Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Statements made in this document and in any documents incorporated by reference that are not purely historical are forward-looking statements, including statements regarding management's plans, objectives, or goals for future operations, products or services, and forecasts of revenues, earnings, or other performance measures. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by words such as "believe," "expect," "anticipate," "plan," "estimate," "should," "will," "intend," or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document and in our Annual Report on Form 10-K for the year ended December 31, 2025, could affect the future financial results of the Company and could cause those results to differ materially from those expressed in forward-looking statements. These factors, many of which are beyond the Company's control, include, but are not limited to, the following:

Problems with technology utilized by us, including potential exposure to fraud, negligence, computer theft, cyber-crime, cyber-threats, and the Company's ability to maintain the security of its data processing and information technology systems.

Operating, legal, and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or the Company specifically, such as government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its related regulations), which change from time to time and over which we have no control, and increased competition from other providers of financial services due to such regulations.

Economic, market, political, and competitive forces affecting the Company's banking and other businesses, including changes in interest rates, monetary policy, and general economic conditions, which may impact net interest income, credit quality, loan demand, or overall conditions in our market area.

Geopolitical conflicts, international tensions, and related economic sanctions, including the potential impact of tariffs, trade restrictions, or changes in U.S. trade policy on businesses in our market area and our business and agricultural borrowers, all of which may have a destabilizing effect on financial markets and economic activity and could indirectly affect credit quality, loan demand, or overall economic conditions in our market area.

The ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company's or banking industry's reputation becomes damaged.

The adequacy of the level of the Company's allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit losses.

Reliance on our management team, including our ability to attract and retain key personnel.

Changes in the value of real estate securing loans made by the Bank.

Adoption of new accounting standards or changes in existing standards.

Compliance or operational risks related to new products, services, ventures, or lines of business, if any, that the Company may pursue or implement.

The risk that the Company's analysis of these risks and forces is incorrect or that the strategies developed to address them are unsuccessful.

The stability of the overall banking industry in the United States.

Prolonged U.S. federal government shutdowns (lapses in appropriations), which may disrupt economic activity, delay or reduce federal payments and guaranty programs (including small-business lending), constrain capital markets or regulatory processes, and reduce the availability of government economic data relied upon by market participants and monetary policymakers.

Developments related to digital assets, including cryptocurrencies and stablecoins, and changes in related laws, supervisory expectations, capital or accounting frameworks, customer adoption, or payment rails,

any of which could affect deposit flows, liquidity management, third-party relationships, operational resiliency, compliance obligations, or reputational risk.

Our ability to pay dividends, repurchase shares, or otherwise return capital to shareholders, which is subject to our capital position and earnings, applicable laws and regulations (including capital buffer and stress-testing requirements), regulatory approvals or supervisory actions, and the discretion of our Board of Directors.

Changes in federal, state, or local tax laws, regulations, rates, or administrative interpretations and the timing of regulatory guidance or implementation that could affect our effective tax rate, deferred tax assets, capital planning, or after-tax earnings.

Other risks and uncertainties set forth in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2025, and, from time to time, in our other filings with the Securities and Exchange Commission ("SEC").

Other risks, uncertainties, and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

These factors should be considered when evaluating the forward-looking statements, and you should not place undue reliance on such statements. This discussion and analysis should be read in conjunction with the description of our "Risk Factors" in Item 1A of the most recently filed Form 10-K.

GENERAL

Critical Accounting Policies

Bank of the James Financial Group, Inc.'s ("Financial" or the "Company") financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). As a community bank primarily serving central Virginia, the financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred, such as lending activities tied to local real estate markets and small business operations. A variety of factors, particularly regional economic conditions, fluctuations in interest rates, and changes in real estate values in our market area, could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may evolve from one previously acceptable method to another, potentially altering the timing of how these events impact our transactions, even if the underlying economics remain unchanged.

The Allowance for Credit Losses on Loans ("ACL") is management's estimate of the current expected credit losses in our loan portfolio and held-to-maturity securities portfolio. With the exception of loans related to agriculture, the Company uses a discounted cash flow model to estimate its current expected credit losses in our loan portfolio and held-to-maturity securities portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. For information on the Company's policies on the ACL, please refer to Note 2 - "Allowance for Credit Losses - Loans" in the Company's Form 10-K for the year ended December 31, 2025. See "Management's Discussion and Analysis Results of Operations - Allowance and Provision for Credit losses" below for further discussion of the allowance for credit losses.

Overview

The following overview of our business has not materially changed since our Annual Report on Form 10-K for the year ended December 31, 2025.

