Virginia National Bankshares Corp: Form 10-Q for the period ended Jun 30, 2026

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, 2025. Operating results for the three and six months ended June 30, 2026 are not necessarily indicative of the results for the year ending December 31, 2026 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements in this report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses, plans and objectives for future operations, changes in laws and regulations applicable to the Company and its subsidiaries, adequacy of funding sources, actuarial expected benefit payments, valuation of foreclosed assets, regulatory requirements, economic environment and other statements contained herein regarding matters that are not historical facts. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or their derivatives, or other statements concerning the opinions or judgment of the Company and its management about future events. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only management’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside management’s control. Although the Company believes that management’s expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of the Company’s business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed in or implied by such forward-looking statements. Any forward-looking statements made by the Company speak only as of the date on which such statements are made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after the date of this report. The Company’s actual results and financial position may differ materially from the anticipated results and financial condition indicated in or implied by these forward-looking statements.

Factors that could cause the Company's actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including trade restrictions, tariffs, 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 Federal Reserve; 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, standards, 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 that underlie 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.

Additional risk factors and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 and in other reports filed from time to time by the Company with the Securities and Exchange Commission. All risk factors and uncertainties described herein and therein should be considered in evaluating any forward-looking statements. The forward-looking statements are expressly qualified by this cautionary statement, and undue reliance should not be placed on such forward-looking statements.

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor four key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, 3) net income per share, and 4) tangible book value per share (a non-GAAP financial measure).

• ROAA for the three months ended June 30, 2026 of 2.24% increased 119 bps when compared to the three months ended June 30, 2025 of 1.05%. ROAA for the six months ended June 30, 2026 was 1.77% compared to 1.08% realized in the same period in the prior year. Both periods of 2026 reflect higher non-interest income due to a gain from the sale of a limited investment partnership interest in Bearing Insurance Group, LLC ("Bearing").
• ROAE for the three months ended June 30, 2026 was 18.81% compared to 10.05% in the same period in the prior year. ROAE for the six months ended June 30, 2026 was 15.14% compared to 10.54% realized in the same period in the prior year.
• Net income per diluted share was $1.65 for the three months ended June 30, 2026, compared to $0.78 for the same period in the prior year. Net income per diluted share was $2.62 for the six months ended June 30, 2026 compared to $1.61 for the same period in the prior year.
• Tangible book value per share (non-GAAP) increased to $34.05 as of June 30, 2026, compared to $29.63 as of June 30, 2025. The increase reflects the impact of the Company's earnings performance that the Company posts as well as the gain from the Bearing transaction in the second quarter of 2026.

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

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 2025 Form 10-K, there have been no changes since that time.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of June 30, 2026 were $1.6 billion. This is a $11.5 million, or 0.7%, decrease from total assets reported at December 31, 2025.

Securities

The Company’s investment securities portfolio as of June 30, 2026 totaled $241.0 million, a decrease of $13.2 million compared with the $254.2 million reported at December 31, 2025. The decrease from year-end was the result of maturities and normal cash flow from paydowns. Paydowns within the securities portfolio provide additional liquidity allowing the Company to take advantage of investment opportunities that complement its growth and earnings strategies. At June 30, 2026 and December 31, 2025, the investment securities holdings represented 14.7% and 15.4% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $6.2 million as of June 30, 2026 and December 31, 2025. 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 CBB Financial Corporation 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, 2026, the unrestricted securities portfolio totaled $234.8 million. The following table summarizes the Company's AFS securities by type as of June 30, 2026, and December 31, 2025 (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 each 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, the District of Columbia and West Virginia.

Total loans were $1.2 billion as of June 30, 2026 and December 31, 2025. Loans as a percentage of total assets at June 30, 2026 were 75.3%, compared to 75.0% as of December 31, 2025.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2026 and December 31, 2025 (dollars in thousands):

Despite strong loan originations in the first half of 2026, loan balances declined $3.6 million from December 31, 2025 to June 30, 2026. During the first half of 2026, the Company funded $85 million in loans, which was comprised of $64 million in organic loan production and $21 million of purchased government guaranteed loans. Payoffs and normal amortization offset the loans funded during the first half of 2026.

