FARMERS & MERCHANTS BANCORP INC

Previous wording

Certain amounts within the noninterest income and noninterest expense section of the Company's consolidated statements of income have been reclassified to conform with current year presentation to provide additional information to the reader.

Current wording

Certain 2024 and 2023 amounts within the loans disclosure (Note 4) and the loan section of Management's Discussion and Analysis have been reclassified to conform with current year presentation to provide additional information to the reader. The reclassifications had no effect on income.

Previous wording

The discussion now centers on the individual line items of the Company's consolidated statement of income and their effect on net income. This section will focus on the most traditional source of revenue contributing to the profitability of the Company which is net interest income.

Current wording

The discussion now centers on the individual line items of the Company's consolidated statement of income and their effect on net income. This section will focus on the most traditional and impactful source of revenue contributing to the profitability of the Company which is net interest income.

Previous wording

In 2024, the focus was on increasing profitability while also repositioning the balance sheet. The effects of which can be seen in the improvement of $4.5 million to net interest income as compared to 2023. Total interest income increased $23.8 million which was offset by increased interest expense of approximately $19.3 million. Interest and fee income from loans were responsible for $16.0 million of the improved interest income with rate accounting for 78.6% of this increase. Average loan balances increased $65.7 million from the prior year and accounted for 21.4% of the increased loan interest income. As of December 31, 2024, the Company’s loan portfolio was 36.0% variable with 31.4% of total loans subject to repricing within the next twelve months. The security portfolio, used for purposes of liquidity and contingency planning as a means of balance sheet gap management, increased $11.8 million in average during 2024 as compared to 2023 with associated interest income increasing $1.9 million over 2023. Average federal funds sold and interest bearing deposit balances increased $91.3 million as compared to the prior year and generated an additional $5.9 million in interest income. During 2024, the prime rate decreased 50 basis points in September and 25 basis points in both November and December to end the year at 7.50%.

Current wording

In 2024, the focus was on increasing profitability while also repositioning the balance sheet. The effects of which can be seen in the improvement of $4.5 million to net interest income as compared to 2023. Total interest income increased $23.8 million which was offset by increased interest expense of approximately $19.3 million. Interest and fee income from loans were responsible for $16.0 million of the improved interest income with rate accounting for 78.6% of this increase. Average loan balances increased $65.7 million from the prior year and accounted for 21.4% of the increased loan interest income. As of December 31, 2024, the Company’s loan portfolio was 36.0% variable with 31.4% of total loans subject to repricing within the next twelve months. The Company’s loan portfolio on December 31, 2023, was 31.6% variable with 24.9% of total loans repricing within the next twelve months. The security portfolio, used for purposes of liquidity and contingency planning as a means of balance sheet gap management, increased $11.8 million in average during 2024 as compared to 2023 with associated interest income increasing $1.9 million over 2023. Average federal funds sold and interest-bearing deposit balances increased $91.3 million as compared to the prior year and generated an additional $5.9 million in interest income. During 2024, the prime rate decreased 50 basis points in September and 25 basis points in both November and December to end the year at 7.50%.

Previous wording

One of the largest factors of the reduced earnings for 2023 as compared to 2022 was the decrease in net interest income of $5.4 million. Increases in average balances and interest rates led to an increase in interest income of approximately $38.7 million which was absorbed by an increase in interest expense of $44.0 million. Loan interest and associated fee income increased $35.1 million as compared to the prior year with 54.2% of it driven by volume. The growth in average loan balances of $417.8 million over 2022 was 5.0% related to organic growth within the Bank's broader markets and 4.5% directly attributable to the Company's recent acquisitions. The Company’s loan portfolio at December 31, 2023, was 31.6% variable with 24.9% of total loans repricing within the next twelve months. Average balances on the security portfolio decreased $28.6 million as compared to 2022 with an increase in interest income of $612 thousand. As securities matured, the balances were used to fund loan growth. During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. In 2023 with the higher interest rates, interest income on federal funds sold and interest bearing bank deposits generated an additional $3.0 million over 2022. Beginning in March of 2022, the prime rate increased 25 basis points followed by a 50 basis point increase in May, four 75 basis point increases in June, July, September and November with a final 50 basis point increase in December to end the year at 7.50%. In 2023, there were four additional 25 basis point increases in February, March, May and July to end the year at 8.50%. Overall, total interest income was $23.8 million higher for 2024 than 2023 on an additional $168.8 million in total average earning assets and was $38.7 million higher for 2023 than 2022 on an additional $378.9 million in total average earning assets.

Current wording

During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. In 2023, there were four additional 25 basis point increases in February, March, May and July to end the year at 8.50%. Overall, total interest income was $23.8 million higher for 2024 than 2023 on an additional $168.8 million in total average earning assets.

Previous wording

Interest expense (which includes deposit, federal funds purchased, securities sold under agreement to repurchase, borrowed funds and subordinated notes) increased from all interest bearing funding sources with the exception of federal funds purchased and securities sold under agreement to repurchase in 2024 over 2023 and all funding sources in 2023 over 2022. Average interest bearing liabilities increased $183.3 million over 2023 with approximately $19.3 million additional interest expense while average interest bearing liabilities increased $366.4 million over 2022 with an additional $44.0 million of interest expense. Overall, the funding goal the last three years has been to grow core deposits. Two strategies have been employed through the years, one of allowing expensive time deposits to run off until needed for funding and secondly to offer new non-interest bearing deposit products. Both of these strategies were designed to assist in controlling interest expense in a rising rate environment. In 2024 and 2023, liquidity needs and loan growth created the need to quickly generate deposits. Competition within the market areas forced us to increase rates for deposits during the three year time period. Between 2022 and 2023, the prime rate increased 525 basis points and decreased 100 basis points in 2024. Average interest bearing deposits increased $149.0 million compared to 2023 and $230.4 million compared to 2022. During 2024, interest expense from deposits increased by $17.5 million from 2023 and 2023 increased by $37.0 million from 2022. The majority, 81.7%, of the increased deposit expense of 2024 and 95.5%, of the increased expense of 2023 was influenced by rates rather than due to additional cost associated with deposit growth. Borrowed fund balances increased in 2024 and 2023 by $41.9 million and $145.8 million, respectively, as a means to fund the loan growth which resulted in an additional interest expense of $2.1 million and $6.7 million, respectively. During 2021, the Company issued subordinated notes and incurred $1.1 million of interest expense in both 2024 and 2023. Refer to Note 10 of the Company’s consolidated financial statements for further discussion regarding subordinated notes.