The Company is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the "Bank"). We conduct four other business activities: mortgage banking through the Bank's Mortgage Division (which we refer to as "Mortgage"), investment services through the Bank's Investment division (which we refer to as "Investment Division"), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as "Insurance Business"),

and as of December 31, 2021, investment advisory services through the Company's wholly-owned subsidiary, Pettyjohn, Wood & White, Inc. (which we refer to as "PWW").

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank has expanded to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington, Rustburg, Buchanan, and Nellysford. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market areas, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank's market areas.

PWW is a Lynchburg, Virginia-based investment advisory firm that generates revenue primarily through investment advisory fees and had approximately $1,010,000,000 in assets under management and advisement as of March 31, 2026.

The Bank's principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.bank.

Our operating results depend primarily upon the Bank's net interest income, which is determined by the difference between (i) interest and dividend income on earning assets-consisting primarily of loans, investment securities, and other investments-and (ii) interest expense on interest-bearing liabilities, consisting principally of deposits and other borrowings. The Bank's net income is also affected by its provision for credit losses, as well as the level of its noninterest income (including gains on sales of loans held for sale, service charges, and investment advisory fees) and its noninterest expenses (including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expenses in complying with regulatory requirements, miscellaneous other expenses, franchise taxes, and income taxes).

The Bank intends to enhance its profitability by increasing its market share in its service areas, providing additional services to customers, and controlling costs.

The Bank services its banking customers through the following locations in Virginia:

Full-Service Branches

The main office located at 828 Main Street in Lynchburg, Virginia (the "Main Street Office"),

A branch located at 5204 Fort Avenue in Lynchburg, Virginia (the "Fort Avenue Branch"),

A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg, Virginia (the "Boonsboro Branch"),

A branch located at 4105 Boonsboro Road in Lynchburg, Virginia (the "Peakland Branch"),

A branch located at 4698 South Amherst Highway in Amherst County, Virginia (the "Madison Heights Branch"),

A branch located at 17000 Forest Road in Forest, Virginia (the "Forest Branch"),

A branch located at 164 South Main Street, Amherst, Virginia (the "Amherst Branch"),

A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (the "Bedford Branch"),

A branch located at 1110 Main Street, Altavista, Virginia (the "Altavista Branch"),

A branch located at 1391 South High Street, Harrisonburg, Virginia (the "Harrisonburg Branch"),

A branch located at 1745 Confederate Blvd, Appomattox, Virginia (the "Appomattox Branch"),

A branch located at 225 Merchant Walk Avenue, Charlottesville, Virginia (the "5th Street Station Branch"),

A branch located at 3562 Electric Road, Roanoke, Virginia (the "Roanoke Branch"),

A branch located at 45 South Main St., Lexington, Virginia (the "Lexington Branch"),

A branch located at 550 Water St., Charlottesville, Virginia (the "Water Street Branch"),

A branch located at 2101 Electric Rd, Roanoke, Virginia (the "Oak Grove Branch"),

A branch located at 13 Village Highway, Rustburg, Virginia (the "Rustburg Branch"),

A branch located at 19792 Main Street, Buchanan, Virginia (the "Buchanan Branch");

A branch located at 2935 Rockfish Valley Highway, Nellysford, Virginia (the "Nellysford Branch"); and

A branch located at 20795 Timberlake Road, Lynchburg, Virginia (the "Timberlake Branch").

Limited Service Branches

Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia, and

Westminster-Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia.

Loan Production Offices

Residential mortgage loan production office located at the Forest Branch,

Residential mortgage loan production office located at 570 West Main St., Wytheville, Virginia,

Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and

Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.

The Investment division and the Insurance Business operate primarily out of offices located at the Main Street Office. PWW operates the Company's investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.

In September 2025, the Bank opened its full-service branch in Nellysford, Virginia and closed the temporary branch it had been operating.

The Bank continuously evaluates areas within our service areas to identify viable branch locations. Based on this evaluation, the Bank may acquire additional suitable sites.

Interest in Additional Properties

1925 Atherholt Road, Lynchburg, Virginia currently serves as the office for the Company's wholly-owned subsidiary, PWW, which leases the space from the Bank on a month-to-month basis. The property is held for possible future branch expansion, although the Bank does not currently have a timeline for opening a branch at this location.

The Bank also owns two additional properties in its market area, one held for possible future expansion or sale and one under contract for sale, subject to due diligence and other customary closing conditions.

The Bank may acquire suitable properties for branch expansion as opportunities arise. Future branch openings are subject to regulatory approval.

