What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-14 compared with 2025-05-15 · 281 added, 217 removed, 231 unchanged (68% of the section changed)

71 unchanged sentences

Overview and Highlights

Net income for the

three months ended March 31, 2025 was $1.9 million, an increase of $122,000, or 6.83%, from the same period in 2024.

Net interest income

increased 9.81%, or $680,000, from $6.9 million for the quarter ended March 31, 2024 to $7.6 million for the quarter ended March 31,

The increase was primarily due to an increase in the yield and average balance of earning assets, specifically loans which increased

27 basis points (”bps”) and $23.5 million when comparing the first three months of 2025 to 2024.

The balance sheet

grew to $880.7 million in total assets as of March 31, 2025, from $854.9 million as of December 31, 2024.

Gross loans increased $13.2

million to $670.7 million as of March 31, 2025.

Additionally, interest-bearing deposits in other banks increased $12.3 million to $66.6

million as of March 31, 2025.

During the first three months of 2025 total deposits increased $26.9 million or 14.53% annualized to $776.9

A dividend of $0.08

per share was paid to shareholders during the first quarter of 2025, a 14.3% increase over the dividend paid in 2024.

During the first

quarter of 2025, we extended a previously announced stock repurchase program, to continue through March 31, 2026.

Since the inception

of the program through March 31, 2025, the Company has repurchased 308,139 shares at an average price of $2.46 per share.

Comparison of

the Three Months ended March 31, 2025 and 2024

Quarter-to-date highlights

on average assets and equity of 0.90% and 10.78% for the first quarter of 2025, compared

to 0.86% and 11.11% for the first quarter of 2024, respectively;

interest margin was 3.69% for the first quarter of 2025 compared to 3.48% for the first quarter

interest income was $7.6 million for the first quarter of 2025, an increase of $680,000,

or 9.81%, compared to the first quarter of 2024;

income for the three months ended June 30, 2025 was $2.5 million, or $0.11 per share, an

increase of $848,000, or 50.36%, from the $1.7 million or $0.07 per share reported for the

same period in 2024.

on average assets and equity of 1.15% and 13.91% for the second quarter of 2025, compared

to 0.79% and 10.56% for the second quarter of 2024, respectively;

interest margin was 3.86% for the second quarter of 2025 compared to 3.41% for the second

quarter of 2024;

interest income was $8.2 million for the second quarter of 2025, an increase of $1.2 million

or 17.85%, compared to the second quarter of 2024;

· Noninterest

income was $2.4 million, an increase of $92,000, or 3.96%, during the first quarter of 2025

compared to the first quarter of 2024;

income was $2.4 million, a decrease of $96,000, or 3.79%, during the second quarter of 2025

compared to the second quarter of 2024;

· Noninterest

expense was $7.3 million, an increase of $295,000, or 4.23%, for the first quarter of 2025

compared to the first quarter of 2024.

During the first

quarter of 2025, interest income increased $737,000 to $11.4 million due to the combination of an increase of 19 bps in the yield on

earning assets to 5.51% and a $32.7 million increase in the average balance of earning assets.

The loan portfolio was the primary driver

of both increases, as the yield rose 27 bps to 6.10%, while the average balance increased $23.5 million for the comparative quarters

ending March 31, 2025 and 2024.

Investment securities contributed $172,000 as the average balance, excluding the unrealized loss, increased

$6.7 million and the yield rose 52 bps, as we reinvest cash flows and grow the portfolio in a higher interest rate environment.

The increased

interest income was partially offset by increased interest expense which rose $57,000 to $3.7 million during the first quarter of 2025

as compared to $3.7 million reported for the same period in 2024.

Interest-bearing deposits accounted for $298,000 of the increase as

the average rate increased 7 bps and the average balance increased $37.0 million for the comparative quarters ending March 31, 2025 and

The increase attributable to interest-bearing deposits was partially offset by a decrease in the cost of borrowed funds, which

decreased 57 bps to 5.26%, as the related interest expense decreased $241,000.

The decline was also impacted by the decreased average

balance related to a $10 million borrowing from the Federal Reserve Bank under the Bank Term Funding Program that was repaid in October

2024, combined with $4.2 million in principal payments made on trust preferred securities in October 2024 and January 2025.

the variable rate paid on the trust preferred securities decreased as overnight and short-term borrowing rates declined during the last

half of 2024.

