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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period June 30, 2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-38084

FARMERS & MERCHANTS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Ohio

34-1469491

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)


307 North Defiance Street, Archbold, Ohio	43502
(Address of principal executive offices)	(Zip Code)

(419) 446-2501

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of Each Exchange
Common Stock, No Par Value	FMAO	NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares of each of the issuers’ classes of common stock, as of the latest practicable date:


Common Stock, No Par Value	13,634,555
Class	Outstanding as of July 31, 2023

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

FARMERS & MERCHANTS BANCORP, INC.

INDEX


Form 10-Q Items		Page
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets - June 30, 2023 and December 31, 2022	3

	Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2023 and June 30, 2022	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2023 and June 30, 2022	5

	Condensed Consolidated Statements of Changes to Stockholders’ Equity - Three and Six Months Ended June 30, 2023 and June 30, 2022	6-7

	Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2023 and June 30, 2022	8-9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	53-78

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	79

Item 4.	Controls and Procedures	80

PART II.	OTHER INFORMATION	80

Item 1.	Legal Proceedings	80

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 3.	Defaults Upon Senior Securities	82

Item 4.	Mine Safety Disclosures	82

Item 5.	Other Information	82

Item 6.	Exhibits	83

Signatures		84

101.INS	Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (1)
101.SCH	Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1)

Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

PART 1 - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(in thousands of dollars)
	June 30, 2023			December 31, 2022
	(Unaudited)
Assets
Cash and due from banks	$	69,760		$	83,085
Federal funds sold		1,433			1,324
Total cash and cash equivalents		71,193			84,409
Interest-bearing time deposits		3,485			4,442
Securities - available-for-sale		363,225			390,789
Other securities, at cost		17,535			9,799
Loans held for sale		1,459			827
Loans, net		2,490,883			2,336,074
Premises and equipment		30,398			28,381
Construction in progress		2,290			278
Goodwill		86,358			86,358
Loan servicing rights		5,635			3,549
Bank owned life insurance		33,470			33,073
Other assets		41,512			37,372
Total Assets	$	3,147,443		$	3,015,351

Liabilities and Stockholders' Equity

Liabilities
Deposits
Noninterest-bearing	$	488,678		$	532,794
Interest-bearing
NOW accounts		770,113			750,887
Savings		581,192			627,203
Time		628,757			557,980
Total deposits		2,468,740			2,468,864
Federal funds purchased and securities sold under agreements to repurchase		51,567			54,206
Federal Home Loan Bank (FHLB) advances		266,818			127,485
Other borrowings		-			10,000
Subordinated notes, net of unamortized issuance costs		34,644			34,586
Dividend payable		2,834			2,832
Accrued expenses and other liabilities		18,177			19,238
Total liabilities		2,842,780			2,717,211

Commitments and Contingencies

Stockholders' Equity
Common stock - No par value 20,000,000 shares authorized; issued and outstanding 14,564,425 shares 6/30/23 and 12/31/22		135,647			135,497
Treasury stock - 929,513 shares 6/30/23, 956,003 shares 12/31/22		(11,298	)		(11,573	)
Retained earnings		216,236			212,449
Accumulated other comprehensive loss		(35,922	)		(38,233	)
Total stockholders' equity		304,663			298,140
Total Liabilities and Stockholders' Equity	$	3,147,443		$	3,015,351

See Notes to Condensed Consolidated Unaudited Financial Statements.

Note: The December 31, 2022, Condensed Consolidated Balance Sheet has been derived from the audited Condensed Consolidated Balance Sheet as of that date.

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	(in thousands of dollars, except per share data)						(in thousands of dollars, except per share data)
	Three Months Ended						Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Interest Income
Loans, including fees	$	31,365		$	22,388		$	61,068		$	42,843
Debt securities:
U.S. Treasury and government agencies		1,030			1,035			2,098			2,058
Municipalities		401			322			809			622
Dividends		148			57			271			99
Federal funds sold		9			9			30			19
Other		424			100			903			169
Total interest income		33,377			23,911			65,179			45,810
Interest Expense
Deposits		10,434			1,379			18,585			2,739
Federal funds purchased and securities sold under agreements to repurchase		427			166			832			318
Borrowed funds		2,113			218			3,393			553
Subordinated notes		285			284			569			553
Total interest expense		13,259			2,047			23,379			4,163
Net Interest Income - Before Provision for Credit Losses*		20,118			21,864			41,800			41,647
Provision for Credit Losses - Loans*		143			1,628			960			2,208
Provision for Credit Losses - Off Balance Sheet Credit Exposures*		(129	)		-			(67	)		-
Net Interest Income After Provision for Credit Losses*		20,104			20,236			40,907			39,439
Noninterest Income
Customer service fees		2,361			2,148			4,808			4,796
Other service charges and fees		1,803			1,008			4,357			2,006
Net gain on sale of loans		108			164			175			861
Net loss on sale of available-for-sale securities		-			-			(891	)		-
Total noninterest income		4,272			3,320			8,449			7,663
Noninterest Expense
Salaries and wages		6,500			5,366			13,157			10,868
Employee benefits		2,071			1,546			4,236			3,600
Net occupancy expense		840			522			1,696			1,120
Furniture and equipment		1,211			1,008			2,463			2,064
Data processing		796			654			1,522			1,258
Franchise taxes		379			757			745			1,175
ATM expense		683			544			1,306			1,076
Advertising		830			300			1,344			537
Net gain on sale of other assets owned		-			(266	)		-			(271	)
FDIC assessment		496			270			802			384
Servicing rights amortization - net		164			59			323			85
Consulting fees		231			233			461			411
Other general and administrative		2,643			2,242			5,720			4,421
Total noninterest expense		16,844			13,235			33,775			26,728
Income Before Income Taxes		7,532			10,321			15,581			20,374
Income Taxes		1,531			2,050			3,114			4,001
Net Income	$	6,001		$	8,271		$	12,467		$	16,373
Basic Earnings Per Share	$	0.44		$	0.63		$	0.92		$	1.25
Diluted Earnings Per Share	$	0.44		$	0.63		$	0.92		$	1.25
Dividends Declared	$	0.21		$	0.2025		$	0.4200		$	0.3925

See Notes to Condensed Consolidated Unaudited Financial Statements

*ASU 2016-13 adopted during the first quarter of 2023; therefore, June 30, 2022 provision amount reflects the incurred loss method.

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	(in thousands of dollars)						(in thousands of dollars)
	Three Months Ended						Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023		June 30, 2022
Net Income	$	6,001		$	8,271		$	12,467	$	16,373
Other Comprehensive Income (Loss) (Net of Tax):
Net unrealized gain (loss) on available-for-sale securities		(5,996	)		(14,602	)		2,034		(35,541	)
Reclassification adjustment for realized loss on sale of available-for-sale securities		-			-			891		-
Net unrealized gain (loss) on available-for-sale securities		(5,996	)		(14,602	)		2,925		(35,541	)
Tax expense (benefit)		(1,260	)		(3,067	)		614		(7,464	)
Other comprehensive income (loss)		(4,736	)		(11,535	)		2,311		(28,077	)
Comprehensive Income (Loss)	$	1,265		$	(3,264	)	$	14,778	$	(11,704	)

See Notes to Condensed Consolidated Unaudited Financial Statements

Farmers & Merchants Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated StatementS of Changes TO Stockholders’ Equity

For the THREE AND SIX Months Ended June 30, 2023

(000’s Omitted, Except Per Share Data)

(Unaudited)


													Accumulated
	Shares of												Other			Total
	Common			Common			Treasury			Retained			Comprehensive			Stockholders'
	Stock			Stock			Stock			Earnings			Loss			Equity
Balance - January 1, 2023		13,608,422		$	135,497		$	(11,573	)	$	212,449		$	(38,233	)	$	298,140
Cumulative effect of change in accounting principle (ASU 2016-13)		-			-			-			(3,371	)		-			(3,371	)
Balance - January 1, 2023 as adjusted for change in accounting principle		13,608,422			135,497			(11,573	)		209,078			(38,233	)		294,769

Net income		-			-			-			6,466			-			6,466
Other comprehensive income		-			-			-			-			7,047			7,047
Issuance of 21,700 shares of restricted stock		21,700			(562	)		263			299			-			-
Stock-based compensation expense		-			306			-			-			-			306
Cash dividends declared - $0.21 per share		-			-			-			(2,831	)		-			(2,831	)
Balance - March 31, 2023		13,630,122			135,241			(11,310	)		213,012			(31,186	)		305,757
Net income		-			-			-			6,001			-			6,001
Other comprehensive loss		-			-			-			-			(4,736	)		(4,736	)
Purchase of treasury stock		(208	)		-			(5	)		-			-			(5	)
Forfeiture of 4,050 shares of restricted stock		(4,050	)		106			(93	)		(13	)		-			-
Stock-based compensation expense		-			300			-			-			-			300
Director stock award		9,048			-			110			70			-			180
Cash dividends declared - $0.21 per share		-			-			-			(2,834	)		-			(2,834	)
Balance - June 30, 2023		13,634,912		$	135,647		$	(11,298	)	$	216,236		$	(35,922	)	$	304,663

See Notes to Condensed Consolidated Unaudited Financial Statements

Farmers & Merchants Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated StatementS of Changes TO Stockholders’ Equity

For the THREE AND SIX months Ended June 30, 2022

(000’s Omitted, Except Per Share Data)

(Unaudited)


													Accumulated
	Shares of												Other			Total
	Common			Common			Treasury			Retained			Comprehensive			Stockholders'
	Stock			Stock			Stock			Earnings			Loss			Equity
Balance - January 1, 2022		13,066,233		$	122,674		$	(11,724	)	$	189,401		$	(3,184	)	$	297,167
Net income		-			-			-			8,102			-			8,102
Other comprehensive loss		-			-			-			-			(16,542	)		(16,542	)
Issuance of 500 shares of restricted stock (Net of forfeitures - 650)		(150	)		(1	)		(15	)		16			-			-
Stock-based compensation expense		-			213			-			-			-			213
Cash dividends declared - $0.19 per share		-			-			-			(2,462	)		-			(2,462	)
Balance - March 31, 2022		13,066,083			122,886			(11,739	)		195,057			(19,726	)		286,478
Net income		-			-			-			8,271			-			8,271
Other comprehensive loss		-			-			-			-			(11,535	)		(11,535	)
Purchase of treasury stock		(1,388	)		-			(54	)		-			-			(54	)
Forfeiture of 1,750 shares of restricted stock		(1,750	)		40			(63	)		23			-			-
Stock-based compensation expense		-			219			-			-			-			219
Director stock award		2,880			-			34			86			-			120
Cash dividends declared - $0.2025 per share		-			-			-			(2,626	)		-			(2,626	)
Balance - June 30, 2022		13,065,825		$	123,145		$	(11,822	)	$	200,811		$	(31,261	)	$	280,873

See Notes to Condensed Consolidated Unaudited Financial Statements

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	(in thousands of dollars)
	Six Months Ended
	June 30, 2023			June 30, 2022
Cash Flows from Operating Activities
Net income	$	12,467		$	16,373
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		1,667			1,418
Amortization of premiums on available-for-sale securities, net		778			1,108
Capitalized additions to servicing rights		(2,409	)		(354	)
Servicing rights amortization and impairment		323			85
Amortization of core deposit intangible		828			398
Amortization of customer list intangible		61			61
Net accretion of fair value adjustments		(1,901	)		(2,070	)
Amortization of subordinated note issuance costs		58			57
Stock-based compensation expense		606			432
Director stock award		180			120
Provision for credit losses - Loans		960			2,208
Provision for credit losses - Off balance sheet credit exposures		(67	)		-
Gain on sale of loans held for sale		(175	)		(861	)
Originations of loans held for sale		(14,980	)		(47,063	)
Proceeds from sale of loans held for sale		14,523			51,408
Gain on sale of other assets owned		-			(271	)
Loss on sales of securities available-for-sale		891			-
Increase in cash surrender value of bank owned life insurance		(397	)		(316	)
Change in other assets and other liabilities, net		(6,648	)		(298	)
Net cash provided by operating activities		6,765			22,435
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls		6,856			19,479
Sales		21,963			-
Purchases		-			(25,884	)
Activity in other securities, at cost:
Sales		399			-
Purchases		(8,135	)		(573	)
Change in interest-bearing time deposits		957			4,229
Proceeds from sale of other assets owned		-			430
Additions to premises and equipment		(5,719	)		(984	)
Loan originations and principal collections, net		(157,793	)		(176,649	)
Net cash used in investing activities		(141,472	)		(179,952	)
Cash Flows from Financing Activities
Net change in deposits		430			31,823
Net change in federal funds purchased and securities sold under agreements to repurchase		(2,639	)		42,676
Proceeds from FHLB advances		345,000			20,000
Repayment of FHLB advances		(205,632	)		(1,388	)
Repayment of other borrowings		(10,000	)		(40,000	)
Purchase of treasury stock		(5	)		(54	)
Cash dividends paid on common stock		(5,663	)		(4,924	)
Net cash provided by financing activities		121,491			48,133
Net Decrease in Cash and Cash Equivalents		(13,216	)		(109,384	)
Cash and Cash Equivalents - Beginning of year		84,409			180,823
Cash and Cash Equivalents - End of period	$	71,193		$	71,439