The Bank continues to evaluate suitable branch locations and may acquire properties for expansion in the next 12 months. Future branch openings are subject to regulatory approval.

OFF-BALANCE SHEET ARRANGEMENTS

The Bank is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk exceeding the

amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept or use these commitments.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's commitments follows (dollars in thousands):

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank's credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank's credit evaluation of the customer.

The Bank has rate lock commitments to originate mortgage loans through its Mortgage Division. The Bank has entered into corresponding commitments with third-party investors to sell each of these loans that close. No other obligation exists. As a result of these contractual relationships with these investors, the Bank is not exposed to losses, nor will it ultimately realize gains related to its rate lock commitments due to changes in interest rates.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents management's assessment of the financial condition of the Company as of March 31, 2026 and December 31, 2025, and the results of operations for the three-month periods ended March 31, 2026 and 2025. This discussion should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Financial Condition Summary

March 31, 2026 as Compared to December 31, 2025

Total assets were $1,061,189,000 on March 31, 2026, compared with $1,039,024,000 at December 31, 2025, an increase of 2.13%. The increase in total assets was primarily due to growth in federal funds sold and securities available-for-sale, reflecting deployment of available liquidity, partially offset by a decline in loans (net of the allowance for credit losses).

Total deposits increased from $937,129,000 at December 31, 2025, to $956,552,000 at March 31, 2026, an increase of $19,423,000, or 2.07%. The growth was driven primarily by an increase in noninterest-bearing demand deposits of $13,306,000 and an increase in NOW, money market, and savings deposits of $6,554,000, while time deposit balances declined modestly by $437,000. The Company continues to utilize the reciprocal portion of the Insured Cash Sweep (ICS) program for customers requiring full FDIC insurance, and may redeploy the non-reciprocal option as market and liquidity conditions warrant.

Total loans, excluding loans held for sale, decreased to $655,334,000 at March 31, 2026, from $667,807,000 at December 31, 2025, a decrease of $12,473,000, or 1.85%. The decline was concentrated in the commercial portfolio, which decreased $4,363,000 (primarily reflecting loan payoffs), and in the consumer portfolio, where consumer open-end and closed-end balances declined $3,192,000 and $1,020,000, respectively. Residential mortgage balances were essentially flat, while residential consumer construction/land balances declined $2,499,000 as construction loans converted to permanent financing or paid off. Within commercial real estate, modest growth in commercial construction/land (an increase of $1,279,000) was more than offset by declines in owner-occupied and non-owner-occupied commercial mortgages, resulting in a net decrease of $1,448,000 in the commercial real estate portfolio.

The following summarizes the position of the Bank's loan portfolio as of the dates indicated by dollar amounts and percentages (dollar in thousands):

Total loans, excluding loans held for sale and net of the allowance for credit losses, decreased to $649,133,000 at March 31, 2026 from $661,357,000 at December 31, 2025, a decrease of 1.85%. The decline was primarily attributable to loan payoffs. While the Company experienced growth in certain commercial and commercial real estate portfolios, these increases were more than offset by the aforementioned paydowns, and residential and consumer lending levels remained relatively stable.

Loans held for sale totaled $2,877,000 at March 31, 2026 compared to $3,472,000 at December 31, 2025, a decrease of 17.14%, due primarily to normal quarterly fluctuations in mortgage production and secondary market sales.

Subsegments of the loan portfolio are set forth in Note 8 to the consolidated financial statements. As of March 31, 2026, non-owner occupied commercial real estate loans and commercial construction and land development loans totaled $231,256,000 representing approximately 35.3% of total loans.

The Bank closely monitors concentrations within its commercial real estate loan portfolio. As of March 31, 2026, non-owner occupied commercial real estate loans totaled $213,638,000, or approximately 32.6% of total loans. The Bank's exposure to higher-risk property types remains limited, with loans secured by large office buildings or shopping centers comprising less than 5% of the non-owner occupied commercial real estate portfolio. The portfolio is primarily secured by smaller, multi-tenant properties that are diversified across industries and geographic markets within the Bank's footprint. The Bank does not have material exposure to loans secured by properties in major metropolitan central business districts, and delinquency levels within the commercial real estate portfolio remained stable during the period.

In addition, to help manage risk, the Bank actively monitors its commercial real estate portfolio through the following, as appropriate:

Origination and Analysis

We have a thorough loan origination process. For all CRE loans secured by real estate collateral, we require an appraisal or valuation at the time of origination. We generally do not approve loans with a loan-to-value ratio exceeding 80%. An individual property cash flow analysis is performed, and, if appropriate, a global cash flow analysis is also conducted. We generally require a debt service coverage ratio of at least 1.2x.

Ongoing Risk Management

Following origination, we continue to manage risk. Our ongoing risk management includes:

Utilizing enhanced risk rating systems specific to CRE exposures;

Obtaining regular third-party loan reviews of the CRE portfolio;

Obtaining subsequent appraisals when either required by regulations or dictated by our internal policies;

Stress testing of property cash flows using various vacancy and rate scenarios during underwriting;

Regularly monitoring local market conditions and property sector trends;

Meeting at least annually with clients to which the Bank has significant exposure, along with market-level monitoring of vacancy rates and rental trends;

Performing annual reviews, including the review of current financial information, rate shocking, and collecting and analyzing rent rolls and operating statements at least annually; and

Utilizing a risk rating system that incorporates both property and borrower performance metrics.

Credit Enhancements

Where appropriate, we mitigate risk by obtaining credit enhancements. Typical enhancements to CRE loans include personal guarantees, secondary collateral, and liquid collateral.

The following table sets forth information for non-owner occupied CRE loans for the five largest categories of loans (classified by purpose code and collateral description) having the highest current principal balance (dollars in thousands):

(1)Loan-to-value is based on collateral valuation at origination date against current bank-owned principal.

The following table sets forth information for owner-occupied CRE loans for the four largest categories of loans, classified by purpose code and collateral description, having the highest current principal balance (dollars in thousands):

(1)Loan-to-value is based on collateral valuation at origination date against current bank-owned principal.

Total nonperforming assets, which consist of nonperforming loans and other real estate owned, were $1,450,000 at March 31, 2026, compared with $1,704,000 at December 31, 2025. As discussed under "Results of Operations-Allowance and Provision for Credit Losses," management believes the allowance for credit losses is adequate to absorb estimated losses inherent in the loan portfolio.

When a loan is placed on nonaccrual status, all accrued but unpaid interest is reversed and the accrual of interest is discontinued until repayment is reasonably assured. Payments received on nonaccrual loans are generally applied to principal, and additional provisions may be recorded as necessary to reflect expected credit losses.

Other real estate owned ("OREO") represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. The Company had no OREO at March 31, 2026 or December 31, 2025, and did not acquire or dispose of any OREO during the three months ended March 31, 2026.

Cash and cash equivalents increased to $87,991,000 at March 31, 2026 from $84,475,000 at December 31, 2025. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments, including federal funds sold. The increase was primarily attributable to higher federal funds sold balances, which rose to $62,894,000 at March 31, 2026 compared to $55,937,000 at December 31, 2025, reflecting the deployment of excess liquidity generated from deposit inflows and loan payoffs.

Securities held-to-maturity decreased slightly to $3,586,000 at March 31, 2026 from $3,590,000 at December 31, 2025, due to normal amortization of premiums.

Securities available-for-sale, carried at fair value, increased to $244,699,000 at March 31, 2026 from $214,128,000 at December 31, 2025, an increase of $30,571,000. The increase reflects $33,628,000 of securities purchases funded by the reinvestment of excess liquidity from deposit inflows, partially offset by $1,686,000 of maturities, calls, and paydowns and a $1,371,000 decline in the pre-tax fair value of the portfolio resulting from changes in market interest rates during the quarter, which contributed to a $1,083,000 increase in after-tax accumulated other comprehensive loss. As of March 31, 2026, unrealized losses on securities available-for-sale totaled $20,278,000 pre-tax and $16,020,000 after tax. These unrealized losses are primarily attributable to changes in market interest rates, and management does not expect to realize such losses, as the Bank has the intent and ability to hold these securities until recovery of fair value or maturity.

Restricted stock, consisting of stock in the Federal Reserve, the Federal Home Loan Bank of Atlanta (FHLBA), and correspondent banks, totaled $1,828,000 at March 31, 2026 and December 31, 2025. These holdings are carried at cost and evaluated for impairment based on par value recoverability.

Liquidity and Capital

Liquid assets, on a consolidated basis, totaled $332,690,000 at March 31, 2026, consisting of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, and available-for-sale securities. This represents an increase from $298,603,000 at December 31, 2025, primarily reflecting higher balances in federal funds sold and securities available-for-sale due to the deployment of excess liquidity generated from deposit inflows.

The Bank has pledged (market values):

approximately $38,697,000 of our available-for-sale securities as collateral with correspondent banks, including the FHLBA, for collateralized lines of credit;

approximately $50,086,000 of our available-for-sale securities as security for public deposits; and

approximately $25,626,000 of our available-for-sale securities as collateral for advances at the Federal Reserve Bank's discount window.

If additional liquidity is needed, the Bank can purchase up to $58,000,000 of Fed funds through correspondent relationships. In addition, the Bank has total borrowing capacity with the Federal Home Loan Bank of Atlanta ("FHLBA") of approximately $46,593,000 based on pledged collateral, consisting of approximately $16,893,000 supported by pledged loans and approximately $29,700,000 supported by pledged investment securities. The Bank may obtain additional FHLBA capacity by pledging additional eligible loans or investment securities. As of March 31, 2026, the Bank had no borrowings from any of these sources. Management believes that liquid assets were adequate at March 31, 2026 and anticipates additional liquidity from deposit growth and loan repayments.

Stockholders' equity totaled $81,284,000 at March 31, 2026, compared with $80,048,000 at December 31, 2025, an increase of 1.54%. The increase primarily reflected net income of $2,774,000, partially offset by dividends paid to common stockholders of $455,000 and a $1,083,00 increase in accumulated other comprehensive loss related to unrealized losses on available-for-sale securities during the period.

At March 31, 2026, deposits in accounts with balances exceeding the FDIC insurance limit of $250,000 totaled approximately $299,728,000 (31.34% of total deposits), compared with $289,069,000 (30.85% of total deposits) at December 31, 2025. Excluding collateralized public deposits, uninsured deposits totaled approximately $259,615,000 (27.14% of total deposits) at March 31, 2026, compared with $252,818,000 (26.98% of total deposits) at December 31, 2025. These amounts are based on account balances without applying FDIC aggregation rules across accounts or ownership capacities and may differ from the actual uninsured portion. The Bank had no brokered deposits or other uninsured deposit-like instruments at March 31, 2026 or December 31, 2025.

The Tier 1 risk-based capital ratio increased from December 31, 2025, primarily due to net income of $2,774,000 for the three months ended March 31, 2026, partially offset by the $455,000 dividend paid to common stockholders.

Bank Level Only Capital Ratios

(1)Includes the capital conservation buffer of 2.50% for all ratios, excluding the Tier 1 capital to average total assets ratio.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, The Company is not subject to the capital requirements imposed by the Bank Holding Company Act. Consequently, The Company does not calculate its financial ratios on a consolidated basis. If calculated, management expects that the capital ratios for the Company on a consolidated basis at March 31, 2026 would be substantially equivalent to those of the Bank.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019, and established a capital conservation buffer of 2.5%. As a result, the Bank is required to maintain a minimum ratio of Tier 1 capital to average total assets of 4.00% (exclusive of the capital conservation buffer), a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer), and a Tier 1 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). Failure to maintain the capital conservation buffer will limit the ability of the Bank and The Company to pay dividends, repurchase shares, or pay discretionary bonuses. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

On April 23, 2026, the federal banking agencies jointly adopted a final rule modifying the community bank leverage ratio ("CBLR") framework, effective July 1, 2026, as further described in Note 10 to the consolidated financial statements. The Bank has not elected to use the CBLR framework and continues to calculate its regulatory capital ratios under the generally applicable risk-based capital rules described above. Management is evaluating whether to opt into the CBLR framework when the final rule becomes effective.

Results of Operations

Comparison of the Three Months Ended March 31, 2026 and 2025

Earnings Summary

For the three months ended March 31, 2026, the Company reported net income of $2,774,000, compared with net income of $842,000 for the same period in 2025, an increase of $1,932,000, or 229.5%.

Basic and diluted earnings per common share were each $0.61 for the three months ended March 31, 2026, compared with $0.19 for the same period in 2025.

The increase in net income for the three months ended March 31, 2026, compared with the same period in 2025, was primarily attributable to higher net interest income, growth in noninterest income, a reduction in noninterest expense, and a recovery of credit losses in the current period compared to a provision for credit losses in the prior year period.

A more detailed analysis of the components that impacted net income for the three-month period ended March 31, 2026, compared with the same period in 2025, follows:

Net interest income increased to $8,734,000 for the three months ended March 31, 2026, from $7,719,000 for the same period in 2025, reflecting higher yields on earning assets and a lower cost of interest-bearing liabilities, including the impact of deposit repricing and the elimination of interest expense on capital notes following their retirement in the second quarter of 2025.

The Company recorded a recovery of credit losses of $146,000 for the three months ended March 31, 2026, compared with a provision for credit losses of $137,000 for the same period in 2025.

Noninterest income increased to $3,964,000 for the three months ended March 31, 2026, compared with $3,283,000 for the same period in 2025, driven by higher wealth management fees, increased gains on sales of loans held for sale, and income from an SBIC fund investment.

Noninterest expense decreased to $9,365,000 for the three months ended March 31, 2026, from $9,826,000 for the same period in 2025, primarily reflecting decreases in data processing and professional services expenses associated with the renegotiation of the Bank's core processing contract, partially offset

by increases in salaries and employee benefits related to higher production volumes and incentive compensation.

These operating results produced an annualized return on average stockholders' equity of 13.87% for the three-month period ended March 31, 2026, compared with 5.27% for the same period in 2025. The annualized return on average assets was 1.07% for the three-month period ended March 31, 2026, compared with 0.33% for the same period in 2025.

See "Noninterest Income" below for mortgage business and wealth management segment discussions.

Interest Income, Interest Expense, and Net Interest Income

The annualized return on average assets was 1.07% for the three months ended March 31, 2026, compared with 0.33% for the same period in 2025. The improvement reflects the increase in net income driven by higher net interest income, growth in noninterest income, lower noninterest expense, and a recovery of credit losses in the current period.

For the three months ended March 31, 2026, total interest income was $11,849,000, compared with $11,234,000 for the same period in 2025, an increase of 5.5%. The increase was primarily attributable to higher yields on earning assets, partially offset by lower average balances of, and yields on, federal funds sold. The yield on average earning assets increased to 4.84% for the three months ended March 31, 2026, from 4.73% for the same period in 2025, primarily reflecting higher yields on loans (5.73% compared with 5.56%) and on the taxable securities portfolio (2.81% compared with 2.41%), as proceeds from lower-yielding maturities and paydowns were reinvested at current market rates. Average earning assets grew to $994,286,000 from $963,688,000, supported by deposit inflows that funded growth in the securities portfolio.

For the three months ended March 31, 2026, interest expense was $3,115,000, compared with $3,515,000 for the same period in 2025, a decline of 11.4%. The decrease was driven by a lower cost of interest-bearing liabilities, which declined to 1.54% for the three months ended March 31, 2026, from 1.78% for the same period in 2025, a reduction of 24 basis points. The decline was attributable to (i) lower rates paid on interest-bearing deposits, with the average rate on total interest-bearing deposits decreasing to 1.49% from 1.73%, reflecting the repricing of NOW, money market, and savings accounts (0.66% and 0.90% for the three months ended March 31, 2026, compared with 0.75% and 1.36% for the same period in 2025) and the repricing of maturing time deposits (3.37% compared with 3.82%); and (ii) the elimination of interest expense on the Company's $10,050,000 of capital notes, which were retired at maturity in the second quarter of 2025. These benefits were partially offset by a higher rate paid on other borrowings (5.50% compared with 3.91%) following the Second Allonge to the NBB Note effective September 30, 2025.

Net interest income for the three months ended March 31, 2026, was $8,734,000, compared with $7,719,000 for the same period in 2025, an increase of 13.2%.

The net interest margin was 3.57% for the three months ended March 31, 2026, compared with 3.25% for the same period in 2025, an increase of 32 basis points. The expansion in net interest margin was primarily attributable to the 24 basis point reduction in the cost of interest-bearing liabilities described above, with the balance reflecting the 11 basis point increase in the yield on earning assets. Although short-term interest rates have stabilized, future rate movements could continue to influence the margin depending on loan repricing and deposit rate competition. For example,

While management does not currently anticipate a need to increase deposit rates, increases in market interest rates or competitive pressures could result in higher deposit costs, which would adversely impact net interest margin and profitability.

A stable interest rate environment may support net interest margin through continued repricing of interest-bearing liabilities and the maintenance of asset yields; however, margin performance will depend on competitive factors and balance sheet dynamics.

In the event of declining interest rates, net interest margin could come under pressure, particularly in the short term, as earning asset yields may reprice more quickly than funding costs given the Company's asset-sensitive position.

Other financial impacts could occur, though such potential impacts are unknown at this time.

The Company's net interest margin analysis and average balance sheets are shown in Schedule I below.

Noninterest Income

Noninterest income is primarily comprised of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments, fees generated from treasury management services, fees from the Company's investment advisory business, and bank-owned life insurance income.

Noninterest income totaled $3,964,000 for the three months ended March 31, 2026, compared to $3,283,000 for the same period in 2025, representing an increase of 20.8%. The increase for the quarter was primarily attributable to higher gains on sales of loans held for sale, increased wealth management fees, and income from an SBIC fund investment, while service fee income remained relatively stable.

The major components of noninterest income for the three months ended March 31, 2026, as compared to the comparable period in 2025, were as follows:

Gains on sale of loans held for sale, primarily through the Mortgage Division, totaled $1,196,000, compared with $837,000 for the same period in 2025.

Wealth management fees increased to $1,413,000, compared with $1,255,000 for the same period in 2025, reflecting continued growth in client assets under management.

Service charges, fees, and commissions were $994,000, compared with $981,000 for the same period in 2025, reflecting relatively stable transactional and deposit account activity.

Life insurance income increased to $211,000 from $188,000, reflecting continued growth in the cash surrender value of bank-owned life insurance policies.

Income from an SBIC fund investment totaled $131,000 for the three months ended March 31, 2026, with no comparable income in the prior year period.

There were no gains on sales of available-for-sale securities for the three months ended March 31, 2026 or March 31, 2025.

Management believes the growth in noninterest income for the first quarter of 2026, particularly in wealth management and mortgage banking, reflects the diversification of the Company's revenue sources. Future levels of noninterest income will depend on a number of factors, including market conditions affecting wealth management assets under management, mortgage origination and sales volumes, and other items that may not recur in future periods.

The Bank, through its Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the markets we serve. As part of the Bank's overall risk management strategy, all loans originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions. The Mortgage Division's primary source of revenue is gains on sale of loans held for sale. The Mortgage Division assumes no credit or interest rate risk on these mortgages, except in limited circumstances such as first payment default.

Purchase mortgage originations totaled approximately $29,323,336, or 58.90%, of total mortgage loans originated in the three months ended March 31, 2026, as compared to approximately $28,323,336, or 83.99%, of the total mortgage loans originated in the same period in 2025. The decrease in the purchase share reflects a modest increase in refinance activity in the first quarter of 2026 relative to the prior-year period, consistent with the moderation in mortgage interest rates that has occurred since the highs reached during 2022 and 2023.

Mortgage interest rates remain elevated relative to the historic lows that prevailed during 2020 and 2021, and overall mortgage origination volume remains below pre-2022 levels. As a result, a substantial portion of existing residential mortgages carries a rate below current market rates, which management believes will continue to constrain the population of borrowers with an economic incentive to refinance. Due to the uncertainty surrounding current and near-term economic conditions, including inflation, geopolitical developments, and other macroeconomic factors, management cannot predict the future direction of mortgage rates. Management anticipates that, in the near term, purchase originations will continue to represent a significant portion of total mortgage activity, and that elevated interest rates relative to pre-2022 levels may continue to put pressure on revenue from the mortgage segment. Future levels of mortgage origination

and refinance activity will depend on prevailing interest rates, housing market conditions, and other factors, many of which are outside the Company's control.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the Bank's branches. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and, in some cases, ongoing management fees such as mutual fund 12b-1 fees. The Investment division's financial impact on our consolidated revenue has been minimal. Although management cannot predict the financial impact of Investment with certainty, management anticipates that the Investment division's revenue as a percentage of our overall noninterest income will remain minimal in 2026.

We conduct our investment advisory business through PWW, which The Company acquired on December 31, 2021. PWW, based in Lynchburg, Virginia, had approximately $1,010,000,000 in assets under management and advisement as of March 31, 2026, as compared to $886,882,000 on March 31, 2025. This increase was due to both the inflow of new assets during the period and investment returns on the assets under management. PWW operates as a subsidiary of The Company and generates revenue primarily through investment advisory fees, which vary based on the value of assets under management. These assets may fluctuate due to client action and market conditions. Despite potential fluctuations, we anticipate that PWW will continue to contribute meaningfully to the Company's consolidated net income.

The Bank provides insurance and annuity products to its customers and others through its Insurance subsidiary. The Bank has two employees licensed to sell insurance products through Insurance. Insurance generates minimal revenue, and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance's impact on noninterest income will remain immaterial for the remainder of 2026.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2026, decreased to $9,365,000 from $9,826,000 for the same period in 2025, representing a decrease of 4.7%. The decrease primarily resulted from lower professional and outside services and data processing expenses associated with the renegotiation of the Company's core processing contract, partially offset by higher salaries and employee benefits.

Total personnel expense (salaries and employee benefits) was $5,500,000 for the three months ended March 31, 2026, compared to $4,777,000 for the same period in 2025. The increase reflects higher commission expense associated with increased production volumes, performance-based incentive compensation accruals, and market compensation adjustments.

Professional and other outside expenses totaled $770,000 for the three months ended March 31, 2026, compared to $1,715,000 for the same period in 2025. The decrease was primarily attributable to consulting fees incurred in the prior year period in connection with the renegotiation of the Company's core processing contract, which were concentrated in that period.

Data processing expense totaled $475,000 for the three months ended March 31, 2026, compared to $820,000 for the same period in 2025. The decrease reflects lower ongoing costs under the Company's amended core processing contract.

Occupancy and equipment expenses were $608,000 for the three months ended March 31, 2026, compared to $570,000 for the same period in 2025, reflecting modest increases associated with facility maintenance and operational needs.

Other noninterest expenses, including supplies, marketing, credit-related costs, FDIC insurance, and amortization of intangibles, totaled $1,265,000 for the three months ended March 31, 2026, compared to $1,274,000 for the same period in 2025, reflecting generally stable operating costs across these categories.

The Company expects that the amended core processing contract, which commenced April 1, 2025 and has a 65-month term, will continue to result in lower ongoing data processing and related costs compared to the prior arrangement.

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Allowance and Provision for Credit Losses

The allowance for credit losses represents management's estimate of expected credit losses inherent in the loan portfolio. The provision for (or recovery of) credit losses adjusts the allowance to a level deemed appropriate by management, while net charge-offs reduce the allowance. The determination of the allowance considers historical loss experience, current conditions, and reasonable and supportable forecasts, as well as loan-specific factors for individually evaluated loans.

The Company recorded a recovery of credit losses of $146,000 for the three months ended March 31, 2026, compared with a provision for credit losses of $137,000 for the same period in 2025. The recovery for the current period consisted of a $91,000 recovery related to the loan portfolio and a $55,000 recovery related to unfunded loan commitments (the latter recorded in other liabilities). The recovery on the loan portfolio reflects (i) a $12,473,000 decline in total loans during the quarter, (ii) continued favorable credit quality, with nonperforming loans declining to $1,450,000 at March 31, 2026 from $1,704,000 at December 31, 2025, and (iii) updated economic forecasts and other inputs to the Company's CECL models. As discussed in Note 8, in the second quarter of 2025 the Company implemented updates to the quantitative CECL loss models for collectively evaluated loan segments, which revised certain maximum loss-rate parameters and incorporated additional post-COVID historical loss data. The updated model specifications, which contributed to a reduction in expected loss rates most notably in the commercial real estate and consumer segments, have remained in use through March 31, 2026, with no further specification changes.

At March 31, 2026, the allowance for credit losses was $6,201,000, or 0.95% of total loans, compared with $6,450,000, or 0.97%, at December 31, 2025, and $7,021,000, or 1.08%, at March 31, 2025. The decrease from year-end reflects the decline in loan balances, continued favorable credit quality, and limited net charge-offs (see Note 8 for additional detail).

Net charge-offs totaled $158,000 for the three months ended March 31, 2026, compared with $51,000 for the same period in 2025.

At March 31, 2026, nonperforming loans totaled $1,450,000, compared with $1,704,000 at December 31, 2025 and $1,799,000 at March 31, 2025. Nonperforming loans represented 0.22% of total loans at March 31, 2026, compared with 0.26% at December 31, 2025.

If interest on nonaccrual loans had been accrued, such income would have been approximately $86,000 for the three months ended March 31, 2026 and $37,000 for the three months ended March 31, 2025.

The allowance for credit losses to total loans ratio was 0.95% at March 31, 2026, and the allowance for credit losses to nonperforming loans ratio was 427.66%, indicating a strong coverage position.

Management believes the allowance for credit losses is appropriate to absorb expected losses inherent in the loan portfolio at March 31, 2026.

Income Taxes

The Company recorded income tax expense of $705,000 for the three months ended March 31, 2026, compared to $197,000 for the same period in 2025. This represents an effective tax rate of approximately 20.3% for the three months ended March 31, 2026, compared with 19.0% for the same period in 2025.

The effective tax rate for both periods was below the statutory rate, primarily due to the impact of tax-exempt income from municipal securities and earnings on bank-owned life insurance ("BOLI"). The increase in the effective tax rate for the current period compared to the prior year period reflects normal variability in the mix of taxable and tax-exempt income.

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Schedule I

(1) Nonaccrual loans are included in the average balances of loans.

(2) Interest income on loans includes loan fees.

(3) The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities using the Company's applicable federal tax rate of 21% for each year.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable