UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2026
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-42512
EAGLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Virginia
54-1601306
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2 East Main Street
P.O. Box 391
Berryville, VA
22611
(Address of principal executive offices)
(Zip Code)
(540) 955-2510
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $2.50
EFSI
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of August 4, 2026 was 5,411,615.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets at June 30, 2026 and December 31, 2025
1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2026 and 2025
2
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2026 and 2025
3
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2026 and 2025
4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2026 and 2025
5
Notes to Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
67
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
68
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
69
Item 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
June 30, 2026
December 31, 2025
(Unaudited)
*
Assets
Cash and due from banks
$
18,281
13,942
Interest-bearing deposits with other institutions
71,169
103,984
Federal funds sold
54,542
99,268
Total cash and cash equivalents
143,992
217,194
Securities available for sale, at fair value, amortized cost of $120,152 and $126,197, respectively
112,466
119,543
Restricted investments, at cost
1,875
3,786
Loans held for sale
5,974
4,786
Loans
1,499,351
1,473,077
Allowance for credit losses
(18,306
)
(15,320
Net Loans
1,481,045
1,457,757
Bank premises and equipment, net
14,974
14,906
Bank owned life insurance
32,293
31,720
Other assets
54,746
38,934
Total assets
1,847,365
1,888,626
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits
463,086
432,171
Savings and interest bearing demand deposits
720,714
728,545
Time deposits
418,135
446,644
Total deposits
1,601,935
1,607,360
Federal funds purchased
11
—
Federal Home Loan Bank advances, long-term
40,000
Subordinated debt, net of unamortized issuance costs
29,613
29,579
Other liabilities
21,901
22,848
Total liabilities
1,653,460
1,699,787
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $10 par value; 500,000 shares authorized and unissued
Common stock, $2.50 par value; authorized 10,000,000 shares; issued and outstanding 2026, 5,411,615 including 86,912 shares of unvested restricted stock; issued and outstanding 2025, 5,374,205 including 68,476 shares of unvested restricted stock
13,311
13,264
Surplus
65,189
64,720
Retained earnings
121,481
116,115
Accumulated other comprehensive loss
(6,076
(5,260
Total shareholders’ equity
193,905
188,839
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
* Derived from the consolidated audited financial statements.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
Six Months Ended
June 30,
2026
2025
Interest and Dividend Income
Interest and fees on loans
21,744
20,409
42,457
40,380
Interest and dividends on securities available for sale:
Taxable interest income
1,188
1,142
2,418
1,837
Interest income exempt from federal income taxes
Dividends
117
143
267
Interest on deposits in banks
1,200
3,060
2,898
5,704
Interest on federal funds sold
176
87
285
126
Total interest and dividend income
24,375
24,815
48,201
48,317
Interest Expense
Interest on deposits
7,050
8,263
14,275
16,767
Interest on Federal Home Loan Bank advances
499
344
1,807
Interest on subordinated debt
355
709
Total interest expense
7,405
9,117
15,328
19,283
Net interest income
16,970
15,698
32,873
29,034
Provision for Credit Losses
3,503
668
5,464
1,901
Net interest income after provision for credit losses
13,467
15,030
27,409
27,133
Noninterest Income
Wealth management fees
2,197
1,650
3,979
3,331
Service charges on deposit accounts
563
517
1,119
1,009
Other service charges and fees
1,028
1,060
1,949
2,032
(Loss) on the sale of bank premises and equipment
(4
(16
(Loss) on the sale of securities
(12,425
Gain on sale of loans
646
1,104
1,658
1,533
Gain on sale of other assets
3,486
Small business investment company income
110
133
376
153
Bank owned life insurance income
289
278
573
551
Other operating income
275
175
382
195
Total noninterest income (loss)
8,590
4,917
13,518
(3,637
Noninterest Expenses
Salaries and employee benefits
9,212
7,845
17,441
15,024
Occupancy expenses
613
598
1,279
1,260
Equipment expenses
451
401
913
824
Advertising and marketing expenses
295
152
486
335
Stationery and supplies
30
35
76
77
ATM network fees
326
332
653
694
Other real estate owned expense (gain), net
(5
Loss on sale of repossessed assets
39
FDIC assessment
169
254
396
576
Computer software expense
422
325
776
607
Bank franchise tax
530
381
1,011
748
Professional fees
641
1,155
1,204
Data processing fees
591
633
1,077
1,183
Loan servicing expense
260
262
529
Other operating expenses
2,081
1,540
3,917
2,824
Total noninterest expenses
15,531
13,399
29,743
25,988
Income (loss) before income taxes
6,526
6,548
11,184
(2,492
Income Tax Expense (Benefit)
1,545
1,278
2,463
(788
Net Income (Loss)
4,981
5,270
8,721
(1,704
Earnings (Loss) Per Share
Net income (loss) per common share, basic
0.92
0.98
1.61
(0.34
Net income (loss) per common share, diluted
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Net income (loss)
Other comprehensive (loss) income:
Unrealized (loss) gain on available for sale securities, net of reclassification adjustments, net of deferred income tax (benefit) expense of $(29) and $(179) for the three months ended June 30, 2026 and 2025, respectively and $(216) and $3,014 for the six months ended June 30, 2026 and 2025 respectively.
(111
(669
(816
11,344
Total other comprehensive (loss) income
Total comprehensive income
4,870
4,601
7,905
9,640
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Common Stock
RetainedEarnings
AccumulatedOtherComprehensive(Loss)
Total
December 31, 2024
8,714
14,901
114,012
(18,640
118,987
Net loss
(6,974
Other comprehensive income
12,013
Vesting of restricted stock awards, stock incentive plan (25,717 shares)
64
(64
Stock-based compensation expense
323
Issuance of common stock, public offering, net (1,796,875 shares)
4,492
49,009
53,501
Repurchase and retirement of common stock (7,348 shares)
(18
(247
(265
Dividends declared ($0.31 per share)
(1,110
March 31, 2025
13,252
63,922
105,928
(6,627
176,475
Net income
Other comprehensive (loss)
Vesting of restricted stock awards, stock incentive plan (4,889 shares)
12
(12
290
Repurchase and retirement of common stock (1,432 shares)
(46
(50
(1,668
June 30, 2025
13,260
64,154
109,530
(7,296
179,648
3,740
(705
413
Vesting of restricted stock awards, stock incentive plan (26,209 shares)
65
(65
Repurchase and retirement of common stock (7,235 shares)
(266
(284
(1,677
March 31, 2026
64,802
118,178
(5,965
190,326
387
(1,678
Consolidated Statements of Cash Flows (Unaudited)
Cash Flows from Operating Activities
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation
419
389
Amortization of other assets
428
543
Origination of loans held for sale
(53,579
(42,521
Proceeds from sale of loans held for sale
54,046
43,418
Net (gain) on sales of loans
(1,658
(1,528
Provision for credit losses
(Gain) on the sale of portfolio loans
Loss on the sale and disposal of premises and equipment
16
Loss on the sale of repossessed assets
Loss on the sale of securities
12,425
(Gain) on the sale of other assets
(3,486
Amortization of subordinated debt issuance costs
34
33
800
(Accretion) of premiums and discounts on debt securities and loans, net
(515
(273
Bank-owned life insurance income
(573
(551
Changes in assets and liabilities:
(Increase) in other assets
(17,419
(539
(Decrease) in other liabilities
(952
(3,984
Net cash (used in) provided by operating activities
(8,227
8,366
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale
16,289
6,899
Proceeds from the sale of securities available for sale
86,822
Purchases of securities available for sale
(9,824
(91,155
Proceeds from the sale of restricted investments
1,931
3,815
Purchases of restricted investments
(20
(44
Purchases of bank premises and equipment
(491
(799
Proceeds from the sale of bank premises and equipment
40
Proceeds from the sale of repossessed assets
96
Proceeds from sale of other assets
5,061
Proceeds from the sale of portfolio loans
18,772
Net (increase) decrease in loans
(28,964
8,290
Funding of capital commitments related to other investments
(492
Net cash (used in) provided by investing activities
(15,922
32,529
Cash Flows from Financing Activities
Net increase in noninterest bearing demand deposits, savings, and interest bearing demand deposits
23,084
217,456
Net (decrease) in time deposits
(28,509
(26,088
Net increase in federal funds purchased
172
Repayments of short-term Federal Home Loan Bank advances
(25,000
Repayments of long-term Federal Home Loan Bank advances
(40,000
(55,000
Net proceeds from issuance of common stock in public offering
Repurchase and retirement of common stock
(315
Cash dividends paid
(3,355
(2,778
Net cash (used in) provided by financing activities
(49,053
161,948
(Decrease) increase in cash and cash equivalents
(73,202
202,843
Cash and Cash Equivalents
Beginning
193,159
Ending
396,002
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest
15,549
20,125
Income taxes
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized (loss) gain on securities available for sale
(1,032
14,358
Repossessed assets acquired in settlement of loans
302
186
Lease liabilities arising from right-of-use assets
204
773
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. General
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP.
In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2026 and December 31, 2025, the results of operations and the changes in shareholders' equity for the three and six months ended June 30, 2026 and 2025, and cash flows for the six months ended June 30, 2026 and 2025. The results of operations for the three and six months ended June 30, 2026 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 (the “2025 Form 10-K”).
Eagle Financial Services, Inc. (the "Company") owns 100% of Bank of Clarke (the “Bank”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.
Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations. None of the reclassifications were of a material nature and they had no effect on prior year net income or shareholders' equity.
Application of the principles of GAAP and practices within the banking industry require management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance of credit losses on loans.
The Company's significant accounting policies followed in preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the Company's 2025 Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2025.
NOTE 2. Stock-Based Compensation Plan
On May 16, 2023, the Company’s shareholders approved the 2023 Stock Incentive Plan which allows key employees and directors to increase their personal financial interest in the Company. The 2023 plan permits the issuance of incentive stock options and non-qualified stock options and the award of common stock, restricted stock, and stock units. The plan authorizes the issuance of up to 250,000 shares of common stock. The 2023 Stock Incentive Plan replaced the 2014 Stock Incentive Plan.
The Company periodically grants restricted stock to its directors, executive officers and certain non-executive officers. Restricted stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restricted period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of one year. Executive officers have been
granted restricted shares which vest over a three year service period and restricted shares which cliff vest based on meeting performance measures over a three year period. Certain non-executive officers also have been granted restricted shares which vest over a three year service period. The Company recognizes compensation expense over the restricted period based on the fair value of the Company's stock on the grant date. The Company's policy is to recognize forfeitures as they occur. As of June 30, 2026, there was $1.7 million of unrecognized compensation cost related to nonvested restricted stock, with a weighted average remaining term of 2.01 years.