(continued)

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)


	(in thousands of dollars)
	Six Months Ended
	June 30, 2023		June 30, 2022
Supplemental Information
Supplemental cash flow information:
Interest paid	$	21,463	$	5,647
Income taxes paid		4,000		3,060
Supplemental noncash disclosures:
Cash dividends declared not paid		2,834		2,626

See Notes to Condensed Consolidated Unaudited Financial Statements

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION AND OTHER

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10Q and Rule 10-01 of Regulation S-X; accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that are expected for the year ended December 31, 2023. The Condensed Consolidated Balance Sheet of the Company as of December 31, 2022, has been derived from the audited Condensed Consolidated Balance Sheet of the Company as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through Farmers & Merchants State Bank. Interest income is primarily recognized on an accrual basis according to nondiscretionary formulas written in contracts, such as loan agreements or investment security contracts. The Company also earns noninterest income from various banking and financial services provided to business and consumer clients such as deposit account, debit card, and mortgage banking services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed.

NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE

On October 1, 2022, the Company acquired Peoples-Sidney Financial Corporation (PPSF), the bank holding company for Peoples Federal Savings and Loan Association, a community bank with three full-service offices in Sidney, Anna and Jackson Center, Ohio, in addition to a separate drive-thru location in Sidney, Ohio. PPSF shareholders had the opportunity to elect to receive either 0.6597 shares of FMAO stock or $24.00 per share in cash for each PPSF share owned, subject to a requirement under the Merger Agreement that the minimum number of PPSF shares exchanged for Farmers & Merchants Bancorp, Inc. (FMAO) shares in the merger was no less than 758,566. Fractional shares of FMAO common stock were not issued in respect of fractional interests arising from the merger but were paid in cash pursuant to the merger agreement. PPSF had 1,167,025 shares outstanding on October 1, 2022. The share price of FMAO stock on October 1, 2022 was $26.87. Total consideration for the acquisition was approximately $23.2 million of which $9.8 million was in cash and $13.4 million in stock. As a result of the acquisition, the Company increased its deposit base in Sidney and the greater Shelby County and reduced transaction costs. The Company also expects to continue to reduce costs through economies of scale.

Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $23.2 million, $6.0 million has been allocated to core deposit intangible included in other assets and is being amortized over seven years on a straight line basis. Goodwill of $5.9 million, resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Peoples Federal Savings and Loan Association. Of that total amount, none of the purchase price is deductible for tax purposes. The following table summarizes the consideration paid for Peoples Federal Savings and Loan Association and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


Fair Value of Consideration Transferred
	(In Thousands)
Cash	$	9,806
Common Shares		13,446
Treasury stock repurchased (125 shares)		(3	)
Total	$	23,249

Recognized amounts of identifiable assets acquired and liabilities assumed

Assets
Cash and cash equivalents	$	18,881
Other securities, at cost		1,271
Loans, net		101,755
Premises and equipment		1,906
Goodwill		5,924
Other assets		12,081
Total Assets Purchased	$	141,818

Liabilities
Deposits
Noninterest bearing	$	7,139
Interest bearing		104,719
Total deposits		111,858
Federal Home Loan Bank (FHLB) advances		896
Accrued expenses and other liabilities		5,815
Total Liabilities Assumed	$	118,569

The fair value of the assets acquired included loans with a fair value of $101.8 million. The gross principal and contractual interest due under the contracts is $116.1 million of which none is expected to be uncollectible. The loans have a weighted average life of 44.4 months.

The fair value of building and land included in premises and equipment was written up $581 thousand with $597 thousand attributable to the buildings and is being amortized over the remaining life of each building. The combined average remaining life of the building is 12.8 years.

The fair value for certificates of deposit incorporated a valuation amount of $662 thousand which is being amortized over 1.1 years. The fair value of Federal Home Loan Bank (FHLB) advances included a valuation amount of $69 thousand which is being amortized over 5.2 years.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Changes in accretable yield, or income expected to be collected, are as follows:


	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022		Six Months Ended June 30, 2023			Six Months Ended June 30, 2022
	(In Thousands)			(In Thousands)		(In Thousands)			(In Thousands)
Beginning Balance	$	741		$	-	$	798		$	-
Additions		3			-		4			-
Accretion		(58	)		-		(116	)		-
Reclassification from nonaccretable difference		-			-		-			-
Disposals		(6	)		-		(6	)		-
Ending Balance	$	680		$	-	$	680		$	-

On October 1, 2021, the Company acquired Perpetual Federal Savings Bank, (PFSB), a community bank with one full-service office in Urbana, Ohio. Shareholders of PFSB elected to receive either 1.7766 shares of FMAO stock or $41.20 per share in cash for each PFSB share owned, subject to adjustment based upon 1,833,999 shares of FMAO to be issued in the merger. PFSB had 2,470,032 shares outstanding on October 1, 2021. The share price of Farmers & Merchants Bancorp, Inc. (FMAO) stock on October 1, 2021 was $22.40. Total consideration for the acquisition was approximately $100.3 million consisting of $59.2 million in cash and $41.1 million in stock. As a result of the acquisition, the Company has had an opportunity to increase its deposit base and reduce transaction costs. The Company has reduced costs through economies of scale.

Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $100.3 million, $668 thousand has been allocated to core deposit intangible included in other assets and is being amortized over seven years on a straight line basis. Goodwill of $25.2 million, resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Perpetual Federal Savings Bank. Of that total amount, none of the purchase price is deductible for tax purposes. The following table summarizes the consideration paid for Perpetual Federal Savings Bank and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


Fair Value of Consideration Transferred
	(In Thousands)
Cash	$	59,234
Common Shares		41,078
Total	$	100,312

Recognized amounts of identifiable assets acquired and liabilities assumed

Assets
Cash and cash equivalents	$	44,975
Federal funds sold		1,672
Interest-bearing time deposits		6,250
Other securities, at cost		2,794
Loans, net		334,661
Premises and equipment		615
Goodwill		25,220
Other assets		3,975
Total Assets Purchased	$	420,162

Liabilities
Deposits
Noninterest bearing	$	2,018
Interest bearing		309,090
Total deposits		311,108
Federal Home Loan Bank (FHLB) advances		6,218
Accrued expenses and other liabilities		2,524
Total Liabilities Assumed	$	319,850

The fair value of the assets acquired included loans with a fair value of $334.7 million. The gross principal and contractual interest due under the contracts is $403.3 million, of which $5.6 million is expected to be uncollectible. The loans have a weighted average life of 52 months.

The fair value of building and land included in premises and equipment was written down by $4 thousand with $297 thousand attributable to the buildings and is being amortized over the useful life of 16.2 years.

The fair value for certificates of deposit incorporated a valuation amount of $3.9 million which was accreted over 1.6 years. The fair value of Federal Home Loan Bank (FHLB) advances included a valuation amount of $218 thousand which is being accreted over 2.6 years.

Changes in accretable yield, or income expected to be collected, are as follows:


	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
Beginning Balance	$	3,906		$	5,004		$	4,236		$	5,262
Additions		11			33			25			97
Accretion		(345	)		(327	)		(689	)		(649	)
Reclassification from nonaccretable difference		-			-			-			-
Disposals		-			-			-			-
Ending Balance	$	3,572		$	4,710		$	3,572		$	4,710

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

On April 30, 2021, the Company acquired Ossian Financial Services, Inc., (OFSI), the bank holding company for Ossian State Bank, a community bank based in Ossian, Indiana. Ossian State Bank operated two full-service offices in the northeast Indiana communities of Ossian and Bluffton. Shareholders of OFSI received $67.71 in cash for each share. OFSI had 295,388 shares outstanding on April 30, 2021. Total consideration for the acquisition was approximately $20.0 million in cash. As a result of the acquisition, the Company has increased its deposit base and reduced transaction costs. The Company has reduced costs through economies of scale.

Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $20.0 million, $980.2 thousand has been allocated to core deposit intangible included in other assets and will be amortized over seven years on a straight line basis. Goodwill of $7.9 million which resulted from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Ossian State Bank and is deductible for tax purposes over 15 years. The following table summarizes the consideration paid for Ossian State Bank and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.


Fair Value of Consideration Transferred
	(In Thousands)
Cash	$	20,001
Total	$	20,001

Recognized amounts of identifiable assets acquired and liabilities assumed

Assets
Cash and cash equivalents	$	20,229
Interest-bearing time deposits		20,226
Securities - available-for-sale		30,243
Other securities, at cost		281
Loans, net		52,403
Premises and equipment		494
Goodwill		7,874
Other assets		5,308
Total Assets Purchased	$	137,058

Liabilities
Deposits
Noninterest bearing	$	34,509
Interest bearing		81,535
Total deposits		116,044
Accrued expenses and other liabilities		1,013
Total Liabilities Assumed	$	117,057

The fair value of the assets acquired included loans with a fair value of $52.4 million. The gross principal and contractual interest due under the contracts is $63.7 million, of which $1.1 million is expected to be uncollectible. The loans have a weighted average life of 52 months.

The fair value of building and land included in premises and equipment was written down by $596 thousand with $244 thousand attributable to buildings and will be accreted over the useful life of 39 years,

The fair value for certificates of deposit incorporated a valuation amount of $59 thousand which was accreted over 1.4 years.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Changes in accretable yield, or income expected to be collected, are as follows:


	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
Beginning Balance	$	426		$	601		$	470		$	645
Additions		-			-			-			-
Accretion		(44	)		(44	)		(88	)		(88	)
Reclassification from nonaccretable difference		-			-			-			-
Disposals		-			-			-			-
Ending Balance	$	382		$	557		$	382		$	557

The results of operations of Ossian State Bank, Perpetual Federal Savings Bank and Peoples Federal Savings and Loan Bank have been included in the Company’s consolidated financial statements since the acquisition dates of April 30, 2021, October 1, 2021 and October 1, 2022, respectively. The following schedule includes pro-forma results for the three and six months ended June 30, 2023 and 2022 as if the Peoples Federal Savings and Loan Bank acquisition had occurred as of the beginning of the comparable prior reporting period. The acquisitions of Ossian State Bank and Perpetual Federal Savings Bank are already included as they had occurred prior to that period.


	(in thousands of dollars, except per share data)				(in thousands of dollars, except per share data)
	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Summary of Operations
Net Interest Income - Before Provision for Credit Losses	$	20,118	$	23,097	$	41,800	$	44,063
Provision for Credit Losses		14		1,628		831		2,121
Net Interest Income After Provision for Credit Losses		20,104		21,469		40,969		41,942
Noninterest Income		4,272		3,438		8,449		7,921
Noninterest Expense		16,756		14,344		33,653		28,839
Income Before Income Taxes		7,620		10,563		15,765		21,024
Income Taxes		1,549		2,071		3,151		4,093
Net Income	$	6,071	$	8,492	$	12,614	$	16,931
Basic and Diluted Earnings Per Share	$	0.45	$	0.63	$	0.93	$	1.25

The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transactions, interest expense on deposits acquired, premises expense for the branches acquired and the related income tax effects. The pro-forma information for the three and six months ended June 30, 2023 includes approximately $342 and $709 thousand, net of tax, respectively, of operating revenue from Peoples Federal Savings and Loan Bank since January 1, 2023.

The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.