As a result, the cost of total interest-bearing liabilities decreased 4 bps to 2.73% during the first quarter of 2025 as

compared to the first quarter of 2024.

As a result, net interest income for the quarter ended March 31, 2025 increased $680,000, or 9.81%,

when compared to the quarter ended March 31, 2024, while the net interest margin increased 21 bps to 3.69% for the quarter ending March

31, 2025, as compared to 3.48% for the same period in 2024 due to the increase in the yield on earning assets outpacing the cost of funds.

expense was $7.2 million, an increase of $375,000, or 5.48%, for the second quarter of 2025

compared to the second quarter of 2024.

Comparison of

the Three Months ended June 30, 2025 and 2024

Net interest income

for the quarter ended June 30, 2025 was $8.2 million, an increase of $1.2 million, or 17.85%, when compared to the quarter ended June

During the second quarter of 2025, interest income increased $947,000 to $12.0 million due to the combination of an increase

of 23 basis points (“bps”) in the yield on earning assets to 5.61% and a $31.7 million increase in the average balance of

earning assets when compared to 2024.

The loan portfolio was the primary driver of both increases, as the yield rose 31 bps to 6.20%,

while the average balance increased $41.9 million compared to the quarter ended June 30, 2024.

Investment securities contributed $125,000

as the average balance, excluding the unrealized loss, increased $4.2 million and the yield rose 37 bps, as we reinvest cash flows and

grow the portfolio in a higher interest rate environment.

Combined with the increased interest income, interest expense decreased $297,000

to $3.7 million during the second quarter of 2025 as compared to $4.0 million reported for the same period in 2024.

The reduced interest

expense is principally attributed to the cost of borrowed funds, which decreased 55 bps to 5.28%, as the related interest expense decreased

The decline was due to the decreased average balance related to a $10 million borrowing from the Federal Reserve Bank under

the Bank Term Funding Program that was repaid in October 2024, combined with $4.2 million in principal payments made on trust preferred

securities in October 2024 and January 2025.

These principal payments reduced the average balance of borrowed funds by $14.1 million

or 39.09% for the comparative quarters ended June 30, 2025 and 2024.

In addition, the variable rate paid on the trust preferred securities

decreased as overnight and short-term borrowing rates declined during the last half of 2024.

As a result, the cost of total interest-bearing

liabilities decreased 28 bps to 2.66% during the second quarter of 2025 as compared to the second quarter of 2024.

The net interest margin

increased 45 bps to 3.86% for the quarter ending June 30, 2025, as compared to 3.41% for the same period in 2024 due to the increase

in the yield on earning assets outpacing the cost of funds.

The following table

6 unchanged sentences

bearing deposits in other banks

investment securities

securities (2)

earning assets

for credit losses

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

17 unchanged sentences

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024.

to rates and volume for the three months ended June 30, 2025, as compared to the three months ended June 30, 2024.

Volume and Rate Analysis

Increase (decrease)

Months Ended 2025 Compared to 2024

Three Months Ended June 30, 2025 Versus 2024

in thousands)

2 unchanged sentences

bearing deposits in other banks

investment securities

earning assets

6 unchanged sentences

The provision for

credit losses charged to the income statement for the quarter ended March 31, 2025 was $259,000 compared to a net reversal of $43,000

for the three months ended March 31, 2024.

The March 2025 provision reflects the impact of valuation allowances for two specifically

assessed borrower relationships, while the reversal recorded in 2024, was due to the resolution of a loan relationship for which a specific

allowance allocation had been assigned, along with net recoveries on previously charged-off loans recorded during the first quarter of

Also, the provision for credit losses on unfunded commitments was $92,000 for the first quarter of 2025 due to growth in construction

loans which are expected to be drawn over the next 12-18 months.

For a discussion of the factors affecting the allowance for credit losses,

including provision expense, refer to Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q.

credit losses charged to the income statement for the quarter ended June 30, 2025 was $154,000 compared to $472,000 for the three months

ended June 30, 2024.

The second quarter 2025 provision reflects the impact of the loan growth while the provision recorded in 2024 was

due to an increase in past due and nonperforming loans during the second quarter of 2024.

The provision for credit losses on unfunded

commitments was $0 for the second quarter of 2025 due to a reduction in the growth rate in commitments for construction loans which are

expected to be drawn over the next 12-18 months.

