Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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

Introduction

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of Farmers and Merchants Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, and with Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Annual Report of Farmers and Merchants Bancshares, Inc. on Form 10-K for the year ended December 31, 2024 (the "Form 10-K"). References in this report to "us", "we", "our", and "the Company" are to Farmers and Merchants Bancshares, Inc. and, unless the context clearly suggests otherwise, its consolidated subsidiaries.

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of "forward-looking statements." Statements that are not historical in nature, including those that include the words "intend", "believe", "estimate", "predict", "potential", or "continue" or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the registration statements and periodic reports that Farmers and Merchants Bancshares, Inc. files with the Securities and Exchange Commission (the "SEC") (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

Farmers and Merchants Bancshares, Inc.

Farmers and Merchants Bancshares, Inc. is a Maryland corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended. The Company was incorporated on November 8, 2016 for the purpose of becoming the holding company of Farmers and Merchants Bank (the "Bank") in a share exchange transaction that was intended to constitute a tax-free exchange under Section 351 of the Internal Revenue Code of 1986, as amended (the "Reorganization"). The 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 Company's primary business activities are serving as the parent company of the Bank and holding a series investment in First Community Bankers Insurance Co., LLC, a Tennessee "series" limited liability company and licensed protected cell captive insurance company ("FCBI"). The Company owns 100% of one series of membership interests issued by FCBI, which series is deemed a "protected cell" under Tennessee law and has been designated "Series Protected Cell FCB-4" (such series investment is hereinafter referred to as the "Insurance Subsidiary").

The Bank is a Maryland commercial bank chartered on October 24, 1919 that is engaged in a general commercial and retail banking business. The Bank has had one inactive subsidiary, Reliable Community Financial Services, Inc., a Maryland corporation that was incorporated in April 1992 to facilitate the sale of fixed rate annuity products and later positioned to sell a full array of investment and insurance products.

The Insurance Subsidiary represents one protected cell of a protected cell captive insurance company (i.e., FCBI) that was formed on November 9, 2016 to better manage our risk programs, provide insurance efficiencies, and add operating income by both keeping insurance premiums paid with respect to such risks within our affiliated group of entities and realizing certain tax benefits that are unique to captive insurance companies. The Company's investment in the Insurance Subsidiary represents one series of membership interests in FCBI. As a "series" limited liability company, FCBI is authorized by state law and its governing instruments to issue one or more series of membership interests, each of which, for all purposes under state law, is deemed to be a legal entity separate and apart from FCBI and its other series.

Effective October 1, 2020, pursuant to a series of merger transactions, Farmers and Merchants Bancshares, Inc. acquired Carroll Bancorp, Inc. ("Carroll") and the Bank acquired Carroll's wholly-owned bank subsidiary, Carroll Community Bank (collectively, the "Merger").

The Company maintains an Internet site at www.fmb1919.bank on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

Estimates and Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. See Note 1 of the Notes to the audited consolidated financial statements as of and for the year ended December 31, 2024, which were included in Item 8 of Part II of the Form 10-K. On an on-going basis, management evaluates estimates, including those related to credit losses and intangible assets, impairment of investment securities, income taxes, and fair value of investments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

The allowance for credit losses on loans represents management's estimate of expected credit losses inherent 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, consideration of current economic trends and conditions and reasonable and supportable forecasts, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.

Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered impaired or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statements of income. Examples include investment securities, goodwill and core deposit intangible, among others.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2024.

Financial Condition

Total assets increased by $25.0 million, or 3.0%, to $869.6 million at September 30, 2025 from $844.6 million at December 31, 2024. The increase in total assets was due primarily to an increase of $39.5 million in loans, an increase of $2.2 million on stock issued by the Federal Home Loan Bank of Altlanta (the "FHLB"), and a $1.6 million increase in other real estate owned. The increase was offset by a decrease in cash equivalents of $12.5 million, a decrease of $4.6 million in debt securities, and a $1.2 million decrease in deferred income taxes.