On January 1, 2019, the Company acquired Limberlost Bancshares, Inc. (“Limberlost”), the bank holding company for Bank of Geneva, a community bank based in Geneva, Indiana. Bank of Geneva operated six full-service offices in the northeast Indiana communities of Geneva, Berne, Decatur, Monroe, Portland and Monroeville. Shareholders of Limberlost received 1,830 shares of FMAO common stock and $8,465.00 in cash for each share. Limberlost had 1,000 shares outstanding on January 1, 2019. The share price of Farmers & Merchants Bancorp, Inc. (FMAO) stock on January 1, 2019 was $38.49. Total

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

consideration for the acquisition was approximately $78.9 million consisting of $8.5 million in cash and $70.4 million in stock. As a result of the acquisition, the Company has had an opportunity to increase its deposit base and reduce transaction costs. The Company has also reduced costs through economies of scale.

Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $78.9 million, $3.9 million has been allocated to core deposit intangible included in other assets and is being amortized over seven years on a straight line basis. Goodwill of $43.3 million resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Bank of Geneva. Of that total amount, none of the purchase price is deductible for tax purposes.

Changes in accretable yield, or income expected to be collected, are as follows:


	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
Beginning Balance	$	681		$	1,097		$	785		$	1,198
Additions		2			3			5			8
Accretion		(108	)		(106	)		(215	)		(212	)
Reclassification from nonaccretable difference		-			-			-			-
Disposals		-			-			-			-
Ending Balance	$	575		$	994		$	575		$	994

As mentioned previously, the acquisition of Bank of Geneva resulted in the recognition of $3.9 million in core deposit intangible assets, the acquisition of Ossian State Bank resulted in the recognition of $980.2 thousand in core deposit intangible assets, the acquisition of Perpetual Federal Savings Bank resulted in the recognition of $668.0 thousand in core deposit intangible assets and the acquisition of Peoples Federal Savings and Loan resulted in the recognition of $6.0 million in core deposit intangible assets which are all being amortized over its remaining economic useful life of 7 years on a straight line basis. Core deposit intangible is included in other assets on the Condensed Consolidated Balance Sheets.

The amortization expense of the core deposit intangible for the six months ended June 30, 2022 was $398 thousand. Of the approximately $1.7 million to be expensed in 2023, $828 thousand has been expensed for the six months ended June 30, 2023. Annual amortization of core deposit intangible assets is as follows:


	(In Thousands)
	Geneva		Ossian		Perpetual		Peoples		Total
2023	$	560	$	140	$	95	$	861	$	1,656
2024		560		140		95		861		1,656
2025		560		140		95		861		1,656
2026		-		140		95		861		1,096
2027		-		140		95		861		1,096
Thereafter		-		47		74		1,506		1,627
	$	1,680	$	747	$	549	$	5,811		8,787

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

On November 16, 2020, FM Investment Services, a division of the Bank, purchased the assets and clients of Adams County Financial Resources (ACFR), a full-service registered investment advisory firm located in Geneva, Indiana.

ACFR was founded in 1994 by R. Lee Flueckiger and provided clients and their families with financial confidence through personalized investment planning and services. As of November 30, 2020, ACFR had approximately $83 million of assets under management and over 450 clients.

Total consideration for the purchase was $825 thousand which consisted of 40,049 shares of stock. Under the acquisition method of accounting, the total purchase is allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $825 thousand, $800 thousand has been allocated to customer list intangible, included in other assets, to be amortized over 6.5 years on a straight line basis.

The amortization expense of the customer list intangible for the six months ended June 30, 2022 was $61 thousand. Of the $123 thousand to be expensed in 2023, $61 thousand has been expensed for the six months ended June 30, 2023. Annual amortization expense of customer list intangible is as follows:


	(In Thousands)
	Adams County Financial Resources
2023	$	123
2024		123
2025		123
2026		123
2027		47
Thereafter		-
	$	539

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 3 SECURITIES

Mortgage-backed securities, as shown in the following tables, are all government sponsored enterprises. The amortized cost and fair value of securities, with gross unrealized gains and losses at June 30, 2023 and December 31, 2022, are as follows:


	(In Thousands)
	June 30, 2023
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	95,034	$	-	$	(8,907	)	$	86,127
U.S. Government agencies		144,048		-		(16,157	)		127,891
Mortgage-backed securities		95,366		-		(13,710	)		81,656
State and local governments		74,249		69		(6,767	)		67,551
Total available-for-sale securities	$	408,697	$	69	$	(45,541	)	$	363,225


	(In Thousands)
	December 31, 2022
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	104,507	$	-	$	(9,829	)	$	94,678
U.S. Government agencies		156,817		-		(17,050	)		139,767
Mortgage-backed securities		101,068		-		(14,141	)		86,927
State and local governments		76,794		69		(7,446	)		69,417
Total available-for-sale securities	$	439,186	$	69	$	(48,466	)	$	390,789

Investment securities will at times depreciate to an unrealized loss position. The Company utilizes the following criteria to assess whether the unrealized loss requires an allowance for credit losses on investment securities. No one item by itself will necessarily signal that an allowance for credit losses on investment securities should be established.

The fair value of the security has significantly declined from book value.

A downgrade has occurred that lowered the credit rating to below investment grade (below Baa3 by Moody and BBB – by Standard and Poors.)

Dividends have been reduced or eliminated or scheduled interest payments have not been made.

Management does not possess both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

If the unrealized loss is determined to be the result of a credit loss, the present value of the cash flows expected to be collected is compared to the amortized cost basis. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Adjustments to the allowance are recorded in the consolidated income statement as a component of the provision for credit losses. The table below is presented by category of security and length of time in a continuous loss position. The Company did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Information pertaining to securities with gross unrealized losses at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	(In Thousands)
	June 30, 2023
	Less Than Twelve Months					Twelve Months & Over					Total
	Gross Unrealized			Fair		Gross Unrealized			Fair		Gross Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
U.S. Treasury	$	(11	)	$	487	$	(8,896	)	$	85,640	$	(8,907	)	$	86,127
U.S. Government agencies		-			-		(16,157	)		127,891		(16,157	)		127,891
Mortgage-backed securities		(124	)		2,826		(13,586	)		78,830		(13,710	)		81,656
State and local governments		(364	)		10,813		(6,403	)		52,499		(6,767	)		63,312
Total available-for-sale securities	$	(499	)	$	14,126	$	(45,042	)	$	344,860	$	(45,541	)	$	358,986


	(In Thousands)
	December 31, 2022
	Less Than Twelve Months					Twelve Months & Over					Total
	Gross Unrealized			Fair		Gross Unrealized			Fair		Gross Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
U.S. Treasury	$	(207	)	$	9,121	$	(9,622	)	$	85,557	$	(9,829	)	$	94,678
U.S. Government agencies		(1,081	)		24,560		(15,969	)		114,906		(17,050	)		139,466
Mortgage-backed securities		(2,454	)		26,905		(11,687	)		60,022		(14,141	)		86,927
State and local governments		(3,223	)		38,771		(4,223	)		25,610		(7,446	)		64,381
Total available-for-sale securities	$	(6,965	)	$	99,357	$	(41,501	)	$	286,095	$	(48,466	)	$	385,452

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, values have only been impacted by changes in interest rates since the securities were purchased, and the Company has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the bonds approach the maturity date.

Below are the gross realized gains and losses for the three and six months ended June 30, 2023 and June 30, 2022.


	Three Months				Six Months
	(In Thousands)				(In Thousands)
	2023		2022		2023			2022
Gross realized gains	$	-	$	-	$	12		$	-
Gross realized losses		-		-		(903	)		-
Net realized losses	$	-	$	-	$	(891	)	$	-
Tax benefit related to net realized losses	$	-	$	-	$	(187	)	$	-

The net realized losses on sales and related tax benefit is a reclassification out of accumulated other comprehensive income (loss). The net realized losses are included in net loss on sale of available-for-sale securities and the related tax benefit is included in income taxes in the condensed consolidated statements of income and comprehensive income (loss).

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The amortized cost and fair value of debt securities at June 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	(In Thousands)
	Amortized
	Cost		Fair Value
One year or less	$	20,116	$	19,736
After one year through five years		238,773		213,819
After five years through ten years		50,560		44,150
After ten years		3,882		3,864
Total	$	313,331	$	281,569
Mortgage-backed securities		95,366		81,656
Total	$	408,697	$	363,225

Investments with a carrying value of $242.5 million and $134.8 million at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and securities sold under repurchase agreements.

Other securities include Federal Home Loan Bank of Cincinnati and Indianapolis stock in the amount of $15.7 million as of June 30, 2023 and $8.1 million as of December 31, 2022. Other securities also includes Ohio Equity Fund for Housing Limited Partnership funding of $1.8 million and $1.7 million out of a total of $4.0 million committed as of June 30, 2023 and December 31, 2022, respectively.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS

Loan balances as of June 30, 2023 and December 31, 2022 are summarized below:


	(In Thousands)
Loans:	June 30, 2023			December 31, 2022
Consumer Real Estate	$	506,866		$	494,423
Agricultural Real Estate		230,837			220,819
Agricultural		128,344			128,733
Commercial Real Estate		1,280,902			1,152,603
Commercial and Industrial		253,444			242,360
Consumer		88,312			89,147
Other		28,996			29,818
		2,517,701			2,357,903
Less: Net deferred loan fees and costs		(1,908	)		(1,516	)
		2,515,793			2,356,387
Less: Allowance for credit losses		(24,910	)		(20,313	)
Loans - Net	$	2,490,883		$	2,336,074

Other loans primarily fund public improvements in the Bank’s service area.

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of June 30, 2023 and December 31, 2022:


	(In Thousands)
	June 30, 2023				December 31, 2022
	Fixed		Variable		Fixed		Variable
Consumer Real Estate	$	341,601	$	165,265	$	354,420	$	140,003
Agricultural Real Estate		142,029		88,808		144,702		76,117
Agricultural		58,445		69,899		52,867		75,866
Commercial Real Estate		993,941		286,961		941,927		210,676
Commercial and Industrial		148,425		105,019		130,513		111,847
Consumer		88,247		65		88,972		175
Other		19,300		9,696		20,029		9,789

As of June 30, 2023 and December 31, 2022 one to four family residential mortgage loans amounting to $213.7 million and $222.5 million, respectively, have been pledged as security for future loans and existing loans the Bank has received from the Federal Home Loan Bank. $11.0 million and $10.4 million of HELOCs were pledged as of June 30, 2023 and December 31, 2022 as well. During the second quarter of 2023 the Bank pledged eligible commercial real estate to the FHLB. At June 30, 2023 the amount pledged was $165.2 million.

Unless listed separately, Other loans are included in the Commercial and Industrial category for the remainder of the tables in this Note 4.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table represents the contractual aging of the recorded investment (in thousands) in past due loans by portfolio classification of loans as of June 30, 2023 and December 31, 2022, net of deferred loan fees and costs:


June 30, 2023	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing

Consumer Real Estate	$	1,287	$	5	$	443	$	1,735	$	505,107	$	506,842	$	-
Agricultural Real Estate		5,047		1		-		5,048		225,483		230,531		-
Agricultural		750		462		-		1,212		127,381		128,593		-
Commercial Real Estate		434		-		255		689		1,277,756		1,278,445		-
Commercial and Industrial		26		-		855		881		281,363		282,244		-
Consumer		29		30		60		119		89,019		89,138		-
Total	$	7,573	$	498	$	1,613	$	9,684	$	2,506,109	$	2,515,793	$	-


December 31, 2022	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing

Consumer Real Estate	$	1,536	$	635	$	90	$	2,261	$	492,162	$	494,423	$	-
Agricultural Real Estate		118		2		1,550		1,670		218,844		220,514		-
Agricultural		433		-		152		585		128,341		128,926		-
Commercial Real Estate		74		-		180		254		1,150,257		1,150,511		-
Commercial and Industrial		953		-		182		1,135		270,984		272,119		-
Consumer		83		37		-		120		89,774		89,894		-
Total	$	3,197	$	674	$	2,154	$	6,025	$	2,350,362	$	2,356,387	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following tables present the amortized cost of nonaccrual loans by class of loans as of June 30, 2023 and the recorded investment of nonaccrual loans by class of loans as of December 31, 2022:


	(In Thousands)
	June 30, 2023
	Nonaccrual				Loans Past
	With No				Due Over
	Allowance				89 Days
	for Credit Loss		Nonaccrual		Still Accruing

Consumer Real Estate	$	808	$	1,025	$	-
Agricultural Real Estate		3,964		3,964		-
Agricultural		56		56		-
Commercial Real Estate		248		248		-
Commercial & Industrial		97		934		-
Consumer		68		68		-
Total	$	5,241	$	6,295	$	-


	(In Thousands)
	December 31, 2022

Consumer Real Estate	$	612
Agricultural Real Estate		1,921
Agricultural		152
Commercial Real Estate		903
Commercial & Industrial		1,096
Consumer		5
Total	$	4,689

The Company recognized $74 thousand and $127 thousand of interest income on nonaccrual loans for the three and six months ending June 30, 2023.