For a discussion of the factors affecting the allowance for credit losses, including

provision expense, refer to Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q.

Noninterest income

increased $92,000 to $2.4 million for the quarter ended March 31, 2025 from $2.3 million for the comparable quarter in 2024.

totaling $2.4 million for the quarter ended June 30, 2025 decreased $96,000 compared to the quarter ended June 30, 2024.

Modest decreases

in earnings from service charges and card processing activities totaling $68,000 were offset by a branded card incentive payment of $141,000.

Modest decreases in service charges and card processing revenues over the past several quarters result from changes in customer spending

in earnings from service charges and financial services revenue totaling $68,000 and $16,000, respectively, and a gain on disposal of

premises and equipment of $53,000 in 2024 that was not repeated in 2025 were partially offset by a $17,000 increase in card processing

Noninterest expense

was $7.3 million for the quarter ended March 31, 2025 compared to $7.0 million for the quarter ended March 31, 2024.

was $7.2 million for the quarter ended June 30, 2025 compared to $6.8 million for the quarter ended June 30, 2024.

The $375,000 dollar

increase resulted from increases in salaries and benefits, and occupancy costs, which combined for an increase of $266,000, and increases

in advertising and ATM network expenses which combined for an increase of $66,000.

The increase in salaries and benefits is attributed

to normal recurring salary adjustments and staffing costs for the recently opened loan production office.

Occupancy costs were impacted

by $47,000 in costs incurred in “refreshing” a branch office and $42,000 in costs for snow and ice removal to keep our branch

locations open and safe during the winter storms.

ATM and card processing expense increases of $52,000 related to normal recurring cost

increases, while advertising increases were due to product and service marketing efforts and costs incurred for a brand update.

increases were partially offset by a combined decrease of $31,000 in loan and loan related expenses and other operating expenses.

The conversion of

our core operating system is scheduled for the fourth quarter of 2025.

While estimated deconversion costs of approximately $850,000 were

accrued for in 2024, we cannot be certain that all costs associated with this transition were captured and that there may be non-capitalized

costs incurred and charged to expense during 2025.

increase resulted from increases in salaries and benefits, occupancy, and data processing costs, which combined for an increase of $119,000,

and increases in advertising, ATM network, loan processing, and other expenses which combined for an increase of $196,000.

in salaries and benefits is attributed to normal recurring salary adjustments and staffing costs for the recently opened loan production

Occupancy costs were impacted by costs for the new loan production office.

Advertising included costs for a program to refresh

the bank branding, while loan costs were impacted by costs associated with a loan promotion.

As we progress with

our planned core conversion, it is expected that additional costs related to overtime, meals and other expenses related to the installation,

testing and training on the new system will be incurred during the remainder of 2025.

The efficiency ratio,

which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, decreased to 67.70% during

the first quarter of 2025 from 75.42% for the first quarter of 2024.

We continue to assess our operational procedures and structure to

improve efficiencies and contain costs.

the second quarter of 2025 from 71.96% for the second quarter of 2024.

We continue to assess our operational procedures and structure

to improve efficiencies and contain costs.

Income tax expense

for the first quarter of 2025 totaled $584,000, an increase of $53,000, or 9.98%, from $531,000 recorded during the same period in 2024.

The effective tax rate for the three months ended March 31, 2025, was 23.43%, compared to 22.92% for the same period in 2024.

in the effective tax rate is largely the result of earnings generated in states that assess an excise or income tax.

for the second quarter of 2025 totaled $751,000, an increase of $243,000, or 47.83%, from $508,000 recorded during the same period in

This increase was in line with the increase in pre-tax income which increased $1.1 million or 49.77% for the comparative three

months ended June 30, 2025 and 2024.

The effective tax rate for the three months ended June 30, 2025, was 22.88%, compared to 23.18%

for the same period in 2024.

While the signing

of the One Big Beautiful Bill Act on July 4, 2025, made many of the provisions of the 2017 Tax Cut and Jobs Act permanent, including

the 21% corporate tax rate, and the reinstatement of bonus depreciation, it also put in place modifications to reduce or limit certain

fringe benefits and charitable contribution deductions and modified information reporting

rules by requiring increased compliance processes by businesses.

Pending the release of final regulations later in 2025, a full assessment

of the impact of this legislation on the Company cannot yet be determined.

Comparison of

the Six Months ended June 30, 2025 and 2024

Year-to-date highlights

income for the six months ended June 30, 2025 was $4.4 million, or $0.19 per share, an increase

of $970,000, or 27.95%, from the $3.5 million or $0.15 per share reported for the same period

on average assets and equity of 1.02% and 12.37% for the first half of 2025, compared to

0.83% and 10.83% for the first six months of 2024, respectively;

For the six months

ended June 30, 2025, net interest income totaled $15.8 million, an increase of $1.9 million, or 13.84%, as compared to the six months

ended June 30, 2024.

The net interest margin increased 34 bps to 3.78% as compared to 3.44% for the same period in 2024.

income improved due to increased average earning assets, which increased $32.2 million, or 3.97%, to $844.7 million.

In addition, the

yield on earning assets improved 21 bps to 5.56% during the comparative six-month periods.

Interest expense for the six months ended

June 30, 2025, totaled $7.5 million, a decrease of $239,000, or 3.09%, from the same period in 2024.

The decrease in interest expense

is due primarily to borrowed funds as discussed above.

The following table

shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated:

Net Interest Margin

Average Balances,

Income and Expense, and Yields and Rates

Six Months Ended

are in thousands)

bearing deposits in other banks

securities (2)

earning assets

Allowance for credit losses

AND SHAREHOLDERS’ EQUITY

Interest-bearing

demand deposits

and money market deposits

interest-bearing deposits

preferred securities

borrowed funds

interest-bearing liabilities

Non-interest-bearing

Shareholders’

liabilities and shareholders’ equity

interest income

interest margin

interest spread

Nonaccrual loans and loans held for sale have been included in average loan balances.

Tax exempt income is not significant and has been treated as fully taxable.

Net interest income

is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2025 Versus 2024

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

For the six months

ended June 30, 2025, the provision for credit losses totaled $413,000 as compared to $429,000 recorded for the same period in 2024.

For the six months

ended June 30, 2025 noninterest income decreased $4,000 to $4.8 compared to the same period in 2024, as combined decreases in service

charges, card processing fees and financial services revenue totaling $139,000 were offset by a branded card incentive payment of $141,000.

For the six months

ended June 30, 2025, noninterest expense totaled $14.5 million compared to $13.8 million for the same period in 2024, an increase of

$670,000 or 4.85%.

The components of the year-over-year increase are largely similar to those discussed for the current quarter.

items include $47,000 in costs incurred in “refreshing” a branch office and $42,000 in costs for snow and ice removal to

keep our branch locations open and safe during the winter storms incurred during the first quarter of 2025.

Balance Sheet

Total assets as of

March 31, 2025 were $880.7 million, an increase of $25.8 million, or 12.25% annualized, from $854.9 million as of December 31, 2024.

Gross loans of $670.7 million as of March 31, 2025 reflected an increase of $13.2 million from $657.5 million as of December 31, 2024.

Liquid assets in the form of cash and cash equivalents increased $15.6 million, or 93.57% annualized, during the first quarter of 2025.

Investment securities increased $2.6 million during the first three months of 2025 due to purchases of $2.9 million, and a decrease in

the unrealized loss on available-for-sale securities of $2.4 million which more than offset maturities, payments and amortization of

$2.7 million.

June 30, 2025 were $892.9 million, an increase of $38.0 million, or 8.96% annualized, from $854.9 million as of December 31, 2024.

loans of $695.8 million as of June 30, 2025 reflected an increase of $38.3 million from $657.5 million as of December 31, 2024.

assets in the form of cash and cash equivalents increased $4.5 million, or 13.38% annualized, during the first six months of 2025.

securities increased $765,000 during the first six months of 2025 due to purchases of $4.8 million and a decrease in the unrealized loss

on available-for-sale securities of $2.1 million which more than offset maturities, payments and amortization of $6.1 million.

Gross loans receivable

increased $13.2 million to $670.7 million as of March 31, 2025 from $657.5 million as of December 31, 2024.

Commercial and residential

real estate loans increased $5.5 million and $2.8 million, respectively, from December 31, 2024 to March 31, 2025.

Consumer loans increased

$1.9 million or 27.04% annualized, which included the purchase of $2.5 million of individual loans during the quarter.

Commercial and

agriculture loans increased $1.4 million and $979,000, respectively, during the first quarter of 2025.

increased $38.3 million, or 11.74% annualized to $695.8 million as of June 30, 2025 from $657.5 million as of December 31, 2024.

and residential real estate loans increased $7.3 million and $14.4 million, respectively, from December 31, 2024 to June 30, 2025.

loans increased $3.0 million, which included the purchase of $2.8 million of individual loans during the six months ended June 30, 2025.

Farmland and Agriculture loans increased $3.8 million and $1.2 million, respectively, during the first six months of 2025.

Deposits totaled

$776.9 million as of March 31, 2025 compared to $750.0 million as of December 31, 2024.

$781.9 million as of June 30, 2025 compared to $750.0 million as of December 31, 2024.

The increase of $31.9 million, or 8.58% annualized,

was due to efforts to attract and retain time deposits and money market account relationships, combined with cyclical funds inflows.

As a result of these efforts and seasonality, total time deposits increased $3.9 million, money market accounts increased $10.0 million,

and noninterest bearing deposits increased $9.1 million during the first quarter of 2025.

The increase in time and money market deposits

contributed to the increase in our cost of interest-bearing deposits, which increased 7 bps to 2.62% for the three months ended March

31, 2025, as compared to the same period in 2024, as previously discussed, due to the shift in the mix of the deposit portfolio as average

deposit growth over the last year has mainly occurred in the higher-rate products as depositors seek to maximize their return on these

As of March 31, 2025,

borrowed funds totaled $22.0 million, a decrease of $3.0 million from December 31, 2024.

Since December 31, 2024, a $3.0 million principal

reduction was paid toward outstanding trust preferred securities.

This repayment, made from available liquidity, will improve net interest

income and the net interest margin in future periods.

During the first

three months of 2025, total shareholders’ equity increased $1.8 million to $72.6 million as of March 31, 2025, due to net income

of $1.9 million and a decrease in the net unrealized loss on available-for-sale securities of $1.9 million.

These increases to capital

were offset by dividends paid to shareholders of $1.9 million, and the repurchase of common stock totaling $68,000.

Consequently, book

value per share increased to $3.07 as of March 31, 2025, compared to $2.99 as of December 31, 2024.

The Bank remains well capitalized

per regulatory guidance.

was due to efforts to attract and retain time deposits and money market account relationships, including replacing a large, high-rate

account with lower-cost brokered time deposits, combined with cyclical funds inflows.

As a result of these efforts and seasonality, total

time deposits increased $11.2 million, money market

accounts increased $14.7 million, and noninterest bearing deposits increased $8.6 million during the first six months of 2025.

in time and money market deposits contributed to the decrease in our cost of interest-bearing deposits, which decreased 6 bps to 2.59%

for the six months ended June 30, 2025, as compared to the same period in 2024, due to the relatively lower cost of money market deposit

rates compared to time deposits, and the downward repricing of a portion of the time deposit portfolio as maturing deposits renew.

the second quarter of 2025, $15.0 million of brokered time deposits were added with maturities ranging from two months to two years.

These deposits supplemented liquidity and supported loan closings and advances, and to bolster on balance sheet liquidity.

As of June 30, 2025,

borrowed funds totaled $27.0 million, an increase of $2.0 million from December 31, 2024.

On June 30, 2025, we took a short-term Federal

Home Loan Bank advance of $5.0 million to bolster liquidity based on anticipated loan closings or advances.

This advance was repaid in

During the first quarter of 2025, a $3.0 million principal reduction was paid toward outstanding trust preferred securities.

repayment improved net interest income and the net interest margin during the current reporting periods and should positively impact

future periods.

During the six months

ended June 30, 2025, total shareholders’ equity increased $4.1 million to $74.8 million, due to net income of $4.4 million and

a decrease in the net unrealized loss on available-for-sale securities of $1.7 million.

These increases to capital were offset by dividends

paid to shareholders of $1.9 million, and the repurchase of common stock totaling $106,000.

Consequently, book value per share increased

to $3.17 as of June 30, 2025, compared to $2.99 as of December 31, 2024.

The Bank remains well capitalized per regulatory guidance.

As previously announced,

on January 24, 2025, the Board of Directors extended the repurchase of up to 500,000 shares of the Company’s common stock through

March 31, 2026.

During the first quarter of 2025 the Company repurchased 22,777 shares at an average price of $3.00 per share.

the commencement of the repurchase plan in 2022, 308,139 shares have been repurchased at an average price of $2.46 per share.

the Board of Directors extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2026.

the first six months of 2025, the Company repurchased 35,846 shares at an average price of $2.98 per share.

Since the commencement of

the repurchase plan in 2022, 321,208 shares have been repurchased at an average price of $2.48 per share.

Asset Quality

The allowance for

credit losses was $7.8 million, or 1.17% as a percentage of total loans, as of March 31, 2025, and $7.7 million, or 1.17%, as of December

The allowance for credit losses on unfunded commitments was $496,000 as of March 31, 2025, as compared to $404,000 at December

credit losses was $7.9 million, or 1.14% as a percentage of total loans, as of June 30, 2025, and $7.7 million, or 1.17%, as of December

The allowance for credit losses on unfunded commitments was $496,000 as of June 30, 2025, as compared to $404,000 at December

The increase in the allowance for credit losses on unfunded commitments was due to an increase in loan commitments, specifically

1 unchanged sentence

Annualized net charge-offs

(recoveries) as a percentage of average loans were 0.01% during the first three months of 2025 compared to 0.02% during the fourth quarter

(recoveries) as a percentage of average loans were 0.02% during the first six months of 2025 compared to (0.01)% during the same period

of 2024 and 0.01% during the first quarter of 2025.

Nonperforming assets,

which include nonaccrual loans and other real estate owned, totaled $4.6 million as of March 31, 2025, an increase of $1.2 million, or

35.83%, since year-end 2024.

Nonaccrual loans increased $1.2 million during the first three months of 2025 due principally to a single

loan relationship totaling $802,000 being placed in nonaccrual status.

Nonperforming assets as a percentage of total assets were 0.52%

as of March 31, 2025, and 0.39% as of December 31, 2024.

which include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned, totaled $3.6 million as of June

30, 2025, an increase of $202,000, or 6.01%, since year-end 2024.

Nonaccrual loans increased $215,000 during the first six months of

2025 due principally to a single loan relationship totaling $802,000 being placed in nonaccrual status.

Nonperforming assets as a percentage

of total assets were 0.40% as of June 30, 2025, and 0.39% as of December 31, 2024.

Other real estate

owned decreased $30,000 to $57,000 as of March 31, 2025, compared to December 31, 2024, due to the sale of a property during the first

owned decreased $30,000 to $57,000 as of June 30, 2025, compared to December 31, 2024, due to the sale of a property during the first

quarter of 2025.

Expenses associated with other real estate owned were $1,000 for the three months ended March 31, 2025, compared to

expenses of $4,000 during the three months ended March 31, 2024.

Expenses associated with other real estate owned, including gains and losses on sales, were net recoveries of $3,000

for the three months ended June 30, 2025, compared to net recoveries of $32,000 during the three months ended June 30, 2024, due to gains

on sales of foreclosed properties recorded of $6,000 and $34,000, during the respective three month periods in 2025 and 2024.

For detailed information

on nonaccrual loans and other real estate owned as of March 31, 2025 and December 31, 2024, refer to Note 6 Loans and Note 10 Other Real

on nonaccrual loans and other real estate owned as of June 30, 2025 and December 31, 2024, refer to Note 6 Loans and Note 10 Other Real

Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard

or below totaled $5.3 million as of March 31, 2025, an increase of $1.3 million from $4.0 million as of December 31, 2024, largely due

to a single loan relationship totaling $802,000 that was downgraded during the first quarter of 2025.

Total past due loans decreased

to $5.0 million as of March 31, 2025 from $6.2 million as of December 31, 2024.

or below totaled $5.7 million as of June 30, 2025, an increase of $1.7 million from $4.0 million as of December 31, 2024, due to two

loan relationships totaling $2.9 million that were downgraded during the first six months of 2025.

The Company is working with one of

these borrowers to bring the classified portion of the loan totaling $2.2 million into compliance with applicable loan covenants and

does not anticipate any loss will result from this loan.

Total past due loans decreased to $4.4 million as of June 30, 2025 from $6.2

million as of December 31, 2024.