Current wording

For 2024, average interest-bearing liabilities increased $183.3 million over 2023 with approximately $19.3 million additional interest expense. Overall, the funding goal the last three years has been to grow core deposits. Two strategies have been employed through the years, one of allowing expensive time deposits to run off until needed for funding and secondly to offer new noninterest-bearing deposit products. Both strategies were designed to assist in controlling interest expense while also providing funding for loan growth. In 2024 and 2023, liquidity needs and loan growth created the need to quickly generate deposits. Competition within the market areas forced us to increase rates for deposits during the prior two years. In 2024, average interest-bearing deposits increased $149.0 million compared to 2023. During 2024, interest expense from deposits increased by $17.5 million from 2023. The majority, 81.7%, of the increased deposit expense of 2024 and 95.5%, of the increased expense of 2023 was influenced by rates rather than due to additional cost associated with deposit growth. Borrowed fund balances increased in 2024 $41.9 million as a means to provide liquidity which resulted in an additional interest expense of $2.1 million.

Previous wording

Total interest expense totaled $77.7, $58.4 and $14.4 million for 2024, 2023 and 2022, respectively. The increased expense was approximately 76.2% attributable to the higher interest rate environment in 2024 as compared to 2023 and 87.2% attributable to the rising interest rate environment in 2023 as compared to 2022.

Current wording

Total interest expense equaled $69.3, $77.7, and $58.4 million for 2025, 2024, and 2023, respectively. The decreased expense for 2025 as compared to 2024 was 79.1% due to change in rates being paid in a falling rate environment. The increased expense was approximately 76.2% attributable to the higher interest rate environment in 2024 as compared to 2023.

Previous wording

Overall, we have seen a decrease in the net interest margin and spread comparing 2022 to 2024. The increased interest expense of 2024 resulted in interest margin remaining flat while interest spread decreased 9 basis points compared to 2023 due to the cost of funds increasing more than the increase in asset yield. Interest margin decreased by 60 basis points and interest spread decreased by 99 basis points in 2023 as compared to 2022 with the increased cost of funds outpacing the increased asset yield. For 2024, average loan balances increased $65.7 million over the prior year with increased interest income of $16.0 million. In 2024, the Bank was able to see the impact of a higher rate environment with 78.6% of the increased interest income related to rate changes as presented in the charts below. Average balances of federal funds sold and interest bearing deposits with other institutions increased $91.3 million and increased interest rates generated an additional $5.9 million in interest income over 2023. The overall asset yield for 2024 increased 50 basis points as compared to 2023. Looking at the components behind the change in net interest margin for 2023 as compared to 2022, increased average balances in loans of $417.8 million over the prior year contributed to increased interest income of $35.1 million with volume responsible for 54.2% of the increase as presented in the charts below. The large revenue gain in loan interest was aided by the increased earnings from federal funds sold and interest bearing deposits of $3.0 million with decreased average balances of $10.3 million as the funds were used for loan growth. The overall asset yield in 2023 increased by 80 basis points over 2022.

Current wording

The increased interest expense of 2024 resulted in the net interest margin remaining flat while interest spread decreased 9 basis points compared to 2023 due to the cost of funds increasing more than the increase in asset yield. For 2024, average loan balances increased $65.7 million over the prior year with increased interest income of $16.0 million. In 2024, the Bank was able to see the impact of a higher rate environment with 78.6% of the increased interest income related to rate changes as presented in the charts below. Average balances of federal funds sold and interest-bearing deposits with other institutions increased $91.3 million and increased interest rates generated an additional $5.9 million in interest income over 2023. The overall asset yield for 2024 increased 50 basis points as compared to 2023.

Previous wording

For 2024, interest expense continued to increase and was 33.0% higher than 2023 and was 76.2% impacted by changes in interest rates. Competition for deposits continued to be extremely high and rate shopping between financial institutions was apparent. The Company’s goal is to increase core deposits which includes savings deposits which increased $126.0 million while non-interest bearing demand deposits decreased $14.8 million in average balances, respectively as compared to 2023. In 2024, time deposits increased $41.9 million in average balances year over year. The increased interest expense in 2024 for savings deposits and time deposits accounted for 91.1% of the total interest expense increase. Overall, cost of funds increased 59 basis points or

Current wording

For 2024, interest expense continued to increase and was 33.0% higher than 2023 and was 76.2% impacted by changes in interest rates. Competition for deposits continued to be extremely high and rate shopping between financial institutions was apparent. The Company’s goal was to increase core deposits, including savings deposits, which increased $126.0 million while noninterest-bearing demand deposits decreased $14.8 million in average balances, respectively as compared to 2023. In 2024, time deposits increased $41.9 million in average balances year over year. The increased interest expense in 2024 for savings deposits and time deposits accounted for 91.1% of the total interest expense increase. Overall, cost of funds increased 59 basis points or 23.3% over 2023 with only 23.8% due to volume increases. The remaining 76.2% was related to changes in interest rates.

Previous wording

The Company will always prefer to see improvement in real dollars over percentages. The strategy for increasing core deposits, in order to mitigate the higher cost of funds and to continue the opportunity for fee dollars from services provided, continues to be a top focus for 2025.

Current wording

The Company will always prefer to see improvement in real dollars over percentages. The strategy for increasing core deposits, to mitigate the higher cost of funds and to continue the opportunity for fee dollars from services provided, continues to be a top focus for 2026.

Previous wording

Total assets of the Company increased overall as did the earning assets in both average and year-end during 2024 and 2023. This matched the increase in interest dollars. The percentage of average earning assets to total average assets reflects the best utilization of funds. For 2024, the percentage at 95.06% was higher than 2023 at 93.81%. The addition of new offices increased the non-earning assets with cash balances held at the new offices and also the investment in the capital assets of their building and furniture. One of the things that has helped to improve the profitability over the years was the percentage of average loans to total assets. For 2024, the average balance of loans to total average assets was 76.82%, 78.02% for 2023 and 74.73% for 2022. Loans are the highest yielding asset for the Company.

Current wording

Total assets of the Company increased overall as did the earning assets in both average and year-end during 2025 and 2024. This matched the increase in interest dollars. The percentage of average earning assets to total average assets reflects the best utilization of funds. The total increase in average earning assets was $19.1 million with the ratio of earning assets to assets decreasing to 94.63% versus 95.06% for 2024. The ratio was 93.81% for 2023. For 2023 and 2025, the addition of new offices increased the non-earning assets with cash balances held at the new offices and the investment in the capital assets of their building and furniture. One office in Troy, MI was added in 3 rd quarter 2025. One of the areas that has helped to improve the profitability over the years was the percentage of average loans to total assets. For 2025, the average balance of loans to total average assets was 78.25%, 76.82% for 2024 and 78.02% for 2023. Overall yield improves when the balances of the highest yielding asset, which is loans, increases. The goal is, as always, to improve the net interest margin and spread and thereby improve profitability.

Previous wording

Net interest spread is the difference between what the Company earns on its assets and what it pays on its liabilities. It is generally from this spread that the Company must fund its operations and generate profit. When the asset yield decreases so must funding costs in order to maintain profitability. It becomes increasingly challenging as the asset yield gets closer to the prime lending rate, or the break-even point, of operations. In a rising rate environment, the challenge is to hold the cost steady while allowing time for the asset portfolio to rise. Floors and ceilings on variable products also impact the level of increase in either scenario. The floors provide yield protection in a lower rate environment while the rising rates will not benefit the asset yield until the spread plus prime is higher than the floor. The challenge is to increase the spread during renewals and on new loans. After the rate hikes in 2022 and 2023, the majority of loans have increased over the floors.

Current wording

Net interest spread is the difference between what the Company earns on its assets and what it pays on its liabilities. It is generally from this spread that the Company must fund its operations and generate profit. When the asset yield decreases so must funding costs in order to maintain the same profitability. It becomes increasingly challenging as the asset yield gets closer to the prime lending rate, or the break-even point, of operations. In a rising rate environment, the challenge is to hold the cost steady while allowing time for the asset portfolio to rise. Floors and ceilings on variable products also impact the level of increase in either scenario. The floors provide yield protection in a lower rate environment while the rising rates will not benefit the asset yield until the spread plus prime is higher than the floor. The challenge is to increase the spread during renewals and on new loans.

Previous wording

The following tables present net interest income, interest spread and net interest margin for the three years 2022 through 2024, comparing average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense. The tables show the corresponding average rates of interest earned and paid. Average outstanding loan balances include non-performing loans, real estate loans held for sale and carrying value adjustments related to interest rate swaps of $1.1 and $2.7 million for 2024 and 2023, respectively. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities. The average cost of funds for 2024 was 3.12%, 59 basis points higher than 2023’s 2.53%.

Current wording

The following tables present net interest income, interest spread and net interest margin for the three years 2023 through 2025, comparing average outstanding balances of earning assets and interest-bearing liabilities with the associated interest income and expense. The tables show the corresponding average rates of interest earned and paid. Average outstanding loan balances include non-performing loans, real estate loans held for sale and carrying value adjustments related to interest rate swaps of $1.7, $1.1, and $2.7 million for 2025, 2024 and 2023, respectively. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities.

Previous wording

The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has also been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also within the net interest spread and margin. The adjustments were based on a 21% tax rate for all years. The tax-exempt interest income was $503, $590 and $614 thousand for 2024, 2023 and 2022, respectively which resulted in a federal income tax savings of $106, $124 and $129 thousand, respectively.

Current wording

The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has also been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also within the net interest spread and margin. The adjustments were based on a 21% tax rate for all years. The tax-exempt interest income was $697, $503, and $590 thousand for 2025, 2024 and 2023, respectively which resulted in a federal income tax savings of $121, $106, and $124 thousand, respectively.

Previous wording

The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2022 through 2024. For 2024, noninterest income was $15.6 million, a decrease of $284 thousand or 1.8% from 2023. Noninterest income increased $109 thousand, or 0.7% in total for 2023 as compared to 2022 which ended at $15.8 million.

Current wording

The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2023 through 2025. For 2025, noninterest income was $17.1 million, an increase of $1.5 million or 9.7% from 2024. Noninterest income decreased $284 thousand or 1.8% in total for 2024 as compared to 2023 which ended at $15.9 million.

Previous wording

The Bank has long promoted the use of debit cards by its customers and continues to build on that philosophy with the introduction of new products. Interchange revenue and fees collected on foreign ATM usage (noncustomers utilizing our ATMs) increased $78 thousand to $5.4 million during 2024 as compared to 2023. During 2023, these revenues increased to $5.3 million as compared to $5.0 million during 2022. 2024 included a Mastercard growth credit of $213 thousand. For 2023, the Mastercard growth credit was $196 thousand and $188 thousand for 2022. In December of 2019, the Bank became a principal with MasterCard and received a $1.75 million signing bonus. The signing bonus was based on achieving $1.1 billion in signature transactions over five years. The bonus was recognized over 60 months with $319 thousand included in 2024 and $351 thousand included in 2023 and 2022’s $5.4 million, $5.3 million and $5.0 million, respectively. While this revenue stream continues to improve with more depositors using electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the noninterest expense section regarding the net effect of debit card activity.

Current wording

Interchange revenue and fees collected on foreign ATM usage (noncustomers utilizing our ATMs) continues to be a significant contributor to overall noninterest income at $5.2 million for 2025 which was a decrease of $168 thousand when comparing to 2024. Interchange revenue increased $78 thousand to $5.4 million during 2024 as compared to 2023. Included in interchange revenue is a Mastercard growth credit of $240 thousand, $213 thousand and $196 thousand for 2025, 2024 and 2023, respectively. In December of 2019, the Bank became a principal with Mastercard and received a $1.75 million signing bonus. The signing bonus was based on achieving $1.1 billion in signature transactions over five years. The bonus was recognized over 60 months with $319 thousand included in 2024's $5.4 million and $351 thousand included in 2023’s $5.3 million. While more depositors are using electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the noninterest expense section regarding the net effect of debit card activity.

Previous wording

Loan servicing income decreased $1.9 million during 2024 as compared to 2023. The establishment of agricultural real estate servicing rights during 2023 recognized $2.3 million of servicing income that was not present in prior years. Loan servicing income was $4.4 million during 2023 as compared to $2.2 million for 2022.

Current wording

Loan servicing income increased $346 thousand as compared to 2024. Capitalized servicing rights for 1-4 family real estate loans and agricultural real estate loans accounted for $277 thousand of the increase. Loan servicing income decreased $1.9 million during 2024 as compared to 2023. The establishment of agricultural real estate servicing rights during 2023 recognized $2.3 million of servicing income that was not present in prior years.

Previous wording

The Bank has seen an increase in its mortgage production volume and the corresponding gains on the sale of these loans. Loan originations driven by refinance activity decreased with the higher interest rates in 2023. Noninterest income from net gain on sales of loans was the highest in 2022 of the three year periods shown. Net gain on sales of loans was $859 thousand, $699 thousand and $1.4 million, respectively in 2024, 2023 and 2022. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans. 45.9% of the gains were attributed to the residential loans in 2024. 84.3% of the gains were attributed to the residential loans in 2023 and 37.6% in 2022. In conjunction with these sales, the Bank maintains servicing rights. The income from one to four mortgage servicing rights was $502 thousand, $415 thousand and $537 thousand for 2024, 2023 and 2022 respectively. Agriculture mortgage servicing rights income was $324 thousand and $2.3 million in 2024 and 2023, respectively.

Current wording

The Bank has seen an increase in its mortgage production volume and the corresponding gains on the sale of these loans. Loan originations have increased from $36.4 million in 2023 to $53.7 million in 2024 to $62.8 million in 2025 as a direct result of lower interest rates. Net gain on sales of loans was $1.3 million, $859 thousand and $699 thousand in 2025, 2024 and 2023, respectively. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans. Residential loans contributed to 39.8% of the gains in 2025, 45.9% in 2024 and 84.3% in 2023. In conjunction with these sales, the Bank maintains servicing rights. The income from one to four mortgage servicing rights was $645 thousand, $502 thousand and $415 thousand for 2025, 2024 and 2023, respectively. Agriculture mortgage servicing rights income was $458 thousand, $324 thousand and $2.3 million in 2025, 2024 and 2023, respectively.

Previous wording

The cash surrender value of bank owned life insurance increased $131 thousand or 15.7% in 2024 compared to 2023 and $143 thousand or 20.7% in 2023 over 2022.

Current wording

The cash surrender value of bank owned life insurance increased $405 thousand or 42.0% as compared to 2024, the result of an additional purchase of $18.0 million of bank owned life insurance in October 2025, and $131 thousand or 15.7% in 2024 compared to 2023.

Previous wording

The last item in the noninterest income section is the net gain or loss on sale of investments. During the first quarter of 2023, securities were swapped at a loss of $891 thousand with securities with a higher annual yield. The loss was recouped by the higher yield during the first eight months of 2023. The Bank did not sell any securities in 2024 or 2022. The available for sale security portfolio switched from an unrealized gain position in 2020 into an unrealized loss position in 2021 that continued through 2024.

Current wording

The last item in the noninterest income section is the net gain or loss on sale of investments. During the first quarter of 2023, securities were swapped at a loss of $891 thousand with securities with a higher annual yield. The loss was recouped by the higher yield during the first eight months of 2023. The Bank did not sell any securities in 2025 or 2024. The available-for-sale security portfolio has improved to approximately a $15.0 million unrealized loss position as of December 31, 2025, from a $36.7 million unrealized loss position as of December 31, 2023.

Previous wording

Noninterest expense increased 2.2% in 2024 as compared to 2023 and was preceded by a 16.9% increase in 2023 as compared to 2022. Represented in dollars, 2024 was $1.5 million higher than 2023 and 2023 was $9.7 million higher than 2022. Acquisition costs incurred in 2023 and 2022 totaled $208 thousand and $2.5 million, respectively with expenses being recorded in multiple line items. There were no acquisition costs in 2024. The largest factor behind the increase in both years was the expense of employee salaries and wages. During 2024, an additional $3.3 million was spent over 2023 which correlates to a 12.1% increase. When making the same analysis for 2023 as compared to 2022, 2023’s costs increased $4.2 million or 18.6%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives comprised of the expense of restricted stock awards and performance incentives. 2024 saw an increase due to our continued investment in people and staffing needs. 2023 saw an increase due to the investment in people for our strategic growth initiative and staffing of new offices. 2022 increased with the acquisition of Peoples Federal Savings and Loan offices. Normal yearly increases to the employees were included in all years. Base pay was up $1.4 million for 2024 over the previous year and 2023 was up $4.7 million over 2022. The full time equivalent number of employees at each year-end increased to 473 for 2024, 456 for 2023 and to 431 for 2022.

Current wording

Noninterest expense increased 11.8% in 2025 to $76.8 million as compared to 2024 and was preceded by a 2.2% increase in 2024 as compared to 2023. Represented in dollars, 2025 was $8.1 million higher than 2024 and 2024 was $1.5 million higher than 2023. One of the largest factors behind the increase in both years was the expense of employee salaries and wages. During 2025, an additional $1.4 million was spent over 2024 which correlates to a 4.7% increase. When making the same analysis for 2024 as compared to 2023, 2024’s costs increased $3.3 million or 12.1%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives comprised of restricted stock award expense and performance incentives. 2025 and 2024 saw an increase due to our continued investment in people and staffing needs. Normal yearly increases to the employees were included in all years. Base pay was up $1.6 million for 2025 over the previous year and 2024 was up $1.4 million over 2023. The offsetting deferred cost increased $791 thousand in 2025 as compared to 2024 and $433 thousand in 2024 as compared to 2023. The full time equivalent number of employees at each year-end increased to 474 for 2025, 473 for 2024 and 456 for 2023.

Previous wording

Incentive pay as it relates to performance was up $2.2 million in 2024 over 2023 and down $1.7 million in 2023 over 2022. The Return on Assets multiple used to award incentive pay increased in 2024 to 1.043 compared to 0.36 in 2023 and 1.196 in 2022. In 2022, acquisition costs were excluded from the calculation. The expense for the restricted stock awards increased in 2024 even though 4,056 fewer shares were granted. This was due to higher market value rates and $108 thousand for the acceleration of stock awards for executive retirements. Restricted stock award expense increased in total $79 thousand in 2024 over 2023. Restricted stock awards expense increased in 2023 due to more shares being granted to a slightly larger number of employees. 7,729 additional shares were awarded in 2023 with lower market values. The expense for 2023 increased by $382 thousand over 2022 with $28 thousand due to the acceleration of stock awards. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 12 of the consolidated financial statements.

Current wording

Incentive pay as it relates to performance was up $533 thousand in 2025 over 2024 and $2.2 million in 2024 over 2023. The Return on Assets multiple used to award incentive pay increased in 2025 to 1.135 compared to 1.043 in 2024 and 0.36 in 2023. The expense for the restricted stock awards increased in 2025 due to an additional 504 shares granted, a higher market price and $34 thousand for the acceleration of stock awards for retirement. Restricted stock award expense increased in 2024 even though 4,056 fewer shares were granted. This was due to higher market value rates and $108 thousand for the acceleration of stock awards for executive retirements. Restricted stock award expense increased in total $34 thousand in 2025 over 2024 and $79 thousand in 2024 over 2023. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 12 of the consolidated financial statements.

Previous wording

Employee benefits expense increased in 2024 as compared to 2023. The 401-K retirement plan accounted for the largest portion of the increase, which was an increase of $601 thousand over 2023. The contribution portion relating to the discretionary profit-sharing percentage was 4.5% in 2024 compared to 1.7% in 2023. Overall, employee benefits increased $1.0 million or 13.6% from 2023.

Current wording

Employee benefits expense increased $785 thousand or 9.2% in 2025 as compared to 2024. Employee group insurance expense with an increase of $571 thousand accounted for the largest portion of the increase. Employers FICA expense increased $225 thousand for 2025. The cost of the 401(k) retirement plan decreased $7 thousand for 2025 as compared to 2024. The contribution portion relating to the discretionary profit-sharing percentage was 4.40% in 2025. Employee benefits expense increased in 2024 as compared to 2023. The 401(k) retirement plan accounted for the largest portion of the increase, which was an increase of $601 thousand over 2023. The contribution portion relating to the discretionary profit-sharing percentage was 4.5% in 2024 compared to 1.7% in 2023. Overall, employee benefits increased $1.0 million or 13.6% from 2023.

Previous wording

Net occupancy expense typically increases as the Company expands. Net occupancy expense increased for 2024 $319 thousand and increased $1.3 million in 2023. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. For 2024, building rent as generated from FM Investments decreased by $195 thousand. Rent is received in lieu of commissions. This revenue was able to partially offset increased building repair and maintenance expenses of $39 thousand and lease expense of $439 thousand and increased building depreciation expense of $328 thousand. Building rent as generated by FM Investments was higher by $94 thousand in 2023 which offset increased building repair and maintenance expenses of $113 thousand. Net occupancy expense increased for 2023 $1.3 million over 2022.

Current wording

Net occupancy expense typically increases as the Company expands. Net occupancy expense increased $278 thousand for 2025 and $319 thousand in 2024. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. Building rent as generated from FM Investments increased by $125 thousand in 2025 as compared to 2024. Rent is received in lieu of commissions. This revenue was able to partially offset increased lease expense of $147 thousand, utilities of $116 thousand, building repair and maintenance expenses of $76 thousand and building depreciation of $43 thousand. Building rent as generated by FM Investments was higher by $195 thousand in 2024 which offset increased lease expense of $439 thousand, building depreciation expense of $328 thousand and building repair and maintenance expenses of $39 thousand.

Previous wording

Furniture and equipment steadily increase as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry.

Current wording

Furniture and equipment steadily increase as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry. Furniture and fixture expense increased $312 thousand for 2025 as compared to 2024 with increased maintenance contracts of $399 thousand and repairs of $75 thousand which were offset by decreased depreciation of $132 thousand and rental expenses of $21 thousand. For 2024, furniture and fixtures increased $242 thousand over 2023 with increased maintenance contracts of $192 thousand and depreciation of $63 thousand offset by decreased rental expenses of $15 thousand.

Previous wording

Data processing costs were lower in 2024 as compared to 2023 by $1.7 million as a result of using credits from the 67 month amended agreement commencing on January 1, 2024. Data processing costs were lower in 2023 as compared to 2022 by $808 thousand. As the pricing on many services is based on number of accounts which the Bank fully expects to increase with the growth from the newer offices and overall Bank growth, data processing costs are expected to increase.

Current wording

The largest noninterest expense increase for 2025 as compared to 2024 was data processing costs at $2.2 million. ATM expense also increased $923 thousand over 2024. Both expense lines had a much smaller usage of flex credits as compared to 2024. Beginning in December of 2025, flex credits of $75 thousand per month will be used until they are exhausted in August of 2028. Data processing costs and ATM expense were lower in 2024 as compared to 2023 by $1.7 million and $941 thousand, respectively, as a result of using credits from the 67 month amended agreement commencing on January 1, 2024. Some of the flex credits may be used on a wide range of services while others are product specific. As the pricing on many services is based on number of accounts which the Bank fully expects to increase with the growth from the newer offices and overall Bank growth, data processing costs are expected to increase. Included in ATM expense are the debit card fees incurred which offset the debit card income as discussed in the noninterest income section.

Previous wording

Advertising and public relations decreased in 2024 by $463 thousand and increased in 2023 by $961 thousand. With the addition of new offices and our new logo launch, 2023 increased over 2022.

Current wording

Advertising and public relations only increased $55 thousand as compared to 2024 and decreased in 2024 by $463 thousand as compared to 2023. 2023 included additional expenses related to new office and the launch of our new logo.

Previous wording

The FDIC assessment increased from 2023 due to an increased assessment base while 2023 increased as compared to 2022 also due to an increased assessment base. With continued growth, the assessment base increases which leads to a greater expense. 2024’s assessment was $127 thousand over 2023. The assessment for 2023 was up $1.1 million compared to 2022.

Current wording

FDIC assessments decreased $390 thousand in 2025 from 2024 due to a decrease in the quarterly assessment multiplier. 2024 FDIC assessments increased $127 thousand due to an increase in the assessment base as compared to 2023. With continued growth, the assessment base increases which can lead to a greater expense.

Previous wording

A correlating expense to the Company's refinancing activity as it relates to loans sold to the secondary market, is the amortization of servicing rights. The amortization is the expense that offsets the income recognized when the loan is first made. Income is recorded when the real estate loan is first sold with servicing retained and is therefore recognized immediately. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. Prior to 2023, servicing rights only included 1-4 family real estate loans. The establishment of agricultural real estate servicing rights, incorporated in the table below for 2023, included capitalized additions of $2.3 million and corresponding amortization of $123 thousand. For 2024, combined servicing rights yielded a net income of $98 thousand along with the establishment of a $97 thousand valuation allowance. For 2023, combined servicing rights yielded a net income of $2.1 million along with the establishment of a $7 thousand valuation allowance. 2022 had a net loss of $22 thousand which excluded the reversal of the $414 thousand valuation allowance established the prior year. Of course, the value (or income) of the servicing right when the loans are sold also impacts the net position. As of December 31, 2024, 3,677 1-4 family real estate loans and 619 agricultural loans are being serviced with corresponding balances of $364.3 million and $141.9 million, respectively. At December 31, 2023, 3,749 1-4 family real estate loans and 593 agricultural loans were being serviced with corresponding balances of $367.8 million and $135.8 million, respectively. 2022 had 3,861 loans serviced with corresponding balances of $375.6 million.

Current wording

A correlating expense to the Company's refinancing activity as it relates to loans sold to the secondary market, is the amortization of servicing rights for 1-4 family real estate loans and agricultural real estate loans. The amortization is the expense that offsets the income recognized when the loan is first sold. Income is recorded when the real estate loan is first sold with servicing retained and is therefore recognized immediately. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. During 2025, combined servicing rights yielded a net loss of $305 thousand which included an increase to the valuation allowance of $786 thousand of which all but $3 thousand was attributable to agricultural real estate servicing rights. For 2024, combined servicing rights yielded a net income of $98 thousand along with the establishment of a $97 thousand valuation allowance. For 2023, combined servicing rights yielded a net income of $2.1 million along with the establishment of a $7 thousand valuation allowance. Included in the capitalized additions for 2023 was $2.3 million for the initial establishment of agricultural real estate servicing rights offset by corresponding amortization of $123 thousand. The value (or income) of the servicing right when the loans are sold also impacts the net position. As of December 31, 2025, 3,597 1-4 family real estate loans and 658 agricultural loans were being serviced with corresponding balances of $362.6 million and $153.4 million, respectively. At December 31, 2024, 3,677 1-4 family real estate loans and 619 agricultural loans were being serviced with corresponding balances of $364.3 million and $141.9 million, respectively. At December 31, 2023, 3,749 1-4 family real estate loans and 593 agricultural loans were being serviced with corresponding balances of $367.8 million and $135.8 million, respectively.

Previous wording

The total allowance for credit losses (ACL) represents management’s estimate of expected credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. The ACL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.

Current wording

The total allowance for credit losses (ACL) represents management’s estimate of expected credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. Please see Note 1 in the consolidated financial statements for additional information related to the ACL.

Previous wording

Provision expense decreased by $754 thousand for 2024 as compared to 2023 and decreased by $2.9 million for 2023 as compared to 2022. Sustained strong asset quality and reduced loan balances kept the provision expense lower. Management continues to monitor asset quality, making adjustments to the provision as necessary. Total net charge-offs were $142, $551 and $529 thousand for 2024, 2023 and 2022, respectively. The consumer portfolio had the largest charge-off activity during 2024 at $346 thousand which was down from $425 and $409 thousand in 2023 and 2022, respectively. The commercial and industrial portfolio had $106 thousand of charge-offs in 2024; however, had the highest level of charge-off activity in 2023 and 2022 at $565 and $418 thousand, respectively. Consumer recoveries were $189, $197 and $169 thousand for 2024, 2023 and 2022, respectively with commercial and industrial recoveries $133, $84 and $93 thousand for the same time periods, respectively. Consumer net charge-offs were $157, $228 and $240 thousand in 2024, 2023 and 2022, respectively. Net charge-offs in the commercial and industrial portfolio were $481 and $325 thousand in 2023 and 2022, respectively with 2024 being a net recovery of $27 thousand.

Current wording

Provision expense increased by approximately $1.7 million for 2025 as compared to 2024 and decreased by $754 thousand for 2024 as compared to 2023. The increase in provision for 2025 was attributed to loan growth, net charge-off activity, a rise in nonaccrual loans and adjustments to qualitative factors reflecting elevated credit risk in certain portfolio segments. Sustained strong asset quality and reduced loan balances kept the provision expense lower in 2024. Management continues to monitor asset quality, making adjustments to the provision as necessary. Total net charge-offs were $734, $142 and $551 thousand for 2025, 2024 and 2023, respectively. The consumer portfolio segment had the largest charge-off activity during 2025 at $758 thousand which was up from $346 and $425 thousand in 2024 and 2023, respectively. Of the total 2025 consumer charge-offs, $364 thousand was for automobiles and trucks and $157 thousand was for recreational vehicles. The commercial and industrial portfolio segment had $250 and $106 thousand of charge-offs in 2025 and 2024, respectively; however, had the highest level of charge-off activity in 2023 at $565 thousand. The 2025 commercial and industrial charge-offs were for four relationships with one of the relationships accounting for approximately 59% of the total. Consumer recoveries were $221, $189 and $197 thousand for 2025, 2024 and 2023, respectively. Of the total 2025 consumer recoveries, $53 thousand was for automobiles and trucks and $60 thousand was for recreational vehicles. Consumer net charge-offs were $537, $157 and $228 thousand in 2025, 2024 and 2023, respectively. Net charge-offs in the commercial and industrial portfolio segment were $216 and $481 thousand in 2025 and 2023, respectively with 2024 being a net recovery of $27 thousand.

Previous wording

Watch list loan balances are comprised of loans graded 5-8. At year-end December 31, 2024, these loans totaled $66.5 million and were $38.4 million lower than December 31, 2023. Commercial real estate, agricultural real estate and commercial loans comprised $49.6 million, $6.1 million and $5.2 million of the watch list loans, respectively. Grade 5 decreased $62.9 million in 2024 as compared to 2023 and Grade 6 increased $24.9 million in the same comparison. There were no Grade 7 loans at December 31, 2024, a decrease of $257 thousand from 2023.

Current wording

At year-end December 31, 2024, these loans totaled $66.5 million and were $38.4 million lower than December 31, 2023. Commercial real estate, agricultural real estate and commercial loans comprised $49.6 million, $6.1 million and $5.2 million of the watch list loans, respectively. Grade 5 decreased $62.9 million in 2024 as compared to 2023 and Grade 6 increased $24.9 million in the same comparison. There were no Grade 7 loans at December 31, 2024, a decrease of $257 thousand from 2023. At December 31, 2024, of the $66.5 million watch list loans, 25.1% were classified as special mention and 74.9% were classified as substandard. No loans were classified as doubtful.

Previous wording

At year-end December 31, 2023, these loans totaled $104.9 million and were $44.9 million higher than December 31, 2022. Grade 5 increased $54.9 million in 2023 as compared to 2022 and Grade 6 decreased $10.4 million in the same comparison. Grade 7 increased $257 thousand over 2022.

Current wording

At year-end December 31, 2023, these loans totaled $104.9 million and were $44.9 million higher than December 31, 2022. Grade 5 increased $54.9 million in 2023 as compared to 2022 and Grade 6 decreased $10.4 million in the same comparison. Grade 7 increased $257 thousand over 2022. Of the aggregate watch list loan balances, as of December 31, 2023, 75.8% of the watch list was classified as special mention, with an additional 23.8% classified as substandard and a small 0.2% or $257 thousand of the $104.9 million watch list was classified as doubtful.

Previous wording

In response to these fluctuations and the offset by loan growth during 2022 through 2024, the Bank’s ACL to outstanding loan coverage percentage changed to 1.01% as of December 31, 2024, 0.97% as of December 31, 2023 and 0.86% as of December 31, 2022. In addition, for 2023 and 2022, our allowance for credit losses does not include a $363 thousand and $785 thousand credit mark associated with the Limberlost acquisition. No credit mark for Limberlost remained at December 31, 2024. For 2024, 2023 and 2022, our allowance for credit losses also does not include a $107 thousand, $294 thousand or $480 thousand credit mark associated with the Ossian acquisition. The credit mark not included in the allowance for credit losses associated with the Perpetual Federal Savings Bank acquisition for 2024, 2023 and 2022 was $1.5 million, $2.8 million and $4.4 million, respectively. 2024, 2023 and 2022 also include a $335 thousand, $566 thousand and $798 thousand credit mark associated with the Peoples Federal Savings and Loan Bank acquisition. Together, all of the credit marks further support the current position of the ACL.

Current wording

In response to these fluctuations and the offset by loan growth during 2023 through 2025, the Bank’s ACL to outstanding loan coverage percentage changed to 1.02% as of December 31, 2025, 1.01% as of December 31, 2024 and 0.97% as of December 31, 2023. In addition, for 2023, our allowance for credit losses does not include a $363 thousand credit mark associated with the Bank of Geneva acquisition. No credit mark for Bank of Geneva remained at December 31, 2024. For 2024 and 2023, our allowance for credit losses also does not include a $107 thousand or a $294 thousand credit mark associated with the Ossian State Bank acquisition. No credit mark for Ossian State Bank remained at December 31, 2025. The credit mark not included in the allowance for credit losses associated with the Perpetual Federal Savings Bank acquisition for 2025, 2024 and 2023 was $112 thousand, $1.5 million and $2.8 million, respectively. 2025, 2024 and 2023 also include a $104 thousand, $335 thousand and $566 thousand credit mark associated with the Peoples Federal Savings and Loan acquisition. Together, all of the credit marks further support the current position of the ACL.

Previous wording

To establish the specific reserve allocation for real estate, a discount to the market value is established to account for liquidation expenses. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Bank’s

Current wording

To establish the specific reserve allocation for real estate, a discount to the market value is established to account for liquidation expenses. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Bank’s Loan Policy. However, unique or unusual circumstances may be present which will affect the real estate value and, when appropriately identified, can adjust the discounting percentage at the discretion of management.

Previous wording

The ACL increased $131 thousand during 2024 which included an increase to the allowance for credit losses of $802 thousand and a decrease to unfunded loan commitments of $671 thousand. The ACL increased $5.7 million and $4.3 million during 2023 and 2022, respectively. The loans past due 30+ days to total loans percentages were 0.22%, 0.44% and 0.26% for December 31, 2024, 2023 and 2022, respectively.

Current wording

The ACL increased approximately $1.4 million during 2025 which was comprised of an increase to the allowance for credit losses of approximately $1.9 million and a decrease to unfunded loan commitments of $506 thousand. During 2024, the ACL increased $131 thousand which included an increase to the allowance for credit losses of $802 thousand and a decrease to unfunded loan commitments of $671 thousand. The ACL increased $5.7 million during 2023. The loans past due 30+ days to total loans percentages were 0.29%, 0.22% and 0.44% for December 31, 2025, 2024 and 2023, respectively.

Previous wording

Income tax expense was $1.1 million higher for 2024 than 2023 as result of approximately a $4.2 million increase of pretax income. Effective tax rates were 20.37%, 19.63% and 19.67% for 2024, 2023 and 2022 respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $127, $149 and $137 thousand for 2024, 2023 and 2022, respectively less the TEFRA adjustments of $21, $20 and $5 thousand respectively. During 2024, the effect of investments reported under the proportional amortization method was $422 thousand.

Current wording

Income tax expense was $2.6 million higher for 2025 as compared to 2024 as result of increased pretax income of approximately $10.0 million in addition to a taxable $1.3 million gain on cash surrender value of bank owned life insurance policies. For 2024, income tax expense was $1.1 million higher than 2023 due to an increase in pretax income of $4.2 million. Amortization of qualified affordable housing projects as discussed in Note 19 caused income tax expense to increase $436 and $417 thousand for 2025 and 2024, respectively. Effective tax rates were 21.67%, 20.37% and 19.63% for 2025, 2024 and 2023 respectively. Excluding the $280 thousand tax expense from the gain on bank owned life insurance and the amortization of the qualified housing projects, the effective tax rate would have been 20.0% and 19.1% for 2025 and 2024, respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $146, $127 and $149 thousand for 2025, 2024 and 2023, respectively less the TEFRA adjustments of $25, $21 and $20 thousand respectively. Beginning in 2025, the effect of tax-exempt interest also includes 25% of the qualified interest income from loans secured by rural or agricultural real estate. During 2025 and 2024, the effect of investments reported under the proportional amortization method was $436 and $422 thousand, respectively.

Previous wording

*ASU 2016-13 was adopted during the first quarter of 2023; therefore, 2020 through 2022 provision amounts reflect the incurred loss method.

Current wording

*ASU 2016-13 was adopted during the first quarter of 2023; therefore, 2021 and 2022 provision amounts reflect the incurred loss method.

Previous wording

All of the Bank’s security portfolio is categorized as available for sale and as such is recorded at fair value.

Current wording

All of the Bank’s security portfolio is categorized as available for sale and as such is recorded at fair value. All mortgage-backed securities are government sponsored enterprises.

Previous wording

The Company has increased its security portfolio in 2024 for purposes of liquidity, Community Reinvestment Act (CRA), and contingency planning as a means of balance sheet gap management. Security balances as of December 31 are summarized below:

Current wording

The Company increased its security portfolio in 2024 for purposes of liquidity, Community Reinvestment Act (CRA), and contingency planning as a means of balance sheet gap management. Security balances as of December 31 are summarized below:

Previous wording

As of December 31, 2024, the Bank also holds stock in the Federal Home Loan Bank of Cincinnati and Indianapolis at a cost of $14.4 million. This is required in order to obtain Federal Home Loan Bank loans, with the Indianapolis relationship having stock and borrowings which originated from our acquisitions.

Current wording

As of December 31, 2025, the Bank also holds stock in the Federal Home Loan Bank of Cincinnati and Indianapolis at a cost of $13.0 million. This is required in order to obtain Federal Home Loan Bank loans, with the Indianapolis relationship having stock and a letter of credit which originated from the Bank of Geneva acquisition.