The following table presents restricted stock activity for the six months ended June 30, 2026 and 2025:
Shares
WeightedAverageGrant DateFair Value
Nonvested, beginning of period
68,476
33.96
64,043
32.02
Granted
45,406
39.44
39,545
36.40
Vested
(26,209
34.50
(30,606
33.02
Forfeited
(761
(875
35.95
Nonvested, end of period
86,912
36.61
72,107
33.95
NOTE 3. Earnings Per Common Share
Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method.
The following table shows the weighted average number of shares used in computing earnings per share for the three and six months ended June 30, 2026 and 2025. During 2026 and 2025, there were no potentially dilutive securities outstanding.
Average number of common shares outstanding used to calculate basic and diluted earnings per share
5,412,016
5,378,214
5,412,018
4,977,482
7
NOTE 4. Securities
Amortized costs and fair values of securities available for sale at June 30, 2026 and December 31, 2025 were as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealized(Losses)
Fair Value
(in thousands)
Obligations of U.S. government corporations and agencies
7,093
(83
7,010
U.S. treasury securities
9,972
(8
9,964
Mortgage-backed securities
76,930
(7,110
69,859
Collateralized mortgage obligations
21,907
(377
21,530
Subordinated debt
4,250
(149
4,103
120,152
41
(7,727
7,458
7,444
9,999
10,001
81,492
480
(6,843
75,129
22,498
84
(87
22,495
4,750
(276
4,474
126,197
568
(7,222
The Company has elected to exclude accrued interest receivable, totaling $457 thousand and $669 thousand at June 30, 2026 and December 31, 2025, respectively from the amortized cost basis of securities. The deferred tax asset on the securities portfolio at June 30, 2026 and December 31, 2025 was $1.6 million and $1.4 million, respectively, and is included in Other Assets in the Consolidated Balance Sheets.
In March 2025, balance sheet repositioning transactions were executed. The Bank sold available for sale securities with an amortized cost balance of $99.2 million and reinvested $66.0 million into purchases of available for sale securities. The sale of securities resulted in a net realized pre-tax loss of $12.4 million recognized during the six months ended June 30, 2025. There were no sales of available for sale securities during the three months ended June 30, 2025 or the three and six months ended June 30, 2026.
The following table summarizes amounts related to the sale of available for sale securities:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Proceeds from sales
Gross realized losses
Net realized losses on securities
8
The amortized cost and estimated fair value of securities at June 30, 2026, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Amortized Cost
Due in one year or less
Due after one year through five years
13,959
13,735
Due after five years through ten years
16,135
15,965
Due after ten years
80,086
72,802
The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at June 30, 2026 and December 31, 2025 were as follows:
Less than 12 months
12 months or more
GrossUnrealizedLosses
3,475
3,535
15
83
35,750
185
28,017
6,925
63,767
7,110
18,846
225
2,684
377
477
23
2,624
3,101
149
68,512
509
36,860
7,218
105,372
7,727
5,503
29,508
6,843
7,116
973
28
3,002
248
3,975
276
13,592
131
32,510
7,091
46,102
7,222
The reference point for determining when securities are in an unrealized loss position is month end. As such, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
There were 53 and 39 debt securities with a fair value below the amortized cost basis, totaling $105.4 million and $46.1 million of aggregate fair value as of June 30, 2026 and December 31, 2025 respectively. The Company concluded that a credit loss does not exist in its securities portfolio at June 30, 2026 based on the fact that (1) changes in fair value were caused by non-credit-related factors, primarily fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) as of June 30, 2026, the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-backed securities, collateralized
9
mortgage obligations, U.S. treasury securities, and obligations of U.S. government corporations and agencies are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such securities will receive timely principal and interest payments.
Securities having carrying values of $4.0 million, $3.0 million and $84.6 million at June 30, 2026 were pledged as security for trust accounts, a deposit relationship and for borrowing capacity at the Federal Reserve Bank ("FRB") discount window, respectively.
The composition of restricted investments at June 30, 2026 and December 31, 2025 was as follows:
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
1,391
3,302
Community Bankers’ Bank Stock
140
NOTE 5. Loans and Allowance for Credit Losses on Loans
The composition of loans at June 30, 2026 and December 31, 2025 was as follows:
December 31,
Mortgage real estate loans:
Construction & Secured by Farmland
95,454
82,336
HELOCs
59,973
58,640
Residential First Lien - Investor
107,456
107,307
Residential First Lien - Owner Occupied
177,739
178,807
Residential Junior Liens
10,117
10,724
Commercial - Owner Occupied
329,817
298,853
Commercial - Non-Owner Occupied & Multifamily
397,617
398,926
Commercial and industrial loans:
SBA PPP loans
Other commercial and industrial loans
118,059
113,220
Marine loans
159,246
175,639
Consumer loans
28,052
28,742
Overdrafts
463
318
Other loans
11,540
13,946
Total loans
1,495,533
1,467,462
Net deferred loan costs and premiums
3,818
5,615
At June 30, 2026, the Company was servicing $48.3 million of loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $757 thousand at June 30, 2026, which are recorded in Other Assets in the Consolidated Balance Sheets. When loans are sold with servicing retained, servicing assets are recorded which represent the Company's right to service loans that were sold. Servicing assets are initially recorded by the Company at fair value and are subsequently amortized in proportion to, and over the period of, estimated net servicing income.
10
Changes in the allowance for credit losses on loans for the three and six months ended June 30, 2026 and 2025 and year-ended December 31, 2025 were as follows:
Year Ended
Balance, beginning
17,326
15,282
15,027
15,320
3,207
856
3,880
5,179
2,002
Recoveries added to the allowance
559
231
361
Credit losses charged to the allowance
(2,269
(335
(4,146
(2,424
(1,411
Balance, ending
18,306
15,979
Past due loans by class at June 30, 2026 and December 31, 2025 were as follows:
30 - 59DaysPast Due
60 - 89DaysPast Due
90 or MoreDaysPast Due
Total PastDue
Current
Total Loans
90 or MoreDays Past Due StillAccruing
301
95,153
59,964
98
107,358
557
733
177,006
4,404
822
4,459
9,685
320,132
8,225
3,707
11,932
385,685
676
379
2,556
3,611
114,448
905
158,341
707
47
17
771
27,281
15,483
1,248
11,314
28,045
1,467,488
20
90 or MoreDays PastDue
90 or MorePast DueStillAccruing
81,908
112
160
272
58,368
391
489
106,818
467
85
24
178,231
57
10,667
4,738
294,115
1,913
5,348
7,261
391,665
240
363
2,311
2,914
110,306
128
60
197
28,545
2,917
848
13,167
16,932
1,450,530
Nonaccrual loans by class at June 30, 2026 and December 31, 2025 were as follows:
Nonaccruals with No Allowance for Credit Losses
Nonaccrual with an Allowance for Credit Losses
NonaccrualLoans
384
482
620
494
2,155
2,304
2,894
1,844
7,282
18
2,932
2,950
2,253
879
3,132
52
3,229
12,917
16,146
11,675
2,723
14,398
The allowance for credit losses on loans by segment at June 30, 2026 and December 31, 2025 was as follows:
As of and For the Six Months Ended
Constructionand Farmland
ResidentialReal Estate
CommercialReal Estate &MultiFamily
Commercial
Marine
Consumer
All OtherLoans
Allowance for credit losses:
Beginning Balance
1,275
3,160
8,163
1,312
710
230
470
Charge-Offs
(1,586
(369
(40
(94
Recoveries
150
37
21
Provision (recovery)
772
(865
3,301
1,661
547
(255
Ending balance
2,050
2,445
9,878
2,675
890
229
139
Ending balance: Individually evaluated for impairment
1,365
1,420
3,064
Ending balance: Collectively evaluated for impairment
1,778
2,438
8,513
1,255
15,242
Loans:
355,285
727,434
12,003
1,081
11,741
16,055
354,204
715,693
115,127
1,479,478
13
As of and For the Year Ended
2,387
2,318
7,251
1,433
238
121
(31
(2,771
(485
(580
(140
(139
308
46
(1,117
565
3,683
211
86
441
49
418
8,114
894
14,853
355,478
697,779
113,224
14,264
728
10,086
3,113
14,355
354,750
687,693
110,111
1,453,107
14
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment:
Real Estate Collateral
Other Collateral
599
13,123
11,242
The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended June 30, 2026.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis is performed on a quarterly basis. The following table presents risk ratings by loan portfolio segment and origination year. Description of these ratings are as follows:
Pass
Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Special Mention
Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. Loan relationships with stale financial statements at their annual review will also cause a downgrade to special mention until current financials are received and upgrade is approved. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.
Classified
Classified loans include loans rated Substandard, Doubtful and Loss.
Credit quality information by class at June 30, 2026 and gross charge-offs by year of origination for the six months ended June 30, 2026 was as follows:
Term Loans Amortized Cost Basis by Origination Year
2024
2023
2022
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
17,955
21,592
34,141
2,107
5,970
7,777
1,917
91,767
649
1,316
1,421
3,386
34,790
3,724
9,198
Current period gross charge-offs
59,931
10,747
17,935
4,704
8,371
13,057
44,670
1,374
100,858
1,651
1,234
2,326
5,211
1,387
10,022
14,389
47,380
2,279
6,034
13,326
18,820
45,990
27,152
64,178
175,652
277
976
45
1,377
154
556
19,013
46,267
28,128
64,779
192
521
1,602
511
1,528
1,716
3,958
9,988
61
129
4,019
220
40,239
33,625
21,951
48,480
66,899
94,900
2,812
4,133
313,039
737
909
3,985
6,488
200
12,319
1,833
471
24,521
49,860
70,884
103,543
3,012
33,014
67,408
25,682
54,292
63,453
115,377
5,429
4,615
369,270
269
415
4,068
12,213
16,965
8,404
2,978
11,382
25,951
54,707
75,925
130,568
403
1,586
28,770
13,266
12,770
5,624
8,271
7,487
31,959
2,353
110,500
3,871
50
4,607
103
1,648
461
234
506
2,952
13,694
16,744
7,272
8,972
7,721
32,515
2,371
127
125
78
55,237
83,180
20,829
123
246
369
1,466
1,472
1,249
9,037
11,547
2,478
27,943
29
32
1,524
705
2,495
94
247
3,955
4,650
606
Total by Risk Category
138,993
174,181
119,828
222,355
283,385
372,773
105,132
13,087
1,429,734
5,594
4,571
10,503
22,554
292
44,068
2,090
2,428
8,963
6,307
523
21,731
139,456
174,661
127,512
229,354
302,851
401,634
105,947
14,118
Total current period gross charge-offs
201
1,429
2,424
Credit quality information by class at December 31, 2025 and gross charge-offs by year of origination for the year ended December 31, 2025 was as follows:
2021
17,680
37,736
6,684
6,158
3,089
6,643
1,144
79,442
1,788
655
2,443
19,468
38,391
7,112
6,666
58,439
31
19,774
6,261
10,174
15,545
23,908
25,060
900
101,622
685
3,025
925
4,635
952
1,050
7,213
10,859
15,643
26,933
25,985
13,144
18,396
47,588
28,716
21,399
45,468
250
174,961
2,784
3,102
744
18,437
47,865
48,996
1,763
628
1,547
1,843
2,541
2,028
161
10,511
213
19
1,696
2,092
36,319
24,619
46,689
69,524
25,728
61,040
3,046
2,736
269,701
1,371
920
3,336
5,879
12,908
24,414
699
2,195
27,834
48,308
72,860
33,802
73,948
468
513
68,609
25,254
53,637
72,478
48,985
94,990
7,909
4,838
376,700
271
2,053
4,153
3,728
6,673
16,878
1,132
4,216
25,525
55,690
77,763
56,929
101,663
1,184
257
817
2,258
23,186
15,740
6,112
9,317
4,531
4,746
41,305
2,125
107,062
2,802
216
3,026
48
113
1,725
766
23,234
18,655
7,837
9,778
4,550
4,962
42,071
2,133
184
120
485
60,223
92,924
22,191
314
266
580
2,237
1,643
1,072
9,713
4,665
7,525
1,870
28,725
1,887
88
7,515
2,102
186,962
130,277
233,766
313,733
157,041
249,903
113,752
11,318
1,396,752
5,140
4,084
7,489
12,632
23,570
54,752
366
2,909
2,852
1,691
6,430
767
943
15,958
189,116
138,326
240,702
322,913
176,103
274,240
114,736
11,326
1,323
570
610
831
239
4,146
Unfunded Commitments: The Company maintains a separate reserve for credit losses on unfunded commitments, which is included in Other Liabilities on the Consolidated Balance Sheet. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the Consolidated Statement of Operations. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded, utilizing the same models and approaches for the Company's other loan portfolio segments, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that maybe drawn prior to the cancellation of the arrangement.