The following table details the Company's levels of non-owner occupied commercial real estate as of June 30, 2026, along with the average loan size and percentage 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, 2025, along with the average loan size and percentage 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, which could increase NPAs in future periods.

Nonaccruals - Nonaccrual loans, comprised of fourteen loans to twelve borrowers, totaled $2.1 million at June 30, 2026, compared to $2.2 million reported at December 31, 2025.

Past Due Loans - The Company had loans in its portfolio totaling $3.7 million, and $7.0 million as of June 30, 2026, and December 31, 2025, 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, 2026 is comprised of four loans totaling $3.6 million which are 100% government-guaranteed, and six student loans totaling $66 thousand.

Troubled Loan Modifications - No loans were modified during the three and six months ended June 30, 2026 or 2025.

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 0.66% as of June 30, 2026 and 0.67% as of December 31, 2025, and the fair value mark that was allocated to the acquired loans was $3.9 million as of June 30, 2026 and $4.7 million as of December 31, 2025.

Recoveries of credit losses on loans totaling $144 thousand and $15 thousand were recorded in the six months ended June 30, 2026 and 2025, respectively. The following is a summary of the changes (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.

Management has elected to perform an individual evaluation on all loans in nonaccrual status. As of June 30, 2026 and 2025, after reviewing each loan no specific reserve was deemed necessary.

The $144 thousand provision release from December 31, 2025 to June 30, 2026 was the result of a combination of events. The improved economic forecast in the first quarter of 2026 drove improvement in factors and thus overall lower reserves. During the first quarter, a significant number of construction loans converted to permanent financing into pools with lower reserve rates. Even though second quarter origination activity was brisk, it did not overtake the releases warranted due to the balance decrease. These changes led to the reduction in the ACL on loans as a percentage of loans of 1 bps from 0.67% at December 31, 2025 to 0.66% at June 30, 2026. The provision for unfunded commitments increased by $36 thousand from December 31, 2025 to June 30, 2026 due to a second quarter increase in unfunded commitments.

The balance in government-guaranteed loans, which do not require an ACL, decreased $2.3 million from December 31, 2025 to June 30, 2026, from $227.5 million to $225.2 million.

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, 2026 and acknowledges that the ACL may increase throughout the year as loan growth and economic conditions may change in the foreseeable future.

Premises and equipment

The Company’s premises and equipment, net of depreciation, totaled $11.6 million and $11.7 million as of June 30, 2026 and December 31, 2025, respectively. 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, 2026, the Company occupied thirteen banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company operates a drive-through location, at 301 East Water Street, Charlottesville, Virginia, which is included in the thirteen.

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, 2026, the Company has recorded $5.6 million of right-of-use assets and $5.5 million of lease liabilities. As of December 31, 2025, $6.3 million of right-of-use assets and $6.2 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. In July 2026, the Company further extended the term of such ground lease. The amended lease has a 20-year term which will begin on November 1, 2026. The extension increases both the right-of-use asset and the lease liability by $5.2 million. This change reflects the present value of additional lease payments over the new term.

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, 2026 were $1.4 billion, a decrease of $22.5 million, or 1.6%, compared to December 31, 2025 (dollars in thousands).

Noninterest-bearing demand deposits on June 30, 2026 were $367.3 million, representing 26.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $761.0 million, and represented 54.0% of total deposits at June 30, 2026. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 80.1% of total deposit accounts at June 30, 2026. 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 $51.3 million and $145.1 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, 2026. As of December 31, 2025, ICS® deposit balances of $60.8 million and $139.6 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 certificates of deposit.

The remaining 19.9% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $280.8 million at June 30, 2026, decreasing from $291.3 million as of December 31, 2025. 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 $10.1 million as of June 30, 2026 and $5.8 million as of December 31, 2025, all of which were reciprocal balances for the Company’s customers.