Following are the characteristics and underwriting criteria for each major type of loan the Bank offers:

Consumer Real Estate: Purchase, refinance, or equity financing of one to four family owner occupied dwelling. Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

Agricultural Real Estate: Purchase of farm real estate or for permanent improvements to the farm real estate. Cash flow from the farm operation is the repayment source and is therefore subject to the financial success of the farm operation.

Agricultural: Loans for the production and housing of crops, fruits, vegetables, and livestock or to fund the purchase or re-finance of capital assets such as machinery and equipment and livestock. The production of crops and livestock is especially vulnerable to commodity prices and weather. The vulnerability to commodity prices is offset by the farmer’s ability to hedge their position by the use of various pricing mechanisms. The risk related to weather is often mitigated by crop insurance.

Commercial Real Estate: Construction, purchase, and refinance of business purpose real estate. Risks include potential construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrower’s ability to repay in orderly fashion, and others. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment before granting loan approval.

Commercial and Industrial: Loans to proprietorships, partnerships, limited liability companies or corporations to provide temporary working capital and seasonal loans as well as long term loans for capital asset acquisition. Risks include adequacy of cash flow, reasonableness of projections, financial leverage, economic trends, management ability and estimated capital expenditures during the fiscal year. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer's ability to repay in a changing rate environment before granting loan approval.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Consumer: Funding for individual and family purposes. Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

Other: Primarily funds public improvements in the Bank’s service area. Repayment ability is based on the continuance of the taxation revenue as the source of repayment.

The Bank uses a nine tier risk rating system to grade its loans. The grade of a loan may change during the life of the loan.

The risk ratings are described as follows.

Zero (0) Unclassified. Any loan which has not been assigned a classification.

One (1) Excellent. Credit to premier customers having the highest credit rating based on an extremely strong financial condition, which compares favorably with industry standards (upper quartile of RMA ratios). Financial statements indicate a sound earnings and financial ratio trend for several years with satisfactory profit margins and excellent liquidity exhibited. Prime credits may also be borrowers with loans fully secured by highly liquid collateral such as traded stocks, bonds, certificates of deposit, savings account, etc. No credit or collateral exceptions exist, and the loan adheres to The Bank's loan policy in every respect. Financing alternatives would be readily available and would qualify for unsecured credit. This rate is summarized by high liquidity, minimum risk, strong ratios, and low handling costs.

Two (2) Good. Desirable loans of somewhat less stature than rate 1, but with strong financial statements. Loan supported by financial statements containing strong balance sheets and a history of profitability. Probability of serious financial deterioration is unlikely. Possessing a sound repayment source (and a secondary source), which would allow repayment in a reasonable period of time. Individual loans backed by liquid personal assets, established history and unquestionable character.

Three (3) Satisfactory. Satisfactory loans of average or slightly above average risk – having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should normally demonstrate acceptable debt service coverage. There may be some weakness but with offsetting features of other support readily available. Loans that are meeting the terms of repayment.

Loans may be rated 3 when there is no recent information on which to base a current risk evaluation and the following conditions apply:

At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk;

At inception, the loan was secured with collateral possessing a loan-to-value adequate to protect The Bank from loss;

The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance;

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk rating is warranted.

Four (4) Satisfactory / Monitored. A “4” (Satisfactory/Monitored) risk rating may be established for a loan considered satisfactory but which is of average credit risk due to financial weakness or uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Satisfactory/Monitored classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given management supervision.

Five (5) Special Mention. Loans that possess some credit deficiency or potential weakness which deserve close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential” versus “defined” impairments to the primary source of loan repayment and collateral.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard:

Loans which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source are uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

Loans are inadequately protected by the current net worth and paying capacity of the borrower.

The primary source of repayment is weakened, and The Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

Loans are characterized by the distinct possibility that The Bank will sustain some loss if deficiencies are not corrected.

Unusual courses of action are needed to maintain a high probability of repayment.

The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation.

Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful:

Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

The possibility of loss is high, but, because of certain important pending factors which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established deferring the realization of the loss.

Eight (8) Loss. Loans are considered uncollectable and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table represents the risk category of loans by portfolio class, net of deferred fees and costs, based on the most recent analysis performed as of December 31, 2022:


	(In Thousands)
	Agricultural				Commercial		Commercial
	Real Estate		Agricultural		Real Estate		and Industrial		Other
December 31, 2022
1-2	$	9,912	$	5,857	$	8,718	$	780	$	-
3		47,405		33,671		370,035		67,506		10,921
4		146,143		88,992		737,745		167,291		18,897
5		10,389		228		9,751		3,592		-
6		6,665		178		24,262		3,132		-
7		-		-		-		-		-
8		-		-		-		-		-
Total	$	220,514	$	128,926	$	1,150,511	$	242,301	$	29,818

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, as was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned risk grading as of December 31, 2022.


	(In Thousands)
	Consumer
	Real Estate
	December 31, 2022
Grade
Pass (1-4)	$	492,575
Special Mention (5)		676
Substandard (6)		1,172
Doubtful (7)		-
Total	$	494,423


	(In Thousands)
	Consumer
	December 31, 2022
Performing	$	89,853
Nonperforming		41
Total	$	89,894

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table reflects loan balances as of June 30, 2023 based on year of origination:


	(In Thousands)
	Term Loans Amortized Cost Basis by Origination Year
													Revolving
													Loans
											Term		Amortized		Grand
	2023		2022		2021		2020		Prior		Total		Cost Basis		Total

Consumer Real Estate
Risk Rating
Pass (1-4)	$	40,806	$	99,239	$	95,955	$	86,022	$	135,764	$	457,786	$	47,333	$	505,119
Special Mention (5)		-		-		-		-		543		543		-		543
Substandard (6)		-		-		405		-		757		1,162		18		1,180
Doubtful (7)		-		-		-		-		-		-		-		-
Total Consumer Real Estate	$	40,806	$	99,239	$	96,360	$	86,022	$	137,064	$	459,491	$	47,351	$	506,842
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural Real Estate
Risk Rating
Pass (1-4)	$	21,557	$	40,186	$	25,457	$	26,773	$	90,134	$	204,107	$	97	$	204,204
Special Mention (5)		-		171		13,135		-		5,776		19,082		-		19,082
Substandard (6)		-		249		-		188		6,808		7,245		-		7,245
Doubtful (7)		-		-		-		-		-		-		-		-
Total Agricultural Real Estate	$	21,557	$	40,606	$	38,592	$	26,961	$	102,718	$	230,434	$	97	$	230,531
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Risk Rating
Pass (1-4)	$	14,815	$	25,059	$	10,432	$	5,167	$	6,645	$	62,118	$	59,778	$	121,896
Special Mention (5)		517		1,035		1,793		1,026		-		4,371		2,248		6,619
Substandard (6)		-		-		-		78		-		78		-		78
Doubtful (7)		-		-		-		-		-		-		-		-
Total Agricultural	$	15,332	$	26,094	$	12,225	$	6,271	$	6,645	$	66,567	$	62,026	$	128,593
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
	Term Loans Amortized Cost Basis by Origination Year
													Revolving
													Loans
											Term		Amortized		Grand
	2023		2022		2021		2020		Prior		Total		Cost Basis		Total

Commercial Real Estate
Risk Rating
Pass (1-4)	$	166,430	$	440,265	$	256,817	$	130,716	$	259,203	$	1,253,431	$	-	$	1,253,431
Special Mention (5)		-		-		-		10,571		1,283		11,854		-		11,854
Substandard (6)		1,118		-		-		75		11,967		13,160		-		13,160
Doubtful (7)		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	167,548	$	440,265	$	256,817	$	141,362	$	272,453	$	1,278,445	$	-	$	1,278,445
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial & Industrial
Risk Rating
Pass (1-4)	$	40,307	$	58,399	$	30,851	$	27,371	$	5,770	$	162,698	$	86,104	$	248,802
Special Mention (5)		197		4		221		155		464		1,041		202		1,243
Substandard (6)		-		476		-		925		331		1,732		1,465		3,197
Doubtful (7)		-		-		-		-		-		-				-
Total Commercial & Industrial	$	40,504	$	58,879	$	31,072	$	28,451	$	6,565	$	165,471	$	87,771	$	253,242
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Other
Risk Rating
Pass (1-4)	$	-	$	200	$	17,526	$	6,179	$	5,097	$	29,002	$	-	$	29,002
Special Mention (5)		-		-		-		-		-		-		-		-
Substandard (6)		-		-		-		-		-		-		-		-
Doubtful (7)		-		-		-		-		-		-		-		-
Total Other	$	-	$	200	$	17,526	$	6,179	$	5,097	$	29,002	$	-	$	29,002
Gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table presents payment performance as of June 30, 2023 by year of origination:


	(In Thousands)
	Term Loans Amortized Cost Basis by Origination Year
													Revolving
													Loans
											Term		Amortized		Grand
	2023		2022		2021		2020		Prior		Total		Cost Basis		Total

Consumer
Payment Performance
Performing	$	15,830	$	49,158	$	13,575	$	6,751	$	3,714	$	89,028	$	43	$	89,071
Nonperforming		-		7		60		-		-		67		-		67
Total Consumer	$	15,830	$	49,165	$	13,635	$	6,751	$	3,714	$	89,095	$	43	$	89,138
Gross charge-offs YTD	$	109	$	24	$	20	$	29	$	-	$	182	$	-	$	182

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table presents collateral-dependent loans grouped by collateral as of June 30, 2023:


	(In Thousands)
	Real
	Estate
Consumer Real Estate	$	20
Agricultural Real Estate		-
Agricultural		-
Commercial Real Estate		25
Commercial & Industrial		-
Consumer		-
Total	$	45

Information about impaired loans as of December 31, 2022 and June 30, 2022 are presented for comparison purposes and are as follows:


	(In Thousands)
	December 31, 2022		June 30, 2022

Impaired loans without a valuation allowance	$	4,194	$	5,680
Impaired loans with a valuation allowance		4,663		4,989
Total impaired loans	$	8,857	$	10,669
Valuation allowance related to impaired loans	$	1,996	$	2,419
Total non-accrual loans	$	4,689	$	5,247
Total loans past-due ninety days or more and still accruing	$	-	$	-
Quarter ended average investment in impaired loans	$	9,660	$	9,748
Year to date average investment in impaired loans	$	10,710	$	11,258

The Bank had approximately $3.6 million of its impaired loans classified as troubled debt restructured (TDR) as of December 31, 2022 and $2.7 million as of June 30, 2022.

Under ASC 310-40, TDRs were eliminated from being classified as such for 2023 and will no longer be reported as such. Modification programs focus on payment pattern changes and/or modified maturity dates with most receiving a combination of the two concessions. The modifications did not result in the contractual forgiveness of principal. During the three months ended June 30, 2023 one new loan was considered a modification to a borrower experiencing financial difficulty. During the second quarter of 2022, there were no new loans considered TDR.

The modification during the second quarter of 2023 consisted of refinancing at a higher balance to a borrower experiencing financial difficulty that would not have otherwise been granted to a borrower. The amount of the new money increase to the loan balance was $411 thousand. No additional funds are being advanced.

For the three months ended June 30, 2023 and 2022, there were no modifications to borrowers experiencing financial difficulty that subsequently defaulted after modification.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

For the majority of the Bank’s impaired loans, the Bank applied the fair value of collateral or used a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine fair value of collateral, collateral asset values securing an impaired loan were periodically evaluated. Maximum time of re-evaluation was every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations were obtained. Until such time that updated appraisals were received, the Bank may have discounted the collateral value used.