The activity in the unfunded commitment reserve for the three and six months ended June 30, 2026 and 2025 and year-ended December 31, 2025 is presented below:
315
592
505
296
(188
(179
(101
611
404
Restructurings for Borrowers Experiencing Financial Difficulty: A loan that has been modified is considered a troubled loan modification when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows.
There were no new loan modifications to borrowers experiencing financial difficulty made during the six months ended June 30, 2026 and 2025.
At June 30, 2026, the amortized cost balance of loans modified in the past 12 months was $3.7 million. This balance represents one customer relationship comprised of three residential multifamily income producing properties in Washington D.C. (the District). These loans are on nonaccrual status and are 90 or more days past due. The Bank has been granted receivership and is actively working with the receiver to update the properties and ready them for sale while continuing to collect the housing payments directly from the District.
There were no loans to borrowers experiencing financial difficulty that had a payment default during the three and six months ended June 30, 2025 and were modified in the twelve months prior to that default.
Default is determined at 30 days or more past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance of credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.
22
NOTE 6. Deposits
The composition of deposits at June 30, 2026 and December 31, 2025 was as follows:
Savings and interest bearing demand deposits:
NOW accounts
308,119
322,687
Money market accounts
291,905
282,828
Regular savings accounts
120,690
123,030
Time deposits:
Balances of less than $250,000
238,824
262,390
Balances of $250,000 and more
179,311
184,254
NOTE 7. Leases
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Right-of-use assets and lease liabilities are included in Other Assets and Other Liabilities, respectively, in the Consolidated Balance Sheets. During the second quarter of 2026, the Company entered into a long-term lease with the intention of moving the Frederick, Maryland loan production office to a new location in Rockville, Maryland. The new lease replaces an expiring lease and resulted in the initial recognition of a right-of-use asset and lease liability of $204 thousand.
The Company’s five long-term lease agreements are classified as operating leases. These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantee and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company’s leases:
Lease liabilities
9,737
9,845
Right-of-use assets
9,276
9,438
Weighted average remaining lease term
11 years
12 years
Weighted average discount rate
4.26
%
4.25
Lease Cost
Operating lease cost
291
310
575
594
Short-term lease cost
Total lease cost
294
313
582
601
Cash paid for amounts included in the measurement of lease liabilities
263
520
508
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:
As of
Lease payments due
2026, remainder
2027
1,107
2028
2029
1,114
2030
1,135
Thereafter
7,429
Total undiscounted cash flows
12,460
Discount
(2,723
NOTE 8. Fair Value Measurements
GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•
Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following section provides a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.
The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2026 and December 31, 2025:
Fair Value Measurements at
Using
Balance as of
Quoted Pricesin ActiveMarkets forIdentical Assets
SignificantOtherObservableInputs
SignificantUnobservableInputs
(Level 1)
(Level 2)
(Level 3)
Assets:
Securities available for sale
U.S. Treasury securities
3,603
500
Derivative:
Interest rate swaps on loans
691
Total assets at fair value
113,157
112,657
Liabilities:
Fair value swap
Total liabilities at fair value
U.S. treasury notes
3,974
1,030
120,573
120,073
75
1,105
25
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis classified as Level 3 for the periods indicated. Level 3 securities consist of one corporate subordinated debt security for which no pricing information was available and therefore priced at book value.
Level 3 Recurring Fair Value Measurements As Of and For The
Three Months Ended June 30,
Six Months Ended June 30,
Beginning balance
Purchases
Sales
Issuances
Settlements
Total Gains (Losses) included in Net Income
Total Gains (Losses) included in OCI
Transfer into Level 3
Transfer out of Level 3
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during six months ended June 30, 2026 and the year ended December 31, 2025.
Individually Evaluated Collateral-Dependent Loans: The estimated fair value of individually evaluated collateral-dependent loans is based on the value of the underlying collateral or the value of the underlying collateral, less estimated cost to sell, as appropriate. Collateral is generally real estate; however, collateral may include vehicles, marine vessels, equipment, inventory, accounts receivable, and/or other business assets. The value of real estate collateral is determined using a market valuation approach based on an appraisal conducted by an independent, licensed appraiser. The value of other assets may also be based on an appraisal, market quotations, aging schedules or other sources. Collateral-dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. Any fair value adjustments are recorded in the period incurred as a provision for credit losses on the Consolidated Statements of Operations. At June 30, 2026 collateral-dependent loans totaling $12.9 million were individually evaluated and being carried at fair value of $9.9 million, the majority of which represents five relationships consisting of loans secured by owner and non-owner occupied commercial real estate properties and commercial business loans collateralized by equipment. At December 31, 2025 there were four collateral-dependent relationships totaling $2.7 million, which were individually evaluated and being carried at fair value of $2.3 million. Three relationships represent five commercial business loans collateralized by equipment and one relationship is collateralized by commercial real estate.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s
26
fair value at the date of acquisition are charged to the allowance for credit losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as collateral-dependent loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at June 30, 2026 or December 31, 2025.
Repossessed Assets: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the asset, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. Costs of significant improvements are capitalized, whereas costs relating to holding assets are expensed. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of an asset to fair value less cost to sell. The fair value measurement of repossessed assets is assessed in the same manner as collateral dependent loans described above. We believe that the fair value follows the provisions of GAAP. The Company held repossessed assets totaling $302 thousand at June 30, 2026 and $135 thousand at December 31, 2025. Repossessed assets are included in Other Assets in the Consolidated Balance Sheets.
The following table summarizes the Company's financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at June 30, 2026 and December 31, 2025.
Carrying value at
IdenticalAssets
ObservableInputs
UnobservableInputs
Financial Assets:
Collateral dependent individually evaluated loans
9,853
Nonfinancial Assets:
Repossessed assets
Quoted Pricesin ActiveMarketsfor IdenticalAssets
2,256
135
27
The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial and nonfinancial assets measured at fair value on a nonrecurring basis for June 30, 2026 and December 31, 2025.
Quantitative information about Level 3 Fair Value Measurements
Valuation Technique(s)
Unobservable Input
Range
Weighted Average (1)
Discounted value
Selling cost and appraisal discount
6% - 61%
31 %
Discounted appraised value
Selling cost
10 %
6% - 40%
9 %
(1) Weighted based on the relative fair value of the specific items measured at fair value.
The carrying value and fair value of the Company’s financial instruments at June 30, 2026 and December 31, 2025 were as follows:
CarryingValueas of
Quoted Pricesin ActiveMarkets forIdenticalAssets
Fair Valueas of
Financial assets:
Cash and short-term investments
Securities
111,966
Restricted investments
Loans, net
1,429,351
Accrued interest receivable
5,053
Derivative assets
Financial liabilities:
Deposits
1,602,484
27,137
Accrued interest payable
1,085
Derivative liabilities
Carrying Valueas of
119,043
Restricted Investments
1,390,948
5,287
1,607,995
40,080
27,106
1,339
NOTE 9. Change in Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes unrealized gains and losses on available for sale securities and changes in benefit obligations and plan assets for the post retirement benefit plan. Changes to accumulated other comprehensive loss are presented net of their tax effect as a component of equity. Reclassifications out of accumulated other comprehensive loss are recorded in the Consolidated Statements of Operations either as a gain or loss.
Changes to accumulated other comprehensive loss by component are shown in the following table for the periods indicated:
UnrealizedGains andLosses onAvailablefor SaleSecurities
Change inBenefitObligationsand PlanAssets forthe PostRetirementBenefitPlan
April 1
(5,962
(3
(6,632
Other comprehensive (loss) before reclassifications
(848
Tax effect of current period changes
179
Current period changes net of taxes
June 30
(6,073
(7,301
January 1
(5,257
(18,645
Other comprehensive (loss) income before reclassifications
26,783
Reclassification of realized losses into earnings
(3,014
For the six months ended June 30, 2025, the reclassification out of accumulated other comprehensive loss represents the realized loss on the sale of available for sale securities, which appears as loss on the sale of securities in the Consolidated Statements of Operations. The tax benefit related to this reclassification was $2.6 million and was included in income tax expense in the Consolidated Statements of Operations.
NOTE 10. Other Real Estate Owned & Repossessed Assets
The following table is a summary of other real estate owned (“OREO”) and repossessed asset activity for the six months ended June 30, 2026 and 2025 and the year ended December 31, 2025:
Other Real Estate Owned
Repossessed Assets
514
Transfer from loans
305
1,346
Sales proceeds
(96
(254
(1,422
(381
Loss on sales
(39
(51
(252
(133
Valuation adjustments
The balance of repossessed assets at June 30, 2026 and December 31, 2025 represents repossessed marine vessels.
There was one loan collateralized by residential real estate with a balance of $154 thousand in the process of foreclosure at June 30, 2026 and none at December 31, 2025.
NOTE 11. Qualified Affordable Housing Project Investments
The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.