As of June 30, 2026 and December 31, 2025, the estimated amounts of uninsured deposits were $333.6 million, or 23.7% of total deposits and $392.0 million, or 27.4% of total deposits, respectively.

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.

As of June 30, 2026, based on the FHLB’s evaluation, the Company has an available credit position of $494.0 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 $133.5 million, secured by commercial mortgages, with borrowings of $20.0 million as of June 30, 2026 and December 31, 2025.

Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with five major regional correspondent banks for a total of $120.0 million and a secured line with the Federal Reserve discount window in the amount of $3.3 million, based on the market value of the collateral.

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 Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of June 30, 2026 and December 31, 2025, total capital securities were $3.6 million, as adjusted to fair value as of the date of the Merger. The rate is 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, 2025 to June 30, 2026 (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 20.77%, 20.77%, 21.59%, and 13.38% respectively, as of June 30, 2026, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 20.52%, 20.52%, 21.35%, and 13.21%, respectively, as of June 30, 2026, also exceeding the minimum requirements.

As of June 30, 2026, 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 2025, the Federal Reserve reduced rates three times with each rate reduction being 25 bps, and the final reduction occurred in December. There were no rate changes in the first half of 2026. While growth is solid, inflation remains above the 2% goal due to supply and energy shocks. At the July 29, 2026 FOMC meeting, where the rates remained unchanged again, the new Federal Reserve Chair Kevin Warsh avoided future guidance on forward rate paths, and focused instead on new task forces to review policy frameworks.

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) balances of intangible assets, including goodwill, that vary significantly between institutions, and (2) 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 per share data):

Net income

Net income for the three months ended June 30, 2026 was $9.0 million, a $4.8 million increase compared to $4.2 million reported for the three months ended June 30, 2025. Net income per diluted share was $1.65 for the three months ended June 30, 2026 compared to $0.78 per diluted share for the same period in the prior year.

Net income for the six months ended June 30, 2026 was $14.3 million, compared to $8.7 million for the six months ended June 30, 2025. Net income per diluted share was $2.62 for the six months ended June 30, 2026, compared to $1.61 for the six months ended June 30, 2025.

The increase in net income in 2026 is primarily the result of the increase in noninterest income, continued decreases in the cost of funds and increases in earning asset yields despite some contraction in loan balances, along with decreases in noninterest expense, particularly in net occupancy, data processing and other expenses. The gain from the sale of the Bearing limited partnership investment augmented noninterest income.

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, 2026 was $13.8 million, a $954 thousand increase compared to net interest income (FTE) of $12.9 million for the three months ended June 30, 2025. The net interest margin (FTE) of 3.65% for the three months ended June 30, 2026 was 25 bps higher than the 3.40% realized during the three months ended June 30, 2025. Interest expense decreased by $590 thousand, 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 11 bps period over period, from 2.23% to 2.12%. A $3.3 million decrease in average balances of time deposit products contributed to the reduced interest expense during the three months ended June 30, 2026 compared to 2025. Average loan balances of $1.2 billion for the three months ended June 30, 2025 were flat compared to average loan balances for the three months ended June 30, 2026. Earning assets were negatively impacted by the decrease in the average balances of securities, decreasing from $266.9 million in the three months ended June 30, 2025 to $243.9 million in the three months ended June 30, 2026; however, an increase of $25.9 million in Federal funds sold during the same periods helped to offset the decreased securities balances. The primary contributor to the margin improvement was decreased funding costs with a $590 thousand expense reduction due to the control of interest rates paid and decreased borrowings.