The Bank used the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge-off in whole or in part was realized when unsecured consumer loans, credit card credits and overdraft lines of credit reached 90 days delinquency. At 90 days delinquent, secured consumer loans were charged down to the value of the collateral, if repossession of the collateral was assured and/or in the process of repossession. Consumer mortgage loan deficiencies were charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. A broker’s price opinion or appraisal was completed on all home loans in litigation and any deficiency was charged off before reaching 150 days delinquent. Commercial and agricultural credits were charged down/allocated at 120 days delinquency, unless an established and approved work-out plan was in place or litigation of the credit was likely to result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt was charged off. Additional charge-off was realized as further unsecured positions were recognized.

The following tables present loans individually evaluated for impairment by class of loans for the three and six months ended June 30, 2022 and for the year ended December 31, 2022.


	(In Thousands)
											QTD
							QTD		QTD		Interest
Three Months Ended June 30, 2022			Unpaid				Average		Interest		Income
	Recorded		Principal		Related		Recorded		Income		Recognized
	Investment		Balance		Allowance		Investment		Recognized		Cash Basis
With no related allowance recorded:
Consumer Real Estate	$	657	$	657	$	-	$	390	$	1	$	4
Agricultural Real Estate		2,414		2,518		-		2,247		6		3
Agricultural		1,296		1,296		-		445		-		1
Commercial Real Estate		1,148		1,148		-		1,323		7		14
Commercial and Industrial		145		145		-		207		-		10
Consumer		20		20		-		20		-		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		2,985		2,985		573		3,105		38		-
Commercial and Industrial		2,004		2,004		1,846		2,011		52		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	657	$	657	$	-	$	390	$	1	$	4
Agricultural Real Estate	$	2,414	$	2,518	$	-	$	2,247	$	6	$	3
Agricultural	$	1,296	$	1,296	$	-	$	445	$	-	$	1
Commercial Real Estate	$	4,133	$	4,133	$	573	$	4,428	$	45	$	14
Commercial and Industrial	$	2,149	$	2,149	$	1,846	$	2,218	$	52	$	10
Consumer	$	20	$	20	$	-	$	20	$	-	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
											YTD
							YTD		YTD		Interest
Six Months Ended June 30, 2022			Unpaid				Average		Interest		Income
	Recorded		Principal		Related		Recorded		Income		Recognized
	Investment		Balance		Allowance		Investment		Recognized		Cash Basis
With no related allowance recorded:
Consumer Real Estate	$	657	$	657	$	-	$	381	$	2	$	6
Agricultural Real Estate		2,414		2,518		-		1,696		13		5
Agricultural		1,296		1,296		-		233		-		1
Commercial Real Estate		1,148		1,148		-		991		11		19
Commercial and Industrial		145		145		-		231		2		10
Consumer		20		20		-		19		1		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		-		-		-		2,775		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		2,985		2,985		573		3,426		74		-
Commercial and Industrial		2,004		2,004		1,846		1,502		65		-
Consumer		-		-		-		4		-		-
Totals:
Consumer Real Estate	$	657	$	657	$	-	$	381	$	2	$	6
Agricultural Real Estate	$	2,414	$	2,518	$	-	$	4,471	$	13	$	5
Agricultural	$	1,296	$	1,296	$	-	$	233	$	-	$	1
Commercial Real Estate	$	4,133	$	4,133	$	573	$	4,417	$	85	$	19
Commercial and Industrial	$	2,149	$	2,149	$	1,846	$	1,733	$	67	$	10
Consumer	$	20	$	20	$	-	$	23	$	1	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
											Interest
Year Ended December 31, 2022			Unpaid				Average		Interest		Income
	Recorded		Principal		Related		Recorded		Income		Recognized
	Investment		Balance		Allowance		Investment		Recognized		Cash Basis
With no related allowance recorded:
Consumer Real Estate	$	509	$	509	$	-	$	355	$	5	$	12
Agricultural Real Estate		2,280		2,385		-		2,048		25		6
Agricultural		152		152		-		588		-		2
Commercial Real Estate		1,234		1,272		-		1,252		29		43
Commercial and Industrial		17		417		-		135		2		10
Consumer		2		2		-		15		1		-
With a specific allowance recorded:
Consumer Real Estate		60		60		6		15		-		1
Agricultural Real Estate		-		-		-		1,388		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		2,874		2,874		438		3,176		150		-
Commercial and Industrial		1,564		1,564		1,551		1,736		149		23
Consumer		165		165		1		2		-		-
Totals:
Consumer Real Estate	$	569	$	569	$	6	$	370	$	5	$	13
Agricultural Real Estate	$	2,280	$	2,385	$	-	$	3,436	$	25	$	6
Agricultural	$	152	$	152	$	-	$	588	$	-	$	2
Commercial Real Estate	$	4,108	$	4,146	$	438	$	4,428	$	179	$	43
Commercial and Industrial	$	1,581	$	1,981	$	1,551	$	1,871	$	151	$	33
Consumer	$	167	$	167	$	1	$	17	$	1	$	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

As of June 30, 2023, the Company had no foreclosed residential real estate property obtained by physical possession and $95 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. This compares to the Company having no foreclosed residential real estate property obtained by physical possession and $170 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceeding were in process according to local jurisdictions as of December 31, 2022. As of June 30, 2022, the Company had no foreclosed residential real estate property obtained by physical possession and $72 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions.

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") No. 2016-13 - "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and implemented the current expected credit losses accounting standard. As a result, the Company recorded a one-time adjustment from equity into the allowance for credit losses for loan losses and unfunded commitment liability in the amount of $4.5 million, or $3.4 million, net of tax.

Allowance for Credit Losses (ACL) has a direct impact on the provision expense. An increase in the ACL is funded through recoveries and provision expense.

The Company segregates its allowance into two reserves: The Allowance for Credit Losses (ACL) and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total Current Expected Credit Losses (CECL).

The allowance does not include an accretable yield of $5.8 and $6.3 million as of June 30, 2023 and December 31, 2022, respectively, nor a nonaccretable yield of $138 thousand as of December 31, 2022, related to the acquisitions of Bank of Geneva in 2019 and Ossian State Bank and Perpetual Federal Savings Bank in 2021 and Peoples Federal Savings and Loan Bank in 2022 as previously discussed in Note 2.

The AULC is reported within other liabilities while the ACL portion associated with loans is netted within the loans, net asset line on the Company’s Condensed Consolidated Balance Sheets.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following tables break down the activity within ACL for each loan portfolio classification and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs for the three and six months ended June 30, 2023:


	(In Thousands)
	Consumer Real Estate		Agricultural Real Estate			Agricultural		Commercial Real Estate		Commercial and Industrial			Consumer			Total
Three Months Ended June 30, 2023
ALLOWANCE FOR CREDIT LOSSES
Beginning balance	$	3,623	$	209		$	66	$	16,088	$	3,414		$	1,234		$	24,634
Provision for credit losses - loans		369		(76	)		41		590		(653	)		(128	)		143
Charge-offs		-		-			-		-		-			(60	)		(60	)
Recoveries		6		104			-		3		6			74			193
Ending Balance	$	3,998	$	237		$	107	$	16,681	$	2,767		$	1,120		$	24,910


	(In Thousands)
	Consumer Real Estate			Agricultural Real Estate			Agricultural			Commercial Real Estate		Commercial and Industrial			Consumer			Total
Six Months Ended June 30, 2023
ALLOWANCE FOR CREDIT LOSSES
Beginning balance	$	998		$	349		$	751		$	11,924	$	5,382		$	909		$	20,313
Adoption of ASU 2016-13		2,874	-		(166	)		(650	)		3,501		(2,165	)		170			3,564
Provision for credit losses-loans		113			(50	)		6			1,251		(462	)		102			960
Charge-offs		-			-			-			-		-			(182	)		(182	)
Recoveries		13			104			-			5		12			121			255
Ending Balance	$	3,998		$	237		$	107		$	16,681	$	2,767		$	1,120		$	24,910

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following tables break down the activity in the AULC for the three and six months ended June 30, 2023:


	(In Thousands)
	Unfunded Loan Commitment & Letters of Credit
Three Months Ended June 30, 2023
ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT
Beginning balance	$	2,228
Provision for credit losses - off balance sheet credit exposures		(129	)
Charge-offs		-
Recoveries		-
Ending Balance	$	2,099


	(In Thousands)
	Unfunded Loan Commitment & Letters of Credit
Six Months Ended June 30, 2023
ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT
Beginning balance	$	1,262
Adoption of ASU 2016-13		904
Provision for credit losses-off balance sheet credit exposures		(67	)
Charge-offs		-
Recoveries		-
Ending Balance	$	2,099

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

Additional analysis, presented in thousands, related to the ALLL for the three and six months ended June 30, 2022 in addition to the ending balances as of December 31, 2022 is as follows:


	Consumer Real Estate		Agricultural Real Estate			Agricultural			Commercial Real Estate		Commercial and Industrial		Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated			Total
Three Months Ended June 30, 2022
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	892	$	606		$	844		$	9,573	$	4,066	$	623		$	1,076	$	167		$	17,847
Charge Offs		-		-			-			-		-		(117	)		-		-			(117	)
Recoveries		4		-			-			3		65		70			-		-			142
Provision (Credit)		43		(260	)		(90	)		851		1,234		(9	)		-		(141	)		1,628
Other Non-interest expense related to unfunded		-		-			-			-		-		-			91		-			91
Ending Balance	$	939	$	346		$	754		$	10,427	$	5,365	$	567		$	1,167	$	26		$	19,591
Ending balance: individually evaluated for impairment	$	-	$	-		$	-		$	-	$	2,419	$	-		$	-	$	-		$	2,419
Ending balance: collectively evaluated for impairment	$	939	$	346		$	754		$	10,427	$	2,946	$	567		$	1,167	$	26		$	17,172
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-		$	-		$	-	$	-	$	-		$	-	$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	410,468	$	199,650		$	127,340		$	977,588	$	264,124	$	55,648		$	-	$	-		$	2,034,818
Ending balance: individually evaluated for impairment	$	657	$	2,414		$	1,296		$	4,133	$	2,149	$	20		$	-	$	-		$	10,669
Ending balance: collectively evaluated for impairment	$	409,318	$	197,039		$	126,044		$	973,258	$	261,854	$	55,628		$	-	$	-		$	2,023,141
Ending balance: loans acquired with deteriorated credit quality	$	493	$	197		$	-		$	197	$	121	$	-		$	-	$	-		$	1,008

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	Consumer Real Estate		Agricultural Real Estate			Agricultural		Commercial Real Estate		Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated			Total
Six Months Ended June 30, 2022
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	857	$	1,040		$	709	$	9,130	$	3,847		$	625		$	1,041	$	34		$	17,283
Charge Offs		-		-			-		-		(6	)		(205	)		-		-			(211	)
Recoveries		9		-			-		5		74			97			-		-			185
Provision (Credit)		73		(694	)		45		1,292		1,450			50			-		(8	)		2,208
Other Non-interest expense related to unfunded		-		-			-		-		-			-			126		-			126
Ending Balance	$	939	$	346		$	754	$	10,427	$	5,365		$	567		$	1,167	$	26		$	19,591
Ending balance: individually evaluated for impairment	$	-	$	-		$	-	$	-	$	2,419		$	-		$	-	$	-		$	2,419
Ending balance: collectively evaluated for impairment	$	939	$	346		$	754	$	10,427	$	2,946		$	567		$	1,167	$	26		$	17,172
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-		$	-	$	-	$	-		$	-		$	-	$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	410,468	$	199,650		$	127,340	$	977,588	$	264,124		$	55,648		$	-	$	-		$	2,034,818
Ending balance: individually evaluated for impairment	$	657	$	2,414		$	1,296	$	4,133	$	2,149		$	20		$	-	$	-		$	10,669
Ending balance: collectively evaluated for impairment	$	409,318	$	197,039		$	126,044	$	973,258	$	261,854		$	55,628		$	-	$	-		$	2,023,141
Ending balance: loans acquired with deteriorated credit quality	$	493	$	197		$	-	$	197	$	121		$	-		$	-	$	-		$	1,008

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


December 31, 2022	Consumer Real Estate		Agricultural Real Estate			Agricultural		Commercial Real Estate		Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated			Total
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	857	$	1,040		$	709	$	9,130	$	3,847		$	625		$	1,041	$	34		$	17,283
Charge Offs		-		-			-		-		(418	)		(409	)		-		-			(827	)
Recoveries		20		-			7		9		93			169			-		-			298
Provision (Credit)		121		(691	)		35		2,785		1,860			506			-		(16	)		4,600
Other Non-interest expense related to unfunded		-		-			-		-		-			-			221		-			221
Ending Balance	$	998	$	349		$	751	$	11,924	$	5,382		$	891		$	1,262	$	18		$	21,575
Ending balance: individually evaluated for impairment	$	6	$	-		$	-	$	438	$	1,551		$	1		$	-	$	-		$	1,996
Ending balance: collectively evaluated for impairment	$	992	$	349		$	751	$	11,486	$	3,831		$	890		$	1,262	$	18		$	19,579
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-		$	-	$	-	$	-		$	-		$	-	$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	494,423	$	220,514		$	128,926	$	1,150,511	$	272,119		$	89,894		$	-	$	-		$	2,356,387
Ending balance: individually evaluated for impairment	$	569	$	2,280		$	152	$	4,108	$	1,581		$	167		$	-	$	-		$	8,857
Ending balance: collectively evaluated for impairment	$	493,449	$	218,039		$	128,774	$	1,146,389	$	270,493		$	89,727		$	-	$	-		$	2,346,871
Ending balance: loans acquired with deteriorated credit quality	$	405	$	195		$	-	$	14	$	45		$	-		$	-	$	-		$	659

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 5 EARNINGS PER SHARE

Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Application of the two-class method for participating securities results in a more dilutive basic earnings per share as the participating securities are allocated the same amount of income as if they are outstanding for purposes of basic earnings per share. There is no additional potential dilution in calculating diluted earnings per share, therefore basic and diluted earnings per share are the same amounts. Other than the restricted stock plan, the Company has no other employee stock based compensation plans.

