Virginia National Bankshares Corp: Form 10-Q for the period ended Jun 30, 2025

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, 2024. Operating results for the three and six months ended June 30, 2025 are not necessarily indicative of the results for the year ending December 31, 2025 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements in this release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgment of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts or other major events, the governmental and societal responses thereto, or the prospect of these events; changes, particularly declines, in general economic and market conditions in the local economies in which the Company operates, including the effects of declines in real estate values; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the impact of changes in laws, regulations and guidance related to financial services including, but not limited to, taxes, banking, securities and insurance; changes in accounting principles, policies and guidelines; the financial condition of the Company’s borrowers; the Company's ability to attract, hire, train and retain qualified employees; an increase in unemployment levels; competitive pressures on loan and deposit pricing and demand; fluctuation in asset quality; assumptions underlying the Company’s ACL; the value of securities held in the Company's investment portfolio; performance of assets under management; cybersecurity threats or attacks and the development and maintenance of reliable electronic systems; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the risks and uncertainties described from time to time in the Company’s press releases and filings with the SEC; and the Company’s performance in managing the risks involved in any of the foregoing. Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 and other reports filed from time to time by the Company with the Securities and Exchange Commission. These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, and 3) net income per share.

• ROAA for the three months ended June 30, 2025 remained consistent when compared to the three months ended June 30, 2024, at 1.05%. ROAA for the six months ended June 30, 2025 was 1.08% compared to 0.98% realized in the same period in the prior year, as net income was higher in the current period as compared to the same period in the prior year.
• ROAE for the three months ended June 30, 2025 was 10.05% compared to 11.07% realized in same period in the prior year. ROAE for the six months ended June 30, 2025 was 10.54% compared to 10.31% realized in the same period in the prior year.
• Net income per diluted share was $0.78 for the three months ended June 30, 2025, compared to $0.77 for the same period in the prior year. Net income per diluted share was $1.61 for the six months ended June 30, 2025, compared to $1.45 for the same period in the prior year. The period over period increases were due to the rise in net income, as described below.
• Tangible book value per share increased to $29.63 as of June 30, 2025, compared to $26.44 as of June 30, 2024. The increase is the result of total equity increasing period over period, coupled with the offsetting impact of intangible assets declining over the same period.

We manage our capital levels through growth, quarterly cash dividends, share repurchases, when prudent, while maintaining a strong capital position. During the second quarter of 2023, the Board of Directors approved a share repurchase plan of up to 5% of outstanding common stock. Repurchases may be made through open market purchases or in privately negotiated transactions. The actual timing, number, and value of shares repurchased under the program will be determined by a committee of the Board. During the first half of 2024, 20,350 shares have been repurchased. No shares have been repurchased in 2025.

Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management’s Discussion and Analysis for more discussion on these financial performance measures.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 8 in the Company’s 2024 Form 10-K.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of June 30, 2025 were $1.6 billion. This is an $18.1 million, or 1.1%, increase from total assets reported at December 31, 2024 and a $61.1 million, or 3.9%, increase from total assets reported at June 30, 2024. Maturities and paydowns within the securities portfolio are being held in overnight investments to fund loan growth as demands arise. In addition, increases of $41.0 million in borrowings since December 31, 2024 have offset deposit contraction as management has continued intentional positioning to curb interest rates.

Securities

The Company’s investment securities portfolio as of June 30, 2025 totaled $263.0 million, a decrease of $6.7 million compared with the $269.7 million reported at December 31, 2024 and a $28.3 million decrease from the $291.4 million reported at June 30, 2024. The decrease from year-end and the prior year was part of a strategic decision to reinvest proceeds into higher yielding assets. At June 30, 2025 and December 31, 2024, the investment securities holdings represented 16.1% and 16.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $8.1 million as of June 30, 2025, compared to $6.2 million as of December 31, 2024 and $6.7 million as of June 30, 2024. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation (the holding company for Community Bankers' Bank), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At June 30, 2025, the unrestricted securities portfolio totaled $254.9 million. The following table summarizes the Company's AFS securities by type as of June 30, 2025, December 31, 2024, and June 30, 2024 (dollars in thousands):

The unrestricted securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible impairments indicating credit losses. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The Company's geographical trade area includes localities in Virginia, Maryland and the District of Columbia that are within a 100-mile radius of any office of the Company as well as the counties of Jefferson and Berkeley in West Virginia.

