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

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

The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three and six months ended, June 30, 2025 and 2024. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.

The consolidated Company is referred to as "we" or "our" or "the Company" in the following discussion.

Critical Accounting Policies and Use of Significant Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the determination of the allowance for credit losses and valuation of goodwill, both of which involves significant judgment by management. Our critical accounting policies and related disclosures about credit losses are discussed in more detail in the Notes to our consolidated financial statements in the 2024 Annual Report. Please refer to Note 1 - Significant Accounting Policies and Note 4 - Loans.

RESULTS OF OPERATIONS

Overview

Reconciliation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate our performance. We believe these non-GAAP financial measures are common in the banking industry and may enhance comparability for peer comparison purposes. These non-GAAP measures should be supplemental to primary GAAP financial measures and should not be read in isolation or relied upon as a substitute for primary GAAP financial measures.

Management reviews yields on tax exempt debt securities and the net interest margin on an FTE basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from debt securities exempt from federal income tax. The following table summarizes components of FTE net interest income for the periods indicated.

		Three Months Ended June 30,								Six Months Ended June 30,
		2025				2024				2025				2024
Net interest income (GAAP)		$	12,244			$	10,618			$	23,882			$	21,097
Tax-equivalent adjustment on securities exempt from federal income tax			101				102				199				206
Net interest income, FTE (non-GAAP)		$	12,345			$	10,720			$	24,081			$	21,303
Average balance of total interest-earning assets		$	1,471,844			$	1,466,851			$	1,465,637			$	1,468,639
Net interest margin (annualized net interest income divided by the average balance of total interest-earning assets) (GAAP)			3.37	%			2.91	%			3.29	%			2.89	%
Net interest margin, FTE (annualized net interest income, FTE, divided by the average balance of total interest earning assets) (non-GAAP)			3.40	%			2.94	%			3.31	%			2.92	%

The efficiency ratio is a non-GAAP financial measure that is calculated by dividing non-interest expense by total revenue (net interest income plus non-interest income), and measures how much it costs to produce one dollar of revenue. The following table summarizes components of our efficiency ratio for the periods indicated.

		Three Months Ended June 30,								Six Months Ended June 30,
		2025				2024				2025				2024
		(Dollars in thousands)
Non-interest expense		$	12,222			$	11,551			$	23,522			$	22,740
Net interest income		$	12,244			$	10,618			$	23,882			$	21,097
Non-interest income			4,658				4,117				8,254				7,130
Total Revenue		$	16,902			$	14,735			$	32,136			$	28,227
Efficiency ratio (non-interest divided by total revenue) (non-GAAP)			72.3	%			78.4	%			73.2	%			80.6	%

Summary of Performance

Interest rates remained elevated during the first six months of both 2025 and 2024, and the yield curve was inverted during both periods. The rapid increase in interest rates during 2022 and 2023 significantly increased funding costs in the banking industry and diminished mortgage loan originations. Higher rates have also negatively affected the fair value of debt securities.

Despite these economic headwinds, our profitability improved significantly in 2025. Net income was $6.1 million in the six months ended June 30, 2025, a 22% increase over the $5.0 million earned in the first half of 2024. Better operating results were primarily due to a $2.8 million, or 13%, improvement in net interest income, offset by a $1.6 million unfavorable variance in credit loss expense. Credit loss expense in the first half of 2025 was $388,000, compared to a credit loss recovery (i.e., a credit to pre-tax earnings) of $1.2 million in the prior year period.

Noninterest income in the first six months of 2025 was $1.1 million, nearly 16%, greater than the first six months of 2024, primarily due to increased mortgage banking income. Noninterest expense increased 3.4% in the first six months of 2025 as compared to the prior year, primarily due to professional fees incurred to register certain shares of our common stock on a registration statement with the SEC.

Selected information about our results for the six months ended June 30, 2025 and 2024 are scheduled below:

Statement of Income Data		Six Months Ended June 30,								Increase (Decrease)
(Dollars in thousands)		2025				2024				Amount				%
Interest income		$	39,638			$	38,380			$	1,258				3.3	%
Interest expense			15,756				17,283				(1,527	)			(8.8	)%
Net interest income			23,882				21,097				2,785				13.2	%
Credit loss expense (recovery)			388				(1,187	)			1,575				(132.7	)%
Noninterest income			8,254				7,130				1,124				15.8	%
Noninterest expense			23,522				22,740				782				3.4	%
Income tax expense			2,165				1,694				471				27.8	%
Net Income		$	6,061			$	4,980			$	1,081				21.7	%

		Six Months Ended June 30,								Increase (Decrease)
		2025				2024				Amount				%
Average Balances (Dollars in thousands)
Average earning assets		$	1,465,637			$	1,468,639			$	(3,002	)			(0.2	)%
Average total assets			1,527,438				1,531,465				(4,027	)			(0.3	)%
Average stockholders' equity			146,245				137,309				8,936				6.5	%
Selected Financial Ratios
Return on average assets			0.80	%			0.65	%			0.15	%			22.4	%
Return on average equity			8.36	%			7.29	%			1.06	%			14.6	%
Net interest margin (1)			3.31	%			2.92	%			0.40	%			13.6	%
Stockholders' equity to total assets			9.53	%			9.30	%			0.23	%			2.5	%
Dividend payout ratio			19.70	%			19.48	%			0.22	%			1.1	%

(1) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

Net income for the three months ended June 30, 2025 was $3.5 million, a 52% increase compared to net income of $2.3 million in the three months ended June 30, 2024. This substantial earnings improvement was driven primarily by a 15% increase in net interest income and 13% increase in noninterest income.

Selected information about our results for the three months ended June 30, 2025 and 2024 are scheduled below:

Statement of Income Data		Three Months Ended June 30,								Increase (Decrease)
(Dollars in thousands)		2025				2024				Amount				%
Interest income		$	20,108			$	19,391			$	717				3.7	%
Interest expense			7,864				8,773				(909	)			(10.4	)%
Net interest income			12,244				10,618				1,626				15.3	%
Credit loss expense (recovery)			(113	)			100				(213	)			(213.0	)%
Noninterest income			4,658				4,117				541				13.1	%
Noninterest expense			12,222				11,551				671				5.8	%
Income tax expense			1,286				779				507				65.1	%
Net Income		$	3,507			$	2,305			$	1,202				52.1	%

		Three Months Ended June 30,								Increase (Decrease)
		2025				2024				Amount				%
Average Balances (Dollars in thousands)
Average earning assets		$	1,471,844			$	1,466,851			$	4,993				0.3	%
Average total assets			1,533,803				1,529,363				4,440				0.3	%
Average stockholders' equity			147,654				138,142				9,512				6.9	%
Selected Financial Ratios
Return on average assets			0.97	%			0.61	%			0.36	%			59.4	%
Return on average equity			9.63	%			6.71	%			2.92	%			43.5	%
Net interest margin (1)			3.40	%			2.94	%			0.46	%			15.7	%
Stockholders' equity to total assets			9.53	%			9.30	%			0.23	%			2.5	%
Dividend payout ratio			17.02	%			21.04	%			(4.02	)%			(19.1	)%

(1) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

Individual components of net income are discussed in more detail below.

