FIRST NATIONAL CORP /VA/

First National Corporation operates as a bank holding company whose primary operating subsidiary, First Bank, is a commercial bank chartered under Virginia law. The Company's market areas include the Shenandoah Valley, the Roanoke Valley, the south-central region of Virginia, the Richmond MSA, and northern North Carolina, with diverse industries including medical and professional services, manufacturing, retail, warehousing, government, hospitality, and higher education. The financial services industry remains highly competitive, and the Company competes with large national and regional financial institutions, credit unions, other community banks, consumer finance companies, mortgage companies, marketplace lenders, other financial technology firms, mutual funds, and life insurance companies.

The Company's primary operating subsidiary, First Bank, believes its competitive advantages include long-term customer relationships, a commitment to excellent customer service, dedicated and loyal employees, and the support of and involvement in the communities that the Company serves. The Company focuses on providing products and services to individuals, small to medium-sized businesses, non-profit organizations, and local governmental entities within its communities. No material part of the business is dependent upon a single or a few customers, and the loss of any single customer would not have a materially adverse effect upon the business.

The primary source of revenue is from net interest income earned by the Bank, which is the difference between interest income and interest expense and currently represents the largest component of the Company's total revenue. Noninterest income is the other source of revenue, derived primarily from service charges on deposits, fee income from wealth management services, and ATM and check card fees. Primary expense categories are salaries and employee benefits, which comprised 51% of noninterest expenses during 2025, followed by other operating expenses, which comprised 12% of noninterest expenses. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations.

The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. The Bank's products and services are delivered through 33 ¹ bank branch offices, one loan production office, and a customer service center in a retirement community.

The Company operates through two reportable operating segments: banking and wealth management. For the year ended December 31, 2025, the provision for credit losses on loans totaled $2.8 million ², compared to $7.9 million ³ in 2024. Noninterest income totaled $17.0 million ⁴ for the year, an increase of $638 thousand ⁵, or 3.9%, compared to $16.4 million ⁶ for the prior year. Noninterest expense increased $12.5 million ⁷, or 23.6%, for the year ended December 31, 2025, compared to the prior year.

The Company acquired Touchstone Bankshares, Inc. on October 1, 2024, and completed the operational merger in the first quarter of 2025. In March of 2025, two previously held subsidiaries of the Company, Bank of Fincastle Services, Inc. and ESF, LLC, were closed with no material impact to the financials related to the closures. During the fourth quarter of 2025, the Company redeemed $13 million ⁸ in subordinated debt, at par, including redemptions of the 5.50% fixed-to-floating rate subordinated note due 2030 on October 1, 2025 ($5 million ⁹) and the 6.00% fixed-to-floating rate subordinated note due 2030 on November 15, 2025 ($8 million ¹⁰). The Company did not make any repurchases of common stock during 2025.

Net income increased by $10.7 million ¹¹ to $17.7 million ¹², or $1.96 ¹³ per diluted share, for the year ended December 31, 2025, compared to $7.0 million ¹⁴, or $1.00 ¹⁵ per diluted share, for the same period in 2024. Return on average assets was 0.87% ¹⁶ and return on average equity was 10.10% ¹⁷ for the year ended December 31, 2025, compared to 0.44% ¹⁸ and 5.33% ¹⁹, respectively, for the year ended December 31, 2024. The net interest margin increased to 3.88% ²⁰ for 2025, compared to 3.51% ²¹ in 2024.

The Company's growth strategy includes expanding market share in existing locations and identifying attractive markets, locations, or opportunities to expand in the future. The Company may open new branches or acquire branches or banks, which would result in increased personnel, occupancy, and other operating expenses. The Company expects to incur a time lag involved in deploying new deposits into attractively priced loans and other higher yielding earning assets, which could depress earnings in the short run. The Company's ability to manage growth successfully depends on whether it can maintain adequate capital levels, maintain cost controls, effectively manage asset quality, and successfully integrate any expanded business divisions or acquired businesses into the organization.

The Company invests in new technology to enhance customer service, and to increase efficiency and reduce operating costs. The Company may utilize new technology, such as AI, in connection with its business and operations. The Company's future success will depend in part upon its ability to create synergies in its operations through the use of technology and to facilitate the ability of customers to engage in financial transactions in a manner that enhances the customer experience. The Company cannot give any assurance that technological improvements will increase operational efficiency or that it will be able to effectively implement new technology-driven products, systems and services or be successful in marketing new products and services to its customers.

The Company's primary expense categories are salaries and employee benefits, which comprised 51% of noninterest expenses during 2025, followed by other operating expenses, which comprised 12% of noninterest expenses. The provision for credit losses is also a primary expense of the Bank, determined by factors that include net charge-offs, asset quality, loan growth, evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company's control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for credit losses.

At December 31, 2025, the Bank employed a total of 308 ²² full-time equivalent employees. The Company's operations center is in Strasburg, Virginia. The Bank owns or leases various other offices in the counties and cities in which it operates. At December 31, 2025, the Bank operated 33 ²³ branches throughout the Shenandoah Valley, south-central regions of Virginia, the Richmond and Roanoke market areas, and northern North Carolina. The Bank also operates a loan production office and a customer service center in a retirement community.

The Company did not repurchase any shares during the year ended December 31, 2025. The Company's future dividend policy is subject to the discretion of its Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity and capital requirements of both the Company and the Bank, applicable governmental regulations and policies and other factors deemed relevant by the Board of Directors. The Company's ability to pay dividends on common stock is limited by contractual restrictions under its subordinated debt and junior subordinated debt.

The Company's business is directly affected by general economic and market conditions; broad trends in industry and finance; legislative and regulatory changes; changes in governmental monetary and fiscal policies; changes in interest rates; and inflation, all of which are beyond its control. A deterioration in economic conditions, in particular a prolonged economic slowdown within its geographic region or a broader disruption in the economy, could result in an increase in loan delinquencies, an increase in problem assets and foreclosures, a decline in demand for products and services, a deterioration in the value of collateral for loans, and changes in the fair value of financial instruments. The Company's loan and deposit activities are directly affected by, and its financial success depends on, economic conditions within its markets, as well as conditions in the industries on which those markets are economically dependent.

The Company faces strong competition from other financial institutions in its primary market area, including large national and regional financial institutions, credit unions, other community banks, mortgage banking companies, consumer finance companies, insurance companies, Fintech, and other institutions, some of which are not subject to the same degree of regulation or restrictions. Many of these competitors have substantially greater resources and lending limits and offer services that the Company does not provide. The Company expects that financial institutions will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

The Company's allowance for credit losses on loans may prove to be insufficient to absorb losses in its loan and securities portfolios, and the Company's banking regulators may require it to increase its allowance by recognizing additional provisions charged to expense. The Company has a significant exposure in commercial real estate loans, which are generally viewed as having more risk of default than residential real estate loans and depend on cash flows from the owner's business or the property to service the debt. The Company's loan portfolio contains construction and development loans, and a decline in real estate values and economic conditions would adversely affect the value of the collateral securing these loans. The Company's concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets. The Company relies on deposits obtained from customers in its target markets to provide liquidity and support growth, and if local customer deposits are not sufficient, it may rely on secondary sources of liquidity such as brokered deposits, borrowings from the Federal Home Loan Bank of Atlanta, federal funds lines of credit, and borrowings from the Federal Reserve Discount Window, but there can be no assurance that these arrangements will be available on favorable terms or at all.

Management's message emphasizes the Company's 2025 financial highlights, including the acquisition of Touchstone Bankshares, Inc. on October 1, 2024, and the completion of the operational merger in the first quarter of 2025. Key themes include net income available to common shareholders of $17.7 million ²⁴ and diluted earnings per share of $1.96 ²⁵ compared to net income of $7.0 million ²⁶ and diluted earnings per share of $1.00 ²⁷ in 2024. Earnings produced a return on average equity of 10.10% ²⁸ for 2025 compared to 5.33% ²⁹ for 2024. The net interest margin increased to 3.88% ³⁰ for 2025, compared to 3.51% ³¹ in 2024. The 2025 provision for credit losses on loans totaled $2.9 million ³², compared to $7.9 million ³³ in 2024. Nonperforming assets as a percentage of total loans were 0.32% ³⁴ on December 31, 2025, compared to 0.50% ³⁵ in 2024. The strategic priorities emphasized include the successful integration of the Touchstone acquisition, managing credit quality, and improving profitability.