The allowance for

1 unchanged sentence

within the loan portfolio, whether or not the losses are actually ever realized.

Through our quarterly assessment, we continue to adjust

the CECL model to best reflect the risks in the portfolio.

However, future provisions may be deemed necessary.

During the first three

months of 2025, we maintained the adjustments to our qualitative factors initiated in 2024, to consider risk factors associated with

commercial real estate and residential mortgage loans.

Those changes, along with recoveries of loans previously charged off and the assessment

of the historical and specific risks associated with the loan portfolio, resulted in a provision for credit losses of $259,000, of which

$167,000 was a provision for the loan portfolio;

and $92,000 was a provision for unfunded commitments.

The following table summarizes

components of the allowance for credit losses and related loans as of March 31, 2025 and December 31, 2024:

Through our quarterly

assessment, we continue to adjust the CECL model to best reflect the risks in the portfolio.

However, future provisions may be deemed

During the first six months of 2025, we maintained the adjustments to our qualitative factors initiated in 2024, to consider

risk factors associated with commercial real estate and residential mortgage loans.

Those changes, along with recoveries of loans previously

charged off and the assessment of the historical and specific risks associated with the loan portfolio, resulted in a provision for credit

losses of $413,000, of which $321,000 was a provision for the loan portfolio and $92,000 was a provision for unfunded commitments.

following table summarizes components of the allowance for credit losses and related loans as of June 30, 2025 and December 31, 2024:

Credit Ratios

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net of recoveries

(recoveries) charge-offs to average loans1

charge-offs to average loans 1

Deferred Tax Asset

and Income Taxes

Due to timing differences between the

book and tax treatments of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized

loss on securities available-for-sale of $2.7 million and $3.2 million, existed as of March 31, 2025 and December 31, 2024, respectively.

Our income tax expense was computed at the federal corporate income tax rate of 21% of taxable income and a blended state tax rate of

We have no significant nontaxable income or nondeductible expenses.

Due to timing differences

between the book and tax treatments of several income and expense items, a net deferred tax asset of $1.6 million is recorded as of June

30, 2025 and December 31, 2024, excluding the deferred tax asset on the unrealized loss on securities available-for-sale of $2.7 million

and $3.2 million, as of June 30, 2025 and December 31, 2024, respectively.

Our income tax expense was computed at the federal corporate

income tax rate of 21% of taxable income and a blended state tax rate of 2.4%.

We have no significant nontaxable income or nondeductible

Capital Resources

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to be subject to various capital requirements administered by banking agencies.

The Bank’s capital ratios along

with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q.

As of March 31, 2025,

capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this

As of June 30, 2025,

the Bank remains well capitalized under the regulatory framework for prompt corrective action.

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Book value per common

share was $3.07 and $2.99 as of March 31, 2025 and December 31, 2024, respectively.

share was $3.17 and $2.99 as of June 30, 2025 and December 31, 2024, respectively.

The increase in book value was due largely to a decrease

in the unrealized loss on available for sale investment securities earnings for the quarter of $1.9 million combined with net earnings

for the quarter of $1.9 million, which more than offset the dividend payment of $0.08 per share and the repurchase of common shares of

$68,000 during the first quarter of 2025.

in the unrealized loss on available for sale investment securities earnings for the year of $1.7 million combined with net earnings for

the year of $4.4 million, which more than offset the dividend payment of $0.08 per share and the repurchase of common shares of $106,000

during the first half of 2025.

Other key performance

indicators are as follows:

Return on average

on average shareholders’ equity1

Average equity to average

Three months ended

Six months ended

Return on average assets 1

Return on average shareholders’ equity 1

Average equity to average assets

Under current economic

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the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock.

through March 31, 2025.

As previously reported, this plan was extended by the Board of Directors through March 31, 2026.

The actual means

and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will

depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions,

and applicable legal and regulatory requirements.

As of March 31, 2025, the Company has repurchased 308,139 shares at an average price

of $2.46 per share since inception of the plan.

During the quarter ended March 31, 2025, the Company repurchased 22,777 shares at an

average price of $3.00 per share.

There is no assurance that the Company will purchase any additional shares under this program.

The actual means and timing of any purchases,

number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors,

including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory

requirements.

As of June 30, 2025, the Company has repurchased 321,208 shares at an average price of $2.48 per share since inception

During the quarter ended June 30, 2025, the Company repurchased 13,069 shares at an average price of $2.95 per share.

is no assurance that the Company will purchase any additional shares under this program.

We closely monitor

our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments.

Collectively, those balances were $145.8 million as of March 31, 2025, up from $128.5 million as of December 31, 2024.

Collectively, those balances were $133.4 million as of June 30, 2025, up from $128.5 million as of December 31, 2024.

The increase is

primarily due to deposit growth exceeding funding needs for loan growth.

A surplus of short-term assets is maintained at levels management

deems adequate to meet potential liquidity needs

As of March 31, 2025,

primarily due to deposit growth, including brokered certificates of deposit and the short-term FHLB advance taken during June 2025.

surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs

As of June 30, 2025,

all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $61.3 million,

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Total investment securities increased

$2.6 million, or 11.16%, annualized during the first quarter of 2025 from $96.0 million as of December 31, 2024 to $98.6 million as of

March 31, 2025.

$765,000, or 1.61%, annualized during the first half of 2025 from $96.0 million as of December 31, 2024 to $96.7 million as of June 30,

The Bank also has additional borrowing capacity on lines for which investments and certain loans are currently pledged.

Our loan to deposit

ratio was 86.34% and 87.67% as of March 31, 2025 and December 31, 2024, respectively.

ratio was 88.99% and 87.67% as of June 30, 2025 and December 31, 2024, respectively.

Available third-party

sources of liquidity as of March 31, 2025 include the following:

sources of liquidity as of June 30, 2025 include the following:

a line of credit with the FHLB, access to brokered certificates of deposit

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liquidity needs;

An additional $189.8 million was available as of March 31, 2025 on the $213.8 million line of credit.

Full use of the

FHLB borrowing capacity would require the Company to pledge additional assets.

As of March 31, 2025

we held brokered time deposits of $3.0 million, unchanged from December 31, 2024.

Internet accounts are limited to customers located

in our primary market area and the surrounding geographical area.

The average balance of and the rate paid on deposits is shown in the

net interest margin analysis tables.

Total reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits were

$7.3 million and $7.0 million as of March 31, 2025 and December 31, 2024, respectively.

Aside from the availability of CDARS time deposits,

we also offer a similar deposit product for transaction account customers through Intrafi Cash Service (“ICS”).

31, 2025 approximately $22.0 million were placed in this product as compared to $23.7 million at December 31, 2024.

Both the CDARS and

ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance

and in June 2025 we borrowed an additional $5.0

million which was repaid in July 2025.

An additional $191.3 million was available as of June 30, 2025 on the $220.3 million line of credit.

Full use of the FHLB borrowing capacity would require the Company to pledge additional assets.

As of June 30, 2025

we held brokered time deposits of $18.0 million, an increase of $15.0 million from December 31, 2024.

These added brokered deposits supplemented

liquidity and supported loan closings and advances and bolstered on-balance-sheet liquidity.

Internet accounts are limited to customers

located in our primary market area and the surrounding geographical area.

The average balance of and the rate paid on deposits is shown

in the net interest margin analysis tables.

Total reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits

were $7.6 million and $7.0 million as of June 30, 2025 and December 31, 2024, respectively.

Aside from the availability of CDARS time

deposits, we also offer a similar deposit product for transaction account customers through Intrafi Cash Service (“ICS”).

As of June 30, 2025 approximately $17.9 million were placed in this product as compared to $23.7 million at December 31, 2024.

CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit

insurance coverage.

Additional liquidity

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however, while we do not anticipate using this as a primary funding source, securities with an

estimated market value of $28.8 million were pledged as of March 31, 2025.

estimated market value of $28.2 million were pledged as of June 30, 2025.

Time deposits of

$250,000 or more were approximately 7.23% of total deposits at March 31, 2025 and 6.84% of total deposits at December 31, 2024.

$250,000 or more were approximately 5.52% of total deposits at June 30, 2025 and 6.84% of total deposits at December 31, 2024.

In January 2025,

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There have been no

material changes during the three months ended March 31, 2025, to the off-balance sheet items and the contractual obligations disclosed

material changes during the six months ended June 30, 2025, to the off-balance sheet items and the contractual obligations disclosed

in our 2024 Form 10-K.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis