Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto as of and for the years ended December 31, 2025 and 2024, which are presented elsewhere in this Annual Report.

The Company was incorporated on August 8, 2016 for the purpose of becoming the bank holding company of the Bank in a share exchange transaction that was intended to constitute a tax-free exchange for federal income tax purposes. This reorganization was consummated on November 1, 2016, at which time the Bank became a wholly-owned subsidiary of the Company and all of the Bank's stockholders became stockholders of the Company by virtue of the conversion of their shares of common stock of the Bank into an equal number of shares of common stock of the Company.

The Merger was effected on October 1, 2020 and involved the acquisition of Carroll by Farmers and Merchants Bancshares, Inc., with Farmers and Merchants Bancshares, Inc. as the surviving corporation, and the acquisition of Carroll Community Bank by the Bank, with the Bank as the surviving bank subsidiary. The Merger was intended to constitute a tax-free reorganization for federal income tax purposes.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and follow general practices within the industry in which the Company operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements presented elsewhere in the Annual Report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for credit losses on loans represents management's estimate of expected credit losses in the loan portfolio. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on collateral dependent loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current and future economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses.

FINANCIAL CONDITION

Total assets were $872.0 million at December 31, 2025, an increase of $27.3 million, or 3.2%, over the $844.6 million recorded at December 31, 2024. The increase was due primarily to a $50.2 million increase in loans offset by a decrease of $18.0 million in cash and cash equivalents and a decrease in investments of $6.4 million.

Total liabilities were $807.3 million at December 31, 2025, an increase of $18.9 million, or 2.4%, over the $788.4 million recorded at December 31, 2024. The increase was due primarily to an increase of $57.7 million in FHLB, offset by a decrease of $88.5 million in brokered CDs, and an increase in other deposits of $50.0 million.

Stockholders' equity was $64.7 million at December 31, 2025 compared to $56.3 million at December 31, 2024, an increase of $8.4 million or 14.9%. The increase was due primarily to net income for 2025 of $5.8 million and a decrease in after-tax unrealized losses on available for sale securities of $3.8 million, offset by dividends paid, net of reinvestments, of $1.3 million.

Loans

Major categories of loans at December 31, 2025 and 2024 are as follows:

		December 31,								December 31,
(Dollars in thousands)		2025								2024
Real estate:
Commercial		$	432,726				68	%		$	398,126				68	%
Construction/Land development			36,352				5	%			27,357				4	%
Residential			118,924				19	%			111,898				19	%
Commercial			49,869				8	%			50,405				9	%
Consumer			469				0	%			176				0	%
			638,340				100	%			587,962				100	%
Less: Allowance for credit losses			4,361								4,260
Deferred origination fees net of costs			835								709
		$	633,144							$	582,993
ACL to loans			0.68	%							0.72	%
Non accrual to loans			0.00	%							0.41	%
ACL to non accrual			0.00	%							174.59	%

The Company had no foreign loans for any of the years presented.

Loans increased by $50.2 million, or 8.6%, to $633.1 million at December 31, 2025 from $583.0 million at December 31, 2024. The increase was due primarily to an increase of $34.6 million in commercial real estate loans and an increase of $9.0 million in construction/land development loans. Additionally, residential loans increased by $7.0 million. The allowance for credit losses increased slightly to $4.4 million as of December 31, 2025 compared to $4.3 million as of December 31, 2024.

The Company has adopted policies and procedures that seek to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring including annual external loan reviews and monthly review at loan committee, and reporting of asset quality and the adequacy of the allowance for credit losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan, and the experience of the lending officer. The Company's policy is to make the majority of its loan commitments in the market area it serves. Management believes that this tends to reduce risk because management is familiar with the credit histories of loan applicants and has in-depth knowledge of the risk to which a given credit is subject. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

The maturities and interest rate sensitivity of the loan portfolio at December 31, 2025 were as follows:

						Maturing after				Maturing after
		Maturing within				one but within				five but within				Maturing after
(Dollars in thousands)		one year				five years				fifteen years				fifteen years				Total
Real Estate:
Commercial		$	63,846			$	217,104			$	91,939			$	59,837			$	432,726
Construction/Land Development			9,922				16,460				3,854				6,116				36,352
Residential			22,122				37,112.00				19,118				40,572				118,924
Commercial			26,730				10,678				12,461				-				49,869
Consumer			351				116				2				-				469
		$	122,971			$	281,472			$	127,375			$	106,522			$	638,340
Rate terms:
Fixed interest rate loans		$	81,835			$	251,402			$	20,667			$	7,108			$	361,012
Adjustable interest rate loans			41,136				30,070				106,708				99,414				277,328
		$	122,971			$	281,472			$	127,375			$	106,522			$	638,340

It is the Company's policy to place a loan in nonaccrual status when any portion of the principal or interest is 90 days past due unless there are mitigating factors. Management closely monitors nonaccrual loans. The Company returns a nonaccrual loan to accruing status when (i) the loan is brought current with the full payment of all principal and interest arrearages, (ii) all contractual payments are thereafter made on a timely basis for at least six months, and (iii) management determines, based on a credit review, that it is reasonable to expect that future payments will be made as and when required by the contract.

Year-end non-accrual loans, segregated by class of loans, were as follows:

(Dollars in thousands)		2025				2024
Non-accrual loans
Commercial real estate		$	-			$	2,440
Residential real estate			-				-
Commercial			-				-
Total non-accrual loans		$	-			$	2,440

At December 31, 2025, the Company had no non-accrual loans.

At December 31, 2024, the Company had three non-accrual commercial real estate loans totaling $2.4 million. Gross interest income of $25.0 thousand would have been recorded in 2024 if these non-accrual loans had been current and performing in accordance with the original terms. The Company allocated $360.0 thousand of its allowance for credit losses to these three non-accrual loans.

At December 31, 2025 and 2024, the Company had no loans that were delinquent 90 days or greater other than the non-accrual loans listed above.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2025 and December 31, 2024:

(Dollars in thousands)		2025				2024
Real estate:
Commercial		$	-			$	2,440
Construction and land development			-				-
Residential			-				270
Commercial			-				-
Consumer			-				-
		$	-			$	2,710

As part of our portfolio risk management, the Company assigns a risk grade to each loan. The factors used to determine the grade are the payment history of the loan and the borrower, the value of the collateral and net worth of any guarantor, and cash flow projections of the borrower. Special mention, Substandard, and Doubtful grades are assigned to loans with a higher frequency of delinquent payments and/or the collateral and/or cash flow are insufficient to support the loan and such loans are included on the Company's watch list. The Special mention grade is intended to be a temporary grade. During 2025 two of our large borrowers experienced short term financial stress. Accordingly, we placed these relationships on special mention status and continue to monitor them closely.

Year-end loans graded special mention, substandard and doubtful are set forth in the following table:

(Dollars in thousands)		2025				2024
Special mention		$	33,120			$	-
Substandard			6,640				10,791
Doubtful			-				-
Total		$	39,760			$	10,791

The allowance for credit losses is a reserve established through a provision for credit losses and is charged to expense. The allowance for credit losses represents an amount which, in management's judgment, will be adequate to absorb expected losses on existing loans and other of credit that may become uncollectible. The Company's allowance for credit loss methodology is calculated in accordance with FASB Topic 326 - Financial Instruments - Credit Losses. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Although management believes, based on currently available information, that the Company's allowance for credit losses is sufficient to cover expected losses in its loan portfolio, no assurances can be given that the Company's level of allowance for credit losses will be sufficient to cover future credit losses incurred by the Company or that future adjustments to the allowance for credit losses will not be necessary if economic or other conditions differ substantially from the economic and other conditions at the time management determined the current level of the allowance for credit losses.

The following tables detail the distribution of the allowance and the activity in the allowance for credit losses by portfolio segment as of and for the years ended December 31, 2025 and 2024. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

																						Allowance for credit losses ending								Outstanding loan balances
(Dollars in thousands)						Provision for																by evaluation method								evaluated:
As of and for the year ended		Beginning				(recovery of)				Charge								Ending
December 31, 2025		balance				credit losses				offs				Recoveries				balance				Individually				Collectively				Individually				Collectively
Real estate:
Commercial		$	2,481			$	550			$	(647	)		$	-			$	2,384			$	-			$	2,384			$	-			$	432,726
Construction and land development			478				42				-				-				520				-				520				-				36,352
Residential			751				(130	)			-				23				644				-				644				-				118,924
Commercial			513				249				-				-				762				-				762				-				49,869
Consumer			4				(3	)			-				-				1				-				1				-				469
Unallocated			33				17				-				-				50				-				50				-				-
		$	4,260			$	725			$	(647	)		$	23			$	4,361			$	-			$	4,361			$	-			$	638,340

																						Allowance for credit losses ending								Outstanding loan balances
						Provision for																balance evaluated for impairment:								evaluated:
(Dollars in thousands)		Beginning				(recovery of)				Charge								Ending
December 31, 2024		balance				credit losses				offs				Recoveries				balance				Individually				Collectively				Individually				Collectively
Real estate:
Commercial		$	2,448			$	33			$	-			$	-			$	2,481			$	360			$	2,122			$	2,440			$	395,686
Construction and land development			253				225				-				-				478				-				478				-				27,357
Residential			1,013				(281	)			(5	)			24				751				-				751				270				111,628
Commercial			494				171				(152	)			-				513				-				512				-				50,405
Consumer			2				7				(5	)			-				4				-				4				-				176
Unallocated			74				(41	)			-				-				33				-				33				-				-
		$	4,284			$	114			$	(162	)		$	24			$	4,260			$	360			$	3,900			$	2,710			$	585,252

		2025				2024
Allowance for credit losses to total loans outstanding			0.68	%			0.72	%
Ratio of net charge-offs to average loans outstanding during the period			0.10	%			0.03	%
Nonaccrual loans to total loans outstanding at period end			0.00	%			0.41	%

Net charge offs/(recoveries) during the period to average loans outstanding:
		2025				2024
Real estate:
Commercial			0.10	%			0.00	%
Construction and land development			0.00	%			0.00	%
Residential			0.00	%			0.00	%
Commercial			0.00	%			0.03	%
Consumer			0.00	%			0.00	%

The Company recorded net loan charge offs of $624 thousand during 2025 and $138 thousand in 2024. The impact on the income statement was a $725 thousand provision for credit losses in 2025 compared to a $114 thousand provision for credit losses in 2024. While the Bank's historical loss rates have been very low, the increase in the provision was necessary to restore the allowance to a level consistent with the Bank's methodology. This was accomplished by evaluating and adjusting, as necessary, certain qualitative and environmental factors.

Management believes that the $4.4 million reserve at December 31, 2025 is appropriate to adequately cover the expected losses in the loan portfolio. The Company's loan portfolio grew by $50.2 million during 2025. The allowance for credit losses as a percentage of gross loans was 0.68% and 0.72% as of December 31, 2025 and 2024, respectively.

Other Real Estate Owned

Other real estate owned ("OREO") at December 31, 2025 included two properties with a carrying value of $1.7 million. One property is a strip center in Westminster, MD and the other is a vacant lot in Orrtanna, PA. The properties are being marketed for sale. At December 31, 2024, OREO included an apartment building located in Baltimore City, MD with a carrying value of $1.2 million, which was sold in 2025.

($000s)		2025				2024
Other Real Estate Owned		$	1,673			$	1,176

Investment Securities

Investments in debt securities decreased by $6.4 million, or 4.4%, to $139.8 million at December 31, 2025 from $146.2 million at December 31, 2024. The decrease was due primarily to maturities and repayments of mortgage-backed securities. At December 31, 2025 and 2024, the Company had classified 85% and 86%, respectively, of the investment portfolio as available for sale. The remaining balance of the portfolio was classified as held to maturity. Securities classified as available for sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the Company's asset/liability management strategy. Available for sale securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. Securities classified as held to maturity, which management has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company does not currently follow a strategy of making security purchases with a view to near-term sales, and, therefore, does not own trading securities. The Company manages the investment portfolio within policies that seek to achieve desired levels of liquidity, manage interest rate sensitivity, meet earnings objectives, and provide required collateral for deposit and borrowing activities.

The following table sets forth the carrying value of investment securities at December 31:

(Dollars in thousands)		2025				2024
Available for sale
State and municipal		$	202			$	487
SBA pools			512				629
Corporate bonds			6,464				7,185
Mortgage-backed securities			111,552				117,412
		$	118,730			$	125,713
Held to maturity
State and municipal		$	21,055			$	20,499

The following table sets forth the scheduled maturities of investment securities at December 31, 2025:

		Available for Sale												Held to Maturity
(Dollars in thousands)		Amortized				Fair								Amortized				Fair
December 31, 2025		cost				value				Yield				cost				value				Yield
Within one year		$	-			$	-				0.00	%		$	-			$	-				0.00	%
Over one to five years			749				706				2.45	%			1,587				1,587				2.91	%
Over five to ten years			6,500				5,961				3.72	%			10,952				10,741				3.27	%
Over ten years			-				-				-				8,516				7,926				3.26	%
			7,249				6,667				3.59	%			21,055				20,254				3.24	%
Mortgage-backed securities and SBA pools, due in monthly installments			128,820				112,063				2.61	%			-				-				-
		$	136,069			$	118,730				2.66	%		$	21,055			$	20,254				3.24	%

Deposits

Total deposits were $720.5 million at December 31, 2025 compared to $758.8 million at December 31, 2024, a decrease of $38.3 million, or 5.1%. The decrease was due to an $88.5 million reduction in brokered CDs, and an $11.1 million decrease in savings accounts, offset by a $19.9 million increase in money market accounts, a $14.7 million increase in reciprocal deposits, a $12.5 million increase in checking accounts, a $10.3 million increase in noninterest-bearing accounts, and a $3.8 million increase in CDs and individual retirement accounts.