At June 30, 2026 and December 31, 2025, the balance of the investment for qualified affordable housing projects was $861 thousand and $977 thousand, respectively. These balances are reflected in Other Assets on the Consolidated Balance Sheets. There were no unfunded commitments related to the investments in qualified affordable housing projects at June 30, 2026 and December 31, 2025.
During the three months ended June 30, 2026 and June 30, 2025, the Company recognized amortization expense of $53 thousand and $67 thousand, respectively. Amortization expense during the six months ended June 30, 2026 and 2025 was $116 thousand and $134 thousand, respectively. Amortization expense is included in income tax expense on the Consolidated Statements of Operations.
Total estimated credits to be received during 2026 are $258 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during the six months ended June 30, 2026 and 2025, were $129 thousand and $138 thousand, respectively.
NOTE 12. Recent Accounting Pronouncements and Other Authoritative Guidance
Pending Adoption
In November 2025, the FASB issued ASU 2025-09, “Derivatives and Hedging (Topic 815): Hedge Accounting Improvements.” The amendments in this ASU enables entities to apply hedge accounting to a greater number of highly effective economic hedges in the following five areas: 1) similar risk assessment for cash flow hedges, 2) hedging forecasted interest payments on choose-your-rate debt instruments, 3) cash flow hedges of nonfinancial forecasted transactions, 4) net written options as hedging instruments, and 5) foreign-currency-denominated debt instrument as hedging instrument and hedged item (dual hedge). This ASU is effective for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. Early adoption is permitted on any date on or after November 25, 2025. The Company does not expect the adoption of ASU 2025-09 to have a material impact on its consolidated financial statements.
In November 2025, the Financial Accounting Standards Board (FASB) issued ASU 2025-08, “Financial Instruments—Credit Losses (Topic 326): Purchased Loans.” The amendments in this ASU expand the population of acquired financial assets accounted for using the gross-up approach. Acquired loans (excluding credit cards) are deemed purchased seasoned loans and accounted for using the gross-up approach upon acquisition if criteria established by the new guidance are met. This change aims to enhance comparability, consistency, and better reflect the economics of acquiring financial assets. This ASU is effective for annual reporting periods beginning after December 15, 2026, and for interim reporting periods within those annual reporting periods. Early adoption is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance. If an entity adopts this ASU in an interim reporting period, it should apply it as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim reporting period. The Company does not expect the adoption of ASU 2025-08 to have a material impact on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company's financial position, results of operations or cash flows.
NOTE 13. Revenue Recognition
Substantially all of the Company's revenue from contracts with customers that is within the scope of ASC 606, "Revenue from Contracts with Customers" is reported within noninterest income. A limited amount of other in-scope items such as gains and losses on other real estate owned are recorded in noninterest expense. The recognition of interest income and certain sources of noninterest income (e.g. gains on securities transactions, bank owned life insurance income, etc.) are governed by other areas of U.S. GAAP. Significant revenue streams that are within the scope of ASC 606 and included in noninterest income are discussed in the following paragraphs.
Income from Fiduciary Activities
Trust asset management fee income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. Estate management fees are based upon the size of the estate. Revenue for estate management fees are recorded periodically, according to a fee schedule and are based on the services that have been provided. The Company does not earn performance-based incentives on customer products sold. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts are principally comprised of overdrawn account fees, account maintenance charges and other activity based fees. The Company’s performance obligations on revenue generated from deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.
Other Service Charges and Fees
The majority of the Company’s noninterest income is derived from short term contracts associated with services provided for other ancillary services such as ATM fees, safe deposit box fees and loan servicing fees. The Company’s performance obligations on revenue generated from these ancillary services are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. Since the rentals and renewals occur fairly consistently, revenue is recognized on a basis consistent with the duration of the performance obligation.
The Company earns interchange fees from credit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized no less than monthly.
Noninterest income (loss) and the related amounts that are from contracts with customers within the scope of ASC 606 disaggregated by major source, for the three and six months ended June 30, 2026 and 2025 consisted of the following:
Three Months EndedJune 30,
Revenue (1)
ASC 606 Revenue (2)
Noninterest income :
Trust asset management fees
1,955
1,320
Brokerage commissions
242
330
Overdrawn account fees
390
Monthly and other service charges
144
Other service charges and fees:
Interchange fees
904
ATM fees
106
101
Other charges and fees (3)
81
Loss on the sale and disposal of bank premises and equipment
264
142
Total noninterest income
4,111
3,391
Six Months EndedJune 30,
3,511
2,629
702
841
764
245
1,719
1,765
198
183
(Loss) on the sale and disposal of bank premises and equipment
(Loss) on sale of securities
171
7,492
6,537
(1) As reported in the Unaudited Consolidated Statements of Operations.
(2) Revenue from contracts with customers in scope of ASC 606.
(3) Other charges and fees include loan servicing rights amortization expense outside the scope of ASC 606.
Contract Balances
The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2026 and December 31, 2025, the Company did not have any significant contract balances.
NOTE 14. Borrowings
The composition of borrowings at June 30, 2026 and December 31, 2025 was as follows:
29,624
69,579
On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $30.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due April 1, 2032 (the “Notes”).
The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes at the holding company and bear an initial interest rate of 4.50% until April 1, 2027, with interest during this period payable semi-annually in arrears. From and including April 1, 2027, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 2.35%, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after April 1, 2027. Initial debt issuance costs were $673 thousand. The debt balance of $30.0 million is presented net of unamortized issuance costs of $387 thousand and $421 thousand at June 30, 2026 and December 31, 2025 respectively.
The Bank pledges certain qualified loans and available for sale investment securities as collateral to the FHLB and FRB. At June 30, 2026 , available borrowing capacity totaled $481.4 million and $59.2 million at the FHLB and FRB discount window, respectively. The Company also has access to federal fund lines of credit extended to the Bank by nonaffiliated banks with which a correspondent banking relationship exists. At June 30, 2026, these available lines totaled $78.0 million.
Additionally, the Company had $70 million in irrevocable letters of credit at June 30, 2026 with the FHLB to secure public deposits.
NOTE 15. Derivatives
The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. Derivative contracts that are not designated in a qualifying hedging relationships include customer accommodation loan swaps.
On August 15, 2024, the Company executed a 2-year, 3.862% pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $35.0 million. The Company receives a variable rate equal to the daily secured overnight financing rate ("SOFR"). This swap will terminate on August 15, 2026. The Company designated the fair value swap under the portfolio layer method ("PLM"). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments are made to record the swap at fair value as either an Other asset or Other liability on the Consolidated Balance Sheets, with changes in fair value recognized in net loans. The carrying value of the fair value swap on the Consolidated Balance Sheets will also be adjusted through loan interest income, based on changes in the fair value attributable to changes in the hedged risk.
The following table represents the carrying value of the portfolio layer method hedged asset and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of June 30, 2026 and December 31, 2025.
Carrying Amount of Hedged Asset
Cumulative Amount of Fair Value Adjustment
Loans receivable (1)
35,025
35,105
105
(1) These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the hedged period. As of June 30, 2026, the amortized cost basis of the closed portfolio used in this hedging relationship was $440.4 million and the cumulative basis adjustment associated with this hedging relationship was $25 thousand. At June 30, 2026, the amount of the designated hedged item was $35.0 million.
The following table summarizes the effect of the fair value hedging relationship recognized in the Consolidated Statements of Operations for the three and six months ended June 30, 2026.
Hedged asset
(21
(38
Fair value derivative designated as hedging instrument
(13
(14
Total (loss) gain recognized in the consolidated statement of operations within interest and fees on loans
(34
44
(52
The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of the swaps with borrowers and the swaps with dealer counterparties.
The following tables summarize key elements of the Company's derivative instruments at June 30, 2026 and December 31, 2025.
Notional Amount
Derivatives designated as hedging instruments:
35,000
Derivatives not designated as hedging instruments:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower
40,743
181
510
Matched interest rate swaps with counterparty
40,980
643
NOTE 16. Business Segments
The Company has three reportable operating segments: community banking, marine lending and wealth management.
The community banking segment offers a wide range of retail and community banking services in the form of loan and deposit products. Revenues consist primarily of net interest income related to investments in non-marine loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity. For the three and six months ended June 30, 2026, the community banking segment's income was impacted by a gain on sale of other assets and a reduction in interest expense. During the second quarter of 2026, the Company sold its membership interest in Bearing Insurance
36
Group, LLC ("Bearing") to an unaffiliated third party and recognized a pre-tax gain of $3.5 million. Additionally, there was no interest expense attributable to FHLB borrowings during the current quarter, reflecting advance maturity in March, 2026. During the first quarter of 2025, the Company sold available for sale securities with an amortized cost of $99.2 million, which resulted in a net realized pre-tax loss of $12.4 million. This loss on the sale of securities is the main driver of the community banking segment's reported net loss, total noninterest loss and income tax benefit for the six months ended June 30, 2025.
Revenue from marine lending operations consist primarily of net interest income related to commercial and consumer marine vessel loans originated through August 2023, at which time the Company ceased accepting new marine lending business. The interest expense allocation is a function of the Bank's internal cost of funds rate and the average loan balance of marine lending. The balance of the marine loan portfolio, which constitutes a significant portion of the Company's assets, revenues, and earnings, totaled $159.2 million and $175.6 million at June 30, 2026 and December 31, 2025, respectively. This balance will continue to decline as the loans are repaid.
The wealth management segment offers both a trust department and investment services. Trust department services include a full range of personal and retirement plan services, and investment services products include, among other products, annuities, IRA's, life insurance, fixed income investing, and full service or discount brokerage services. Non-deposit investment products are offered through a third-party service provider.
Financial information of the parent company is included in the "All Other" category. The parent company's revenue and expenses are comprised primarily of interest expense associated with subordinated debt.
The Company's segment structure reflects the financial information and reports used by our chief operating decision maker to make decisions regarding the business, including resource allocations and performance. Our Chief Executive Officer is the chief operating decision maker ("CODM"). We evaluate performance and allocate resources based on the operating income of each operating segment. The CODM uses segment operating income in the annual budget process. The operating income of each operating segment includes the revenues of the segment less expenses that are directly related to those revenues. Operating overhead, shared costs and share-based compensation costs are included in Community Banking. As such, expenses may not be representative of the costs expected to be incurred if the specific business segments operated as stand-alone entities. The Company expects it will continue to evaluate its business segments and internal reporting structure, including the production of discrete financial information to the CODM.
The following tables provide income and asset information as of June 30, 2026 and December 31, 2025 and for three and six months ended June 30, 2026 and 2025, which are included within the Consolidated Balance Sheets and Consolidated Statements of Operations.