Total liabilities increased by $18.1 million, or 2.3%, to $806.5 million at September 30, 2025 from $788.4 million at December 31, 2024. The increase was due primarily to a $45.2 million increase in FHLB advances and a $0.7 million increase in long term debt. This was offset by a decrease in deposits of $24.7 million and a $3.1 million decrease in repurchase agreements.

Stockholders' equity increased by $6.9 million, or 12.3%, to $63.2 million at September 30, 2025 from $56.3 million at December 31, 2024. The increase was primarily due to net income of $4.1 million, a reduction of $3.3 million in accumulated other comprehensive loss, and a $0.6 million increase in additional paid in capital, offset by cash dividends paid of $1.1 million.

Loans

Major categories of loans at September 30, 2025 and December 31, 2024 were as follows:

		September 30,								December 31,
(Dollars in Thousands)		2025								2024
Real estate:
Commercial		$	430,518				69	%		$	398,126				68	%
Construction/Land development			34,217				5	%			27,357				5	%
Residential			111,032				18	%			111,898				19	%
Commercial			51,864				8	%			50,405				8	%
Consumer			133				0	%			176				0	%
Total Loans			627,764				100	%			587,962				100	%
Less: Allowance for credit losses			4,257								4,260
Deferred origination fees, net of costs			1,050								709
		$	622,457							$	582,993

Net loans increased by $39.5 million, or 6.8%, to $622.5 million at September 30, 2025 from $583.0 million at December 31, 2024. The increase was due primarily to increases of $32.4 million in commercial real estate loans, $6.9 million in construction loans, and $1.5 million in commercial loans. The growth was due to the addition of new lending staff during the last 18 months and stabilizing interest rates. The allowance for credit losses on loans at September 30, 2025 remained steady at $4.3 million at 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 and reporting of asset quality and the adequacy of the allowance for credit losses on loans. 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 following table provides the activity for the allowance for credit losses losses for the three and nine month periods ended September 30, 2025 and 2024:

		Three Months Ended September 30, 2025																Nine Months Ended September 30, 2025
(Dollars in thousands)		Held to maturity securities				Loans				Unfunded loan commitments				Total				Held to maturity securities				Loans				Unfunded loan commitments				Total
Beginning balance		$	81			$	4,233			$	173			$	4,487			$	60			$	4,260			$	240			$	4,560
Provision for (recovery of) credit losses			(2	)			308				21				327				19				622				(46	)			595
Charge-offs			-				(290	)			-				(290	)			-				(646	)			-				(646	)
Recoveries			-				6				-				6				-				21				-				21
Ending balance		$	79			$	4,257			$	194			$	4,530			$	79			$	4,257			$	194			$	4,530

		Three Months Ended September 30, 2024																Nine Months Ended September 30, 2024
(Dollars in thousands)		Held to maturity securities				Loans				Unfunded loan commitments				Total				Held to maturity securities				Loans				Unfunded loan commitments				Total
Beginning balance		$	127			$	4,082			$	196			$	4,405			$	36			$	4,284			$	228			$	4,548
Provision for (recovery of) credit losses			(90	)			103				(13	)			-				1				44				(45	)			-
Charge-offs			-				-				-				-				-				(156	)			-				(156	)
Recoveries			-				6				-				6				-				19				-				19
Ending balance		$	37			$	4,191			$	183			$	4,411			$	37			$	4,191			$	183			$	4,411

Watch list loans include loans classified as Special Mention, Substandard, and Doubtful. As of September 30, 2025, the Company had $35.9 million of loans on a watch list for which the borrowers have the potential for experiencing financial difficulties. As of December 31, 2024, the Company had $8.1 million of such loans. Watch List loans are subject to ongoing management attention and their classifications are reviewed regularly.

Management believes that the $4.3 million reserve at September 30, 2025 is adequate to cover the expected losses in the loan portfolio. The Company's loan portfolio grew by $39.5 million during the first nine months of 2025. The allowance for credit losses on loans was 0.68% of the loan portfolio at September 30, 2025 compared to 0.72% at December 31, 2024.