Total loans were $1.2 billion as of June 30, 2025, December 31, 2024, and June 30, 2024. Loans as a percentage of total assets at June 30, 2025 were 75.9%, compared to 73.6% as of June 30, 2024. Loans as a percentage of deposits at June 30, 2025 were 89.4%, compared to 84.3% as of June 30, 2024.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2025, December 31, 2024, and June 30, 2024 (dollars in thousands):

Loan balances increased by $5.7 million or 0.5% from December 31, 2024 to June 30, 2025. During the first half of 2025, the Company funded $40.7 million in organic loan production and purchased $17.2 million in government guaranteed loans. Paydowns and normal amortization of $52.2 million offset the loans funded during the first half of the current year.

The following table details the Company's levels of non-owner occupied commercial real estate as of June 30, 2025, along with the average loan size and % of risk ratings for each category (dollars in thousands):

The following table details the Company's levels of non-owner occupied commercial real estate as of December 31, 2024, along with the average loan size and % of risk ratings for each category (dollars in thousands):

Loan quality

The Company continues to experience extremely low levels of NPAs, as a result of strict underwriting standards and practices. However, the economic environment in the Company's lending footprint could be impacted as persistent inflation, higher interest rates, and other signs of recession materialize, which could increase NPAs in future periods.

Nonaccruals - Nonaccrual loans, comprised of fourteen loans to thirteen borrowers, totaled $2.6 million at June 30, 2025, compared to balances of $2.3 million and $2.4 million reported at December 31, 2024 and June 30, 2024, respectively.

Past Due Loans - The Company had loans in its portfolio totaling $5.2 million, $754 thousand and $1.6 million, as of June 30, 2025, December 31, 2024 and June 30, 2024, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The past due balance as of June 30, 2025 is comprised of six loans totaling $5.1 million which are 100% government-guaranteed, and four student loans totaling $31 thousand.

Troubled Loan Modifications - No loans were modified during the three months ended June 30, 2025. During the first quarter of 2024, one loan was modified for a borrower experiencing financial difficulties, totaling $703 thousand. As of June 30, 2025, the Company had TLMs totaling $1.2 million.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

Allowance for Credit Losses

The relationship of the ACL to total loans and nonaccrual loans appears below (dollars in thousands):

The ACL on loans as a percentage of loans was 0.67% as of June 30, 2025, 0.68% as of December 31, 2024, and 0.69% as of June 30, 2024. The fair value mark that was allocated to the acquired loans was $21.3 million as of the Effective Date, with a remaining balance of $5.7 million as of June 30, 2025.

Recoveries of credit losses totaling $15 thousand and $508 thousand were recorded in the six months ended June 30, 2025 and 2024, respectively. The following is a summary of the changes in the ACL for the six months ended June 30, 2025 and 2024 (dollars in thousands):

For additional insight into management’s approach and methodology in estimating the ACL, please refer to the earlier discussion of “Allowance for Credit Losses” in Note 5 of the Notes to Consolidated Financial Statements. In addition, Note 5 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the ACL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ACL was adequately provided for as of June 30, 2025 and acknowledges that the ACL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of June 30, 2025 totaled $12.2 million compared to $15.4 million as of December 31, 2024 and $15.8 million as of June 30, 2024, decreasing from prior year due to the sale of a branch facility in the first quarter of 2025. Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of June 30, 2025, the Company occupied thirteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters and operations center. VNB Trust & Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia.

Both the Arlington Boulevard facility in Charlottesville and the People Place facility in Albemarle County also contain office space that is currently under lease to tenants.

Leases

As of June 30, 2025, the Company has recorded $7.0 million of right-of-use assets and $6.9 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2024, $5.6 million of right-of-use assets and $5.4 million of lease liabilities were included on the balance sheet. Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis. During the second quarter of 2025, the Company extended the ground lease associated with the Pantops headquarters for an additional five-year period. During the first quarter of 2024, the Company extended one branch lease for an additional five-year period.

Deposits

Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Commonwealth of Virginia.

Total deposits as of June 30, 2025 were $1.4 billion, a decrease of $34.5 million, or 2.4%, compared to December 31, 2024, yet an increase of $15.2 million, or 1.1%, compared to June 30, 2024 (dollars in thousands).