Year-to-date overview - Net interest income (FTE) for the six months ended June 30, 2026 was $26.8 million, a $1.6 million increase compared to net interest income (FTE) for the six months ended June 30, 2025. The net interest margin (FTE) of 3.52% was 18 bps higher than the 3.34% realized during the six months ended June 30, 2025. Interest expense decreased by $1.3 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 15 bps period over period, from 230 bps to 215 bps. A $9.0 million decrease in average balances of time deposit products contributed to a lower interest expense in 2026. Average loan balances of $1.2 billion for the six months ended June 30, 2026 were flat compared to average loan balances for the six months ended June 30, 2025. Earning assets were negatively impacted by the decrease in the average balances of securities, decreasing from $269.2 million in the six months ended June 30, 2025 to $248.8 million in the six months ended June 30, 2026. There was an increase in Federal funds sold of $31.8 million which helped offset the decrease in securities.

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

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities. 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 (a non-GAAP financial measure).

(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.

(5) Ratio is computed on an annualized basis.

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 (a non-GAAP financial measure).

(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.

(5) Ratio is computed on an annualized basis.

Provision for credit losses

A provision for credit losses of $231 thousand was recognized during the three months ended June 30, 2026 compared to $3 thousand recognized during the three months ended June 30, 2025. For the six months ended June 30, 2026 and 2025 there were recoveries of $105 thousand and $157 thousand, respectively. The provision recognized in the three months ended June 30, 2026 was due to construction and multifamily project loans originated which drove increases in the ACL as those pools require higher reserves. The fluctuation of loan balances with a net reduction of outstanding balances from December 31, 2025 to June 30, 2026 contributed to the release. In addition, the migration of loans that were refinanced into pools requiring lower reserves contributed to the release.

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, 2026. 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 increases in our required ACL and record additional provision for credit loss exposure.

Noninterest income

The components of noninterest income are shown below (dollars in thousands):

(1) Percentage change is not reported when the baseline (prior period) is zero, as the percentage change is mathematically undefined.

Noninterest income for the three months ended June 30, 2026 of $6.0 million was $4.7 million or 360.1% more than the amount recorded for the three months ended June 30, 2025, due primarily to the gain on the sale of limited partnership investment. The sale of the Company's interest in the investment in Bearing Insurance Group, LLC, a full service insurance agency owned by multiple banks throughout Virginia, was completed on May 1, 2026.

(1) Percentage change is not reported when the baseline (prior period) is zero, as the percentage change is mathematically undefined.

Noninterest income for the six months ended June 30, 2026 of $7.5 million was $4.5 million or 144.9% more than the amount recorded for the six months ended June 30, 2025, due primarily to the gain on sale of the limited partnership investment, as discussed above.

Noninterest expense

The components of noninterest expense are shown below (dollars in thousands):

Noninterest expense for the quarter ended June 30, 2026 of $8.3 million was $412 thousand or 4.7% less than the quarter ended June 30, 2025. This decrease is primarily due to lower data processing costs resulting from the contract renewal negotiations which occurred in the fourth quarter of 2025, reduction of depreciation expenses on fully-depreciated assets and a reduction in other expenses (which includes legal fees) incurred in the most recent quarter compared to the same quarter of 2025.

The components of noninterest expense for the six months ended June 30, 2026 and 2025 are shown below (dollars in thousands):

Noninterest expense for the six months ended June 30, 2026 of $16.5 million was $1.0 million or 5.9% less than the six months ended June 30, 2025. This decrease is primarily due to the same factors discussed above.

Efficiency Ratio

The efficiency ratio (FTE) was 41.6% for the three months ended June 30, 2026 compared to 61.2% for the same quarter of 2025, primarily due to a one time gain on sale of limited partner investment. The efficiency ratio (FTE) of 47.9% for the six months ended June 30, 2026 improved from 61.8% realized in the six months ended June 30, 2025, as all the components of the ratio improved for both the quarter to date and year to date periods of 2026 compared to 2025. 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, 2026 and 2025, the Company provided $2.3 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 20.1% and 21.9%, respectively. For the six months ended June 30, 2026 and 2025, the Company provided $3.5 million and $2.1 million for Federal income taxes, respectively, resulting in effective tax rates of 19.9% and 19.3%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the changes in pretax earnings, low-income housing tax credits and the levels of permanent tax differences.

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, 2026 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, 2026, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2025. 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.