The reserve for held to maturity securities was $79 thousand at September 30, 2025 and $60 thousand at December 31, 2024. The reserve can vary from quarter to quarter due to the unrated portion of the bond portfolio where the projected life is the most significant factor in determining the reserve. The unrated bonds have a call provision at the option of the issuer. Market rates at quarter end determines if the bonds are projected to be called which shortens the projected life of the bonds significantly. If market rates are at a level that a call is not projected, the bonds are assumed to reach maturity which significantly lengthens the projected life. A longer projected life increases the allowance for credit losses.

Investment Securities

Investments in debt securities decreased by $3.9 million, or 2.7%, to $142.3 million at September 30, 2025 from $146.2 million at December 31, 2024. The Company had classified 85% and 86% of the investment portfolio as available for sale as of September 30, 2025 and December 31, 2024, respectively. 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 debt 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 the Company has both the positive intent and ability to hold to maturity, are reported at amortized cost. The Company records unrealized gains and losses on equity securities in earnings. 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.

Other Real Estate Owned

Other real estate owned ("OREO") as of September 30, 2025 consisted of three properties: (i) a strip shopping center in Carroll County, Maryland that was placed in OREO during June, 2025; (ii) an apartment building in Baltimore, Maryland that was acquired in the Merger; and (iii) a land parcel in Gettysburg, Pennsylvania. All three properties are being marketed for sale.

		September 30,				December 31,
(dollars in thousands)		2025				2024
Other Real Estate Owned		$	2,775			$	1,176

Other assets

Other assets decreased by $804 thousand to $7.4 million at September 30, 2025 from $8.2 million at December 31, 2024 due primarily to decreases in prepaid expenses.

Deposits

Total deposits decreased by $24.7 million, or 3.3%, to $734.1 million at September 30, 2025 from $758.8 million at December 31, 2024. The decrease in deposits was due primarily to a $61.8 million decrease in brokered CDs, a $6.7 million decrease in interest bearing checking accounts, a $3.1 million decrease in sweep accounts, and a $2.6 million decrease in savings accounts. This was offset by a $15.5 million increase in CDARS deposits, $14.2 million increase in demand deposits, a $12.6 million increase in money market accounts, a $5.9 million in ICS accounts, and a $3.1 million increase in CDs. The decreases in brokered CDs were due to calls and maturities that were strategically replaced with lower cost FHLB advances and other lower cost brokered CDs.

The following table shows the average balances and average costs of deposits for the nine month periods ended September 30, 2025 and 2024:

		September 30, 2025								September 30, 2024
		Average								Average
(dollars in thousands)		Balance				Cost				Balance				Cost
Noninterest bearing demand deposits		$	109,687				0.00	%		$	111,088				0.00	%
Interest bearing demand deposits			116,694				0.91	%			125,273				0.76	%
Savings and money market deposits			145,791				0.77	%			150,372				0.69	%
Time deposits			370,849				3.97	%			271,372				4.30	%
		$	743,021				2.28	%		$	658,105				2.08	%

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 $22.2 million under a secured line of credit with the Federal Home Loan Bank of Atlanta (the "FHLB"). At September 30, 2025 the Bank also has a facility with the Federal Reserve Bank of Richmond (the "Reserve Bank"), which has been in place for over 10 years and is collateralized by loans. Under this facility, the Bank can borrow approximately $30.2 million at September 30, 2025. Additionally, 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 at September 30, 2025.

FHLB advances of $50.2 million and $5.0 million were outstanding as of September 30, 2025 and December 31, 2024, respectively. There were no borrowings from the Reserve Bank or our commercial bank lenders at September 30, 2025 or December 31, 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. Uninsured deposits were approximately $120.3 million, or 16.4% of total deposits, at September 30, 2025.

