NEW PEOPLES BANKSHARES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution About Forward-Looking Statements We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include: ● the success or failure of our efforts to implement our business plan; ● any required increase in our regulatory capital ratios; ● satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors; ● deterioration of asset quality; ● changes in the level of our nonperforming assets and charge-offs; ● fluctuations of real estate values in our markets; ● our ability to attract and retain talent; ● demographical changes in our markets which negatively impact the local economy; ● the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators; ● the successful management of interest rate risk; ● the successful management of liquidity; ● changes in general economic and business conditions in our market area and the United States in general; ● credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks; ● competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources; ● customer acceptance of new products and services we have offered or may offer; ● deposit flows and competition for deposits; ● the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations; ● the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues and other catastrophic events; ● geopolitical conditions, including trade restrictions and tariffs, and acts or threats of terrorism, international hostilities, military conflicts or actions taken by the U.S. or other governments in response thereto, which could impact business and economic conditions in the U.S. and abroad; ● the continued effective operation of our information technology systems and third-party service providers, including the stabilization and ongoing performance of our core processing platform following the system conversion completed during the fourth quarter of 2025; ● the effects of cyber incidents or other failures, disruptions, or breaches of our operational or security systems, or those of our third-party vendors or other service providers, including as a result of cyber threats or attacks; ● our ability to successfully manage cybersecurity, including generative artificial intelligence risks; ● our ability to assist in managing third party fraud against customer accounts including but not limited to check, credit and debit card, and electronic funds transfer fraud; ● our reliance on third-party vendors and correspondent banks; ● changes in generally accepted accounting principles; ● changes in governmental regulations, tax rates and similar matters; and ● other risks, which may be described, from time to time, in our filings with the SEC. 25 Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Critical Accounting Policies For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2025, and Note 2 Summary of Significant Accounting Policies, in Item 1 of this Form 10-Q. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our allowance for credit losses. The allowance for credit losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for credit losses, we refer you to the section on “Asset Quality” in this discussion. Overview and Highlights Quarter-to-date highlights include: ● Net income for the second quarter of 2026 was $3.5 million, or $0.15 per share. ● Net interest margin was 4.12% for the second quarter of 2026 compared to 3.86% for the second quarter of 2025. ● Total loans held for investment were $732.3 million as of June 30, 2026, an increase of $22.7 million, or 3.20%, from $709.6 million as of December 31, 2025. ● Total deposits increased $29.2 million, or 3.66%, during the six months ended June 30, 2026 to $827.5 million. ● The annualized return on average assets for the quarter was 1.47%. ● The annualized return on average equity for the quarter was 16.28%. ● New Peoples Bank remains well-capitalized with a leverage ratio of 11.17%. Comparison of the Three Months ended June 30, 2026 and 2025 Net interest income for the quarter ended June 30, 2026 was $9.4 million, an increase of $1.2 million, or 14.38%, compared to the second quarter of 2025. Interest and dividend income increased $1.2 million to $13.2 million due to the combination of an increase of 17 basis points (“bps”) in the yield on earning assets to 5.78% and a $60.6 million increase in the average balance of earning assets when compared to the second quarter of 2025. The loan portfolio was the primary driver of both increases as the yield rose 25 bps to 6.45% while the average balance increased $46.4 million compared to the second quarter of 2025. Also contributing to the improvement in net interest income was lower funding costs. While the average balance of interest-bearing liabilities increased $40.2 million, the cost decreased 14 bps to 2.52%, and total interest expense increased only $49,000 to $3.8 million during the second quarter of 2026 compared to the second quarter of 2025. The reduction in the cost of interest-bearing liabilities is primarily due to maturing time deposits repricing in a lower interest-rate environment and declines in both the cost and balance of borrowed funds. The decrease in the average balance of borrowed funds was due to a $3 million principal payment on a borrowing from the Federal Home Loan Bank of Atlanta during the fourth quarter of 2025. In addition, the variable rate paid on the trust preferred securities decreased as overnight and short-term borrowing rates declined during the last half of 2025. The net interest margin improved 26 bps to 4.12% for the quarter ended June 30, 2026, compared to 3.86% for the same period in 2025, due to the increase in the yield on earning assets and the decline in the cost of funds. The net interest spread widened by 31 bps to 3.26% for the second quarter of 2026 from 2.95% for the comparable period of 2025. 26 The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated: Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates Three Months Ended June 30, 2026 2025 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 728,192 $ 11,710 6.45 % $ 681,828 $ 10,540 6.20 % Federal funds sold 382 4 3.68 % 276 3 4.43 % Interest-bearing deposits in other banks 75,315 687 3.66 % 60,976 663 4.36 % Investment securities (2) 111,020 787 2.84 % 111,272 752 2.71 % Total earning assets 914,909 13,188 5.78 % 854,352 11,958 5.61 % Less: Allowance for credit losses (8,327 ) (7,956 ) Non-earning assets 36,616 36,905 Total assets $ 943,198 $ 883,301 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 71,461 $ 107 0.60 % $ 72,194 $ 128 0.71 % Savings and money market deposits 225,103 1,027 1.83 % 194,919 832 1.71 % Time deposits 288,899 2,410 3.35 % 275,114 2,490 3.63 % Total interest-bearing deposits 585,463 3,544 2.43 % 542,227 3,450 2.55 % Other borrowings 7,000 62 3.51 % 10,055 89 3.51 % Trust preferred securities 11,986 187 6.18 % 11,986 205 6.76 % Total borrowed funds 18,986 249 5.19 % 22,041 294 5.28 % Total interest-bearing liabilities 604,449 3,793 2.52 % 564,268 3,744 2.66 % Non-interest-bearing deposits 244,072 236,284 Other liabilities 9,628 9,680 Total liabilities 858,149 810,232 Shareholders’ equity 85,049 73,069 Total liabilities and shareholders’ equity $ 943,198 $ 883,301 Net interest income $ 9,395 $ 8,214 Net interest margin 4.12 % 3.86 % Net interest spread 3.26 % 2.95 % (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. 27 Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025. Volume and Rate Analysis Increase (decrease) Three Months Ended June 30, 2026 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest income: Loans $ 735 $ 435 $ 1,170 Federal funds sold 1 — 1 Interest-bearing deposits in other banks 141 (117 ) 24 Taxable investment securities (2 ) 37 35 Total earning assets 875 355 1,230 Interest expense: Interest-bearing demand deposits (2 ) (19 ) (21 ) Savings and money market deposits 139 56 195 Time deposits 120 (200 ) (80 ) Other borrowings (27 ) — (27 ) Trust preferred securities — (18 ) (18 ) Total interest-bearing liabilities 230 (181 ) 49 Change in net interest income $ 645 $ 536 $ 1,181 The provision for credit losses charged to the income statement for the quarter ended June 30, 2026 was $63,000 compared to $154,000 for the three months ended June 30, 2025. The provision expense for the second quarter of 2026 is primarily attributable to growth in the loan portfolio and a modest adjustment to the qualitative factors in the calculation of the allowance for credit losses on one-to-four-family residential mortgage loans and for geopolitical uncertainty related to the conflict in the Middle East and was partially offset by a slight decrease in the overall historical loss rates. The provision expense also benefited from the net recoveries on loans previously charged off and a reduction in the allowance for credit losses on unfunded commitments resulting from a decline in construction loan commitments. A recovery of credit losses on unfunded commitments of $5,000 was recognized for the second quarter of 2026 due to a $4.6 million reduction in commitments on construction loans. The provision for credit losses on unfunded commitments for the second quarter of 2025 was $0. Noninterest income, totaling $2.5 million for the second quarter of 2026, increased $84,000 compared to the quarter ended June 30, 2025. The improvement was driven primarily by a $100,000 increase in income from card processing and interchange income. Noninterest expense was $7.4 million for the quarter ended June 30, 2026, an increase of $168,000, or 2.33%, compared to the second quarter of 2025. The increase was primarily attributable to contractual and inflationary price increases, an increase in incentive accruals and less costs deferred on loan originations, partially offset by reductions in other operating expense categories, including expenses for the debit card rewards program which was discontinued in the fourth quarter of 2025. The efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income, on a tax-equivalent basis, plus noninterest income, decreased to 61.93% during the second quarter of 2026 from 67.70% for the second quarter of 2025. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. 28 Income tax expense for the second quarter of 2026 totaled $1,020,000, an increase of $269,000, or 35.82%, from $751,000 recorded during the same period in 2025. This increase was in line with the increase in pre-tax income which increased $1.2 million or 36.19% for the comparative three months ended June 30, 2026 and 2025. The effective tax rate for the three months ended June 30, 2026, was 22.81%, compared to 22.88% for the same period in 2025. Comparison of the Six Months ended June 30, 2026 and 2025 Year-to-date highlights include: ● Net income for the six months ended June 30, 2026 was $6.5 million, or $0.28 per share, an increase of $2.1 million, or 46.69%, from the $4.4 million or $0.19 per share reported for the same period in 2025. ● Returns on average assets and equity of 1.41% and 15.49% for the first half of 2026, compared to 1.02% and 12.37% for the first six months of 2025, respectively; For the six months ended June 30, 2026, net interest income totaled $18.2 million, an increase of $2.4 million, or 15.09%, as compared to the six months ended June 30, 2025. The net interest margin increased 27 bps to 4.05% as compared to 3.78% for the same period in 2025. Net interest income improved due to growth in average earning assets, which increased $61.0 million, or 7.2%, to $905.7 million. In addition, the yield on earning assets improved 18 bps to 5.74% during the six months ended June 30, 2026 compared to the same period in 2025. Interest expense for the six months ended June 30, 2026 totaled $7.6 million, an increase of $88,000, or 1.18%, from the same period in 2025, as a 16 basis-point decline in the cost of interest-bearing liabilities to 2.53% was more than offset by a $42.2 million increase in the average balance of interest-bearing liabilities. The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated: Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates Six Months Ended June 30, 2026 2025 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 722,531 $ 22,925 6.40 % $ 670,488 $ 20,452 6,15 % Federal funds sold 436 8 3.63 % 208 5 4.42 % Interest-bearing deposits in other banks 73,201 1,325 3.65 % 62,681 1,355 4.36 % Investment securities (2) 109,527 1,527 2.79 % 111,290 1,497 2.71 % Total earning assets 905,695 25,785 5.74 % 844,667 23,309 5.56 % Less: Allowance for credit losses (8,251 ) (7,873 ) Non-earning assets 36,950 37,157 Total assets $ 934,394 $ 873,951 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,852 $ 219 0.61 % $ 72,293 $ 265 0.74 % Savings and money market deposits 220,633 1,968 1.80 % 190,952 1,610 1.70 % Time deposits 289,902 4,891 3.40 % 274,841 5,024 3.69 % Total interest-bearing deposits 583,387 7,078 2.45 % 538,086 6,899 2.59 % Other borrowings 7,000 123 3.51 % 10,028 177 3.51 % Trust preferred securities 11,986 372 6.18 % 12,085 409 6.73 % Total borrowed funds 18,986 495 5.19 % 22,113 586 5.27 % Total interest-bearing liabilities 602,373 7,573 2.53 % 560,199 7,485 2.69 % Non-interest-bearing deposits 237,510 231,690 Other liabilities 9,714 9,631 Total liabilities 849,597 801,520 Shareholders’ equity 84,797 72,431 Total liabilities and shareholders’ equity $ 934,394 $ 873,951 Net interest income $ 18,212 $ 15,824 Net interest margin 4.05 % 3.78 % Net interest spread 3.21 % 2.87 % (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. 29 Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the six months ended June 30, 2026, as compared to the six months ended June 30, 2025. Volume and Rate Analysis Increase (decrease) Six Months Ended June 30, 2026 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest income: Loans $ 1,623 $ 850 $ 2,473 Federal funds sold 4 (1 ) 3 Interest-bearing deposits in other banks 209 (239 ) (30 ) Taxable investment securities (25 ) 55 30 Total earning assets 1,811 665 2,476 Interest expense: Interest-bearing demand deposits 2 (48 ) (46 ) Savings and money market deposits 259 99 358 Time deposits 270 (403 ) (133 ) Other borrowings (54 ) — (54 ) Trust preferred securities (3 ) (34 ) (37 ) Total interest-bearing liabilities 474 (386 ) 88 Change in net interest income $ 1,337 $ 1,051 $ 2,388 For the six months ended June 30, 2026, the provision for credit losses totaled $303,000 as compared to $413,000 recorded for the same period in 2025. For the six months ended June 30, 2026, noninterest income totaled $5.2 million, an increase of $301,000 compared to the same period in 2025, driven primarily by a $221,000 increase in card processing and interchange income and a $74,000 increase in financial and investment services income. For the six months ended June 30, 2026, noninterest expense totaled $14.6 million, an increase of $129,000, or 0.89%, over the same period in 2025. The increase primarily resulted from higher salaries and employee benefits, partially offset by lower occupancy costs and discontinuance of the debit card rewards program. Balance Sheet Total assets as of June 30, 2026 were $942.2 million, an increase of $32.5 million, or 3.57%, from $909.7 million as of December 31, 2025. Loans held for investment of $732.3 million as of June 30, 2026 reflected an increase of $22.7 million, or 3.20%, from $709.6 million as of December 31, 2025. During the second quarter of 2026, the Company transferred its $1.3 million credit card portfolio from loans held for investment to loans held for sale based on management’s decision to sell the portfolio. The sale of the portfolio is not expected to be finalized until 2027. Liquid assets in the form of cash and cash equivalents increased $7.1 million, or 9.20%, during the first six months of 2026. Investment securities available for sale increased $2.2 million during the first six months of 2026 due to purchases of $9.9 million offset by maturities, calls, payments and amortization of $6.7 million and a $1.0 million increase in the unrealized loss on securities available for sale. 30 Gross loans receivable increased $22.7 million, or 3.19%, to $732.3 million at June 30, 2026, compared with $709.6 million at December 31, 2025. Construction and land development loans increased $10.8 million, or 25.26%, to $53.6 million during the first six months of 2026. The increase was partly attributable to draws on construction lines originated in prior periods, which also contributed to the decrease in unfunded commitments during the first half of 2026. Lending collateralized by multifamily properties increased $5.1 million, or 11.05%, to $51.0 million at June 30, 2026. Non-real estate commercial loans increased $5.5 million, or 10.39%, from December 31, 2025 to June 30, 2026. Deposits totaled $827.5 million as of June 30, 2026, compared to $798.3 million as of December 31, 2025. The increase of $29.2 million, or 3.66%, was due to continued efforts to attract and retain money market account relationships combined with growth in noninterest-bearing demand deposits. Uninsured deposits as of June 30, 2026 were estimated at $136 million, or 16.4% of total deposits. As of June 30, 2026 and December 2025, borrowed funds totaled $19.0 million. During the six months ended June 30, 2026, total shareholders’ equity increased $3.5 million to $86.3 million, due to net income of $6.5 million, which was partially offset by an increase in the net unrealized loss on available-for-sale securities of $805,000, dividends paid to shareholders of $2.1 million, and the repurchase of common stock totaling $98,000. Consequently, book value per share increased to $3.67 as of June 30, 2026, compared to $3.52 as of December 31, 2025. The Bank remains well capitalized per regulatory guidance. During the first six months of 2026, the Company repurchased 27,701 shares of its common stock at an average price of $3.54 per share. Since the commencement of the repurchase plan in 2022, 382,774 shares have been repurchased at an average price of $2.61 per share. On July 20, 2026, the Board of Directors approved the termination of the Company's stock repurchase program. As a result, the Company will no longer repurchase shares of its common stock under the program. Asset Quality The allowance for credit losses on loans was $8.2 million, or 1.12% as a percentage of total loans, as of June 30, 2026, and $8.1 million, or 1.14%, as of December 31, 2025. The decrease in the allowance as a percentage of loans was primarily attributable to charge-offs recorded on two individually evaluated borrower relationships for which specific allowance allocations had been established at year-end. One of these relationships had two pieces of collateral – the residential property was foreclosed and reclassified into other real estate owned and the commercial property was sold at auction during the first six months of 2026. The charge-off on the other relationship was largely driven by the amount of time that it had been in its classified status. The $108,000 increase in the allowance for credit losses on loans was attributable to provision expense associated with a larger loan portfolio and modest adjustments to qualitative factors for geopolitical uncertainty related to the conflict in the Middle East and one-to-four-family residential mortgage loans. The allowance for credit losses on unfunded commitments was $455,000 as of June 30, 2026, as compared to $471,000 as of December 31, 2025. The decrease in the allowance for credit losses on unfunded commitments was due to a decrease in loan commitments, specifically residential and commercial real estate construction loan commitments. Annualized net charge-offs (recoveries) as a percentage of average loans were (0.02%) during the second quarter of 2026 compared to 0.14% during the first quarter of 2026 and 0.02% during the second quarter of 2025. Annualized net charge-offs for the first six months of 2026 and 2025 were 0.06% and 0.02%, respectively. Nonperforming assets, which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.5 million as of June 30, 2026, a decrease of $320,000, or 8.29%, since year-end 2025. Nonaccrual loans decreased $285,000 during the first six months of 2026 primarily due to the charge-off of the specific allowance allocations on the individually evaluated loans and a loan that was removed from nonaccrual status based on performance. Nonperforming assets as a percentage of total assets were 0.38% as of June 30, 2026 and 0.42% as of December 31, 2025. Other real estate owned increased to $225,000 as of June 30, 2026 from $89,000 at December 31, 2025 due to the foreclosure on the residential property discussed above. During the second quarter of 2026, a residential property in other real estate owned was sold for a $37,000 gain. For detailed information on nonaccrual loans and other real estate owned as of June 30, 2026 and December 31, 2025, refer to Note 6 Loans and Note 10 Other Real Estate Owned in Item 1 of this Form 10-Q. 31 Loans rated substandard or below totaled $3.2 million as of June 30, 2026, an increase of $600,000 from $2.6 million as of December 31, 2025. Total past due loans decreased to $4.8 million as of June 30, 2026 from $7.2 million as of December 31, 2025. The allowance for credit losses is maintained at a level that management deems appropriate to absorb any expected future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. Through our quarterly assessment, we continue to adjust the CECL model to best reflect the risks in the portfolio. However, future provisions may be deemed necessary. During the first six months of 2026, we maintained the adjustments to our qualitative factors initiated in 2024 and carried forward into 2025, to consider risk factors associated with commercial real estate and residential mortgage loans, including a modest increase in 2026 in the risk factor for residential mortgage loans based on the past dues and increases in loans in the process of foreclosure in that portfolio. Those changes, along with recoveries of loans previously charged off and the assessment of the historical and specific risks associated with the loan portfolio, resulted in a provision for credit losses of $303,000, which included a $319,000 provision for the loan portfolio; and a $16,000 recovery of credit losses on unfunded commitments. The following table summarizes components of the allowance for credit losses and related loans as of June 30, 2026 and December 31, 2025: Selected Credit Ratios June 30, December 31, (Dollars in thousands) 2026 2025 Allowance for credit losses - loans $ 8,215 $ 8,107 Total loans 732,260 709,587 Allowance for credit losses to total loans 1.12 % 1.14 % Nonaccrual loans $ 3,313 $ 3,598 Nonaccrual loans to total loans 0.45 % 0.51 % Ratio of allowance for credit losses loans to nonaccrual loans 2.48 X 2.25 X Charge-offs net of recoveries $ 211 $ 316 Average loans $ 722,531 $ 689,104 Net charge-offs to average loans 1 0.06 % 0.05 % 1 - Annualized Deferred Tax Asset and Income Taxes Due to timing differences between the book and tax treatments of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available-for-sale of $2.3 million and $2.1 million existed as of June 30, 2026 and December 31, 2025, respectively. Our income tax expense was computed at the federal corporate income tax rate of 21% of taxable income and a blended state tax rate of 1.87%. We have no significant nontaxable income or nondeductible expenses. Capital Resources The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q. As of June 30, 2026, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements. Book value per common share was $3.67 and $3.52 as of June 30, 2026 and December 31, 2025, respectively. The increase in the book value was due largely to the $6.5 million, or $0.28 per share, of net income for the first six months of 2026, partially offset by the net increase in the unrealized loss on available for sale investment securities of $805,000, the cash dividend payment of $0.09 per share and the repurchase of common shares for $98,000 during the first half of 2026. 32 Other key performance indicators are as follows: Three months ended June 30, Six months ended June 30, 2026 2025 2026 2025 Return on average assets 1 1.47 % 1.15 % 1.41 % 1.02 % Return on average shareholders’ equity 1 16.28 % 13.91 % 15.49 % 12.37 % Average equity to average assets 9.02 % 8.27 % 9.08 % 8.29 % 1 - Annualized Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient. During the first quarter of 2026, the Company paid a cash dividend of $0.09 per common share to our shareholders. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the Company. As previously reported, the Company had approved a one-year stock repurchase program that authorized the repurchase of up to 500,000 of the Company’s common shares through March 31, 2027. On July 20, 2026, the Board of Directors approved the termination of the Company's stock repurchase program. As a result, the Company will no longer repurchase shares of its common stock under the program. As of June 30, 2026, the Company had repurchased 382,774 shares at an average price of $2.61 per share since inception of the plan. During the quarter ended June 30, 2026, the Company repurchased 16,205 shares at an average price of $3.53 per share. Liquidity We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments. Collectively, those balances were $153.1 million as of June 30, 2026, up from $141.0 million as of December 31, 2025. The increase is primarily due to deposit growth exceeding funding needs for loan growth and cash provided by operations. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs. As of June 30, 2026, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $68.8 million, which is net of the $29.8 million of securities pledged as collateral. Generally, the investment portfolio serves as a source of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond (the FRB). Due to the unrealized loss on securities available-for-sale, the sale of investments, other than shorter-term investments with minimal unrealized losses or more recently purchased investments, would not be a main source of liquidity at this time due to the immediate impact on regulatory capital; however, the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowed funds. Total investment securities increased $2.2 million, or 4.55%, annualized during the first half of 2026 from $96.4 million as of December 31, 2025 to $98.6 million as of June 30, 2026. The Bank also has additional borrowing capacity on lines for which investments and certain loans are currently pledged. Our loan to deposit ratio was 88.48% and 88.89% as of June 30, 2026 and December 31, 2025, respectively. Available third-party sources of liquidity as of June 30, 2026 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks. 33 We have used our line of credit with the FHLB to issue letters of credit totaling $14.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on these letters of credit have been issued. The letters of credit are considered to be draws on our FHLB line of credit. In May 2023, we borrowed $10.0 million from the FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity needs and prepaid $3 million of the outstanding balance in the fourth quarter of 2025; and, in June 2025, we borrowed an additional $5.0 million which was repaid in July 2025. An additional $261.0 million was available as of June 30, 2026 on the $282.0 million line of credit. Full use of the FHLB borrowing capacity would require the Company to pledge additional assets. As of June 30, 2026 we held brokered time deposits of $8.0 million, unchanged from December 31, 2025. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the rate paid on deposits is shown in the net interest margin analysis tables. Total reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits were $7.3 million and $7.0 million as of June 30, 2026 and December 31, 2025, respectively. Aside from the availability of CDARS time deposits, we also offer a similar deposit product for transaction account customers through Intrafi Cash Service (“ICS”). As of June 30, 2026 approximately $11.4 million were placed in this product as compared to $16.1 million at December 31, 2025. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage. Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $24.6 million were pledged as of June 30, 2026. Time deposits of $250,000 or more were approximately 6.21% of total deposits at June 30, 2026 and 7.15% of total deposits at December 31, 2025. In January 2025, we made a voluntary principal payment of $3.0 million on an outstanding trust preferred security. We may consider making future principal payments based on our available liquidity and considering other funding opportunities that may be available. With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control. Given continued economic uncertainty, the level of market interest rates, and potential impacts from proposed or enacted tariffs and other trade restrictions, along with ongoing geopolitical conflicts than can contribute to energy price volatility and broader financial market volatility, we continue monitoring our liquidity position, specifically cash on hand, and readily-available contingent funding sources, in order to meet customer demands. Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability Committee. Off Balance Sheet Items and Contractual Obligations There have been no material changes during the six months ended June 30, 2026, to the off-balance sheet items and the contractual obligations disclosed in our 2025 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.