table below (in thousands).
December 31, 2025
Within 1 Year
1 Year to 5 Years
5 Years to 15 Years
After 15 Years
Fixed Rates
Adjustable
Rates
Fixed Rates
Adjustable
Rates
Fixed Rates
Adjustable
Rates
Fixed Rates
Adjustable
Rates
Total
1-4 Family residential construction
Other construction, land development and land
Secured by farmland
Home equity – open end
Real Estate
Home equity – closed end
Multifamily
Owner-occupied commercial real estate
Other commercial real estate
Agricultural loans
Commercial and industrial
Credit cards
Automobile loans
Other consumer loans
Municipal loans
Less: Deferred loan fees, net of costs
Total
Asset Quality
The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. These include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of the allowance for credit losses. Management classifies non-performing assets as non-accrual loans, loans 90 days or more past due and still accruing, and other real estate owned, or OREO. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank had no assets classified as OREO at December 31, 2025, compared to $77 thousand in assets classified as OREO at December 31, 2024.
There were $6.0 million in total non-performing assets at December 31, 2025. This is a decrease of $1.2 million when compared to the December 31, 2024 balance of $7.2 million. This decrease resulted primarily from a decrease in nonaccrual loans. In 2025, fourteen loans were added to nonaccrual status due to delinquent payments in the following segments: secured by farmland, home equity – open end, real estate, owner occupied commercial real estate, agricultural loans, and commercial and industrial loans. These additions were offset by a loan secured by farmland being paid in full, one loan in owner occupied commercial real estate paying off and another returning to accrual status, an other commercial real estate loan paying off, and a commercial and industrial loan paying off.
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Nonperforming Assets and Credit Ratios
(dollars in thousands):
December 31,
Nonaccrual loans
Loans past due 90 days and accruing interest
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Allowance for credit losses
Total Loans
Ratios:
Allowance for credit losses to Total Loans
Allowance for credit losses to Total nonperforming assets
Allowance for credit losses to Nonaccrual loans
Nonaccrual Loans to Total Loans
Analysis of Allowance for Credit Losses on Loans
Refer to the discussion in “Critical Accounting Policies” and Note 1 “Nature of Banking Activities and Significant Accounting Policies” in Notes to Consolidated Financial Statements for management’s methodology to estimate the allowance for credit losses.
The Company maintains the allowance for credit losses on loans at a level deemed adequate by management for expected credit losses. Management evaluates the adequacy of the allowance for credit losses on loans utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experience, trends in delinquencies, non-performing loans and other risk assets, and other qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated.
For the year ended December 31, 2025, net charge-offs of loans totaled $2.9 million or 0.34% of average loans held for investment, compared to net charge-offs of $2.6 million or 0.31% for the year ended December 31, 2024. A majority of the charge-offs in 2025 and 2024 related to the Company’s indirect automobile lending, due to deteriorating economic conditions and higher inflation.
The provision for credit losses, including the recovery for unfunded commitments, was $2.7 million and $2.3 million for the years ended December 31, 2025 and 2024, respectively. The provision for credit losses in 2025 reflects $46.9 million in loan growth, coupled with $2.0 million in net charge offs in the automobile segment. The provision for credit losses in 2024 reflects $17.9 million in loan growth, coupled with $1.9 million in net charge offs in the automobile segment. Additionally, management adjusted qualitative factors in the model methodology for economic conditions based on changes in the economic forecast during 2025, changes in loan volume, and changes in past due trends.
The provision for credit losses includes a recovery of $117 thousand and $43 thousand on the reserve for unfunded commitments for the years ended December 31, 2025 and 2024, respectively. The provision for credit losses on loans and for unfunded commitments net together as reflected in the provision for credit losses on the consolidated statements of income. See Note 4 “Allowance for Credit Losses” in Notes to Consolidated Financial Statements for a summary of the activity in the allowance for credit losses for years ended December 31, 2025 and 2024.
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Analysis of Allowance for Credit Losses
(dollars in thousands)
Years Ended December 31,
Net charge-offs (recoveries)
Average loans outstanding (1)
Net charge-offs (recoveries) to average loans outstanding
Net charge-offs (recoveries)
Average loans outstanding (1)
Net charge-offs (recoveries) to average loans outstanding
1-4 Family residential construction
Other construction, land development and land
Secured by farmland
Home equity – open end
Real estate
Home Equity – closed end
Multifamily
Owner-occupied commercial real estate
Other commercial real estate
Agricultural loans
Commercial and industrial
Credit Cards
Automobile loans
Other consumer loans
Municipal loans
Total
(1) Averages as disclosed are based on the outstanding balances of the loans in each segment. These averages do not include net deferred costs and premiums.
Allocation of Allowance for Credit Losses on Loans
(dollars in thousands)
December 31, 2025
December 31, 2024
Allowance for Credit Losses on Loans
Percent of Loans in Segment to Total Loans
Allowance for Credit Losses on Loans
Percent of Loans in Segment to Total Loans
1-4 Family residential construction
Other construction, land development and land
Secured by farmland
Home equity – open end
Real estate
Home Equity – closed end
Multifamily
Owner-occupied commercial real estate
Other commercial real estate
Agricultural loans
Commercial and industrial
Credit Cards
Automobile loans
Other consumer loans
Municipal loans
Total
Deposits
Core deposits are the Company’s primary source of funding. Demand deposits, money market accounts, savings accounts, and time deposits provide a source of fee income and opportunities to build customer relationships. Total deposits were $1.25 billion and $1.20 billion at December 31, 2025 and 2024, respectively, which represents an increase of $50.1 million or 4.19% during 2025. There was a shift in deposit mix when comparing the periods. As of December 31, 2025, there were increases in noninterest bearing demand, interest checking, and savings accounts, coupled with a decrease in time deposits compared to December 31, 2024.
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The following table shows the deposit balances for 2025 and 2024 (dollars in thousands).
December 31, 2025
December 31, 2024
Balance
% of total deposits
Balance
% of total deposits
Noninterest-bearing demand
Interest checking
Savings accounts
Time deposits
Total deposits
The following table includes the average deposits and average rates paid for 2025 and 2024 (dollars in thousands).
December 31, 2025
December 31, 2024
Average Balance
Rate
Average Balance
Rate
Noninterest-bearing demand
Interest-bearing:
Interest checking
Savings accounts
Time deposits
Total interest-bearing deposits
Total average deposits
Total uninsured deposits in excess of $250 thousand were $167.4 million and $131.8 million at December 31, 2025 and 2024, respectively.
The following table sets forth maturity ranges of time deposits, as of December 31, 2025, that meet or exceed the FDIC insurance limit (in thousands).
Maturity period:
December 31, 2025
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
Borrowings
In October 2025, the Company entered into a Subordinated Note Purchase Agreement pursuant to which the Company issued and sold $10.0 million in aggregate principal amount of 7.55% fixed to floating rate subordinated notes due November 1, 2035. After the sale, the Company redeemed in full the $7.0 million subordinated note due July 31, 2030. See Note 9 “Short-Term Debt” and Note 10 “Long-Term Debt” in Notes to the Consolidated Financial Statements.
Shareholders’ Equity
Total Shareholders’ Equity increased by $18.7 million to $104.8 million due to net income of $11.2 million and other comprehensive income of $10.8 million, offset by dividends to shareholders of $3.7 million. Other comprehensive income includes an $11.2 million improvement in unrealized losses in the bond portfolio and a $434 thousand adjustment to the pension liability.
Market Risk Management
Market risk is the sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, and equity prices. The Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations impact the amount of interest income and expense the Bank pays or receives on the majority of its assets. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets.
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The Company manages interest rate risk through an asset and liability committee (“ALCO”) composed of members of its Board of Directors and executive management. The ALCO is responsible for monitoring and managing the Company’s interest rate risk and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides an additional analysis of the sensitivity of the earnings to changes in interest rates to static gap analysis. Assumptions used in the model rates are derived from historical trends, peer analysis, and management’s outlook, and include loans and deposit growth rates and projected yields and rates. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different assets and liability accounts move differently when the prime rate changes and is reflected in different rate scenarios.
The following table represents interest rate sensitivity on the Company’s net interest income using different rate scenarios:
Change in Prime Rate
% Change in Net Interest Income
+ 400 basis points
+ 300 basis points
+ 200 basis points
+ 100 basis points
- 100 basis points
- 200 basis points
- 300 basis points
- 400 basis points
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net economic value is the market value of all assets minus the market value of all liabilities. The change in net economic value over different rate environments is an indication of the longer- term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation.
The following table reflects the change in net economic value over different rate environments:
Change in Prime Rate
% Change in Net Economic Value
+ 400 basis points
+ 300 basis points
+ 200 basis points
+ 100 basis points
- 100 basis points
- 200 basis points
- 300 basis points
- 400 basis points
Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance.
The Company uses a variety of traditional and on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the “gap” between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect itself from unanticipated rate movements, by understanding the dynamic nature of its balance sheet components.
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An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. At December 31, 2025, the Company had $103.6 million more in liabilities repricing than assets subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.
Liquidity
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, loans held for sale, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, credit availability at the Federal Reserve Bank, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuances. Management believes the Company’s current overall liquidity is sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
The Company closely monitors changes in the industry and market conditions that may impact the Company’s liquidity. Deposits have remained a steady source of liquidity from 2024 to 2025. The Company may use other means of borrowings or other liquidity sources to fund any liquidity needs based on declines in deposit balances. The Company is also closely tracking the potential impacts on the Company’s liquidity of declines in fair value of the Company’s securities portfolio due to rising market interest rates.
As of December 31, 2025, liquid assets totaled $92.7 million, or 6.8% of total assets, and liquid earning assets totaled $73.4 million, or 5.7% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. The Bank is scheduled to receive $64.1 million from bond paydowns and maturities by the end of 2026 which can be used to fund future loan growth and for other purposes.
In 2025, the Bank pledged investment securities with a par value totaling $133.4 million to the Federal Reserve System’s Discount Window. The Discount Window provides access to funding to help depository institutions manage their liquidity risks. The Bank did not borrow from the Discount Window during 2025. In addition to the Discount Window, the Bank has access to off-balance sheet liquidity through unsecured Federal funds lines totaling $90.0 million at December 31, 2025, and December 31, 2024. The Bank also has a secured line of credit with the FHLB with available credit of $180.1 million and $172.7 million as of December 31, 2025, and December 31, 2024, respectively. The FHLB line of credit is secured by a blanket lien on qualifying loans in the residential, commercial, agricultural real estate, and home equity portfolios.
The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets.
Capital Resources
The Company continues to maintain capital ratios intended to support its asset growth. The federal bank regulatory agencies have implemented regulatory capital rules known as “Basel III.” The Basel III rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. There is also a capital conservation buffer that requires banks to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.50% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees. The Company’s accumulated other comprehensive income or loss, resulting from unrealized gains and losses, net of income tax, on investment securities available for sale, is excluded from regulatory capital.
Pursuant to the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not required to comply with Basel III on a parent-only basis. As of December 31, 2025, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under applicable capital adequacy rules. The Company currently expects to continue to exceed required minimum capital ratios. See Note 14 “Regulatory Matters” in Notes to Consolidated Financial Statements for more information regarding the Company’s and its subsidiary bank’s capital ratios.