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 that was 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 Merger Loan matured on September 30, 2025. The interest rate on the Merger Loan was fixed at 4.10%. The Company made quarterly interest-only payments through October 1, 2021. During the remaining term of the Merger Loan, the Company was required to make quarterly interest and principal payments of approximately $646.5 thousand, which was based on a nine year straight-line amortization schedule. To secure its obligations under the Merger Loan, the Company pledged all of its shares of common stock of the Bank to the lender. As of December 31, 2024, the balance due under the Merger Loan was $11.3 million. On September 30, 2025, the Company repaid the $10.0 million due under the Merger Loan using a portion of the net proceeds from its sale of Subordinated Notes discussed below.

On September 25, 2025, Farmers and Merchants Bancshares, Inc. entered into a Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold $12.5 million in aggregate principal amount of its 7.875% Fixed to Floating Rate Subordinated Notes due September 25, 2035 (the "Subordinated Notes"). 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 Notes semi-annually in arrears on March 26^th and September 26^th 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, their maturity dates 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 26^th, June 26^th, September 26^th, and December 26^th 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 Subordinated Notes, in whole or in part, only under 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 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 Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations.

The payment of principal and interest on the 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 SubordinatedNotes 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 portion of the net proceeds that were not used to repay the Merger Loan 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:

		September 30,				December 31,
(Dollars in thousands)		2025				2024
Amount oustanding at period end:
Securities sold under repurchase agreements		$	2,458			$	5,564
Federal Home Loan Bank advances			50,200				5,000
Long-term debt (net of issuance costs)			12,024				11,329
Weighted average rate paid at period end:
Securites sold under repurchase agreements			1.25	%			1.25	%
Federal Home Loan Bank advances			3.88	%			1.00	%
Long-term debt			7.88	%			4.10	%
Average rate paid during the period ended:
Securites sold under repurchase agreements			1.27	%			1.25	%
Federal Home Loan Bank advances			3.61	%			1.00	%
Long-term debt			4.26	%			4.10	%

The long-term debt outstanding at September 30, 2025 will be payable at maturity on September 30, 2035.

Off-Balance Sheet Arrangements

In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. Outstanding loan commitments, unused lines of credit, and letters of credit as of September 30, 2025 and December 31, 2024 are as follows:

		September 30,				December 31,
(Dollars in thousands)		2025				2024
Loan commitments
Construction and land development		$	3,323			$	532
Commercial			4,057				7,250
Commercial real estate			19,560				24,062
Residential			5,826				405
		$	32,766			$	32,249
Unused lines of credit
Home-equity lines		$	16,018			$	17,505
Commercial lines			65,026				49,249
		$	81,044			$	66,754
Letters of credit		$	2,311			$	1,974

Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

The maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that is likely to be incurred as a result of funding its credit commitments.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Nine Months Ended September 30, 2025 and 2024

General

Net income for the nine months ended September 30, 2025 was $4.1 million compared to $3.4 million for the same period of 2024. Total interest income increased by $3.0 million, from $28.1 million for the nine months ended September 30, 2024 to $31.1 million for the nine months ended September 30, 2025. Total interest expense increased by $600 thousand, from $12.7 million for the nine months ended September 30, 2024 to $13.3 million for the nine months ended September 30, 2025. The provision for credit losses for the nine month periods ended September 30, 2025 and 2024 was $595 thousand and $0, respectively. Noninterest income increased by $191 thousand, from $1.3 million for the nine months ended September 30, 2024 to $1.5 million thousand for the nine months ended September 30, 2025. Noninterest expense increased by $1.3 million, from $12.3 million for the nine months ended September 30, 2024 to $13.6 million for the nine months ended September 30, 2025. Income tax expense increased by $65 thousand, from $993 thousand for the nine months ended September 30, 2024 to $1.1 million for the nine months ended September 30, 2025.