Net Interest Income

Our profitability depends primarily on net interest income. Net interest income represents the difference between income derived from interest-earning assets and the expense incurred on interest-bearing liabilities. Net interest income is affected by the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities ("interest rate spread") as well as the relative volumes of interest-earning assets and interest-bearing liabilities during the reporting period.

Our earning asset yields and cost of funds have been affected by the rate cuts of the Federal Open Market Committee ("FOMC"). These rate cuts, totaling 100 basis points, occurred at the FOMC's meetings in September, November, and December, 2024. Since then, the FOMC has maintained its target rate for federal funds at 4.25-4.50% through its July 2025 meeting. Yields on earning assets, especially fixed rate loans and debt securities, have lagged behind the increase in funding costs. The Federal Reserve's rapid increases in short-term interest rates in 2023 and 2022 affected our funding sources much faster, and to a greater degree, than our ability to reprice earning assets.

Our net interest income was $23.9 million and $21.1 million for the six months ended June 30, 2025 and 2024, respectively. In the first half of 2025, on a full-tax equivalent basis, our net interest margin improved to 3.31% from 2.92% in the same period of 2024. The improvement in net interest margin was due primarily to higher loan yields and a decrease in the cost of time deposits and FHLB advances.

Our net interest income was $12.2 million and $10.6 million for the three months ended June 30, 2025 and 2024, respectively. In the second quarter of 2025, on a full-tax equivalent basis, our net interest margin improved to 3.40%, up from 3.26% in the first quarter of 2025 and 2.94% in the second quarter of 2024. The improvement in net interest margin was due primarily to higher loan yields and a decrease in the cost of time deposits and FHLB advances.

For the six months ended June 30, 2025, a full-tax equivalent basis, total interest income improved by $1.25 million, or 3%, compared to the same period of 2024. The increase was substantially due to higher loan yields. Loan pricing improved as older loans were renewed or replaced with new volume at higher, current rates. The increase in loan yields, to 5.84% from 5.63%, more than offset a slight decrease in average loan volume.

For the three months ended June 30, 2025, on a full-tax equivalent basis, total interest income improved by $0.7 million, or a 3.7%, in the second quarter of 2025 compared to the same quarter of 2024. The increase was primarily due to higher loan yields. Loan pricing improved as older loans were renewed or replaced with new volume at higher, current rates. The increase in loan yields, to 5.93% from 5.69%, more than offset a very slight decrease in average loan volume.

During the six months ended June 30, 2025, the average amortized cost balance of debt securities was $160.4 million, a 9.5% decline from the comparable period of 2024. This decline was due to maturities, calls, and paydowns.

For the six months ended June 30, 2025, dividends on Federal Home Loan Bank of Chicago ("FHLB") stock decreased to $147,000 from $212,000 in the comparable period of 2024. The decrease was primarily due to a 27% decrease in average balance. We have redeemed some FHLB stock because we have been borrowing less from the FHLB. The timing of dividend payments and stock purchases and redemptions may distort the yield on average balances.

Interest expense decreased by $1.5 million, or nearly 9%, in the six months ended June 30, 2025, compared to the same period in 2024. Interest expense on time deposits decreased by $872,000 because the average balance decreased slightly and the interest rate declined significantly, from 4.13% to 3.81%. During the first six months of 2025, the cost reduction on time deposits more than offset increased interest expense on demand and savings and money market deposits. The cost of total interest-bearing deposits declined to 2.57% in the first half of 2025, from 2.69% in the comparable period of 2024.

Interest expense decreased by $909,000, or 10%, in the three months ended June 30, 2025, compared to the same period of 2024. Interest expense on time deposits decreased by $760,000, or 14%, as both the average volume and interest rate declined. The cost reduction on time deposits more than offset increased interest expense on demand and savings and money market deposits. The cost of total interest-bearing deposits declined to 2.56% in the three months ended June 30, 2025, from 2.76% in the three months ended June 30, 2024.

Average interest-bearing deposits in the six months ended June 30, 2025 were 1% more than in the comparable period of 2024. Average time deposits decreased by nearly 1% while average interest-bearing demand deposits increased by nearly 4%. Average savings and money market account balances increased 1% compared to the first half of 2024.

Average interest-bearing deposits in the three months ended June 30, 2025, as compared to the three months ended June 30, 2024, were little changed. Average time deposits decreased by 3% while average interest-bearing demand deposits increased by nearly 7%. Average savings and money market account balances increased 1% compared to the second quarter of 2024.

The cost of FHLB advances and repurchase agreements also decreased significantly in 2025 as deposit and borrowing costs in 2025 were influenced by the FOMC short-term rate cuts, totaling 100 basis points, during the last four months of 2024. During the six months ended June 30, 2025, the rate on FHLB advances was 4.66%, as compared to the 5.39% cost during the comparable period of 2024. Consequently, due to favorable volume and rate variances, interest expense on FHLB advances was $915,000 less in the six months ended June 30, 2025, compared to the same period in 2024.

During the three months ended June 30, 2025, the rate on FHLB advances was 4.57%, as compared to the 5.33% cost in the same period of 2024. Consequently, due to favorable volume and rate variances, interest expense on FHLB advances was $284,000 less in the second quarter of 2025 compared to the same quarter of 2024.

The following table sets forth information relating to average balances of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2025 and 2024. Non-accrual loans are included in average balances. The yields in the table below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense. This table reflects the average yields on assets and average costs of liabilities (derived by dividing income or expense by the average balance of assets or liabilities, respectively) as well as the "net interest margin" for the periods shown.