Noninterest-bearing demand deposits on June 30, 2025 were $384.5 million, representing 27.7% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $723.1 million, and represented 52.1% of total deposits at June 30, 2025. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 79.8% of total deposit accounts at June 30, 2025. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep deposit products. ICS® deposit balances of $26.5 million and $133.1 million are included in the interest checking accounts and in the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2025. As of December 31, 2024, ICS® deposit balances of $22.8 million and $105.9 million are included in the interest checking accounts and in the money market and savings deposit account balances, respectively. All ICS® accounts consist of reciprocal balances for the Company’s customers. The Company currently holds no brokered or specialty CDs.

The remaining 20.2% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $281.4 million at June 30, 2025, decreasing from the balances as of December 31, 2024 as a result of the discontinuance of several interest rate promotions that the Bank ran in 2024. Included in these deposit totals are CDARSTM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled $7.6 million as of June 30, 2025 and $4.9 million as of December 31, 2024, all of which were reciprocal balances for the Company’s customers.

As of June 30, 2025 and December 31, 2024, the estimated amounts of uninsured deposits were $371.5 million, or 26.7% and $389.6 million, or 27.3% of total deposits, respectively.

Federal funds purchased

The Company did not purchase federal funds at June 30, 2025, compared to $236 thousand at December 31, 2024 and $2.4 million at June 30, 2024. Any excess funds are sold on a daily basis in the federal funds market and Federal funds are purchased as needed to meet liquidity needs.

Borrowings

Borrowings, consisting primarily of FHLB advances, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained. The Company borrowed an additional $41.0 million in FHLB advances during the first six months of 2025, primarily utilizing proceeds from the borrowings to fund demands on deposits.

As of June 30, 2025, based on the FHLB’s evaluation, the Company has an available credit position of $408 million, for which access can be negotiated based on multiple factors. The Company currently has a collateral dependent line of credit with the FHLB for $110.6 million, secured by commercial mortgages, with borrowings of $61.0 million as of June 30, 2025. As of December 31, 2024, there were $20.0 million in outstanding borrowings with the FHLB.

Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with five major regional correspondent banks for a total of $119.0 million and a secured line with the Federal Reserve discount window in the amount of $3.2 million, based on the market value of the collateral. See above for outstanding balances in Federal funds purchased as of the dates presented.

Junior Subordinated Debt

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of June 30, 2025 and December 31, 2024, total capital securities were $3.5 million, as adjusted to fair value as of the date of the Merger. Historically, the interest rate on the capital security reset every three months at 1.70% above the then current three-month LIBOR and was paid quarterly. With the cessation of LIBOR, on September 13, 2023, the rate converted to a spread adjustment of 0.03% plus a margin of 1.70% above the three-month CME Term SOFR.

The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2024 to June 30, 2025 (dollars in thousands):

The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 18.65%, 18.65%, 19.46% and 12.12%, respectively, as of June 30, 2025, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 18.65%, 18.65%, 19.46% and 12.12%, respectively, as of June 30, 2025, also exceeding the minimum requirements.

As of June 30, 2025, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the PCA regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

RESULTS OF OPERATIONS

Industry events and economic environment

Management of the Company continually monitors the impact of various global and national events on the Company's results of operations and financial condition, including inflation and economic recessionary conditions, changes in interest rates, the political environment, geopolitical conflicts, competition, liquidity matters, changes in legislative or regulatory requirements and changes in government policy, such as the imposition of tariffs and potential trade barriers. The timing and impact of inflation, fluctuations in and volatility of interest rates, and the competitive landscape of loans and deposits on our business and results of operations will depend on future developments, which are uncertain and unpredictable. In July 2025, the One Big Beautiful Bill Act was signed into law, which includes a wide variety of tax reform provisions affecting individuals as well as businesses, including extending and modifying certain key provisions from the Tax Cuts and Jobs Act of 2017 and expanding certain incentives from the Inflation Reduction Act of 2022 while accelerating the phase-out of others.

Inflation has eased in the first half of 2025, but it was estimated at 2.7% as of June 2025, which is still over the FOMC’s 2.0% target. In late 2024, the Federal Reserve shifted its interest rate policy as inflationary pressure began to ease and economic growth moderated, lowering rates 75 bps between September and December in 2024, which resulted in the current Federal Funds target rate range of 4.25% to 4.50%. The FOMC has maintained the Federal Funds target rate range at 4.25% to 4.50% so far in 2025, and it is difficult to predict how the Federal Reserve will balance possible inflationary pressure with the potential of slower economic growth and whether they will respond accordingly.