Net Interest Income

Net interest income was $17.8 million for the nine months ended September 30, 2025 compared to $15.4 million for the same period of 2024. The net yield on interest earning assets increased to 2.98% for the nine months ended September 30, 2025 from 2.67% for the same period of 2024. Higher interest income on loans was the driving factor in the higher net interest income along with lower cost of funds.

Total interest income for the nine months ended September 30, 2025 was $31.1 million compared to $28.1 million for the same period of 2024, an increase of $3.0 million, or 11.0%.

Total interest income on loans for the nine months ended September 30, 2025 increased by $4.6 million when compared to the same period of 2024 due to a $64.1 million higher average loan balance for the nine months ended September 30, 2025 when compared to the same period of 2024 and a higher loan yield of 5.79% for the nine months ended September 30, 2025 versus 5.36% for the same period of 2024. Investment income for the nine months ended September 30, 2025 decreased by $1.6 million, or 29.8%, when compared to the same period of 2024 due to a decrease in the fully-taxable equivalent yield to 3.02% for the nine months ended September 30, 2025 compared to 3.47% for the same period of 2024, and a $39.1 million lower average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 33 basis points to 5.19% for the nine months ended September 30, 2025 from 4.86% for the same period of 2024. The average balance of total interest-earning assets increased by $28.4 million to $804.3 million for the nine months ended September 30, 2025 compared to $775.9 million for the same period of 2024.

Total interest expense for the nine months ended September 30, 2025 was $13.3 million compared to $12.7 million for the same period of 2024, an increase of $600 thousand, or 4.7%. The increase was due to a $33.3 million increase in the average balance of interest-bearing liabilities to $657.8 million for the nine months ended September 30, 2025 compared to $624.5 million for the same period of 2024. Overall cost of funds on interest bearing deposits and borrowings was 2.70% for the nine months ended September 30, 2025 compared to 2.71% for the same period of 2024. The cost of funds for time deposits decreased to 3.97% for the nine months ended September 30, 2025 from 4.30% for the same period of 2024. Costs of funds attributable to long-term debt increased slightly from 4.18% for the nine months ended September 30, 2024 to 4.26% for the same period of 2025. The cost of advances from the FHLB increased to 3.61% for the nine months ended September 30, 2025 from 2.18% for the same period of 2024.

Average noninterest-earning assets increased by $7.3 million to $28.7 million for the nine months ended September 30, 2025 compared to $21.5 million in the same period of 2024. Average noninterest-bearing deposits decreased by $1.4 million to $109.7 million during the nine months ended September 30, 2025 compared to $111.1 million in the same period of 2024. The average balance in stockholders' equity increased by $5.3 million for the nine months ended September 30, 2025 when compared with the same period of 2024.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the nine month periods ended September 30, 2025 and 2024. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

Average Balance Sheet, Interest and Yields
		Nine Months Ended												Nine Months Ended
(Dollars in thousands)		September 30, 2025												September 30, 2024
		Average												Average
		Balance				Interest				Yield				Balance				Interest				Yield
Assets:
Loans		$	611,727			$	26,572				5.79	%		$	547,646			$	22,021				5.36	%
Securities, taxable			146,273				3,194				2.91	%			186,277				4,798				3.43	%
Securities, tax exempt			18,975				548				3.85	%			18,076				516				3.80	%
Securities combined			165,248				3,742				3.02	%			204,353				5,314				3.47	%
Federal funds sold and other interest bearing deposits			27,350				971				4.73	%			23,887				920				5.14	%
Total interest-earning assets			804,325			$	31,285				5.19	%			775,886			$	28,255				4.86	%
Noninterest-earning assets			28,744												21,481
Total assets		$	833,069											$	797,367
Liabilities and Stockholders'Equity:
NOW, savings, and money market		$	262,485			$	1,632				0.83	%		$	275,645			$	1,490				0.72	%
Certificates of deposit			370,849				11,033				3.97	%			271,372				8,754				4.30	%
Securities sold under repurchase agreements			4,448				42				1.27	%			5,207				49				1.26	%
Term Debt			10,708				342				4.26	%			12,364				388				4.18	%
FRB advances and other borrowings			-				-				0.00	%			53,234				1,910				4.78	%
FHLB advances			9,288				251				3.61	%			6,682				109				2.18	%
Total interest-bearing liabilities			657,778				13,300				2.70	%			624,504				12,700				2.71	%
Noninterest-bearing deposits			109,687												111,088
Noninterest-bearing liabilities			6,859												8,299
Total liabilities			774,324												743,891
Stockholders' equity			58,745												53,476
Total liabilities and stockholders' equity		$	833,069											$	797,367
Net interest income						$	17,985											$	15,555
Interest rate spread											2.49	%											2.15	%
Net yield on interest-earning assets											2.98	%											2.67	%
Ratio of average interest-earning assets to Average interest-bearing liabilities											122.28	%											124.24	%

Provision for Credit Losses

For the nine months ended September 30, 2025, provisions for credit losses on loans totaled $622 thousand and a provision for held to maturity securities of $19 thousand, offset by a recovery for unfunded loan commitments of $46 thousand, resulted in a net provision of $595 thousand. For the nine months ended September 30, 2024, provisions for credit losses on loans was $44 thousand and a provision for held to maturity securities of $1 thousand, offset by a recovery for unfunded loan commitments of $45 thousand resulted in a net provision of $0.

Allocation of the Allowance for Credit Losses on Loans
At September 30, 2025 and December 31, 2024
(Dollars in thousands)
		2025								2024
		Allocation				% of Total*				Allocation				% of Total*
Real estate:
Commercial		$	2,282				68.58	%		$	2,481				67.71	%
Construction and land development			520				5.45	%			478				4.65	%
Residential			642				17.69	%			751				19.03	%
Commercial			762				8.26	%			513				8.57	%
Consumer			1				0.02	%			4				0.00	%
Unallocated			50				0.00	%			33				0.03	%
		$	4,257				100.00	%		$	4,260				100.00	%

* Percentage of loan type to the total loan portfolio.

		For the Nine Months Ended
		September 30,
		2025				2024
		(Dollars in thousands)
Balance at beginning of year		$	4,260			$	4,284
Charge-offs:
Real Estate:
Commercial			(646	)			-
Commercial			-				(153	)
Consumer			-				(3	)
Total Charge-offs		$	(646	)		$	(156	)
Recoveries:
Real Estate:
Residential		$	21			$	19
Total Recoveries		$	21			$	19
Net (charge offs)/recoveries		$	(625	)		$	(137	)
Provision for credit losses - loans			622				44
Balance at end of period		$	4,257			$	4,191

		At September 30, 2025				At December 31, 2024
Ratios:
ACL on loans to loans			0.68	%			0.72	%
Non performing loans to loans			0.20	%			0.00	%
Non accrual loans to loans			0.00	%			0.41	%
ACL on loans to non accrual loans			0.00	%			174.59	%

Noninterest Income

Noninterest income for the nine months ended September 30, 2025 was $1.5 million compared to $1.3 million for the same period of 2024, an increase of $191 thousand, or 14.4%. The increase was due primarily to an increase of $126 thousand for the gain on the settlement of a fair value hedge, a $32 thousand increase in loss on sale of debt securities, a $109 thousand increase in other fees and commissions, an $85 thousand increase in mortgage banking income, and an increase of $28 thousand in bank owned life insurance income, offset by a $94 thousand decrease in service charges on deposits, and a decrease non-recurring of insurance proceeds of $143 thousand from the storm damage to the Bank's Upperco, Maryland location recorded during the nine months ended September 30, 2024 versus $73 related to the theft of the Company's ATM at its Owings Mills, Maryland location suring the nine months ended September 30, 2025.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2025 totaled $13.6 million compared to $12.3 million for the same period of 2024, an increase of $1.3 million, or 10.8%. The increase was due primarily to an increase in salaries and benefits of $617 thousand due to higher staffing levels in 2025, an increase in Federal Deposit Insurance Corporation premiums of $184 thousand, an increase in OREO expenses of $41 thousand due to two loans being foreclosed and moved to OREO in 2025, and an increase of $379 thousand in occupancy and furniture and equipment expense as a result of increased building repairs, office maintenance expenses, and increased rent expense.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2025 was $1.1 million compared to $993 thousand for the same period of 2024. The effective tax rate was 20.6% for the nine months ended September 30, 2025 compared to 22.5% for the same period of 2024. The decrease in the effective tax rate was due to the reduction of a deferred tax liability in 2025.