The Compensation Committee of the Company has determined that it is appropriate to award shares of the common stock of the Company to Outside Directors and Employees that are officers of the Company or the Bank who also serve as Directors of the Company and the Bank as a portion of their retainer for services rendered as Directors of the Company and the Bank. The Committee believes that it is appropriate to award the Directors shares equal to a specific dollar amount, rounded to the nearest whole share on an annual basis commencing on June 5, 2020 and thereafter on the first Friday of June in each year. Directors receive a prorated dollar value of shares for a partial year of service. The value for the shares is to be based upon the closing price for shares on June 4, 2020 and thereafter on the first Thursday in June in each year. On June 4, 2021, ten Directors received approximately $6,000 worth of shares which equated to 272 shares while four Directors received a prorated dollar value of shares. On October 1, 2021, a new Director was added as a result of the Perpetual Federal Savings Bank acquisition and received 68 prorated shares worth approximately $1,523. On June 3, 2022, twelve Directors each received $10,013 which equated to 240 shares. On June 2, 2023, twelve Directors each received $14,997 which equated to 754 shares. The use of stock for Directors’ retainer, does not have an effect on diluted earnings per share as it is immediately vested.

Any stock awards to senior management are made in March with other members of management receiving any awards in August. On March 1, 2023, senior management received stock awards of 21,700 shares worth approximately $562,030.


	(In thousands of dollars, except per share data)
	Three Months Ended						Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Earnings per share
Net income	$	6,001		$	8,271		$	12,467		$	16,373
Less: distributed earnings allocated to participating securities		(31	)		(21	)		(62	)		(42	)
Less: undistributed earnings allocated to participating securities		(35	)		(48	)		(69	)		(96	)
Net earnings available to common shareholders	$	5,935		$	8,202		$	12,336		$	16,235

Weighted average common shares outstanding including participating securities		13,632,440			13,065,975			13,624,094			13,066,123
Less: average unvested restricted shares		(150,065	)		(108,849	)		(143,163	)		(110,004	)
Weighted average common shares outstanding		13,482,375			12,957,126			13,480,931			12,956,119
Basic and diluted earnings per share	$	0.44		$	0.63		$	0.92		$	1.25

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

Fair Value Measurements:

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.

Available-for-sale securities, when quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. The Bank holds some local municipals that the Bank evaluates based on the credit strength of the underlying project. The fair value is determined by valuing similar credit payment streams at similar rates.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

The following summarizes financial assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:


Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(In Thousands)
June 30, 2023	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets - (Securities Available-for-Sale)
U.S. Treasury	$	86,127	$	-	$	-
U.S. Government agencies		-		127,891		-
Mortgage-backed securities		-		81,656		-
State and local governments		-		64,442		3,109
Total Securities Available-for-Sale	$	86,127	$	273,989	$	3,109

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
December 31, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets - (Securities Available-for-Sale)
U.S. Treasury	$	94,678	$	-	$	-
U.S. Government agencies		-		139,767		-
Mortgage-backed securities		-		86,927		-
State and local governments		-		66,072		3,345
Total Securities Available-for-Sale	$	94,678	$	292,766	$	3,345

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following tables represent the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of the three and six month periods ended June 30, 2023 and June 30, 2022. During the three month period ended March 31, 2022, there was one security transferred from Level 3 to Level 2.


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at April 1, 2023	$	1,835		$	1,305		$	3,140

Change in Fair Value		(4	)		(27	)		(31	)

Payments & Maturities		-			-			-

Reclassification & Adjustments		-			-			-

Balance at June 30, 2023	$	1,831		$	1,278		$	3,109


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at April 1, 2022	$	2,108		$	1,394		$	3,502

Change in Fair Value		(19	)		(69	)		(88	)

Payments & Maturities		-			-			-

Reclassification & Adjustments		-			-			-

Balance at June 30, 2022	$	2,089		$	1,325		$	3,414


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable		Total
Balance at January 1, 2023	$	2,071		$	1,274	$	3,345

Change in Fair Value		5			4		9

Payments & Maturities		(245	)		-		(245	)

Reclassification & Adjustments		-			-		-

Balance at June 30, 2023	$	1,831		$	1,278	$	3,109

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at January 1, 2022	$	2,307		$	2,466		$	4,773

Change in Fair Value		(58	)		(152	)		(210	)

Payments & Maturities		(160	)		-			(160	)

Reclassification & Adjustments		-			(989	)		(989	)

Balance at June 30, 2022	$	2,089		$	1,325		$	3,414

Most of the Company's available-for-sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2023 and December 31, 2022, such assets consist primarily of collateral dependent loans. Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that have expected credit losses. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management's best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)

At June 30, 2023 and December 31, 2022, fair value of collateral dependent loans categorized as Level 3 was $45 thousand and $2.7 million, respectively.

During 2023, impairment was recognized on real estate servicing rights based upon the independent third party's quarterly valuation. A valuation allowance was established by strata to quantify the likely impairment of the value of the real estate servicing rights to the Company. If the carrying amount of an individual strata exceeds the fair value, impairment was recorded on that strata so the servicing asset was carried at fair value. Impairment was $2 thousand at June 30, 2023. There was no impairment at December 31, 2022.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:


	(In Thousands)				Range
	Fair Value at				(Weighted
	June 30, 2023		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	3,109	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	3.49- 5.48% (4.78%)

Collateral dependent loans		45	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	25.00-25.00% (25.00%)

Real estate servicing rights		39	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	4.03- 4.65% (4.63%)


	(In Thousands)				Range
	Fair Value at				(Weighted
	December 31, 2022		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	3,345	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	2.08-5.01% (4.38%)

Collateral dependent impaired loans		2,667	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	20.00-29.01% (24.13%)

Real estate servicing rights		-	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	-

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table presents assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:


	(In Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2023
	Balance at June 30, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	45	$	-	$	-	$	45
Real estate servicing rights		39		-		-		39


	(In Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2022
	Balance at December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent impaired loans	$	2,667	$	-	$	-	$	2,667

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2023 and December 31, 2022 are reflected below.


	(In Thousands)
	June 30, 2023
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	71,193	$	71,193	$	71,193	$	-	$	-
Interest-bearing time deposits		3,485		3,473		-		3,473		-
Securities - available-for-sale		363,225		363,225		86,127		273,989		3,109
Other securities		17,535		17,535		-		-		17,535
Loans held for sale		1,459		1,437		-		-		1,437
Loans, net		2,490,883		2,316,031		-		-		2,316,031
Interest receivable		11,145		11,145		-		-		11,145

Financial Liabilities:
Interest bearing deposits	$	1,351,305	$	1,351,263	$	-	$	-	$	1,351,263
Non-interest bearing deposits		488,678		488,678		488,678		-		-
Time deposits		628,757		616,958		-		-		616,958
Total Deposits		2,468,740		2,456,899		488,678		-		1,968,221

Federal funds purchased and securities sold under agreement to repurchase		51,567		51,567		-		-		51,567
Federal Home Loan Bank advances		266,818		263,316		-		-		263,316
Other borrowings		-		-		-		-		-
Subordinated notes, net of unamortized issuance costs		34,644		29,070		-		29,070		-
Interest payable		3,655		3,655		-		-		3,655

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)


	(In Thousands)
	December 31, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	84,409	$	84,409	$	84,409	$	-	$	-
Interest-bearing time deposits		4,442		4,440		-		4,440		-
Securities - available-for-sale		390,789		390,789		94,678		292,766		3,345
Other securities		9,799		9,799		-		-		9,799
Loans held for sale		827		815		-		-		815
Loans, net		2,336,074		2,171,152		-		-		2,171,152
Interest receivable		10,440		10,440		-		-		10,440

Financial Liabilities:
Interest bearing deposits	$	1,378,090	$	1,377,944	$	-	$	-	$	1,377,944
Non-interest bearing deposits		532,794		532,794		532,794		-		-
Time deposits		557,980		543,737		-		-		543,737
Total Deposits		2,468,864		2,454,475		532,794		-		1,921,681

Federal funds purchased and securities sold under agreement to repurchase		54,206		54,206		-		-		54,206
Federal Home Loan Bank advances		127,485		125,761		-		-		125,761
Other borrowings		10,000		10,000		-		10,000		-
Subordinated notes, net of unamortized issuance costs		34,586		30,993		-		30,993		-
Interest payable		1,739		1,739		-		-		1,739

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 7 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company had $21 million federal funds purchased as of June 30, 2023 and $22.6 million as of December 31, 2022. During the same time periods, the Company had $30.6 million and $31.6 million in securities sold under agreement to repurchase.


	June 30, 2023
	Remaining Contractual Maturity of the Agreements (In Thousands)

	Overnight & Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Federal funds purchased	$	21,000	$	-	$	-	$	-	$	21,000
Repurchase agreements
US Treasury & agency securities	$	1,599	$	-	$	-	$	28,968	$	30,567
Total	$	22,599	$	-	$	-	$	28,968	$	51,567


	December 31, 2022
	Remaining Contractual Maturity of the Agreements (In Thousands)

	Overnight & Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Federal funds purchased	$	22,573	$	-	$	-	$	-	$	22,573
Repurchase agreements
US Treasury & agency securities	$	1,115	$	-	$	-	$	30,518	$	31,633
Total	$	23,688	$	-	$	-	$	30,518	$	54,206

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 8 SUBORDINATED NOTES

On July 30, 2021, the Company announced the completion of a private placement of $35 million aggregate principal amount of its 3.25% fixed-to-floating rate subordinated notes due July 30, 2031 (the “Notes”) to various accredited investors (the “Offering”). The price for the Notes was 100% of the principal amount of the Notes. The Notes qualify as Tier 2 capital for regulatory purposes in proportionate amounts until July 30, 2026. The Company used the net proceeds from the Offering for general corporate purposes, including financing acquisitions and organic growth.

Interest on the Notes accrues at a rate equal to (i) 3.25% per annum from the original issue date to, but excluding, the five-year anniversary, payable semi-annually in arrears, and (ii) a floating rate per annum equal to a benchmark rate, which is expected to be the Three-Month Term SOFR (as defined in the Notes), plus a spread of 263 basis points from and including the five-year anniversary until maturity, payable quarterly in arrears. Beginning on or after the fifth anniversary of the issue date through maturity, the Notes may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption will be at a redemption price equal to 100% of the principal amount of Notes being redeemed, plus accrued and unpaid interest.


	June 30, 2023					December 31, 2022
(In Thousands)	Principal		Unamortized Note Issuance Costs			Principal		Unamortized Note Issuance Costs
Subordinated Notes	$	35,000	$	(356	)	$	35,000	$	(414	)

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 10 RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU required the measurement of all expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations now use forward-looking information to better calculate their credit loss estimates. Many of the loss estimation techniques used prior to adoption of the ASU are still permitted, although the inputs to those techniques were changed to reflect the full amount of expected credit losses. Organizations continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU required enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures included qualitative and quantitative requirements that provided additional information about the amounts recorded in the financial statements. In addition, the ASU amended the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). FASB subsequently approved a delay in adoption for Smaller Reporting Companies. The Company had completed an analysis to determine that it qualifies as a Smaller Reporting Company. As such, adoption was postponed until January 1, 2023.

The Current Expected Credit Losses (“CECL”) methodology applies to loans held for investment, held to maturity debt securities, and off balance-sheet credit exposures. The ASU allows for several different methods of computing the ACL: closed pool, vintage, average charge-off, migration, probability of default / loss given default, discounted cash flow, and regression. Based on its analysis of observable data, the Company concluded the average charge-off method to be the most appropriate and statistically relevant. A 20-year lookback will be utilized as the historical loss period due to its inclusion of several economic cycles and relevance to real estate secured assets.

The Company began working with its third-party service provider to review parallel reports in June 2019. At the end of first quarter 2022, the Company evaluated and refined its methodology and produced a parallel report for the calculation of the ACL under the ASU guidance. The Company contracted with a third party to perform an independent validation of its processes and methodology. This validation has been completed and, at this time, is anticipated to be performed on an annual basis. As the Company conducts its own risk-based audits, the audit risk assessment will determine the scope and frequency of future model validations.

The qualitative impact of the new accounting standard will still be directed by many of the same factors that impacted the previous methodology for computing the allowance including, but not limited to, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition to this, the Company will also use reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee, quarterly economic projections for change in real GDP and of national unemployment.

The Company adopted ASU 2016-13 on January 1, 2023, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The Company did not make any material changes to its business practices as a result of implementing the ASU.

The transition adjustment of the CECL adoption included an increase in the allowance for loan losses of $3.6 million, increase in the allowance for unfunded loan commitment and letters of credit of $0.9 million and a $3.4 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Condensed Consolidated Balance Sheets, with the $1.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Condensed Consolidated Balance Sheets.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

The following table illustrates the impact of adopting the ASU:


	January 1, 2023
	(In Thousands)
	As Reported				Impact of
	Under		Pre-ASU 2016-13		ASU 2016-13
	ASU 2016-13		Adoption		Adoption
Consumer Real Estate	$	3,872	$	998	$	2,874
Agricultural Real Estate		183		349		(166	)
Agricultural		101		751		(650	)
Commercial Real Estate		15,425		11,924		3,501
Commercial & Industrial		3,217		5,382		(2,165	)
Consumer		1,079		909		170
Unfunded Loan Commitment & Letters of Credit		2,166		1,262		904
Current Expected Credit Losses	$	26,043	$	21,575	$	4,468

In March 2022, the FASB issued ASU 2022-02 "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." This ASU eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and requires entities to evaluate all receivable modifications under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. The amended guidance adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amended guidance also requires disclosure of current period gross charge-offs by year of origination within the vintage disclosures required by ASC 326. The amended guidance is effective for the Company on January 1, 2023, with early adoption permitted. The Company adopted ASU 2022-02 effective January 1, 2023. There was no financial impact as a result of adopting the standard.

In March 2022, the Sixth Circuit issued a ruling in CIC Services LLC v IRS vacating a previously referenced IRS Notice 2016-66. That ruling, as it stood, would remove the requirement of disclosure on Form 8886. However, on April 10, 2023, the IRS issued IR-2023-74 proposing regulations that classify Sec. 831(b) captives with less than a 65% claims loss ratio over a 10-year period as a "listed transaction." This provision would apply to only captives that have been in existence for at least 10 years. This is a change from Notice 2016-66 which classified Sec. 831(b) captives with less than a 70% claims loss ratio as a "transaction of interest." Final regulations are expected to be issued in Q4 2023. Management and its advisors are in the process of evaluating the impact of these proposed regulations.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company continues to prudently monitor its loan growth to best serve its customers. Year over year, the growth has been 23.6% (excluding PPP balances) of which organic growth accounted for 18.5% (excluding PPP and acquisitions). In terms of dollars, the largest increase was in commercial real estate, $301.7 million, or 30.5%, year over year. In terms of percentage, the largest increase was in consumer at 59.4% or $32.9 million year over year.

F&M Commercial Banking Division entered 2023 with a strong loan pipeline but demand has softened throughout F&M’s footprint. Client results from 2022 and YTD performance were good; however, client concerns remain about availability of workforce, interruptions and delays in the supply chain and energy prices. Rising interest rates have slowed loan demand in some sectors. Credit quality of the portfolio remains good.

F&M Agricultural Banking Division also experienced double digit growth as comparing June 30, 2023 to June 30, 2022. Commodity prices have remained high and at profitable levels. The overall outlook for grain, livestock and agri-businesses is optimistic for 2023 as our agricultural base appears positioned to make positive financial strides. Land values have continued to remain strong. The agriculture portfolio remains healthy with a positive future outlook.

F&M has seen a slow-down in production in the 1-4 family consumer real estate portfolio. Refinances have slowed significantly with the increase in rates. For the six months ended June 30, 2023, the Bank originated $12.1 million 1-4 family loans for sale compared to $26.7 million for the prior comparable period. This impact correlates to the lower gain on sale of assets, nearly $686 thousand lower than last year as of the same time period year-to-date June 30th.

The increased loan growth along with rate increases has positively impacted the interest earnings. Interest income was $10.6 million higher year over year. Funding of the loan growth has resulted in increased borrowings. Increased rates have driven both deposit rates and borrowing rates significantly higher. Net interest margin decreased 43 basis points in comparing the six months ended June 30, 2023, to June 30, 2022. The largest areas impacted by the increased rates is in the public fund offerings, higher net worth individuals and borrowing opportunities. The increases are beginning to show in the consumer deposits as the Bank offers special promotions to raise additional deposits to fund loan growth. The Company remains comfortable with its ability to raise funds as the Bank’s loan to deposit ratio is approximately 100.9%. Further discussion of the balance sheet composition movements and the impact on the earnings can be viewed in the Material Results of Operations section that follows.

F&M is halfway through the first year of its new three year strategic plan to be positioned to be a $4 - $5 billion dollar bank. As F&M positions itself for moderate growth, there will be continued emphasis on the investment in back office staff. Core and loan software systems are also being reviewed as part of the strategic plan. Three new offices were opened in the second quarter and two more are anticipated in the third quarter. This planned growth will continue to contribute to increased noninterest expense in future periods.

As mentioned previously in our comments regarding our commercial customers, F&M too is experiencing pressure for staffing – both in the cost of recruiting new talent and in retaining existing. Salary expenses were $1.2 million higher in first half 2023 year over year as compared with 2022. Pension plan expense increased $354 thousand and payroll taxes increased $196 thousand as compared to the six months ended June 30, 2022. As mentioned earlier, F&M has continued to invest in its back office staffing as part of its strategic plan. The opening of three new offices in the second quarter of 2023 has also contributed to staffing costs. At June 30, 2023, the Bank had 460 full time equivalent employees compared to 431 at December 31, 2022 and 390 at June 30, 2022. The operating efficiency ratio has increased as part of our investment into our strategic vision.

Noninterest expense saw an increase in advertising expense of $807 thousand over the first half of 2022. This was due to the unveiling of our new branding and logo during the second quarter. FDIC assessments also increased during the six months ended June 30, 2023 as compared to the prior year.

Overall, net income decreased 23.6% for the first half of 2023 as compared to the same time period 2022. Return on assets decreased to 0.81% as compared to 1.22% and return on equity decreased to 8.21% compared to 11.32% for the same time period. Year to date earnings per share are $0.92 compared to $1.25.

The Company remains well capitalized as it operates in a volatile rate environment and the size and footprint of its operations continues to grow. We continue to work towards our long-term objectives while we report and recognize many of the one-time costs incurred along the way. Asset quality remains strong. Our historical prudent approach to lending remains the foundation of our operations. We continue to embrace the opportunities presented and remain diligent to accomplishing our mission.

NATURE OF ACTIVITIES

Farmers & Merchants Bancorp, Inc. (the “Company”) is a financial holding company incorporated under the laws of Ohio in 1985. Our subsidiaries are The Farmers & Merchants State Bank (the “Bank”), a local independent community bank that has been primarily serving Northwest Ohio and Northeast Indiana since 1897, and Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and located in Nevada. We report our financial condition and net income on a consolidated basis and we have only one segment.

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501. The Bank operates thirty-five full-service banking offices throughout Northwest Ohio and Northeast Indiana and a drive-up facility in Archbold. These include a new office in downtown Toledo and in Oxford, Ohio which formerly was a successful LPO for the Bank. The Bank also operates three Loan Production Offices (LPOs), one each in Ohio, Indiana and Michigan.

The Farmers & Merchants State Bank engages in general commercial banking and savings business including commercial, agricultural and residential mortgage, consumer and credit card lending activities. The largest segment of the lending business relates to commercial, both real estate and non-real estate. The type of commercial business ranges from small business to multi-million dollar companies. The loans are a reflection of business located within the Banks’ market area of Ohio, Indiana and Michigan. Because the Bank's offices are primarily located in Northwest Ohio and Northeast Indiana, a substantial amount of the loan portfolio is comprised of loans made to customers in the farming industry for such items as farmland, farm equipment and operating loans for seed, fertilizer, and feed. Other types of lending activities include loans for home improvements, and loans for the purchase of autos, trucks, recreational vehicles, motorcycles, and other consumer goods.

The Bank also provides checking account services, as well as savings and time deposit services such as certificates of deposits. In addition, Automated Teller Machines (ATMs) or Interactive Teller Machines (ITMs) are provided at most branch locations along with other independent locations in the market area. ITMs operate as an ATM with the addition of remote teller access to assist the user. The Bank has custodial services for Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). The Bank provides on-line banking access for consumer and business customers. For consumers, this includes bill-pay, on-line statement opportunities and mobile banking. For business customers, it provides the option of electronic transaction origination such as wire and Automated Clearing House (ACH) file transmittal. In addition, the Bank offers remote deposit capture or electronic deposit processing and merchant credit card services. Mobile banking was added in 2012 and has been widely accepted and used by consumers. Upgrades to our digital products and services continue to occur in both retail and business lines. The Bank continues to offer new suites of products as customer preferences change and the Bank adapts and adopts new technologies. The Bank continues to offer products that also meet the needs of our more traditional customers.

The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Bank's practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year, a five year and a seven year fixed rate mortgage after which the interest rate will adjust annually. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of brokers. With the acquisition of Perpetual Federal Savings Bank in the 4th quarter of 2021 and the addition of Peoples Federal Savings in the 4th quarter of 2022, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area.

The Bank does not have a program to fund sub-prime loans. Sub-prime loans are characterized as a lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail banking customers.

All loan requests are reviewed as to credit worthiness and are subject to the Bank's underwriting guidelines as to secured versus unsecured credit. Secured loans are in turn subject to loan to value (LTV) requirements based on collateral types as set forth in the Bank's Loan Policy. In addition, credit scores of those seeking consumer credit are reviewed and if they do not meet the Bank's Loan Policy guidelines, an additional officer approval is required.

Consumer Loans:

•

Maximum loan to value (LTV) for cars, SUVs, and trucks is 110% depending on whether direct or indirect.

•

Loans above 100% are generally the result of sales tax.

•

Boats, campers, motorcycles, RV's and Motor Coaches range from 80%-90% based on age of vehicle.

•

1st or 2nd mortgages on 1-4 family homes maximum range from 80-85%.

•

Raw land LTV maximum ranges from 65%-75% depending on whether or not the property has been improved.

Commercial/Agriculture:

Accounts Receivable:

•

Up to 80% LTV less retainages and greater than 90 days.

Inventory:

•

Agriculture:

Livestock and grain up to 80% LTV, crops (insured) up to 75% and Warehouse Receipts up to 87%.

•

Commercial:

Maximum LTV of 50% on raw and finished goods.

•

Floor plan:

New/used vehicles to 100% of wholesale.

New/Used recreational vehicles and manufactured homes to 80% of wholesale.