Community Banking
Marine Lending
Wealth Management
All Other
Eliminations
Consolidated
Interest Income
22,254
2,121
6,314
736
Net Interest Income (Expense)
15,940
1,385
(355
Gain on sales of loans
Other noninterest income
2,240
7,944
Net Revenue (Expense)
22,290
25,560
2,975
528
8,545
630
583
97
Other noninterest expense
4,202
4,564
Total Noninterest Expenses
14,372
91
908
Income (loss) before taxes
4,943
1,332
Income tax expense (benefit)
1,213
279
(108
3,730
605
1,053
(407
Other data:
Capital expenditures
282
Depreciation and amortization
358
409
22,158
2,657
7,724
1,038
14,434
1,619
2,120
1,693
3,813
17,658
20,615
Provision for (recovery of) credit losses
794
(126
7,276
577
618
3,347
116
3,682
12,339
158
4,525
917
(513
855
339
3,670
1,280
725
(405
447
38
43,848
4,353
13,069
1,550
30,779
2,803
(709
7,795
4,065
11,860
40,232
46,391
16,322
1,044
1,226
53
8,101
8,791
27,699
1,583
7,616
2,072
2,482
(986
1,738
435
(231
5,878
1,637
1,961
(755
491
779
881
42,954
5,363
16,340
2,234
26,614
3,129
3,838
3,417
7,255
19,560
25,397
2,171
(270
13,971
1,001
1,219
1,020
174
1,148
6,693
7,317
24,051
1,459
(Loss) income before taxes
(6,662
3,169
1,958
(957
Income tax (benefit) expense
(1,651
665
411
(213
Net (Loss) Income
(5,011
2,504
(744
799
932
Total assets at June 30, 2026
1,678,024
167,060
790
1,491
Total assets at December 31, 2025
1,705,394
181,062
849
1,321
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on certain information relevant to the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes thereto included in the 2025 Form 10-K, and in conjunction with the Unaudited Consolidated Financial Statements and notes thereto presented in Part I, Item 1, Financial Statements, of this Form 10-Q. Operating results for the three and six months ended June 30, 2026 are not necessarily indicative of the results for the full-year ending December 31, 2026 or any future period.
GENERAL
Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank.
The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and mortgage-backed securities, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law.
The Company strives to be an outstanding financial institution in its market by: building solid sustainable relationships with its customers, employees, communities, and shareholders; offering best-in-class products and services; and being the leader in the markets it serves.
At June 30, 2026, the Company had total assets of $1.85 billion, net loans of $1.48 billion, total deposits of $1.60 billion, and shareholders’ equity of $193.9 million.
The Company has continued to build on its strategic actions taken during 2025, which was marked by a successful capital raise and balance sheet repositioning of its investment securities portfolio. These actions strengthened its balance sheet and improved its forward earnings profile. Our vision for 2026 is about disciplined growth with smart investment and continued focus on people and technology, which we believe will lead to stronger core earnings and a balance sheet positioned for more consistent results.
CRITICAL ACCOUNTING ESTIMATES
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which requires us to make estimates and assumptions. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.
Our most significant policies are described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to our audited financial statements for the year ended December 31, 2025, included in the Company's 2025 Annual Report on Form 10-K filed with the SEC. There have been no changes since that time.
NON-GAAP FINANCIAL MEASURES
This report refers to certain financial measures that are computed under a basis other than GAAP ("non-GAAP"). The Company uses certain non-GAAP financial measures, including non-GAAP net income, non-GAAP noninterest income, non-GAAP earnings per share, non-GAAP return on average equity and average assets, tax-equivalent net interest income and efficiency ratio, to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.
The Company executed significant non-recurring transactions during the second quarter of 2026 and the first quarter of 2025 that significantly impacted the Company's operating results for the respective periods. In May 2026, the Company sold its membership interest in Bearing Insurance Group, LLC ("Bearing") to an unaffiliated third party and recognized a pre-tax gain of $3.5 million. During the first quarter of 2025, the Company executed balance sheet repositioning transactions and recorded a realized loss on the sale of the available for sale securities totaling $12.4 million. These transactions significantly impacted the Company's operating results and certain performance metrics and ratios for the three months ended June 30, 2026 and the six months ended June 30, 2026 and 2025.
The following table reconciles the GAAP reported measure to the adjusted non-GAAP measure to show the impact of significant non-recurring transactions for the periods presented:
(dollars in thousands except for per share data)
GAAP Net income (loss)
Adjustments to net income (loss):
Loss on sales of securities
(Gain) on sale of other assets
Tax effect of adjustments to net income (loss)
732
(2,609
Non-GAAP Net income
2,227
5,967
8,112
GAAP Noninterest income (loss)
Adjustments to noninterest income (loss):
Non-GAAP Noninterest income
5,104
10,032
8,788
Earnings (loss) per share, basic and diluted (GAAP)
Effect of adjustments to net income
(0.51
1.97
Non-GAAP Earnings per share, basic and diluted
0.41
1.10
1.63
Annualized return on average equity
10.35
11.93
9.18
(2.19
)%
(5.72
(2.90
12.62
Non-GAAP Annualized return on average equity
4.63
6.28
10.43
Annualized return on average assets
1.08
1.09
0.95
(0.18
(0.60
(0.30
1.03
Non-GAAP Annualized return on average assets
0.48
0.65
0.85
43
For additional information and calculations of tax-equivalent net interest income and efficiency ratio, see the sections entitled "Tax-Equivalent Net Interest Income" and "Efficiency Ratio" below.
FORWARD LOOKING STATEMENTS
This report contains statements that are "forward looking statements." The Company may also make forward looking statements in other documents that are filed with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. Forward looking statements include statements regarding our expectations, intentions, and objectives, or other expressions that predict or indicate future events and trends and which do not relate to historical matters. The words “believe,” “expect,” “may,” “will,” “should,” "could," “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. You should not rely on forward looking statements, as they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward looking statements.
Some of the factors that might cause these differences include the following:
You should carefully review all of these factors and you should be aware that there may be other factors that cause these differences. These forward looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
RESULTS OF OPERATIONS
Summary
The following tables present a summarized consolidated statement of operations for the periods indicated:
Change
$ Change
% Change
1,272
Noninterest income
3,673
Net revenues
4,945
2,835
424
Noninterest expense
2,132
Income before income taxes
(22
0
Income tax expense
(289
Adjusted net income (non-GAAP) (1)
(3,043
(58
(1) Adjusted to exclude the gain on sale of other assets in connection with the Company's sale of its membership interest in Bearing during the three months ended June 30, 2026. See "Non-GAAP Financial Measures" for a reconciliation to comparable measures calculated in accordance with GAAP.
3,839
Noninterest income (loss)
17,155
472
20,994
3,563
187
3,755
13,676
549
3,251
10,425
612
(2,145
(26
(1) Adjusted to exclude the gain on sale of other assets in connection with the Company's sale of its membership interest in Bearing and the loss on sale of securities in connection with the Company's balance sheet repositioning transactions recognized during the six months ended June 30, 2026 and 2025, respectively. See "Non-GAAP Financial Measures" for a reconciliation to comparable measures calculated in accordance with GAAP.
The Company's net income decreased during the three months ended June 30, 2026, compared to the three months ended June 30, 2025 primarily due to a higher provision for credit losses and increased noninterest expenses, mostly offset by an increase in noninterest income and improved net interest income.
During the six months ended June 30, 2026 the Company's net income increased compared to the six months ended June 30, 2025 primarily due to loss on the sale of available for sale securities totaling $12.4 million, or $9.8 million, net of tax, recognized during the prior year period. The 2026 year-to-date period also increased due to improved net interest income and gain on sale of other assets, which was mostly offset by higher noninterest expenses and provision for credit losses over the corresponding 2025 period.
The following table presents a summary of performance metrics and ratios for the periods indicated:
Earnings per share, basic and diluted
Adjusted earnings per share, basic and diluted (non-GAAP)(1)
Return on average assets
Adjusted return on average assets (non-GAAP)(1)
Return on average equity
Adjusted return on average equity (non-GAAP)(1)
(1) Adjusted to exclude the gain on sale of other assets in connection with the Company's second quarter 2026 sale of its membership interest in Bearing and the loss on sale of securities in connection with the Company's balance sheet repositioning transactions during the first quarter of 2025. See "Non-GAAP Financial Measures" for a reconciliation to comparable measures calculated in accordance with GAAP.
Return on average equity ("ROE") measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders.
Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Factors reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control.
Average Balances, Income and Expenses, Yields and Rates (Tax-Equivalent Basis)
The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the three months ended June 30, 2026 and 2025 (dollars in thousands):
Average
Income/
Yield/
Balance
Expense
Rate (2)
Securities:
Taxable
116,041
4.34
115,712
4.37
Total Securities
1,478,699
21,675
5.88
1,419,117
20,309
5.74
Non-accrual
15,113
16,337
Tax-Exempt (1)
7,002
4.98
5.04
1,500,814
21,762
5.82
1,445,453
20,435
5.67
Federal funds sold and interest-bearing deposits in other banks
147,832
1,376
3.73
281,749
3,146
4.48
Total earning assets
1,764,687
24,393
5.54
1,842,914
24,841
5.41
Allowance for credit losses on loans
(17,761
(15,439
Total non-earning assets
103,429
105,484
1,850,355
1,932,959
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
313,794
1,684
2.15
303,498
1,632
2.16
291,872
1,578
2.17
273,415
1,521
2.23
Savings accounts
122,424
0.10
130,166
0.11
$250,000 and more
169,195
1,589
3.77
174,030
1,911
4.41
Less than $250,000
247,613
2,167
3.51
310,108
3,163
4.09
Total interest-bearing deposits
1,144,898
2.47
1,191,217
2.78
NM
Federal Home Loan Bank advances
40,824
4.90
Subordinated debt, net
29,602
4.81
29,535
4.82
Total interest-bearing liabilities
1,174,500
2.53
1,261,578
2.90
Noninterest-bearing liabilities:
Demand deposits
460,963
473,911
Other Liabilities
21,852
20,286
1,657,315
1,755,775
Shareholders' equity
193,040
177,184
Total liabilities and shareholders' equity
16,988
15,724
Net interest spread
3.01
2.51
Interest expense as a percent of average earning assets
1.68
1.98
Net interest margin (non-GAAP) (3)
3.86
3.42
NM - Not Meaningful
The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the six months ended June 30, 2026 and 2025 (dollars in thousands):
119,068
2,561
116,535
2,104
3.64
4.49
116,710
2,108
1,458,305
42,314
5.85
1,430,666
40,180
5.66
14,825
10,182
7,224
5.05
10,064
253
5.06
1,480,354
42,495
5.79
1,450,912
40,433
5.62
172,820
3,183
3.71
263,367
5,830
4.46
1,772,242
48,239
5.49
1,830,989
48,371
5.33
(16,733
(15,334
103,234
104,113
1,858,743
1,919,768
313,058
3,351
289,558
3,095
289,426
3,093
273,776
3,033
122,523
131,528
73
170,710
3,235
3.82
180,006
4,026
4.51
256,115
3.57
310,799
6,540
4.24
1,151,832
2.50
1,185,667
2.85
14,144
75,497
4.83
29,594
29,526
4.84
1,195,573
2.59
1,290,695
449,169
450,559
22,469
21,671
1,667,211
1,762,925
191,532
156,843
32,911
29,088
2.32
1.74
2.12
3.74
3.20
Tax-Equivalent Net Interest Income
The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income. Tax-equivalent net interest income (Non-GAAP) is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for 2026 and 2025.
GAAP Financial Measurements:
Interest Income - Loans
Interest Income - Securities and Other Interest-Earnings Assets
2,631
4,406
5,744
7,937
Interest Expense - Deposits
Interest Expense - Borrowings
854
2,516
Total Net Interest Income
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)
Total Tax Benefit on Tax-Exempt Interest Income
54
Net Interest Income
Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates.
The year-over-year improvements in net interest income, tax-equivalent net interest income, net interest spread, and net interest margin demonstrate the benefits of the balance sheet repositioning strategy completed in March 2025, in which the Company raised capital, increased cash on hand and replaced lower-yielding investment securities with higher yielding securities. The Company has deployed capital to reduce its reliance on wholesale borrowings and for meaningful loan growth.
The increase in net interest income during the three and six months ended June 30, 2026 primarily reflects decreases in the average balances of interest-bearing liabilities and reductions in the average rates paid while being partially offset by lower income from interest-earning assets, namely federal funds sold and interest-bearing deposits in other banks.
Net interest income, on a tax-equivalent basis, was $17.0 million and $15.7 million for the three months ended June 30, 2026 and 2025, respectively, an increase of $1.3 million, or 8.0%. For the six months ended June 30, 2026 and 2025, tax-equivalent net interest income was $32.9 million and $29.1 million, respectively, an increase of $3.8 million, or 13.1%.
The Company's net interest spread and net interest margin increased 50 basis points and 44 basis points, respectively, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, the Company's net interest spread and net interest margin increased 58 basis points and 54 basis points, respectively, compared to six months ended June 30, 2025. Ongoing margin pressures include loan demand unpredictability, deposit competition, and elevated funding costs.
Total average balance of securities increased by $329 thousand and $2.4 million for the three and six months ended June 30, 2026, respectively, from the average balance in the prior year periods. The average yield on securities decreased three basis points during the three months ended June 30, 2026 compared to the three months ended June 30, 2025. During the six months ended June 30, 2026, the average yield on securities increased 70 basis points compared to the six months ended June 30, 2025, reflecting the sale of lower-yielding securities and reinvestment into higher-yielding securities in the first quarter of 2025.
The total average loan balances for the three months ended June 30, 2026 increased $55.2 million and for the six months ended June 30, 2026 increased $29.4 million compared to the same periods in 2025. The increase in average balances reflect strong growth in commercial real estate, construction, commercial and industrial, and home equity lines of credit loan portfolios, offset by continued amortization of the marine loan portfolio. The year-to-date change was also impacted by the sale of a pool of mortgage loans totaling $18.8 million early in the first quarter of 2025.
Total average balance of federal funds sold and interest-bearing deposits in other banks decreased $133.9 million and $90.5 million during the three and six months ended June 30, 2026, respectively, compared to the three and six months ended June 30, 2025, largely due to loan growth and the payoff of maturing borrowings.
Total average interest-bearing deposit balances for three and six months ended June 30, 2026 decreased $46.3 million and $33.8 million from the same periods in 2025. For the three months ended June 30, 2026, average balances of time deposits and savings accounts decreased $67.3 million and $7.7 million, respectively, partially offset by NOW and money market accounts which increased $10.3 million and $18.5 million, respectively. The average rate paid on interest-bearing deposits decreased 31 basis points and 35 basis points during the three and six months ended June 30, 2026, respectively, compared to the three and six months ended June 30, 2025 reflecting lower average rates paid on time deposits.
The average balance of FHLB advances decreased $40.8 million and $61.4 million during the three and six months ended June 30, 2026, respectively, compared to the three and six months ended June 30, 2025 due to maturing advances that were not replaced with new borrowings. During March 2026, the Company's remaining FHLB borrowings were fully paid down, which materially reduced our reliance on wholesale funding.
Volume and Rate Analysis (Tax-Equivalent Basis)
Interest income and expense are affected by fluctuation in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.
51
The following table provides information about changes in rate and volume (dollars in thousands):
June 30, 2026 from 2025
Increase (Decrease)Due to:
Volume
Rate
Earning Assets:
(9
457
Tax-exempt
(2
864
502
1,366
780
1,354
2,134
(37
(71
(1
(72
(1,309
(461
(1,770
(1,778
(869
(2,647
(478
(448
(1,025
893
(132
Interest-Bearing Liabilities:
256
95
(73
(322
(200
(591
(791
(585
(411
(996
(1,058
(951
(2,009
(484
(729
(1,213
(877
(1,615
(249
(250
(499
(1,490
(1,463
(733
(979
(1,712
(2,367
(1,588
(3,955
Change in net interest income
255
1,264
1,342
2,481
3,823
The provision for credit losses results from management's review of the adequacy of the allowance for credit losses. The allowance for credit losses is management’s estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions. Estimating the amount required to maintain an adequate allowance for credit losses involves a high degree of judgment.
The following table presents the provision for credit losses:
Provision for credit losses on loans
2,351
3,177
159
Provision for credit losses on unfunded commitments
484
(257
386
(382
The increase in the provision for credit losses for the three and six months ended June 30, 2026 and 2025 included the impact of a change in historical loss factors driven by charge-offs, higher qualitative factors adjustments including forecasted economic conditions and loan growth, and higher specific reserve allocations on individually evaluated nonaccrual loans.
For both the three and six months ended June 30, 2026, net charge-offs totaled $2.2 million, compared to net charge-offs totaling $159 thousand and $1.1 million during the three and six months ended June 30, 2025, respectively. The higher qualitative factor adjustment was primarily driven by loan growth in the commercial and industrial and construction loan portfolios.
Specific reserve allocations totaled $3.1 million at June 30, 2026, compared to $1.5 million at June 30, 2025, primarily reflecting new or increased allocations on commercial loan relationships during the first half of 2026. At June 30, 2026, five commercial loan relationships comprised $2.7 million, or 89%, of the total specific reserve allocation, including two commercial and industrial relationships, two multi-family commercial real estate relationships, and one relationship with both commercial and industrial and commercial real estate exposure. The $1.6 million increase from June 30, 2025 was primarily attributable to four commercial loan relationships for which specific allocations were recorded based on updated collateral information and one new nonaccrual relationship added during the second quarter of 2026, partially offset by charge-off of loan balances with previously established specific reserve balances.
Total noninterest income (loss) was $8.6 million and $4.9 million for the three months ended June 30, 2026 and 2025, respectively, and $13.5 million and $(3.6) million for the six months ended June 30, 2026 and 2025, respectively. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three and six months ended June 30, 2026 and 2025, which are included within the respective Consolidated Statements of Operations headings.
648
(32
(Loss) on disposal of bank premises and equipment
100
(75
(458
(41
(23
(17
223
146
(472
Wealth management fee income increased from 2025 to 2026. Wealth management fee income is comprised of income from fiduciary activities as well as commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. Since June 30, 2025, assets under management increased $55.0 million, or 10.1%, to $599.0 million, reflecting increases in market value and new business accounts. Additionally, per transaction fees for estates and other services have also contributed to the year over year increase in revenue. Partially offsetting these increases was a decrease in investment sales commissions.
Service charges on deposit accounts increased during the three and six months ended June 30, 2026 compared to the same period in 2025. The increase is mainly driven by higher overdraft charges and account analysis income.
The Company executed balance sheet repositioning transactions within its investment securities portfolio during March 2026. The sale of $99.2 million of available for sale debt securities, with a fair value of $86.8 million, resulted in a net pre-tax loss of $12.4 million during the six months ended June 30, 2025. There were no sales of available for sale debt securities in the three and six months ended June 30, 2026.
Gain on sale of loans decreased during the three months ended June 30, 2026 compared to 2025 reflecting a decrease attributable to SBA loans due to a lower volume sold, partially offset by an increase attributable to a higher volume of mortgage loans sold. The Company sold $28.2 million in loans on the secondary market during the three months ended June 30, 2026, consisting of mortgage loans totaling $24.3 million and SBA commercial loans totaling $3.9 million. This compares to sales of $25.5 million during the three months ended June 30, 2025, consisting of $17.1 million mortgage loans and $8.4 million SBA loans.
Gain on sale of loans increased during the six months ended June 30, 2026 when compared to the same period in 2025. The 2026 year-to-date volume of sales declined, however, $18.3 million of portfolio mortgage loans sold during the six months ended June 30, 2025 were priced at par, which had a minimal impact on income. Excluding the portfolio loan sale, sold loan volume increased during the six months ended June 30, 2026. The Company sold $52.3 million loans on the secondary market, consisting of $40.9 million of mortgage loans and $11.4 million of SBA commercial loans during the six months ended June 30, 2026. This compares to total loan sales of $60.7 million, consisting of $32.0 million of mortgage loans originated for sale, $9.9 million SBA commercial loans, and a pool of $18.8 million residential mortgage loans held for investment during the six months ended June 30, 2025.
Gain on sale of other assets increased during the three months ended June 30, 2026. The Company sold its membership interest in Bearing to an unaffiliated third party. A pre-tax gain of $3.5 million was recognized from this sale and is recorded in gain on sale of other assets.
Income from holdings in small business investment companies increased during the six months ended June 30, 2026 compared to the same period in 2025. The increase during the current year period is mainly attributed to higher cash distributions received, based on the results of their performance and difference in timing of distributions.
Other operating income increased for the three and six months ended June 30, 2026 compared to the same periods in 2025 primarily due to $80 thousand cash distribution received during the quarter from the Company's investment in housing equity fund.
Total noninterest expenses increased $2.1 million, or 16%, for the three months ended June 30, 2026 and $3.8 million, or 14%, for the six months ended June 30, 2026 compared to the same periods in 2025. The following table presents the components of noninterest expense for the three and six months ended June 30, 2026 and 2025, which are included within the respective Consolidated Statements of Operations headings.
1,367
2,417
89
151
(6
(85
(33
(180
(90
(49
(42
(7
(106
541
1,093
Salaries and employee benefits increased during the three and six months ended June 30, 2026 over 2025, primarily reflecting increases in salaries due to investments in staffing and higher annual incentive compensation plan accruals as certain performance metrics were attained. Further contributing to the increases were higher stock-based compensation expense and employee medical insurance costs. The Company's number of full-time equivalent employees ("FTE's") has increased from 244 at June 30, 2025 to 259 at June 30, 2026.
Advertising and marketing expenses increased during the three and six months ended June 30, 2026 compared to 2025 mainly due to higher business development and digital marketing campaigns.
FDIC assessment expense, which is based in part on asset size and capital levels, decreased during the three and six months ended June 30, 2026 compared to the same periods in 2025. The decreased expense primarily reflects an improvement in the financial ratio portions of the assessment rate reflecting a stronger capital position largely due to improved net income during 2026 and the capital raise completed in early 2025.
Computer software expenses increased $97 thousand and $169 thousand during the three and six months ended June 30, 2026 respectively, compared to the same period in 2025 reflecting ongoing investments in technology to enhance systems security and improve operational efficiencies.
Bank Franchise tax increased during the three and six months ended June 30, 2026 compared to the same period in 2025 due to a higher estimate for 2026, reflective of the Bank's capital level.
Data processing fees decreased during the three and six months ended June 30, 2026 compared to the same period in 2025 reflecting core provider contract price discounts in 2026.
55
Other operating expenses increased by $541 thousand, or 35%, and $1.1 million, or 39%, during the three and six months ended June 30, 2026, respectively, compared to the three and six months ended June 30, 2025. The increases largely reflect higher expenses related to volume based costs, loan collection, and other loan costs as well as higher charitable contributions primarily driven by the Bank's matching of donations from a very successful "Give with BOC" campaign. Partially offsetting this was a decline in fraudulent transaction activity costs in 2026 compared to 2025.
Efficiency Ratio
The efficiency ratio of the Company was 70.29% and 64.91% for the three months ended June 30, 2026 and 2025, respectively and 69.16% and 68.23% for the six months ended June 30, 2026 and 2025. The decline in the efficiency ratio during the 2026 periods reflects increases in noninterest expenses, partially offset by increases in net interest income. The efficiency ratio is not a measurement under GAAP. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income. The Company adjusts for non-recurring items such as gains and losses on the investment portfolio and other gains/losses from OREO, repossessed or other assets, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.
The calculation of the efficiency ratio for the three and six months ended June 30, 2026 and 2025 was as follows:
Summary of Operating Results:
Noninterest expenses (GAAP)
Less: Loss on sale of repossessed assets
Adjusted noninterest expenses (Non-GAAP)
29,704
25,855
Noninterest income (loss) (GAAP)
Less: (Loss) on the sale and disposal of premises and equipment
Less: Gain on the sale of other assets
Less: (Loss) on the sale of securities
Adjusted noninterest income (Non-GAAP)
5,108
10,036
8,804
Tax equivalent adjustment (1)
Total net interest income and noninterest income, adjusted (Non-GAAP)
22,096
20,641
42,947
37,892
Efficiency ratio
70.29
64.91
69.16
68.23
Income Taxes
The following table presents the Company's income tax provision (benefit) and effective tax rate for the periods indicated:
Effective income tax rate
23.67
19.52
22.02
(31.62
56
Income tax expense for the three months ended June 30, 2026 was comprised of federal and state income taxes of $1.5 million and $65 thousand, respectively. For the three months ended June 30, 2025, the Company recognized income tax expense of $1.3 million, comprised of federal and state income taxes of $1.2 million and $56 thousand, respectively.
For the six months ended June 30, 2026, income tax expense was comprised of federal and state income taxes of $2.4 million and $109 thousand, respectively. For the six months ended June 30, 2025, the Company recognized a net income tax benefit of $846 thousand, which represented a federal income tax benefit partially offset by state income taxes of $58 thousand.
Income tax expense increased during the second quarter 2026 compared to the 2025 period due to an adjustment to the proportional amortization expense for investments in qualified rehabilitation credits and tax credits on qualified affordable housing project investments of $174 thousand. This adjustment was based on final 2025 income tax results.
The increase in income tax expense during the six months ended June 30, 2026 compared to the six months ended June 30, 2025 reflects the level of net income recognized during the first half of 2026 compared to a net loss recognized during the 2025 period as well as the proportional amortization expense adjustment recorded during the second quarter of 2026.
The effective tax rate for the three and six months ended June 30, 2026 was also impacted by the proportional amortization expense adjustment, causing it to exceed the statutory rate of 21%. The effective tax rate for the three and six months ended June 30, 2025 was below the statutory rate of 21% due primarily to the recognition of tax-exempt life insurance income and the Company's net loss position for the six months ended June 30, 2025.
For the three and six months ended June 30, 2025, the effective tax rate was also impacted by the March 2025 balance sheet repositioning transaction previously discussed in the "Non-GAAP Financial Measures" section above.
Business Segments
The Company has three reportable operating segments: community banking, marine lending and wealth management. See Note 16 to the Consolidated Financial Statements.
The following table presents a summarized statement of operations for the community banking business segment for the three and six months ended June 30, 2026 and 2025:
(1,410
(3,271
1,506
4,165
3,584
3,957
Net Revenue
4,632
20,672
2,181
2,746
2,033
3,648
Income (Loss) before taxes
14,278
(214
3,389
205
10,889
(217
Net interest income increased during the three and six months ended June 30, 2026 compared to the three and six months ended June 30, 2025 primarily due to income earned on: i) non-marine loans; ii) reduction in time deposit interest expense due primarily to lower average rates paid; and iii) reduction in borrowings interest expense as FHLB advances have matured. These increases were partially offset by a decrease in the level of interest-earning deposits balances in other banks as cash was deployed to payoff the Company's remaining FHLB advances, as well as an increase in customer NOW and money market deposit balances. For the six months ended June 30, 2026, net interest income increased over six months ended June 30, 2025 due the investment securities portfolio, which was restructured in the first quarter of 2025 to sell and replace lower yielding investments with higher yielding securities.
Provision for credit losses reflects an increase in historical loss factors due to net charge-offs totaling $1.9 million and $1.8 million for the three and six months ended June 30, 2026, respectively, as well as specific reserves of $3.1 million. Provision for credit losses for the three and six months ended June 30, 2025 reflects net charge-offs totaling $45 thousand and $936 thousand, respectively, as well as specific reserves of $1.5 million. The increase in the specific reserve was primarily attributable to four commercial loan relationships for which new specific allocations were recorded during the first half of 2026 driven by updated collateral information and a new nonaccrual relationship added during the second quarter of 2026.
Other noninterest income increased during the three and six months ended June 30, 2026 over the three and six months ended June 30, 2025 primarily due to the Company's sale of its membership interest in Bearing to an unaffiliated third party. A pre-tax gain on the sale in the amount of $3.5 million was recognized as a gain on sale of other assets during the second quarter of 2026.
Loss on the sale of securities during the six months ended June 30, 2025 resulted from the Company's execution of balance sheet repositioning transactions within its investment securities portfolio in March 2025. Available for sale debt securities totaling $99.2 million, with a fair value of $86.8 million, were sold and a pre-tax loss of $12.4 million was recognized.
The increase in income tax expense during the six months ended June 30, 2026 was due to the Company's net income compared to its net loss recorded during six months ended June 30, 2025, which was directly related to the recognized loss on the sale of securities during the 2025 period.
The following table presents a summarized statement of operations for the marine lending segment for the three and six months ended June 30, 2026 and 2025:
(536
(1,010
(19
Interest Expense (1)
(302
(29
(684
(234
(326
(10
654
(519
(303
(35
(28
Income before taxes
(853
(53
(1,097
(178
(230
Net Income
(675
(867
(1) Allocation of interest expense is a function of the Bank's internal cost of funds rate and the average loan balance of the marine lending portfolio.
Net revenues declined due to pay downs in the portfolio, which are not being replaced with new loan originations. The marine loan portfolio totaled $159.2 million and $196.4 million at June 30, 2026 and June 30, 2025, respectively.
58
Provision for credit losses increased primarily due to an increase in the historical loss factor, which was partially offset by declining loan balances during the three and six months ended June 30, 2026 compared to the three and six months ended June 30, 2025. Net charge-offs were $367 thousand for the three and six months ended June 30, 2026 and $114 thousand for the three and six months ended June 30, 2025.
The following table presents a summarized statement of operations for the wealth management segment for the three and six months ended June 30, 2026 and 2025:
132
124
524
328
414
Net revenue increased during the three and six months ended June 30, 2026 over the 2025 periods due to increases in trust services income reflecting fees earned on a higher level of assets under management and estate settlements, partially offset by a decrease in investment sales revenue. Assets under management were $599.0 million and $544.1 million at June 30, 2026 and 2025, respectively.
FINANCIAL CONDITION
Select financial condition data is presented in the following table:
(7,077
26,274
(2,986
(41,261
(5,425
(0
FHLB advances
(100
Total shareholders' equity
5,066
The carrying amounts of the Company's available for sale securities are as follows:
59
Amount
Percent
62
63
Total securities available for sale at fair value
Total securities available for sale decreased $7.1 million, or 5.92% during the six months ended June 30, 2026. The Company purchased $10.3 million of securities during the six months ended June 30, 2026 and had total maturities, calls, and principal repayments of $16.3 million. There were no sales during the six months ended June 30, 2026.
Net unrealized loss on available for sale securities was $7.7 million at June 30, 2026 as compared to a net unrealized loss of $6.7 million at December 31, 2025. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss).
The primary cause of the unrealized losses at June 30, 2026 and December 31, 2025 was changes in market interest rates, rather than other market conditions or credit concerns of the issuers over the time between purchase and measurement periods. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the Company concluded a credit loss did not exist.
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Details of the Company's loan portfolio are presented below:
Percent to Total Loans
Total residential real estate loans
Total commercial real estate loans
Total mortgage real estate loans
1,178,173
1,135,593
Commercial and industrial loans
Net deferred loans costs and premiums
Gross loans
Gross loans were $1.50 billion and $1.47 billion at June 30, 2026 and December 31, 2025, respectively. This represents an increase of $26.3 million, or 1.78%, during the six months ended June 30, 2026. The ratio of gross loans to deposits increased
during the six months ended June 30, 2026 from 91.65% at December 31, 2025 to 93.60% at June 30, 2026 reflecting the increase in gross loans and a 0.34% decrease in deposits during the same time period.
The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. The decline in gross loans is primarily attributable to SBA loan sales, marine loan portfolio paydowns, and significant payoffs of matured commercial and industrial and municipal notes. This decline was partially offset by growth within the commercial real estate loan portfolio.
During the six months ended June 30, 2026, through the normal course of business, $52.3 million in loans were sold, consisting of $40.9 million in mortgage loans originated for sale and $11.4 million of SBA commercial loans.
Commercial real estate loans increased during the six months ended June 30, 2026 reflecting growth in the owner occupied and construction portfolios. The Company experienced steady activity across commercial business lines reflecting its focus on relationship-based lending in its core markets.
Marine loans are declining due to normal paydowns and payoffs only as the Company is no longer accepting new marine business. At present, the Company expects to hold the remaining outstanding loans until they are ultimately repaid.
Allowance for Credit Losses on Loans
The purpose of, and the methods for, measuring the allowance for credit losses on loans are discussed in Note 1 to the Consolidated Financial Statements in the 2025 Form 10-K.
The following table presents the activity in the allowance for credit losses on loans and related ratios for the periods indicated:
Balance at beginning of period
Construction & secured by farmland
Residential real estate
(30
Commercial real estate
(971
(253
(134
(114
(57
Other
(47
Total charge-offs
99
252
Total recoveries
Net (charge-offs)
(2,227
(159
(2,193
(1,050
Balance at end of period
Net (charge-offs) to average loans (annualized)
(0.04
(0.59
(0.29
Allowance for credit losses on loans as a percentage of gross loans
1.22
1.11
During the six months ended June 30, 2026, the Company recorded charge-offs of $2.4 million primarily due to a $1.6 million partial write-down of a single multifamily relationship to the fair value of the underlying collateral, net of estimated selling costs. The remaining charge-offs were attributable to smaller relationships, including marine vessels and commercial loans secured by equipment as well as writeoffs of overdraft and credit card accounts.
Recoveries recognized during the six months ended June 30, 2026 totaled $231 thousand, primarily due to a recovery on a residential mortgage loan.
During the six months ended June 30, 2025, charge-offs were primarily related to a non-owner occupied commercial loan relationship consisting of four residential multifamily income producing properties totaling $971 thousand. Recoveries were $361 thousand resulting in net charge-offs of $1.1 million for the six months ended June 30, 2025.
The increase of 11 basis points in the allowance for credit losses on loans to gross loans ratio largely reflects the increase in specific reserve allocations required at June 30, 2026. The increase was also attributable to changes in historical loss ratios, primarily within the marine and non‑owner occupied commercial real estate portfolios and higher qualitative factors due to loan growth in the commercial and industrial and construction loan portfolios.
Management believes that the allowance for credit losses on loans is currently adequate to absorb the current expected losses in the loan portfolio.
Credit Risk, Nonperforming Assets and Other Assets
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk on a quarterly basis. The following table presents credit risk ratings as of June 30, 2026 and December 31, 2025:
Risk categories
Loans risk rated as special mention, which exhibit negative trends and potential weaknesses, include loans with stale financial information. Of the total special mention loans, $28.6 million had stale financial information at June 30, 2026 compared to $35.7 million at December 31, 2025. The reduction in total special mention loans was largely due to upgrades upon receipt and review of current financial information and the migration of one relationship to classified. Partially offsetting the decrease were additions for potential credit weakness reflecting insufficient debt service coverage ratio, reduction in income, bankruptcy notice, as well as the lack of current financial information required to complete annual reviews.
Loans risk rated as classified, include substandard, doubtful, and loss loans increased primarily due to two commercial real estate relationships and was partially offset by a $1.6 million partial write-down to an already existing classified multi-family relationship. The additions to classified include a $3.6 million multifamily loan which moved to nonaccrual status during the second quarter, and a $4.1 million non-owner occupied office building that is active and accruing, however was downgraded from special mention to classified during the first quarter of 2026 due to cash flow concerns.
All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity.
Nonperforming assets and related ratios are detailed in the table below:
Nonaccrual loans
Loans past due 90 days or more and accruing interest
Other real estate owned and repossessed assets
Total nonperforming assets
16,468
14,593
Allowance for credit losses on loans to nonperforming assets
111
Allowance for credit losses on loans to total gross loans
1.04
Allowance for credit losses on loans to nonaccrual loans
Nonaccrual loans to total gross loans
Non-performing assets to period end gross loans, other real estate owned and repossessed assets
0.99
Nonperforming assets increased by $1.9 million during the six months ended June 30, 2026, primarily reflecting the addition of of a $3.6 million multi-family loan to nonaccrual status, partially offset by paydowns, a $1.6 million partial write-down to an existing nonaccrual multi-family relationship as well as a change in repossessed assets.
Total past due loans, as disclosed in Note 5 to the Consolidated Financial Statements, increased by $11.1 million and totaled $28.0 million at June 30, 2026 compared to $16.9 million at December 31, 2025. The increase in past due loans primarily reflects loans secured by commercial real estate in the past due 30-59 days category. One owner occupied commercial real estate relationship consisting of two loans totaling $5.2 million and two non-owner occupied commercial real estate loans totaling $7.7 million became past due during the six months ended June 30, 2026, while a $1.9 million non-owner occupied commercial real estate loan moved into current status during the six months ended June 30, 2026. The loans that primarily drove the increase in past due balances are rated special mention and classified.
Nonaccrual loans are risk rated as classified and comprised the majority of the classified loan balance as previously described. Management evaluates the financial condition of borrowers and the value of any collateral on nonaccrual loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans and are reflected in the allowance for credit losses on loans. At June 30, 2026 total specific reserves of $3.1 million were required primarily reflecting five commercial loan relationships, compared to specific reserves of $467 thousand at December 31, 2025.
Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses to principal that require additional provisions for credit losses to be charged against earnings.
For real estate loans, upon foreclosure, the balance of the loan is transferred to OREO and carried at the fair value of the property based on current appraisals and other current market trends, less estimated selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off to the allowance for credit losses. A review of the recorded property value is performed in conjunction with normal quarterly reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations.
Total deposits were $1.60 billion and $1.61 billion at June 30, 2026 and December 31, 2025, respectively. This represents a marginal decrease of $5.4 million or 0.34% during the six months ended June 30, 2026.
The following table provides the composition of total deposits at June 30, 2026 and December 31, 2025.
June 30,2026
December 31,2025
30,915
(14,568
9,077
(2,340
Time deposits less than $250,000
(23,566
Time deposits $250,000 and more
(4,943
Core deposits (1)
1,334,550
1,304,733
29,817
Core deposits as a percent of total deposits
Non-core deposits (2)
267,385
302,627
(35,242
Non-core deposits as a percent of total deposits
(1) Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts and time deposits less than $250,000, excluding wholesale or brokered deposits.
(2) Non-core deposits consist of brokered deposits, CDARs and time deposits of $250,000 or more.
Total deposits remained relatively stable with a decrease in non-core deposits of $35.2 million, reflecting runoff of higher cost deposits, partially offset by core deposits which increased $29.8 million during the six months ended June 30, 2026. The increase in core deposits was in line with management's effort to grow these deposits to support loan expansion.
In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds also affects the cost of time deposits. Marketing efforts, including rate specials and emphasis on customer relationships are utilized to maintain maturing accounts and to acquire new time deposit accounts. At June 30, 2026, over 86% of deposits were fully FDIC insured.
CAPITAL RESOURCES
The Bank continues to be a well capitalized financial institution. Total shareholders’ equity at June 30, 2026 was $193.9 million, reflecting a percentage of total assets of 10.50%, as compared to $188.9 million and 10.00% at December 31, 2025. The $5.0 million increase in shareholders’ equity was primarily due to net operating income of $8.7 million earned during the six months ended June 30, 2026, partially offset by an increase in unrealized losses on available for sale securities amounting to $816 thousand, net of tax and dividends declared of $3.4 million. During each of the six months ended June 30, 2026 and 2025, the Company declared dividends of $0.62 per share. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.
At June 30, 2026, the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions. The Bank monitors these ratios on a quarterly basis and has several strategies, including without limitation the issuance of common stock, to ensure that these ratios remain above regulatory minimums. The Bank's capital amounts and ratios are presented using the Federal Reserve's risk-based capital framework.
The risk-based capital rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement of 2.5% was effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The capital conservation buffer rule requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
At June 30, 2026 and December 31, 2025, the Bank's regulatory capital and related ratios were as follows:
Tier 1 Capital:
Common stock
1,682
Capital surplus
9,773
217,015
211,730
Nonmortgage servicing assets
(757
(637
Total Tier 1 capital
227,713
222,548
Common equity tier 1 capital
Tier 2 Capital:
Allowable portion of allowance for credit losses and reserve for off-balance sheet commitments
18,918
15,128
Total Tier 2 capital
Total risk-based capital
246,631
237,676
Risk weighted assets
1,593,125
1,530,835
Capital Ratios:
Common equity Tier 1 capital ratio
14.29
14.54
Tier 1 risk-based capital ratio
Total risk-based capital ratio
15.48
15.53
Tier 1 leverage ratio
12.27
11.68
Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.
LIQUIDITY
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, unpledged securities classified as available for sale and loans maturing within one year. At June 30, 2026, liquid assets totaled $345.3 million as compared to $423.4 million at December 31, 2025. These amounts represented 20.88% and 24.91% of total liabilities at June 30, 2026 and December 31, 2025, respectively. The decrease during the first half of 2026 was primarily due to lower levels of deposits with other institutions and federal funds sold as well as a decrease in balance of loans maturing within one year, partially offset by an increase in available for sale securities.
The Company generally attempts to minimize liquidity demand by primarily utilizing core deposits to fund asset growth. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, including the Federal Reserve discount window and federal funds lines of credit with larger financial institutions as additional sources of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes in off-balance sheet arrangements and contractual obligations as reported in the 2025 Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the 2025 Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2026 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). The Company is currently using the 2013 COSO Framework.
There were no changes in the Company’s internal control over financial reporting during the Company’s 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.
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.
Item 1A. Risk Factors
There were no material changes to the Company’s risk factors as disclosed in the 2025 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table details the Company's purchases of its common stock during the second quarter of 2026 pursuant to its Stock Repurchase Program ("the Program"). On June 17, 2026, the Board of Directors of the Company re-authorized the purchase of up to 150,000 shares for repurchase under the Program. The Program expires on June 30, 2027.
Issuer Purchases of Equity Securities
Total Numberof SharesPurchased
Average PricePaid Per Share
Total Numberof SharesPurchased asPart ofPubliclyAnnounced Plan
MaximumNumber ofShares thatmay Yet BePurchasedUnder thePlan
141,947
April 1 - April 30, 2026
May 1 - May 31, 2026
June 1 - June 30, 2026
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
During the fiscal quarter ended June 30, 2026, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(a) of Regulation S-K).
Item 6. Exhibits
The following exhibits are filed with this Form 10-Q or incorporated by reference to previous filings. This list includes the exhibit index:
31.1
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.1
Eagle Financial Services, Inc. 2026 Employee Stock Purchase Plan (incorporated herein by reference to Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on May 19, 2026, filed on April 8, 2026).
The following materials from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2026 formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.
104
The cover page from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2026 formatted in Inline XBRL (included with Exhibit 101).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 10th day of August, 2026.
Eagle Financial Services, Inc.
By:
/S/ BRANDON C. LOREY
Brandon C. Lorey
President and Chief Executive Officer
/S/ KATHLEEN J. CHAPPELL
Kathleen J. Chappell
Executive Vice President, Chief Financial Officer
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