Comparison of Operating Results for the Three Months Ended September 30, 2025 and 2024

General

Net income for the three months ended September 30, 2025 was $1.7 million compared to $1.1 million for the same period in 2024. Total interest income increased by $1.1 million, from $9.8 million for the three months ended September 30, 2024 to $10.9 million for the three months ended September 30, 2025. Total interest expense decreased by $156 thousand, from $4.8 million for the three months ended September 30, 2024 to $4.6 million for the three months ended September 30, 2025. The provision for credit losses for the three-month periods ended September 30, 2025 and September 30, 2024 was $327 thousand and $0, respectively. Noninterest income increased by $100 thousand, from $451 thousand for the three months ended September 30, 2024 to $551 thousand for the three months ended September 30, 2025. Noninterest expense increased by $338 thousand, from $4.1 million for the three months ended September 30, 2024 to $4.4 million for the three month ended September 30, 2025. Income tax expense increased by $120 thousand, from $342 thousand for the three months ended September 30, 2024 to $462 thousand for the three months ended September 30, 2025.

Net Interest Income

Net interest income was $6.4 million for the three months ended September 30, 2025 compared to $5.1 million for the same period of 2024. The net yield on interest earning assets increased to 3.09% for the three months ended September 30, 2025 from 2.62% for the same period of 2024. Higher interest income on loans was the driving factor in the higher net interest income along with lower cost of funds.

Total interest income on loans for the three months ended September 30, 2025 increased by $1.4 million when compared to the same period of 2024 due to a $58.5 million higher average loan balance for the three months ended September 30, 2025 when compared to the same period of 2024 and a higher loan yield of 5.95% for the three months ended September 30, 2025 versus 5.58% for the same period of 2024. Investment income for the three months ended September 30, 2025 decreased by $536 thousand, or 30.4%, when compared to the same period of 2024 due to a decrease in the fully-taxable equivalent yield to 3.04% for the three months ended September 30, 2025 compared to 3.60% for the same period of 2024, and a $37.8 million lower average investment balance. The fully-taxable equivalent yield on total interest-earning assets increased 33 basis points to 5.38% for the three months ended September 30, 2025 from 5.05% for the same period of 2024. The average balance of total interest-earning assets increased by $43.0 million to $825.9 million for the three months ended September 30, 2025 compared to $782.9 million for the same period of 2024.

Total interest expense for the three months ended September 30, 2025 was $4.6 million compared to $4.8 million for the same period of 2024, a decrease of $156 thousand, or 3.3%. The decrease was due to the overall cost of funds dropping to 2.74% for the three months ended September 30, 2025 from 3.00% for the same period in 2024. Interest expense on time deposits decreased to 3.90% for the three months ended September 30, 2025 from 4.54% for the same period of 2024. The cost of advances from the FHLB increased to 4.43% for the three months ended September 30, 2025 from 2.99% for the same period of 2024.

Average noninterest-earning assets increased by $6.9 million to $31.4 million for the three months ended September 30, 2025 compared to $24.6 million in the same period of 2024. Average noninterest-bearing deposits increased by $10.5 million to $117.2 million during the three months ended September 30, 2025 compared to $106.7 million in the same period of 2024. The average balance in stockholders' equity increased by $4.9 million for the three months ended September 30, 2025 when compared with the same period of 2024.

The following table sets forth information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities for the three-month periods ended September 30, 2025 and 2024. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.

Average Balance Sheet, Interest and Yields
		Three Months Ended												Three Months Ended
(Dollars in thousands)		September 30, 2025												September 30, 2024
		Average												Average
		Balance				Interest				Yield				Balance				Interest				Yield
Assets:
Loans		$	625,431			$	9,307				5.95	%		$	566,893			$	7,902				5.58	%
Securities, taxable			142,995				1,071				3.00	%			181,816				1,624				3.57	%
Securities, tax exempt			19,125				163				3.41	%			18,099				174				3.85	%
Securities combined			162,120				1,234				3.04	%			199,915				1,798				3.60	%
Federal funds sold and other interest bearing deposits			38,390				453				4.72	%			16,130				193				4.79	%
Total interest-earning assets			825,941			$	10,994				5.32	%			782,938			$	9,893				5.05	%
Noninterest-earning assets			31,446												24,555
Total assets		$	857,387											$	807,493
Liabilities and Stockholders'Equity:
NOW, savings, and money market		$	265,255			$	501				0.76	%		$	260,437			$	547				0.84	%
Certificates of deposit			379,267				3,843				4.06	%			296,463				3,364				4.54	%
Securities sold under repurchase agreements			4,014				13				1.30	%			4,073				13				1.28	%
Term Debt			10,736				120				4.47	%			11,917				125				4.20	%
FRB advances and other borrowings			-				-				0.00	%			54,000				648				4.80	%
FHLB advances			12,670				129				4.07	%			8,652				65				2.99	%
Total interest-bearing liabilities			671,942				4,606				2.74	%			635,542				4,762				3.00	%
Noninterest-bearing deposits			117,171												106,694
Noninterest-bearing liabilities			7,523												9,438
Total liabilities			796,636												751,674
Stockholders' equity			60,751												55,819
Total liabilities and stockholders' equity		$	857,387											$	807,493
Net interest income						$	6,388											$	5,131
Interest rate spread											2.58	%											2.06	%
Net yield on interest-earning assets											3.09	%											2.62	%
Ratio of average interest-earning assets to Average interest-bearing liabilities											122.92	%											123.19	%

Provision for Credit Losses

For the three months ended September 30, 2025, provisions for credit losses on loans totaled $308 thousand, a provision for unfunded loan commitments of $21 thousand, offset by a recovery of provision on held to maturity securities of $2 thousand, resulted in a net provision of $327 thousand. For the three months ended September 30, 2024, the provision for credit losses on loans was $103 thousand, offset by a recovery of provision on held to maturity securities of $90 thousand and unfunded loan commitments of $13 thousand resulted in a net provision of $0.

Noninterest Income

Noninterest income for the three months ended September 30, 2025 was $551 thousand compared to $451 thousand for the same period of 2024, an increase of $100 thousand, or 22.2%. The increase was due primarily to a $32 thousand increase in mortgage banking income, a non recurring insurance payment of $73 thousand related to the theft of an ATM, an increase of $2 thousand in bank owned life insurance income, and a $25 thousand increase in other fees and commissions, offset by a decrease of $24 thousand in service changes on deposits.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2025 totaled $4.4 million compared to $4.1 million for the same period of 2024, an increase of $338 thousand, or 8.3%. The increase was due primarily to an increase in Federal Deposit Insurance Corporation premiums of $59 thousand, an increase in salaries and benefits of $324 thousand due to higher staffing levels in 2025, and an increase of $49 thousand in occupancy and furniture and equipment expense as a result of increased building repairs, office maintenance expenses, and increased rent expense.

Income Tax Expense

Income tax expense for the three months ended September 30, 2025 was $462 thousand compared to $342 thousand for the same period of 2024. The effective tax rate was 21.3% for the three months ended September 30, 2025 compared to 23.3% for the same period of 2024. The decrease in the effective tax rate was due to the reduction of a deferred tax liability in 2025.