		Six Months Ended June 30,
		2025												2024
		Average Balance				Interest Income / Expense				Average Yield / Rate				Average Balance				Interest Income / Expense				Average Yield / Rate
										(Dollars in thousands)
Assets
Loans (1) (2)		$	1,278,533			$	37,019				5.84	%		$	1,280,555			$	35,853				5.63	%
Debt securities - taxable			109,055				1,231				2.28	%			123,077				1,393				2.28	%
Debt securities - tax-exempt (3)			51,345				949				3.73	%			54,241				982				3.64	%
Interest-bearing balances at banks			21,167				471				4.49	%			4,411				122				5.56	%
Federal funds sold			2,103				20				1.92	%			1,685				24				2.86	%
Federal Home Loan Bank stock			3,434				147				8.63	%			4,670				212				9.13	%
Total interest-earning assets			1,465,637				39,837				5.48	%			1,468,639				38,586				5.28	%
Cash and due from banks -noninterest bearing			16,299												20,358
Cash surrender value of life insurance			20,412												19,860
Premises and equipment, net			25,075												25,417
Unrealized gains (losses) on securities			(13,747	)											(15,697	)
Allowance for credit losses on loans			(14,488	)											(15,486	)
Other assets			28,250												28,374
Total assets		$	1,527,438											$	1,531,465
Liabilities and stockholders' equity
Deposits
Demand, interest-bearing		$	284,177			$	1,972				1.40	%		$	273,800			$	1,738				1.28	%
Savings and money market			319,795				2,655				1.67	%			315,268				2,526				1.61	%
Time deposits			500,296				9,464				3.81	%			503,688				10,336				4.13	%
Total interest-bearing deposits			1,104,268				14,091				2.57	%			1,092,756				14,600				2.69	%
Federal Home Loan Bank advances			48,512				1,121				4.66	%			76,014				2,036				5.39	%
Securities sold under agreement to repurchase			20,331				358				3.55	%			21,292				454				4.29	%
Federal funds purchased and other borrowings			420				11				5.28	%			459				18				7.89	%
Subordinated debt			9,841				175				3.59	%			9,817				175				3.58	%
Total interest-bearing liabilities			1,183,372				15,756				2.68	%			1,200,338				17,283				2.90	%
Non-interest bearing demand deposits			178,895												176,510
Other noninterest bearing liabilities			18,926												17,308
Total liabilities			1,381,193												1,394,156
Stockholders' equity			146,245												137,309
Total liabilities and stockholders' equity		$	1,527,438											$	1,531,465
Net interest income / margin (3)						$	24,081				3.31	%						$	21,303				2.92	%
Less tax equivalent adjustment							(199	)											(206	)
Net interest income						$	23,882											$	21,097

(1) Includes loans held for sale and nonaccrual loans.

(2) Yield amounts on loans include fees.

(3) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

The following table sets forth average balances of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2025 and 2024. This table reflects the average yields on assets and average costs of liabilities (derived by dividing income or expense by the average balance of assets or liabilities, respectively) as well as the net interest margin for the periods shown.

		Three Months Ended June 30,
		2025												2024
		Average Balance				Interest Income / Expense				Average Yield / Rate				Average Balance				Interest Income / Expense				Average Yield / Rate
										(Dollars in thousands)
Assets
Loans (1) (2)		$	1,285,692			$	18,791				5.93	%		$	1,287,563			$	18,216				5.69	%
Debt securities - taxable			109,821				649				2.40	%			115,049				613				2.14	%
Debt securities - tax-exempt (3)			51,699				480				3.76	%			53,442				485				3.65	%
Interest-bearing balances at banks			19,329				216				4.53	%			4,761				66				5.58	%
Federal funds sold			1,783				10				2.27	%			1,745				12				2.77	%
Federal Home Loan Bank stock			3,520				63				7.26	%			4,291				101				9.47	%
Total interest-earning assets			1,471,844				20,209				5.57	%			1,466,851				19,493				5.34	%
Cash and due from banks -noninterest bearing			16,342												20,019
Cash surrender value of life insurance			20,483												19,928
Premises and equipment, net			24,960												25,272
Unrealized gains (losses) on securities			(13,363	)											(16,379	)
Allowance for credit losses on loans			(14,552	)											(14,992	)
Other assets			28,089												28,664
Total assets		$	1,533,803											$	1,529,363
Liabilities and stockholders' equity
Deposits
Demand, interest-bearing		$	284,633			$	1,017				1.45	%		$	267,072			$	857				1.29	%
Savings and money market			319,223				1,304				1.66	%			315,340				1,270				1.62	%
Time deposits			498,106				4,638				3.78	%			515,209				5,398				4.21	%
Total interest-bearing deposits			1,101,962				6,959				2.56	%			1,097,621				7,525				2.76	%
Federal Home Loan Bank advances			55,595				627				4.57	%			68,760				911				5.33	%
Securities sold under agreement to repurchase			20,446				180				3.57	%			22,022				234				4.27	%
Federal funds purchased and other borrowings			918				11				4.86	%			920				15				6.56	%
Subordinated debt			9,844				87				3.58	%			9,820				88				3.60	%
Total interest-bearing liabilities			1,188,765				7,864				2.68	%			1,199,143				8,773				2.94	%
Non-interest bearing demand deposits			179,188												175,001
Other noninterest bearing liabilities			18,196												17,077
Total liabilities			1,386,149												1,391,221
Stockholders' equity			147,654												138,142
Total liabilities and stockholders' equity		$	1,533,803											$	1,529,363
Net interest income / margin (3)						$	12,345				3.40	%						$	10,720				2.94	%
Less tax equivalent adjustment							(101	)											(102	)
Net interest income						$	12,244											$	10,618

(1) Includes loans held for sale and nonaccrual loans.

(2) Yield amounts on loans include fees.

(3) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

Volume variances are equal to the increase or decrease in average balance multiplied by the average rate in the prior period. Changes attributable to rate variances are equal to the increase or decrease in the average interest rate multiplied by the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate multiplied by the change in average balance and are included below in the average volume column.

The volume and rate variances table below indicate the difference in interest earned and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to changes in average balances (volume) or average interest rates for the six months ended June 30, 2025.

		Six Months Ended June 30, 2025
		Increase (Decrease) Due to
		Average Volume				Average Rate				Net Change
		(Dollars in thousands)
Income from interest-earning assets
Loans		$	(158	)		$	1,324			$	1,166
Debt securities - taxable			(162	)			-				(162	)
Debt securities - tax-exempt (1)			(56	)			23				(33	)
Interest-bearing balances at banks			373				(24	)			349
Federal funds sold			4				(8	)			(4	)
Federal Home Loan Bank stock			(53	)			(12	)			(65	)
Total interest income		$	(53	)		$	1,304			$	1,251
Expense from interest-bearing liabilities
Demand deposits, interest-bearing		$	67			$	167			$	234
Savings and money market deposits			31				98				129
Time deposits			(93	)			(779	)			(872	)
Total interest expense on deposits			5				(514	)			(509	)
Federal Home Loan Bank advances			(641	)			(274	)			(915	)
Securities sold under agreement to repurchase			61				(157	)			(96	)
Federal funds purchased and other borrowings			5				(12	)			(7	)
Subordinated debt			(-	)			-				-
Total interest expense			(570	)			(957	)			(1,527	)
Net interest income (1)		$	517			$	2,261			$	2,778
Tax equivalent adjustment											7
Net interest income										$	2,785

(1) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

The volume and rate variances table below indicate the difference in interest earned and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to changes in average balances (volume) or average interest rates for the three months ended June 30, 2025.

		Three Months Ended June 30, 2025
		Increase (Decrease) Due to
		Average Volume				Average Rate				Net Change
		(Dollars in thousands)
Income from interest-earning assets
Loans		$	(178	)		$	753			$	575
Debt securities - taxable			(36	)			72				36
Debt securities - tax-exempt (1)			(20	)			15				(5	)
Interest-bearing balances at banks			162				(12	)			150
Federal funds sold			-				(2	)			(2	)
Federal Home Loan Bank stock			(15	)			(23	)			(38	)
Total interest income		$	(86	)		$	802			$	716
Expense from interest-bearing liabilities
Demand deposits, interest-bearing		$	56			$	104			$	160
Savings and money market deposits			5				29				34
Time deposits			(204	)			(556	)			(760	)
Total interest expense on deposits			(143	)			(423	)			(566	)
Federal Home Loan Bank advances			235				(519	)			(284	)
Securities sold under agreement to repurchase			101				(155	)			(54	)
Federal funds purchased and other borrowings			12				(16	)			(4	)
Subordinated debt			1				(2	)			(1	)
Total interest expense			206				(1,115	)			(909	)
Net interest income (1)		$	(291	)		$	1,916			$	1,625
Tax equivalent adjustment											1
Net interest income										$	1,626

(1) Reflects tax equivalent adjustment for federal tax exempt income based on a 21% tax rate.

Provisions for Credit Losses

Credit risk is inherent in the business of making loans. We maintain an allowance for credit losses on loans through charges or credits to earnings, which are presented in the statements of income as credit loss expense or recovery of credit loss expense. Determining the appropriate level of the allowance involves a high degree of management judgment and is based upon historical and projected losses in the loan portfolio, including the fair value of collateral or discounted cash flows of specifically identified impaired loans. This process, by its nature, creates variability in the amount and frequency of charges or credits to the Company's earnings. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. Subsequent recoveries, if any, are credited to the allowance.

At June 30, 2024 our recovery of credit loss expense on loans was $1,042,000 and recovery of credit loss expense on off balance sheet loans was $145,000. In 2024, our recovery of credit loss expense on loans was $1.4 million, partially offset by $162,000 of credit loss expense on off-balance sheet commitments. The expense recovery was largely due to decreases in the loss factors applied to certain loan pools. During the first quarter of 2024, we refined the loss factors in our CECL model to include more current and relevant data. The changes reflect faster loan paydown experience and a more favorable economic climate than previously expected. Consequently, the loss factors applied to some of our loan pools, primarily in the real estate segment, decreased, while these adjustments increased the estimated loss factors applied to other loan pools, such as construction and commercial loans. The net effect was a recovery of credit loss expense. These changes reduced the expected loss factors applied to pools of loans and off-balance sheet commitments and resulted in a $1.3 million credit to earnings, with $988,000 and $298,000 attributable to loans and off-balance sheet commitments, respectively. The credit to earnings was offset by corresponding decreases to the allowances for expected losses on loans and off-balance sheet commitments.

Expected losses on individual problem loans were approximately $800,000 at both June 30, 2025 and December 31, 2024, so approximately 95% of our allowance was allocated to pools of loans.

Credit loss expense on loans was $103,000 for the second quarter of 2025. Credit loss recovery on loans was $53,000 for the second quarter of 2024. Economic conditions have been moderate, with GDP projections and unemployment holding steady, resulting in a mixed loss rate calculation for individual segments. Qualitative risk factors were adjusted down slightly from the previous period as a projected downturn in commercial real estate property values did not materialize.

Non-Interest Income

The following table sets forth the Company's various components of non-interest income for the six months ended June 30, 2025.

		Six Months Ended June 30,								Increase (Decrease)
		2025				2024				Amount				Percentage
Non-interest income		(In Thousands of Dollars)
Service charges on deposits						$	511			$	(511	)			(100.0	)%
Mortgage banking income			5,488				4,483				1,005				22.4	%
Debit card and ATM fees			896				914				(18	)			(2.0	)%
Insurance services			728				529				199				37.6	%
Trust fees			102				111				(9	)			(8.1	)%
Other customer service fees			624				66				558				845.5	%
Earnings on Bank-owned life insurance			281				261				20				7.7	%
Other non-interest income			135				255				(120	)			(47.1	)%
Total non-interest income		$	8,254			$	7,130			$	1,124				15.8	%

The following table sets forth the Company's various components of non-interest income for the three months ended June 30, 2025.

		Three Months Ended June 30,								Increase (Decrease)
		2025				2024				Amount				Percentage
Non-interest income		(In Thousands of Dollars)
Service charges on deposits		$	(253	)		$	271			$	(524	)			(193.4	)%
Mortgage banking income			3,310				2,718				592				21.8	%
Debit card and ATM fees			469				478				(9	)			(1.9	)%
Insurance services			319				299				20				6.7	%
Trust fees			65				67				(2	)			(3.0	)%
Other customer service fees			572				29				543				1872.4	%
Earnings on Bank-owned life insurance			142				131				11				8.4	%
Other non-interest income			34				124				(90	)			(72.6	)%
Total non-interest income		$	4,658			$	4,117			$	541				13.1	%

Non-interest income was $4.7 million in the three months ended June 30, 2025 and $4.1 million in the three months ended June 30, 2024, representing a 13% improvement.

Insurance service revenue contributed to the increase in consolidated non-interest income in 2025. The timing of premium payments received from customers may skew insurance revenue from one quarter to the next. Insurance services revenue is generated by Tri-County Insurance Services, Inc. (d/b/a First State Insurance) ("FSI"), a wholly-owned subsidiary of the Bank. FSI had revenue of $728,000 in the six months ended June 30, 2025, an increase of $199,000, or 38% increase from the same period in 2024. The revenue increase in 2025 is primarily due to incentive commissions received from insurers. FSI continues to be profitable, with net income of $201,000 and $96,000 in the six months ended June 30, 2025 and 2024, respectively.

The average balance of our investment in life insurance policies was $20.4 million and $19.9 million during the first six months of 2025 and 2024, respectively. The increase in cash surrender value resulted in a tax exempt yield of 2.78% and 2.58% during the six months ended June 30, 2025 and 2024 respectively. No death benefits were received in either year. As an investment, the policies are designed to be held until death of the insured.

The average balance of our investment in life insurance policies was $20.5 million and $19.9 million during the three months ended June 30, 2025 and 2024, respectively. The increase in cash surrender value resulted in a tax exempt yield of 2.81% and 2.64% during the three months ended June 30, 2025 and 2024, respectively. As noted above, no death benefits were received in either year. As an investment, the policies are designed to be held until death of the insured.

Most of our mortgage banking activity occurs at First State Mortgage Services, LLC ("FSM"), a wholly-owned subsidiary of the Bank. Mortgage banking income increased by $1.0 million, or 22%, in the six months ended June 30, 2025 compared to the same period in 2024. Loan originations have increased in 2025, following a modest increase of 1.7% in calendar year 2024.

In the three months ended June 30, 2025, mortgage banking income increased by $592,000, or 22%, compared to the same period of 2024. Loan originations in second quarter of 2025 were significantly higher than the comparable quarter of 2024. Operating results continued to improve as FSM achieved a small profit in the second quarter of 2025, following years of net losses in 2024, 2023, and 2022.

FSM is structured to provide conventional and government-sponsored financing on 1-4 family residences. FSM's profitability and mortgage loan volume are greatly affected by market interest rates. Rising interest rates, beginning in March 2022, have substantially ended mortgage refinancing activity and slowed the pace of home sales. Demand for new single-family homes still exists, but the supply of existing homes on the market has been reduced.

FSM had 68 full-time equivalent employees at June 30, 2025, compared to 70 at December 31, 2024. We continue to try and adjust the scale of mortgage operations without significantly reducing our capacity to serve our markets.

Despite the less favorable rate environment in recent years, FSM financial performance has been improving. The net loss for the first half of 2025 was 44% less than the comparable period in 2024, and FSM had a small profit of $12,000 for the quarter ended June 30, 2025, compared to a net loss of $204,000 for the quarter ended June 30, 2024.

Non-Interest Expense

The following table sets forth the various components of our non-interest expense for the six months ended June 30, 2025 and 2024.

		Six Months Ended June 30,								Increase (Decrease)
		2025				2024				Amount				Percentage
Non-interest expense		(In Thousands of Dollars)
Salaries and employee benefits		$	15,458			$	15,128			$	330				2.2	%
Occupancy			1,335				1,444				(109	)			(7.5	)%
Furniture and equipment			575				593				(18	)			(3.0	)%
Data processing			2,044				1,857				187				10.1	%
FDIC insurance assessments			338				360				(22	)			(6.1	)%
Insurance			62				70				(8	)			(11.4	)%
Advertising			327				317				10				3.2	%
Professional fees			1,296				865				431				49.8	%
Other non-interest expense			2,087				2,106				(19	)			(0.9	)%
Total non-interest expense		$	23,522			$	22,740			$	782				3.4	%
Efficiency ratio			73.2	%			80.6	%			(7.4	)%			(9.1	)%
FTE employees at period-end			286				309				(23	)			(7.4	)%

The following table sets forth the various components of our non-interest expense for the three months ended June 30, 2025 and 2024.

		Quarter Ended June 30,								Increase (Decrease)
		2025				2024				Amount				Percentage
Non-interest expense		(In Thousands of Dollars)
Salaries and employee benefits		$	7,906			$	7,553			$	353				4.7	%
Occupancy			666				725				(59	)			(8.1	)%
Furniture and equipment			292				295				(3	)			(1.0	)%
Data processing			1,054				975				79				8.1	%
FDIC insurance assessments			171				180				(9	)			(5.0	)%
Insurance			31				16				15				93.8	%
Advertising			171				169				2				1.2	%
Professional fees			924				575				349				60.7	%
Other non-interest expense			1,007				1,063				(56	)			(5.3	)%
Total non-interest expense		$	12,222			$	11,551			$	671				5.8	%
Efficiency ratio			72.3	%			78.4	%			(6.1	)%			(7.8	)%
FTE employees at period-end			286				309				(23	)			(7.4	)%

Despite inflationary pressures, we were largely successful in controlling non-interest expense in the first half of 2025. Total non-interest expense increased slightly more than the rate of inflation, which included the costs of preparing our registration statement to file with the SEC and increased incentive pay for our mortgage bankers.

In the three months ended June 30, 2025, our efficiency ratio decreased to 72% from 78% for the comparable period of 2024. The lower efficiency ratio results from significantly higher net interest income and non-interest income, up 15% and 13%, respectively, in the three months ended June 30, 2025. In contrast, non-interest expense increased 6% in the three months ended June 30, 2025 largely due to higher incentive-based pay and the costs of preparing our registration statement.

Income Taxes

Income tax expense was $2.2 million and $1.7 million in the six months ended June 30, 2025 and 2024, respectively. The 28% increase in income tax expense was directionally consistent with the 24% increase in pre-tax income. Our effective income tax rate (income tax expense divided by pre-tax income) was 26.3% and 25.4% in the first half 2025 and 2024, respectively, compared to the combined federal and state statutory income tax rate of approximately 28.5%. The difference between the combined federal and state statutory rate and our effective tax rate is primarily due to tax-exempt interest income and earnings on Bank-owned life insurance. The average balance of our tax-exempt municipal securities decreased in 2025 due to maturities, calls, and paydowns. Less tax-exempt interest income contributed to the higher effective tax rate in 2025.

In the three months ended June 30, 2025 and 2024, our income tax expense was $1.3 million and $779,000 respectively. The 65% increase in tax expense was directionally consistent with the 55% increase in our pre-tax income. Our effective income tax rate (income tax expense divided by pre-tax income) was 26.8% and 25.3% in the three months ended 2025 and 2024, respectively, compared to the combined federal and state statutory income tax rate of approximately 28.5%.

FINANCIAL CONDITION

Overview

Total assets were $1.56 billion at June 30, 2025, representing an increase of $23.7 million, or 1.5%, from December 31, 2024. The most significant change in assets was the $13.7 million increase in mortgage loans held for sale. Asset growth was funded primarily by FHLB advances and retained earnings.

Our primary investing activities are the origination of real estate, commercial, and agricultural loans and the purchase of debt securities. Assets are funded primarily by deposits, borrowings such as FHLB advances, securities sold under agreement to repurchase and stockholders' equity.

Our primary earning assets and funding sources are discussed below, including significant changes in our assets, liabilities, and stockholders' equity during the first six months of 2025.

Securities Portfolio

The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

Consistent with our investment policy, our portfolio consists of (i) U.S. Treasury securities and U.S. Government sponsored entities' debt securities for liquidity and pledging; (ii) mortgage-backed securities and collateralized mortgage obligations, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; and (iii) municipal obligations, which provide tax free income and limited pledging potential.

All debt securities are classified as available-for-sale. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), which is a component of stockholders' equity. Regular adjustments are made to reflect changes in the fair value of our available-for-sale securities.

Our investment portfolio increased $4.4 million from December 31, 2024 to June 30, 2025 with the purchase of additional securities to the portfolio.

The amortized cost and fair value of our Treasury securities were $19.9 million and $19.1 million, respectively at June 30, 2025. The amortized cost and fair value of our Treasury securities were $25.8 million and $24.6 million, respectively, at December 31, 2024. Our federal agency obligations consist of securities issued by U.S. government-sponsored enterprises, primarily the FHLB. We also invest in SBA guaranteed loan participations.

The fair value of our debt securities recovered in the second quarter of 2025 compared to year-end 2024. Unrealized losses in our securities portfolio are due to increases in interest rates rather than credit deterioration. None of our securities has had a past due payment.

Absent credit quality concerns or further increases in market interest rates, unrealized losses on debt securities generally recover as the maturity date approaches.

Loan Portfolio

Our loan portfolio consists of various types of loans. The three segments of our loan portfolio are: commercial (including agricultural production); real estate; and consumer. At June 30, 2025 and December 31, 2024, the real estate segment comprised 89% and 88%, respectively, of our loan portfolio. The real estate segment primarily consists of commercial and one-to-four family residential loans. Smaller portions of the real estate segment are agricultural loans and construction and land loans. Our loans are primarily to borrowers in the Illinois markets where we operate.

Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, small retail shopping centers, single family and multi-family residential buildings, and various other properties including restaurants and hotels. None of our loans are secured by, or dependent on, office buildings in large urban centers such as downtown Chicago. Agricultural real estate loans are primarily for land acquisition and other long-term farm financing.

At June 30, 2025 and December 31, 2024, approximately 90% of our residential real estate loans are secured by first liens on one-to-four family residential properties. The rest of the portfolio are home equity loans and other home loans secured by junior liens. At origination, evaluation of borrower repayment ability includes a review of debt to income, credit scores, and certain other information. Collateral coverage is based on appraisals.

Construction and land development loans are generally secured by vacant land and/or property in the process of improvement, including (1) land development preparatory to erecting vertical improvements, and (2) the construction of industrial, commercial, residential, or farm buildings. Repayment of these loans typically depends on the sale of the property to third parties or the successful and timely completion of the improvements by the builder for the end user.

Commercial and agricultural loans are primarily for working capital, asset acquisition or expansion, and other business purposes. Underwriting of these loans is based primarily on the historical and projected cash flow of the borrower, guarantor support and finally on the underlying collateral. Financial information obtained from borrowers, such as tax returns or accountant-prepared financial statements are used to evaluate debt service sufficiency. Such financial information and evaluations are updated periodically during the life of the loan.

Consumer loans for household, family, and other personal expenditures are less than 1% of our total loan portfolio. At the time of origination, we evaluate the borrower's repayment ability primarily through a review of debt to income and credit scores.

Loan characteristics and risks and underwriting are described in more detail in our consolidated financial statements in the 2024 Annual Report, primarily in accompanying Notes 1 and 4.

Loan volume in the first half of 2025 was slightly more compared to year-end 2024. Total loans were approximately 0.2% more at June 30, 2025 compared to year-end 2024.

The following table sets forth loans within each segment of our portfolio at June 30, 2025 and year-end 2024, including their percentage of total loans and increase (decrease) through the second quarter of 2025:

		June 30,				Dec. 31,				June 30,				Dec. 31,				Increase (Decrease)
		2025				2024				2025				2024				in 2025
		(Dollars in thousands)								Percent of Total Loans								Percentage
Commercial
Commercial		$	73,154			$	69,720				5.7	%			5.5	%			4.9	%
Agricultural			61,234				80,577				4.8	%			6.3	%			(24.0	)%
Real estate
Commercial real estate			558,735				538,810				43.7	%			42.2	%			3.7	%
Agricultural real estate			161,579				170,401				12.6	%			13.4	%			(5.2	)%
Consumer real estate			388,921				386,475				30.4	%			30.3	%			0.6	%
Construction and land			27,473				21,841				2.2	%			1.7	%			25.8	%
Consumer
Installment			4,302				4,196				0.3	%			0.3	%			2.5	%
Vehicle			2,427				3,119				0.2	%			0.2	%			(22.2	)%
Credit cards			1,274				1,270				0.1	%			0.1	%			0.3	%
Total loans			1,279,099				1,276,409				100.0	%			100.0	%			0.2	%
Allowance for credit losses			(14,665	)			(14,444	)			(1.1	)%			(1.1	)%			1.5	%
Loans, net		$	1,264,434			$	1,261,965												0.2	%

Past Due Loans

Loans past due are summarized in the following table.

		(Dollars in thousands)								Percentage of Total Loans
Loans past due		June 30, 2025				December 31, 2024				June 30, 2025				December 31, 2024
30-89 days past due		$	6,977			$	5,318				0.55	%			0.42	%
90 or more days past due			2,867				3,784				0.22	%			0.30	%
Total loans past due 30 days or more		$	9,844			$	9,102				0.77	%			0.71	%

Past due loans remain at manageable levels. At June 30, 2025, three loans comprise 91% of total loans past due 90 days or more. The largest two loans each had a balance of approximately $1.2 million each and are secured by owner-operated commercial real estate. The other is a residential mortgage loan that is fully secured. Management believes cash flow from operations and, if necessary, collateral coverage will prevent or mitigate losses on these loans.

Sources of Funds

Our primary sources of funds are deposits, FHLB borrowings, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are influenced by market interest rates, economic conditions, and customer behavior, all of which can change over time.

Deposits

The composition and cost of our deposit base are important components in analyzing our net interest margin and balance sheet liquidity. Our liquidity is impacted by the volatility of deposits, given the risk of that money leaving our Bank for rate-related or other reasons. Deposits can be adversely affected if economic conditions weaken, especially in the markets where we operate.

Due to well publicized bank failures in 2023, concerns about uninsured deposits have risen. Potentially, our most volatile deposits are those that exceed the FDIC deposit insurance limit. Rate sensitivity is another potential cause of deposit volatility, as customers may seek more attractive interest rates on their balances. Customers with higher balances may be more rate-sensitive than customers with smaller balances.

Total average deposits were $1.10 billion in the second quarter of 2025. Total deposits as of June 30, 2025 were $1.27 billion, representing a $4.5 million (or $0.4%) decrease from year-end 2024. However, the majority of this decrease can be attributed to a reduction in brokered deposits by approximately $16 million from year end to June 30, 2025. At June 30, 2025, deposit categories were similar to year end 2024 as a percent of total deposits.

Also in 2023, we began participating in a program offered by the State of Illinois, whereby we obtain time deposit funding in exchange for commitments to make a certain amount of agricultural loans. The average balance of State of Illinois time deposits was $65.0 million at June 30, 2025 and December 31, 2024.

Deposits as of June 30, 2025 and year-end 2024 are presented below, together with the percentage increase (decrease) as of June 30, 2025:

		June 30,				December 31,				Increase
		2025				2024				(Decrease)
Deposit Category (Dollars in thousands)
Demand, non-interest bearing		$	170,359			$	176,978				(3.7	)%
Demand, interest bearing			275,687				263,600				4.6	%
Savings, including money market			323,632				331,480				(2.4	)%
Time, $250 and over			141,813				131,874				7.5	%
Time, under $250			357,285				369,364				(3.3	)%
Total deposits		$	1,268,776			$	1,273,296				(0.4	)%

Maturities of time deposits as of June 30, 2025 are shown below:

		June 30, 2025				Percentage of Total
Maturing Period (Dollars in thousands)
Within one year		$	422,181				84.6	%
Over one year through two years			57,613				11.5	%
Over two years through three years			16,285				3.3	%
Over three years through four years			2,089				0.4	%
Over four years through five years			929				0.2	%
Total time deposits		$	499,097				100.0	%

Core deposits are defined by the banking regulators as all deposit accounts of $250,000 and less, minus any fully insured brokered deposits of $250,000 or less. Our core deposits have been relatively stable, while our use of brokered deposits has declined in 2024 and the first half of 2025. Information about our core deposits and brokered deposits follows as of the dates indicated:

		June 30, 2025				December 31, 2024
Core and Brokered Deposits (Dollars in thousands)
Core deposits		$	1,095,197			$	1,093,886
% of total deposits			86.3	%			85.9	%
Change from prior balance sheet date		$	1,311			$	42,720
% Change from prior balance sheet date			0.1	%			4.1	%
Brokered deposits		$	32,482			$	49,223
% of total deposits			2.6	%			3.9	%

A portion of our deposits are from state, county, and municipal customers. In general, public deposits exceed the FDIC insurance limits so, as allowed by law, we have specifically pledged a portion of our debt securities to collateralize these deposits. The banking regulators refer to collateralized public deposits as "preferred deposits."

As shown below, uninsured and preferred deposit balances have been relatively stable. Estimated uninsured deposits and preferred deposits and their percentage to total deposits follow as of the dates indicated:

		June 30, 2025				December 31, 2024
Uninsured and Preferred Deposits (Dollars in thousands)
Estimated amount of uninsured deposits		$	313,576			$	320,972
Preferred deposits			107,363				107,613
Estimated uninsured deposits, net of preferred deposits		$	206,213			$	213,359
As a percent of total deposits
Estimated uninsured deposits			24.7	%			25.2	%
Estimated uninsured deposits, net of preferred			16.3	%			16.8	%

Other Borrowings

We also used repurchase agreements as a funding source. Repurchase agreements provide secured borrowings from customers whose funds exceed FDIC deposit insurance limits. To repay these borrowings, we are required to repurchase identical securities to those that are sold. The average balance of securities sold under agreement to repurchase was $20.3 million and $22.5 million at June 30, 2025 and December 31, 2024, respectively.

We also maintain a borrowing arrangement with the FHLB. FHLB advances totaled $86.9 million at June 30, 2025, compared to $67.9 million at year-end 2024. The increase in FHLB advances from year-end occurred to fund loan growth as well as decrease the brokered deposits.

Off-Balance Sheet Arrangements

As a provider of financial services, we issue standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards, and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash, and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $7.0 million and $6.7 million at June 30, 2025 and December 31, 2024, respectively.

At June 30, 2025 and December 31, 2024, we had outstanding loan commitments, including letters of credit, totaling $258.8 million and $232.0 million, respectively. These commitments consist primarily of unfunded lines of credit and commitments to make loans.

We anticipate that sufficient funds will be available to meet current loan commitments. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As required by ASC 326, we maintain an allowance for expected credit losses on off-balance sheet commitments. The allowance balance is included with other liabilities on our balance sheet. The allowance balance is calculated in the same manner as our allowance for credit losses on loans, except we estimate the percentage of off-balance sheet commitments that we will actually fund in the future. Our allowance for credit losses on off-balance sheet commitments was $1.0 million at June 30, 2025 and $987,083 at December 31, 2024. There were no charge-offs of any off-balance sheet commitments in 2024 or the first half of 2025.

Funding at the Company Level

At June 30, 2025 and December 31, 2024, the Company had $10.0 million of subordinated debentures outstanding. These unsecured subordinated debentures mature in 2031.

In 2022, the Company obtained a $10 million operating line of credit from Bankers' Bank. The line of credit was most recently renewed in 2024 with a maturity date of October 29, 2026. The line of credit is secured by all the stock of the Bank and has covenants specific to capital and other financial ratios. The Company was in compliance with these covenants at June 30, 2025 and December 31, 2024. There were no borrowings on the line of credit during the first six months of 2025 or during 2024.

The Company primarily depends on dividends from the Bank for its cash needs. The Bank must maintain profitable operations and satisfy its capital requirements in order to pay dividends to its parent company. In addition to debt service, the parent company uses cash to pay dividends to its stockholders.

LIQUIDITY

Liquidity management is a daily function. Excess funds are generally invested in short-term investments. Cash inflows are typically generated from earnings, loan payments, mortgage loan sales, maturing securities, and increased deposit balances and borrowings. Debt securities can also be sold to provide funds. The Bank's cash outflows are primarily for loan advances, security purchases, deposit withdrawals, and maturities of other borrowings.

In the event we require funds beyond our ability to generate them internally, additional funds are generally available from FHLB advances and the Federal Reserve Discount Window. Brokered deposits and deposits obtained through listing services are other potential sources of funds. Our parent company also has a $10 million line of credit that could be used for Bank liquidity.

We maintain significant capacity to borrow from the FHLB and the Federal Reserve. The Bank's pledged collateral, related borrowings, and additional borrowings available are summarized below.

		June 30, 2025				December 31, 2024
Collateral pledged to
Federal Home Loan Bank		$	888,551			$	892,193
Federal Reserve Discount Window			94,447				111,238
		$	982,998			$	1,003,431
Borrowings from the
Federal Home Loan Bank		$	86,917			$	67,917
Federal Reserve Discount Window			-				-
		$	86,917			$	67,917
Additional borrowing available from the
Federal Home Loan Bank		$	447,651			$	483,639
Federal Reserve Discount Window			79,906				85,839
Total borrowing available		$	527,557			$	569,478

Our most liquid assets are cash and cash equivalents and securities available-for-sale. The levels of these assets are dependent on the operating, financing, lending, and investing activities during any given year. These liquid assets totaled $195.6 million at June 30, 2025 and $188.7 million at December 31, 2024.

Operating activities used $8.4 million and $1.1 million of cash for the six-months ended June 30, 2025 and 2024, respectively. Net income is a primary source of operating cash, as adjusted for certain items including gains on sales of assets, changes in income and expense accruals, and non-cash expenses such as depreciation and the provision for credit losses.

Mortgage banking activity was another important source of cash from operating activities, as shown in the following table.

Cash flows from mortgage loans held for sale		Six Months Ended June 30, 2025				Six Months Ended June 30, 2024
(Dollars in thousands)
Proceeds from loan sales		$	141,224			$	127,125
Gains on sales of loans		$	(5,096	)		$	(4,498	)
Origination of loans held for sale			(149,800	)			(127,772	)
Net cash provided (used)		$	(13,672	)		$	(5,145	)

Investing cash flows related to debt securities provided significant cash in both 2025 and 2024, as summarized below.

Cash flows from security purchases and maturities		Six Months Ended June 30, 2025				Six Months Ended June 30, 2024				Increase (Decrease)
(Dollars in thousands)
Proceeds from maturities, paydowns, and calls		$	11,127			$	30,035			$	(18,908	)
Purchases of available-for-sale securities			(13,931	)			0				(13,931	)
Net cash provided (used)		$	(2,804	)		$	30,035			$	(32,839	)

In the six months ended June 30, 2025, net cash used in investing activities was $5.7 million, primarily due to purchases of securities, of $13.9 million.

Financing activities provided $16.6 million of net cash in the six months ended June 30, 2025. Net decreases in deposits were $4.5 million in the six months ended June 30, 2025. Increases of FHLB advances provided $19.0 million of financing cash in the six months ended June 30, 2025, as management relied more on other funding sources.

Less significant sources and uses of cash from financing activities include cash dividends paid, purchases and retirement of our common stock, and proceeds from stock options exercised. Netted together, these equity transactions used $2.0 million of cash in the six months ended June 30, 2025.

Cash and cash equivalents increased $2.5 million in the six months ended June 30, 2025. We consider cash and cash equivalents, in combination with other liquidity sources, to be adequate for our operations.

Management believes the Bank's liquid assets and unused borrowing capacity are sufficient for our operations, including the ability to fund loan originations and meet deposit outflows.

CAPITAL

As of June 30, 2025, total stockholders' equity was $149.0 million, an increase of $5.8 million, or 4.1%, from $143.2 million at December 31, 2024. The increase to total stockholders' equity was primarily driven by net income of $6.1 million and was reduced by dividends declared and paid of $1.2 million and improvement of $1.2 million in accumulated other comprehensive income (loss).

The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of June 30, 2025, the Company's capital levels remained characterized as "well-capitalized".

The actual capital amounts and ratios of the Company and the Bank as of June 30, 2025 and December 31, 2024, are presented in the table below. Capital ratios for June 30, 2025 are preliminary until the Call Report is filed.

		Capital Ratios								Capital Amounts
Capital ratios of the Bank, as of June 30, 2025		Minimum Required				Actual				Minimum Required				Actual
										(Dollars in thousands)
Common Equity Tier 1 capital to risk-weighted assets (1)			7.0	%			13.8	%		$	80,971			$	159,095
Total capital to risk-weighted assets (1)			10.5	%			14.9	%		$	121,457			$	172,679
Tier 1 Capital to risk-weighted assets (1)			8.5	%			13.8	%		$	98,322			$	159,095
Tier 1 Capital to average assets (leverage ratio) (2)			5.0	%			10.4	%		$	76,954			$	159,095

	(1)	Minimum required, including the capital conservation buffer, under the Basel III Capital Rules
	(2)	Minimum required to be categorized as "well capitalized" under the prompt corrective action provisions

The payment of dividends by the Bank would be restricted if the Bank does not meet the minimum Capital Conservation Buffer as defined by Basel III regulatory capital guidelines and/or if, after payment of the dividend, the Bank would be unable to maintain satisfactory regulatory capital ratios. Bank dividends are similarly restricted by the prompt corrective action provisions.

Consolidated capital amounts and ratios are not presented because they are not required for consolidated entities with less than $3 billion in total assets and the Bank comprises over 90% of the consolidated assets of the Company. Nonetheless, regulators expect bank holding companies to be a "source of strength" to their subsidiary banks and we follow that principle in managing capital at both the Bank and Company levels.

FSM is subject to capital requirements in connection with its mortgage banking activities. Failure to maintain minimum capital requirements could result in the FSM's inability to originate mortgage loans for the respective investor and therefore could have a direct material effect on FSM's financial results.

Dividends and Share Buybacks

We continue our history of paying cash dividends to stockholders. Dividends were $0.50 per share year-to-date at June 30, 2025.

Dividends were $0.85 per share in 2024. Our ratio of dividends declared to net income was 20% year-to-date in 2024.

From time to time, our Board of Directors authorizes the purchase of the Company's outstanding common stock, subject to a dollar amount limit over a specified period. The number of shares purchased, and the timing, manner, price, and amount of the purchases are determined at the Company's discretion. Among other factors, we consider stock price, trading volume, general market conditions, and our capital and liquidity needs.

We purchased and retired 45,175 shares in 2024 for approximately $1.9 million. In the first half of 2025, we purchased and retired 5,800 shares for approximately $263,000. Our most recent share buyback program has been substantially completed as of June 30, 2025.

FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statemen ts of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as "believe," "expect," "anticipate," "project," "possible," "continue," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:

	●	the effects of future economic, business and market conditions and changes, particularly in our Indiana market area, including prevailing interest rates and the rate of inflation;
	●	governmental trade, monetary, tax and fiscal policies;
	●	the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;
	●	changes in borrowers' credit risks and payment behaviors;
	●	the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates;
	●	the performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, the strength of the commercial real estate market in our Indiana markets, and recent changes in retail and office usage patterns;
	●	risk of cybersecurity attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;
	●	the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;
	●	the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
	●	the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;
	●	the effects of disruption and volatility in capital markets on the value of our investment portfolio;
	●	changes in the prices, values and sales volumes of residential real estate;
	●	changes in the scope and cost of FDIC insurance, the state of Indiana's Public Deposit Insurance Fund and other coverages;
	●	the impact of litigation and other claims we may be subject to from time to time;
	●	the effects of fraud by or affecting employees, customers or third parties;
	●	changes in the availability and cost of credit and capital in the financial markets;
	●	changes in technology or products that may be more difficult or costly, or less effective than anticipated;
	●	changes in accounting policies, rules and practices;
	●	the risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; and
	●	the risks noted in the Risk Factors discussed in the Company's Form S-1, filed with the SEC on July 18, 2025, as well as other risks and uncertainties set forth from time to time in the Company's other filings with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.