The following table shows the average balances and average costs of deposits for the years ended December 31:

		2025								2024
(Dollars in thousands)		Average Balance				Cost				Average Balance				Cost
Noninterest bearing demand deposits		$	112,580				0.00	%		$	110,123				0.00	%
Interest bearing demand deposits			120,985				0.99	%			123,279				0.79	%
Savings and money market deposits			147,933				0.82	%			149,356				0.70	%
Certificates of deposit			359,294				3.91	%			289,735				4.32	%
		$	740,792				2.22	%		$	672,493				2.16	%

As of December 31, 2025, certificates of deposit greater than $250,000 mature as follows:

(Dollars in thousands)
Period		Balance
3 months or less		$	30,236
Over 3 months to 6 months			20,431
Over 6 months to 12 months			7,278
Over 12 months			2,006
Total		$	59,951

Deposits in excess of $250 thousand were $199.8 million as of December 31, 2025. The bank offers programs to its depositors which provide insurance above the FDIC's $250 thousand threshold.

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, lines of credit, including home-equity lines and commercial lines, and letters of credit. Loan commitments generally have interest rates at current market values, fixed expiration dates, and may require a fee. Lines of credit generally have variable interest rates and do not necessarily represent future cash flow requirements because it is unlikely that all customers will draw upon their lines in full at any one time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

For commitments to extend credit, lines of credit, and letters of credit, the Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

At December 31, the Company's off-balance sheet financial instruments were as follows:

Unused lines of credit
Home-equity lines		$	15,491			$	17,505
Commercial lines			64,568				49,249
		$	80,059			$	66,754
Letters of credit		$	2,234			$	1,836

Management does not believe that any of the foregoing arrangements are reasonably likely to have a material adverse effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Borrowings and Other Contractual Obligations

The Company's contractual obligations consist primarily of borrowings and operating leases for various facilities.

Securities sold under agreements to repurchase represent overnight borrowings from customers. Securities owned by the Company which are used as collateral for these borrowings are primarily U.S. government agency securities.

On September 30, 2020, Farmers and Merchants Bancshares, Inc. borrowed $17.0 million from First Horizon Bank to be used, on October 1, 2020, to fund a portion of the merger consideration paid in the Merger (the "Merger Loan"). Net of issuance costs of $28.1 thousand, the Company received $16.9 million in loan proceeds. The loan matured on September 30, 2025. The interest rate on the loan was fixed at 4.10%. The Company made quarterly interest-only payments through October 1, 2021. During the remaining term of the loan, the Company paid quarterly interest and principal payments of approximately $646.5 thousand, which was based on a nine-year straight-line amortization schedule. The remaining balance of approximately $9.9 million was repaid at maturity using the proceeds of the September 2025 sale of the Subordinated Notes.

On September 25, 2025, Farmers and Merchants Bancshares, Inc. issued and sold $12.5 million in aggregate principal amount of its Subordinated Notes. The Subordinated Notes were issued by the Company at a price equal to 100% of their face amounts. The Subordinated Notes have stated maturity dates of September 25, 2035 (the "Maturity Date").

From and including the original issue date of the Subordinated Notes the ("Issue Date") to but excluding September 26, 2030 or the date of earlier redemption, the Company will pay interest on the Subordinated Notes semi-annually in arrears on March 26th and September 26th of each year at a fixed interest rate of 7.875% per annum, computed on the basis of a 360-day year consisting of twelve 30-day months, beginning on March 26, 2026. From and including September 26, 2030, to, but excluding, the Maturity Date or the date of earlier redemption (the "Floating Rate Period"), the Company will pay interest on the Subordinated Notes at a floating interest rate at the Three-Month Term SOFR (as defined in the Subordinated Notes), reset quarterly, plus 458 basis points, computed on the basis of a 360-day year and the actual number of days elapsed. During the Floating Rate Period, the Company will pay interest on the Subordinated Notes quarterly in arrears on March 26th, June 26th, September 26th, and December 26th of each year, beginning on December 26, 2030. Notwithstanding the foregoing, if the Three-Month Term SOFR rate is less than zero, then the Three-Month Term SOFR rate shall be deemed to be zero.

The Subordinated Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Subordinated Notes are not subject to redemption at the option of the holder. Prior to September 26, 2030, the Company may redeem the Notes, in whole or in part, only under the certain limited circumstances set forth in the Subordinated Notes. On or after September 26, 2030, the Company may redeem the Subordinated Notes, in whole or in part, at its option, on any Interest Payment Date (as defined in the Subordinated Notes). Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed, together with any accrued and unpaid interest on the Subordinated Notes being redeemed to but excluding the date of redemption. Any redemption of the Subordinated Notes will be subject to the receipt of any and all required federal and state regulatory approvals, including the approval of the Federal Reserve to the extent then required under applicable laws or regulations.

The payment of principal and interest on the Subordinated Notes is subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to the Company. The Subordinated Notes are general unsecured, subordinated obligations of the Company and rank junior to all of its existing and future Senior Indebtedness (as defined in the Subordinated Notes). The Subordinated Notes are obligations of only the Company and are not obligations of, and are not guaranteed by, any of its subsidiaries, including the Bank. Further, the Subordinated Notes are intended to qualify as Tier 2 capital of the Company for regulatory capital purposes.

Specific information about the Company's borrowings and contractual obligations is set forth in the following table:

			At December 31,
(Dollars in thousands)			2025				2024
Amount oustanding at year end:
Securities sold under repurchase agreements			$	4,317			$	5,564
Federal Home Loan Bank advances mature in	2025		$	-			$	5,000
	2026		$	50,200			$	-
	2027		$	12,500			$	-
Subordinated Debt (net of issuance costs) matures in	2035		$	12,036			$	-
Long Term Debt (net of issuance costs) matures in	2025		$	-			$	11,329
Weighted average rate paid at December 31:
Securities sold under repurchase agreements				1.25	%			1.25	%
Federal Home Loan Bank advances				3.82	%			1.00	%
Subordinated Debt				7.88	%			N/A
Long-term debt				N/A				4.10	%

The terms of the Company's operating leases, including the future minimum payments under those leases, are disclosed in Note 8 to the consolidated financial statements.

RESULTS OF OPERATIONS

Overview

The Company reported net income of $5.8 million for the year ended December 31, 2025 compared to $4.3 million for the year ended December 31, 2024. The increase of $1.5 million from 2024 was due to an increase in net interest income of $3.6 million and an increase on non-interest income of $224 thousand. This was offset by an increase in the provision for credit losses of $548 thousand, an increase in noninterest expense of $1.4 million, and a $376 thousand increase in income taxes.

Net Interest Income

The primary source of income for the Company is net interest income, which is the difference between interest income on interest-earning assets, such as investment securities and loans, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings.

For the year ended December 31, 2025, the Company recorded net interest income of $24.4 million compared to $20.8 million for 2024, an increase of $3.6 million. The increase was attributable to a 30 basis point increase in the yield on earning assets from 4.92% to 5.22% and a 6 basis point decrease in the cost of interest bearing liabilities to 2.70% in 2025 from 2.76% in 2024.

Total interest income for the year ended December 31, 2025 increased by $4.0 million to $42.4 million from $38.4 million for 2024. The increase was due primarily to an increase in average interest earning assets of $31.1 million to $815.7 million in 2025 from $784.6 million in 2024.

Interest income from loans was $36.1 million in 2025 compared to $30.3 million in 2024, an increase of $5.8 million. This increase was attributable to a $59.4 million increase in the average balance of loans to $617.2 million in 2025 from $557.9 million 2024 and a 40 basis point increase in the average yield on loans to 5.84% in 2025 from 5.44% in 2024.

For the year ended December 31, 2025, the Company recorded interest income on securities of $4.8 million compared to $6.8 million for the same period in 2024. The $2.0 million decrease in 2025 was attributable to a $37.0 million decrease in the average balance of securities to $164.3 million in 2025 from $201.3 million in 2024 and a 48 basis point decrease in the average yield on securities to 2.98% in 2025 from 3.46% in 2024.

Interest income on federal funds sold and other interest-earning assets (FHLB stock and certificates of deposit) increased by $300 thousand to $1.5 million in 2025 compared to $1.2 million in 2024. The increase was due to an $8.6 million increase in the average balance of federal funds sold and other interest-earning assets to $34.1 million in 2025 from $25.5 million in 2024, offset by a 39 basis point decrease in the average yield to 4.66% in 2025 from 5.05% in 2024.

Total interest expense increased by $438 thousand to $18.0 million in 2025 compared to $17.5 million in 2024. The increase was due to a $31.6 million increase in the average balance of interest-bearing liabilities to $666.2 million in 2025 from $634.6 million in 2024 offset by a 6 basis point decrease in the cost of interest-bearing liabilities to 2.70% in 2025 from 2.76% in 2024.

Interest paid on NOW, savings, and money market deposit accounts increased by $397 thousand to $2.4 million in 2025 compared to $2.0 million in 2024. The increase was due to a 16 basis point increase in the cost of funds to 0.90% in 2025 from 0.74% in 2024, offset by a $3.7 million decrease in the average balance of these deposits to $268.9 million in 2025 from $272.6 million in 2024.

Interest paid on time deposits increased by $1.5 million to $14.0 million in 2025 compared to $12.5 million in 2024. The increase was due to an increase of $69.6 million in the average balance to $359.3 million in 2025 from $289.7 million in 2024, offset by a decrease of 41 basis points in the average rate paid to 3.91% in 2025 from 4.32% in 2024.

Interest paid on securities sold under repurchase agreements decreased by $6 thousand to $59 thousand in 2025 compared to $65 thousand in 2024. The decrease was attributable to a $500 thousand decrease in the average balance of securities sold under repurchase agreements to $4.7 million in 2025 from $5.2 million in 2024.

Interest paid on long-term debt was $599 thousand in 2025 compared to $508 thousand in 2024. This debt relates to the $17 million Merger Loan, which was repaid on September 30, 2025, and the Subordinated Notes issued in September 2025. The average balance, net of issuance costs, decreased $1.1 million to $11.0 million in 2025 from $12.1 million in 2024 due to scheduled principal payments.

The FRB's Bank Term Funding Program ("BTFP") was initiated in March 2023. The Company utilized the BTFP with an average balance of $0 and $48.7 million during 2025 and 2024, respectively and a cost of 0% and 4.75% in 2025 and 2024, respectively. We recorded an associated interest expense of $0 and $2.3 million in 2025 and 2024, respectively. The balance was fully repaid late in 2024.

Interest paid on FHLB advances increased by $724 thousand to $847 thousand in 2025 from $123 thousand in 2024. The change was attributable to a $16.0 million increase in the average balance of FHLB advances to $22.3 million in 2025 from $6.3 million in 2024 and an increase in the average rate paid to 3.80% in 2025 from 1.96% in 2024.

The following table sets forth certain information relating to the Company's average interest-earning assets and interest-bearing liabilities for the periods indicated. The yields and rates are calculated by dividing interest income or expense by the average daily balance of assets or liabilities, respectively. Non-accruing loans are included in the average balance.

(Dollars in thousands)		2025												2024
		Average												Average
		Balance				Interest				Yield				Balance				Interest				Yield
Assets:
Loans		$	617,249			$	36,062				5.84	%		$	557,862			$	30,338				5.44	%
Securities, taxable			145,331				4,174				2.87	%			183,194				6,268				3.42	%
Securities, tax exempt			18,969				730				3.85	%			18,082				694				3.84	%
Securities combined			164,300				4,904				2.98	%			201,276				6,962				3.46	%
Federal funds sold and other interest bearing deposits			34,139				1,592				4.66	%			25,468				1,286				5.05	%
Total interest-earning assets			815,688				42,558				5.22	%			784,606				38,586				4.92	%
Noninterest-earning assets			30,502												25,437
Total assets		$	846,190											$	810,043
Liabilities and Stockholders'Equity:
NOW, savings, and money market		$	268,918			$	2,411				0.90	%			272,635				2,014				0.74	%
Certificates of deposit			359,294				14,049				3.91	%			289,735				12,504				4.32	%
Securities sold under repurchase agreements			4,691				59				1.25	%			5,195				65				1.25	%
Term Debt			11,041				599				5.43	%			12,125				508				4.19	%
FRB advances and other borrowings			-				-				0.00	%			48,694				2,313				4.75	%
FHLB advances			22,305				847				3.80	%			6,273				123				1.96	%
Total interest-bearing liabilities			666,249			$	17,965				2.70	%			634,657			$	17,527				2.76	%
Noninterest-bearing deposits			112,580												110,123
Noninterest-bearing liabilities			7,107												10,653
Total liabilities			785,936												755,433
Stockholders' equity			60,254												54,610
Total liabilities and stockholders' equity		$	846,190											$	810,043
Net interest income						$	24,593											$	21,059
Interest rate spread											2.52	%											2.16	%
Net yield on interest-earning assets											3.02	%											2.68	%
Ratio of average interest-earning assets to Average interest-bearing liabilities											122.43	%											123.63	%

The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories of the Company's interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes in net interest income attributed to volume (change in volume multiplied by the prior year's interest rate), and (ii) changes in net interest income attributed to rate (change in rate multiplied by the prior year's volume). The change in interest due to the combined rate and volume changes is allocated proportionally to the change in volume and rate.

RATE/VOLUME ANALYSIS

		Year ended December 31, 2025 compared to 2024
(Dollars in thousand)		Change due to variance in
		Volume				Rate				Total
Interest income:
Loans		$	3,371			$	2,352			$	5,723
Securities, taxable			(1,178	)			(916	)			(2,094	)
Securities, tax exempt			34				2				36
Federal funds sold and other interest-earning assets			411				(104	)			307
Total interest-earning assets			2,638				1,334				3,972
Interest expense:
NOW, savings, and money market			(28	)			425				397
Certificates of deposit			2,799				(1,254	)			1,545
Securities sold under repurchase agreements			(6	)			-				(6	)
Long-term debt			(48	)			140				92
FRB advances and other borrowings			(1,157	)			(1,157	)			(2,314	)
FHLB advances			530				194				724
Total interest-bearing liabilities			2,090				(1,652	)			438
Change in net interest income		$	548			$	2,986			$	3,534

Noninterest Income

Noninterest income was $2.0 million in 2025 compared to $1.8 million in 2024, an increase of $200 thousand. The increase was due primarily to an increase of $89 thousand on the gain on SBA loans, a $94 thousand increase in the gain on the settlement of a fair value hedge, an increase of $49 thousand in mortgage banking income, and an increase in bank owned life insurance income of $30 thousand. This was offset by a decrease in insurance proceeds of $89 thousand, a decrease in service charges on deposit accounts of $117 thousand, and decreases in other fees and commissions.

Noninterest Expense

Total noninterest expense increased by $1.4 million to $18.3 million in 2025 from $16.9 million in 2024. The increase was due primarily to an increase in salaries and benefits of $677 thousand due to additional staff being added during the year, an increase in occupancy costs of $99 thousand as a result of increased rent and repairs costs, and an increase on furniture and equipment costs of $300 thousand due primarily to higher software maintenance costs. Professional fees decreased by $127 thousand due to the lower use of consultants. FDIC insurance premiums increased $187 thousand due to higher assessment rates. Losses on OREO increased by $101 thousand.

Other noninterest expenses include the following:

(Dollars in thousands)		2025				2024
Directors fees		$	264			$	294
Correspondent bank services			239				242
Telephone			287				283
Internet banking fees			241				218
Stationery, printing and supplies			127				141
Liability insurance			119				120
Insurance claims			(77	)			(57	)
Other			925				782
		$	2,125			$	2,023

Income Taxes

Income taxes increased by $376 thousand to $1.6 million in 2025 from $1.2 million in 2024.

The Company's effective tax rate decreased to 21.8% in 2025, from 22.4% in 2024. The decrease was due to a higher percentage of tax exempt revenue and the reduction of a deferred tax liability. Note 11 to the consolidated financial statements provides additional information about the Company's taxes, including a reconciliation of the Company's effective tax rate to the Federal statutory rate of 21%.

INTEREST RATE RISK

The Company's principal market risk is exposure to the risk that the interest rates associated with our interest-bearing liabilities and interest-earning assets will fluctuate. This risk arises from the Company's lending, investing and deposit-taking activities, and is affected by many factors, including economic and financial conditions, movements in interest rates and consumer preferences. Interest rate fluctuation has a direct impact on the Company's net interest income. Net interest income is susceptible to interest rate risk when deposits and other short-term liabilities have different repricing intervals than do loans, investments and other interest-earning assets. When interest-earning assets mature or reprice faster than interest-bearing liabilities, a decline in interest rates may cause a decline in net interest income. Conversely, when interest-bearing liabilities mature or reprice faster than interest-earning assets, an increase in interest rates may cause a decline in net interest income.

The Company recognizes that there are many types of interest rate risk. Management believes that the three types that pose the greatest potential threat to current and long-term earnings are:

•

Repricing risk - the difference in the timing of the scheduled maturity and re-pricing dates of assets and liabilities within a certain time frame;

•

Option risk - interest rate related options embedded in the Company's assets and liabilities which change the cash flow characteristics of the assets and liabilities; and

•

Yield curve / basis risk - changes in the relationship between different interest rates with the same maturity or interest rates across a maturity spectrum which create compression or expansion of our net interest margin.

The Company uses earnings at risk and economic value at risk measures to quantify our exposure to these types of interest rate risk. We believe that using simulations that measure all three types of risks in combination is a more efficient tool for measurement, and we therefore do not routinely process models to isolate each risk. Rather, we combine the three types of analyses, which we believe provides a better overall result than a simulation based on a single system and a more economical use of resources than targeted models. Following is a description of the analyses to be utilized:

Earnings at Risk

Earnings at Risk ("EAR") measures exposure to net changes in net interest income ("NII"), and is considered the Company's best source of managing short-term interest rate risk (one-year and two-year time frames). EAR is a dynamic analysis, which can capture all the different forms of interest rate risk under many different interest rate scenarios, and using various assumptions for growth, optionality, and yield curve structure.

Economic Value of Equity

Economic Value of Equity ("EVE") is management's primary analytical tool for measuring long-term interest rate risk, and helps to measure if the long-term safety and soundness of the Company is being compromised for the sake of short-term results. However, the Company also recognizes the inherent difficulties of calculating a definitive value for many sections of the balance sheet as well as the weakness that EVE ignores future events (e.g., growth, etc.). These difficulties, coupled with the nature of our core business, allow the Company to adopt wide limits for this measure.

In order to mitigate the impact of changing interest rates, the Board of Directors has established policies and procedures that include acceptable parameters for the relationship between rate sensitive assets to rate sensitive liabilities as measured by earnings at risk and economic value at risk. The Asset/Liability Committee reviews rate sensitivity measures on a quarterly basis. Material deviations from policy parameters are reported to the Board of Directors and corrective action is initiated and monitored.

Measures of NII at risk produced by simulation analysis are indicators of an institution's short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Based upon the most recent data available to the Company (as of December 31, 2025), the simulation analysis produced the following estimated changes in NII, assuming the indicated rate changes:

		(Dollars in thousands)
Change in Rate		2025
400 basis point increase		$	(3,014	)
300 basis point increase			(1,918	)
200 basis point increase			(1,116	)
100 basis point increase			(485	)
100 basis point decrease			1,359
200 basis point decrease			1,912
300 basis point decrease			2,185
400 basis point decrease			2,284

LIQUIDITY MANAGEMENT

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet depositor withdrawal requirements, to fund loans, and to fund our other debts and obligations as they come due in the normal course of business. We maintain our asset liquidity position internally through short-term investments, the maturity distribution of the investment portfolio, loan repayments, and income from earning assets. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed.

The Bank is approved to borrow 75% of eligible pledged single-family residential loans and 50% of eligible pledged commercial loans as well as investment securities, or approximately $86.3 million under a secured line of credit with the FHLB. The Bank also has a facility with the Federal Reserve Bank of Richmond (the "FRB"). Under the facility, which has been in place for over 10 years and is collateralized by loans, the Bank can borrow approximately $32.5 million. Finally, the Bank has $23.5 million ($14.5 million unsecured and $9.0 million secured) of overnight federal funds lines of credit available from commercial banks.

FHLB advances of $62.7 million and $5.0 million were outstanding as of December 31, 2025 and 2024, respectively. In 2020 the Company borrowed $17.0 million to facilitate the Merger in 2020 which was repaid in September 2025. On September 25, 2025, the Company issued $12.5 million in Subordinated Notes. There were no borrowings from the FRB or from our commercial bank lenders at December 31, 2025 and 2024. Management believes that we have adequate liquidity sources to meet all anticipated liquidity needs over the next 12 months. Management knows of no trend or event which is likely to have a material impact on our ability to maintain liquidity at satisfactory levels. Deposits in excess of $250 thousand were $199.8 million as of December 31, 2025. The bank offers programs to its depositors which provide insurance above the FDIC's $250 thousand threshold.

Cash provided by operating activities increased by $3.7 million to $6.1 million in 2025 from $2.3 million in 2024. Cash used in investing activities increased by $18.8 million to $41.5 million in 2025 from $22.7 in 2024 due primarily to a $4.8 million decrease in the net cash inflow from the debt securities portfolio, a decrease of $23.9 million in cash provided by the sale of a security, and an increase in the purchases of FHLB stock of $2.7 million offset by a $7.4 million decrease in the net cash outflow from the loan portfolio and an increase in the proceeds from the sale of OREO property of $906 thousand. Cash provided by financing activities decreased by $22.9 million to $17.5 million in 2025 from $40.4 million in 2024 due primarily to a $33.0 million decrease in cashflow from FRB advances and a decrease in interest bearing deposits of $48.2 million, of which $40.9 million were brokered CDs. These were offset by a $57.7 million increase in the net cash inflow from FHLB advances, $12.0 million in net cash flow from the issuance of Subordinated Notes, and an increase in cash flow from non-interest bearing deposits of $9.9 million.

Information about the various financial obligations, including contractual obligations and commitments that may require future cash payments, to which we are subject is set forth above under the captions "Off-Balance Sheet Transactions" and "Borrowings and Other Contractual Obligations".

CAPITAL RESOURCES AND ADEQUACY

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. These requirements are discussed in Item 1 of Part I of this Annual Report under the heading, "Supervision and Regulation - Capital Requirements".

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio ("CBLR") framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

On April 6, 2020, in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency, issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act. Under the interim final rules, the community bank leverage ratio was reduced to 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company has not opted-in to the CBLR framework.

Additional information regarding the capital requirements that apply to us can be found in Note 12 of the consolidated financial statements and notes thereto included in the Annual Report.

The following table presents actual and required capital ratios as of December 31, 2025 and 2024, for the Bank under the applicable capital regulations. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2025 and 2024. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations.

										Minimum								To Be Well
(Dollars in thousands)		Actual								Capital Adequacy (1)								Capitalized
December 31, 2025		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total capital (to risk-weighted assets)		$	86,141				12.32	%		$	73,433				10.50	%		$	69,936				10.00	%
Tier 1 capital (to risk-weighted assets)			81,508				11.65	%			59,446				8.50	%			55,949				8.00	%
Common equity tier 1 (to risk- weighted assets)			81,508				11.65	%			48,955				7.00	%			45,459				6.50	%
Tier 1 leverage (to average assets)			81,508				9.38	%			34,774				4.00	%			43,468				5.00	%
December 31, 2024
Total capital (to risk-weighted assets)		$	81,161				12.37	%		$	68,910				10.50	%		$	65,628				10.00	%
Tier 1 capital (to risk-weighted assets)			76,601				11.67	%			55,784				8.50	%			52,503				8.00	%
Common equity tier 1 (to risk- weighted assets)			76,601				11.67	%			45,940				7.00	%			42,658				6.50	%
Tier 1 leverage (to average assets)			76,601				9.12	%			33,580				4.00	%			41,974				5.00	%

(1)

Note: The above table includes the capital conservation buffer, where applicable.

The Company intends to fund future growth primarily with cash, federal funds, maturities of investment securities and deposit growth. Management knows of no other trend or event that will have a material impact on capital.