Management will continue to deploy solid asset liability management strategies to manage our risk related to interest rate fluctuations and monitor balance sheet trends, deposit flows, and liquidity needs to enable us to meet the needs of our customers and maintain financial flexibility.

Non-GAAP presentations

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include tangible book value per share, tangible equity and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) balances of intangible assets, including goodwill, that vary significantly between institutions, and (3) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to, or more important than, GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands, except for the per share data):

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Net income

Net income for the three months ended June 30, 2025 was $4.2 million, a $79.0 thousand increase compared to $4.2 million reported for the three months ended June 30, 2024. Net income per diluted share was $0.78 for the three months ended June 30, 2025 compared to $0.77 per diluted share for the same period in the prior year.

Net income for the six months ended June 30, 2025 was $8.7 million, compared to $7.8 million for the six months ended June 30, 2024. Net income per diluted share was $1.61 for the six months ended June 30, 2025, compared to $1.45 for the six months ended June 30, 2024.

The increase in net income for each of the periods noted above is primarily the result of decreased cost of funds, as discussed in more detail below.

Net interest income

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE).

Quarterly overview - Net interest income (FTE) for the three months ended June 30, 2025 was $12.9 million, a $1.6 million increase compared to net interest income (FTE) of $11.3 million for the three months ended June 30, 2024. The net interest margin (FTE) of 3.40% for the three months ended June 30, 2025 was 36 bps higher than the 3.04% realized during the three months ended June 30, 2024. Interest expense decreased by $1.1 million, positively impacting net interest income (FTE) and net interest margin (FTE), compared to the same period in the prior year. Overall, the cost of interest-bearing deposits decreased 51 bps period over period, from 274 bps to 223 bps. A $52.1 million decrease in average balances of time deposit products contributed to the reduced interest expense during the second quarter of 2025. The increase in average loan balances, from $1.1 billion for the three months ended June 30, 2024 to $1.2 billion for the three months ended June 30, 2025, positively impacted interest income by $1.3 million. This metric was however negatively impacted by the decrease in the average balances of securities, decreasing from $327.7 million in the three months ended June 30, 2024 to $266.9 in the three months ended June 30, 2025, negatively impacting interest income (FTE) by $418 thousand period over period.

Year-to-date overview - Net interest income (FTE) for the six months ended June 30, 2025 was $25.3 million, a $3.0 million increase compared to net interest income (FTE) for the six months ended June 30, 2024. The net interest margin (FTE) of 3.34% for the six months ended June 30, 2025 was 36 bps higher than the 2.98% realized during the six months ended June 30, 2024. Interest expense decreased $2.1 million, positively impacting net interest income (FTE) and net interest margin (FTE), compared to the same period in the prior year. Overall, the cost of interest-bearing deposits decreased 44 bps period over period, from 274 bps to 230 bps. A $43.5 million decrease in average balances of time deposit products contributed to the lower interest expense during the first half of 2025. The increase in average loan balances, from $1.1 billion for the six months ended June 30, 2024 to $1.2 billion for the six months ended June 30, 2025, positively impacted interest income by $2.8 million. This metric was however negatively impacted by the decrease in the average balances of securities, decreasing from $349.0 million in the six months ended June 30, 2024 to $269.2 in the six months ended June 30, 2025, negatively impacting interest income (FTE) by $1.1 million period over period.

Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and six months ended June 30, 2025 and 2024. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income

(1) Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3) Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4) The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Consolidated Average Balance Sheet and Analysis of Net Interest Income

(1) Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3) Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4) The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for credit losses

An expense to the provision for credit losses of $3 thousand was recognized during the three months ended June 30, 2025 compared to a provision release of $338 thousand recognized during the three months ended June 30, 2024. The second quarter 2025 provision was comprised of $90 thousand provision for loan losses, due primarily to declining balances in pools with higher loss rates offsetting reserves required by changes in environmental factors, and a recovery of $87 thousand for unfunded commitments, as a result of a decline in unfunded construction commitments. The second quarter 2024 recovery of provision for credit losses was comprised of $519 thousand of recovery of provision for loan losses and $181 thousand of provision for losses on unfunded commitments.

A recovery of provision for credit losses of $157 thousand was recognized during the six months ended June 30, 2025 compared to a recovery of provision for loan losses of $360 thousand recognized during the six months ended June 30, 2024. The first half 2025 recovery or provision for credit losses was comprised of a recovery of provision for credit losses of $15 thousand and a recovery of provision for losses on unfunded commitments of $142 thousand. The first half 2024 recovery of provision for credit losses was comprised of $508 thousand of recovery of provision for loan losses and $148 thousand of provision for losses on unfunded commitments.

An update to the peer data used in the Company's CECL model was performed during the three months ended June 30, 2024. This included a new group of peer banks, an adjustment to the k-factors used in the DCF models, and the election to mirror CRE non-owner occupied data for the multifamily pool based on the more appropriate and reasonable data fit. In addition, during the second quarter of 2024, a reallocation of qualitative factor weightings for each pool was performed based on assessment of applicability and significance in terms of anticipated effect of each factor on loss rates for each pool. An update to the prepayment and curtailment rates used in the Company's CECL model was performed during the three months ended September 30, 2024. No changes to the model have been made during the first six months of 2025.

The decrease in unfunded commitment reserve was almost entirely due to the reserve associated with the construction portfolio. In the second quarter of 2025, the construction pool was assigned a loss rate of 1.77%, compared to 2.04% in the first quarter of 2025. This decrease was due to a 26% decrease in the portfolio balance as several projects funded during the second quarter.

Further discussion of management’s assessment of the ACL is provided earlier in the report and in Note 5 – Allowance for Credit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the ACL was adequately provided for at June 30, 2025. The ACL calculation, provision for credit losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. Should economic conditions worsen, we could experience further increases in our required ACL and record additional provision for credit loss exposure.

Noninterest income

The components of noninterest income for the three months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest income for the three months ended June 30, 2025 of $1.3 million was $380 thousand or 22.5% less than the amount recorded for the three months ended June 30, 2024, due primarily to a reduction in debit/credit card and ATM fees, as a result of a reduction in number of accounts.

The components of noninterest income for the six months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest income for the six months ended June 30, 2025 of $3.1 million was $798 thousand or 20.6% less than the amount recorded for the six months ended June 30, 2024, due primarily to the fact that a gain of $379 thousand on the early termination of debt was recorded in the first quarter of 2024, coupled with the reduction in wealth management and debit/credit card and ATM fees. The reduction in wealth management fees is primarily attributable to the sale of Masonry Capital effective April 1, 2024, as fees earned in the first quarter of 2024 by such segment contributed $190 thousand to the Company; the decline in wealth management fees associated with Masonry Capital was offset by a reduction in Masonry Capital-related expenses of $200 thousand. The increase year-over-year in gains on sale of assets resulted from the sale of a branch which closed in the first quarter of 2025.

Noninterest expense

The components of noninterest expense for the three months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest expense for the quarter ended June 30, 2025 of $8.7 million was $559 thousand or 6.9% more than the quarter ended June 30, 2024. This increase is primarily due to increases in bank franchise tax and data processing expenses, as well as professional fees and legal expenses related to special projects, partially offset by continued reductions in compensation expense and right-sizing the branch network from the Merger.

The components of noninterest expense for the six months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest expense for the six months ended June 30, 2025 of $17.5 million was $564 thousand or 3.3% higher than the six months ended June 30, 2024. Increases were due primarily to expenses associated with special projects but were partially offset by reductions in compensation expense as the Bank continues to recognize operational efficiencies.

The efficiency ratio (FTE) was 61.2% for the three months ended June 30, 2025 compared to 62.7% for the same quarter of 2024, due predominantly to the increase in net interest income (FTE), as described above. The efficiency ratio of 61.8% for the six months ended June 30, 2025 improved from the 64.8% realized in the six months ended June 30, 2024 for the same reason. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended June 30, 2025 and 2024, the Company provided $1.2 million and $929 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 21.9% and 18.3%, respectively, increasing primarily due to adoption of the proportional amortization method for low income housing tax credits. For the six months ended June 30, 2025 and 2024, the Company provided $2.1 million and $1.6 million for Federal income taxes, respectively, resulting in effective income tax rates of 19.3% and 17.0%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the accounting change associated with the recognition of low-income housing tax credits and the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.

OTHER SIGNIFICANT EVENTS

None

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the quarter ended June 30, 2025, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2024. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered not to be material also may materially adversely affect our business, financial condition and/or operating results.