Equipment:

•

New, not to exceed (NTE) 80% of invoice, used NTE 50% of listed book or 75% of appraised value.

•

Restaurant equipment up to 35% of market value.

•

Heavy trucks, titled trailers NTE 75% LTV and aircraft up to 75% of appraised value.

Real Estate:

•

Maximum LTVs range from 70%-80% depending on type.

•

Maximum LTV on non-traditional loan up to 85%.

FM Investment Services, the brokerage department of the Bank, opened for business in April 1999. Securities are offered through Raymond James Financial Services, Inc. In November of 2020, FM Investment Services purchased the assets and clients of Adams County Financial Resources (ACFR) which is discussed in further detail in Note 2 to the Company’s financial statements. Securities are offered through Raymond James Financial Services, Inc.

In December of 2014, the Company became a financial holding company within the meaning of the Bank Holding Company Act of 1956 as amended (the “Act”), in order to provide the flexibility to take advantage of the expanded powers available to a financial holding company under the Act. Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a captive insurance company (the “captive”) in December 2014 which is located in Nevada and regulated by the State of Nevada Division of Insurance.

The Bank’s primary market includes communities located in the Ohio counties of Champaign, Defiance, Fulton, Hancock, Henry, Lucas, Shelby, Williams, Wood and in the Indiana counties of Adams, Allen, DeKalb, Jay, Steuben and Wells. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.

At June 30, 2023, we had 460 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which is contributory. We consider our employee relations to be good.

RECENT REGULATORY DEVELOPMENTS

The Bank remains attentive to the current regulatory environment in light of the regulatory agencies’ risk-based approach to examinations. Regulatory changes and the complexity of new and amended rules have resulted in challenges and uncertainties which could pose an increased risk of noncompliance. Various significant mortgage rules require monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ongoing compliance.

The global spread of the Coronavirus (COVID-19) and resulting declaration of a world-wide pandemic have impacted the financial services industry and banking operations in the United States (US) and world-wide. The financial services sector is identified as a Critical Infrastructure Sector by the Department of Homeland Security during the COVID-19 response efforts. How basic business operations can be conducted has undergone a rapid and dramatic change. At the same time continuity of business operations involves promoting safety and security of customers and employees, providing a quality customer experience, and maintaining effective delivery systems and channels of communication. Regulatory guidance has been issued to manage and mitigate the unprecedented impact of the COVID-19 pandemic on business operations. Regulatory agencies promote prudent and practical efforts to assist customers and communities during this national emergency. Such assistance to alleviate the financial impact on affected customers involved modification of loan terms for existing borrowers, waiver of certain fees and charges, providing small dollar loans, and offering forbearance and payment deferrals on mortgage loan obligations due to financial hardship. Legislation enacted in March 2020 has provided the CARES Act. The CARES Act, among other matters, resulted in expansion of SBA Lending Programs; provided for a financial election to suspend GAAP principles and regulatory determinations for COVID-19 related loan modifications that would otherwise be deemed Troubled Debt Restructuring; gave the FDIC authority to establish a temporary Debt Guarantee Program for bank liabilities; delayed Current Expected Credit Losses (CECL) compliance; reduced the Community Bank Leverage Ratio to 8% to eliminate risk-based capital compliance for banks under $10 billion; required credit furnishers that agree to deferred loan payments, forbearance on a delinquent account, or any other relief during the national emergency to report accounts as current to Credit Reporting Agencies; and defined forbearance requirements and terms for single family and multi-family loans backed by federal government agencies or government sponsored entities due to COVID-19 financial hardship. Of immediate and significant importance was the rollout of the SBA Paycheck Protection Program (PPP). The PPP authorized lending of up to $350 billion in 100% guaranteed 7(a) loans to cover payroll costs, interest on mortgage payments, rent obligations, and utilities. The PPP provided a guaranteed loan for which a portion of the loan up to or equal to 8 weeks of covered payroll and specific operating expenses can be forgiven. The maximum loan size was capped at the lessor of 250% of the average monthly payroll costs or $10 million.

In April 2020, legislation known as the Paycheck Protection Program and Health Care Enhancement Act provided additional funding to replenish and supplement key programs under the CARES Act. Included in this legislation was the extension of the PPP with an additional $320 billion in funding. At least $60 billion of this funding was to be set aside for small and midsize banks and community lenders. Since April, the SBA has issued various Interim Final Rules to supplement and clarify matters involving the PPP. The Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was enacted in early June 2020. This provided more flexibility to Borrowers regarding use of PPP loan funds. Certain provisions were retroactive to the date of the CARES Act and all PPP loans. Among these provisions were the extension of the covered period of the loan, extension of the forgiveness period, deferral of payments based on the loan forgiveness period, reduction in the minimum that must be spent for payroll costs, extended date by which employees must be rehired, and removal of restrictions on payroll tax deferral. The term for subsequent PPO loans made after enactment of the PPPFA was extended to five years from two. A primary focus is now directed to aiding PPP borrowers in navigating the loan forgiveness process.

Additionally, the PPP was reauthorized with passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. It was originally intended to run through March 31, 2021 and was subsequently extended to May 31, 2021. Under the new legislation, $284 billion in funding for first and second-time PPP loan borrowers was provided to the SBA. Three categories of businesses were eligible to apply for PPP: 1) qualified business that did not receive a PPP loan during the first funding round; 2) previous PPP loan recipients who need a second loan and meet certain criteria; previous PPP loan recipients who returned all or a portion of their original loans and want to apply to additional funding. To be eligible, any business applying for PPP must have been in operation since at least February 15, 2020. Specific eligibility criteria applied to first-time PPP borrowers and previous PPP loan recipients. For 2021, PPP provides expanded coverage for expenditures in addition to covered payroll and specific operating expenses. For second-time loan recipients, the maximum loan amount was reduced from $10 million to $2 million. A loan recipient was eligible for full loan forgiveness if at least 60% of the loan amount is spent on payroll costs. Funds must be spent over a covered period of the loan recipients’ choosing between eight and 24 weeks after loan origination to be eligible for forgiveness. Depending on the continued duration of COVID-19 spread, further legislation and regulatory guidance may continue due to the economic impact on customers, businesses, communities, and industry sectors.

The Coronavirus Response and Relief Supplemental Appropriations Act, passed by Congress in December 2020, extended certain provisions of the CARES Act and affected the Company into 2021. Key banking provisions under this legislation include the following:

•

Provided an additional $284.6 billion in Paycheck Protection Program (PPP) funding for loans to small businesses, including for borrowers who have previously received a PPP loan.

•

A one-page simplified forgiveness process for PPP loans under $150,000.

•

Clarification to various CARES Act provisions, the tax treatment of PPP expenses, lender responsibilities for agent fees, and lender “hold harmless” protections under the PPP and other laws.

•

A further delay in Troubled Debt Restructuring (TDR) accounting until 60 days after the termination of the national emergency, or January 1, 2022. During third quarter 2021, there was one loan modification for $3.1 million that would have been previously treated as TDR under the guidance in ASC 310-40.

•

A further optional delay in Current Expected Credit Loss (CECL) accounting until January 1, 2022 which was further delayed until January 1, 2023.

•

A new round of Economic Impact Payments (EIPs) for consumers, with aggressive distribution timelines and new exemptions from garnishments.

•

Significant added support for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs).

•

Funding for agricultural support programs and for renter assistance programs.

•

Termination of existing Federal Reserve emergency lending authority under the CARES Act, while preserving the Fed’s general 13(3) emergency authority existing prior to that Act.

In December 2020, new Qualified Mortgage (QM) Definition rules were issued by the Consumer Financial Protection Bureau. One set of rules revised the General QM definition and another set added the definition of a Seasoned QM Loan. Both QM Loan rules had an effective date of March 1, 2021. The revised General QM rule replaced the General QM loans definition of a 43% debt-to-income (DTI) limit with a focus on the loan pricing and whether the Annual Percentage Rate exceeds the average prime offer rate by less than 2.25 percentage points. Compliance with the revised General QM Loan rule had a mandatory compliance date of July 1, 2021. The existing Temporary Government Sponsored Entity (GSE) QM option was set to expire as of the mandatory compliance date for the revised General QM Rule. Subsequently, the CFPB issued a final rule published in the Federal Register on April 30, 2021 which delayed and extended the mandatory compliance date for the revised General QM rule to October 1, 2022. The Company now complies with the revised price-based new General QM Loan definition and its requirements. Since the Company sells fixed rate consumer mortgage loans to the Federal Home Loan Mortgage Corporation, it must remain attentive to their current loan underwriting requirements.

On March 30, 2023, the CFPB issued final rules which amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) as made by Section 1071 of the Dodd-Frank Act. Covered financial institutions are required to collect and report data on covered credit applications involving small businesses, including those businesses owned by women or minorities. Small businesses are defined as those businesses (including agricultural businesses) which had gross annual revenue of $5 million of less during its most recent fiscal year. Data will be reported to the CFPB which will then make aggregated information publicly available. These new final rules have a phased implementation period with the largest lenders being required to collect and report data first.

Lenders that originated at least 2,500 small business loans annually must begin data collection on October 1, 2024. Lenders that originated at least 500 small business loans annually will be required to begin data collection as of April 1, 2025. For those Lenders that originated at least 100 small business loans annually, data collection will be required to begin as of January 1, 2026. The Bank conducted a preliminary assessment based on the number of covered loans originated in 2022. Based on the preliminary assessment, the Bank would be subject to the data collection requirements as of April 1, 2025. Data collection and reporting of small business loans does not include nonprofit or government entities or businesses with gross annual revenues that exceed $5 million. Additionally, data collection involves demographic information collected from a loan applicant regarding that applicant’s status as a minority-owned business, a women-owned business, and an LGBTQI+-owned business, as well as the applicant’s principal owners’ ethnicity, race, and sex. Applicants can refuse to provide demographic information.

Implementation of these final rules will involve significant changes to processes and procedures in conjunction with new software configurations to accommodate and capture required data points regarding applications and final action taken.

With regard to all regulatory matters, the Bank remains committed in making good faith efforts to comply with technical requirements of the laws, rules, regulations, and guidance from both federal and state agencies which govern its activities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and the Company follows general practices within the financial services industry in which it operates. At times the application of these principles requires management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements and accompanying notes.

These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. These policies, along with the disclosures presented in the notes to the condensed consolidated financial statements and in the management's discussion and analysis of the financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates, and judgments underlying those amounts, management has identified the determination of the ACL, the valuation of its Servicing Rights and the valuation of real estate acquired through or in lieu of loan foreclosures (“OREO Property”) as the accounting areas that require the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

Agricultural Real Estate Servicing Rights are included in Servicing Rights. The Company has contracted with a third party to assist in the calculation of the valuation of the Agricultural Real Estate Servicing Rights.

OREO Property held for sale is initially recorded at fair value at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell.

Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and a write-down is recorded by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell.

The net income from operations of foreclosed real estate held for sale is reported either in noninterest income or noninterest expense depending upon whether the property is in a gain or loss position overall. At June 30, 2023, December 31, 2022, and June 30, 2022 there were no OREO property holdings.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $9.7 million at June 30, 2023 and was reported in Other Assets on the Condensed Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipation repayments.

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Mortgage loans are charged off at 180 days past due, and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Consumer and credit card loans continue to accrue interest until they are charged off no later than 120 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The ACL represents management’s estimate of probable credit losses inherent in the Bank’s loan portfolio, unfunded loan commitments, and letters of credit 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.

The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Bank’s methodology provides an estimate of the probable credit losses either by calculating a specific loss per credit or by applying our methodology to groupings based on similar risk characteristics.

The loan portfolio was grouped based on loans with similar risk characteristics. The following groupings are utilized in the CECL calculation:


Multifamily	Farmland
Single Family HELOC	Acquired: Commercial & Industrial
Construction & Land	Impaired: Construction & Land
Commercial Real Estate	Impaired: Consumer
Consumer	Impaired: Commercial Real Estate
Single Family Sr Lien	Impaired: Single Family Sr Lien
Single Family Jr Lien	Impaired: Single Family Jr Lien
Commercial & Industrial	Impaired: Commercial & Industrial
Agriculture	Acquired: Agriculture
Commercial Real Estate: Construction & Land	Acquired: Single Family HELOC
Paycheck Protection Program - 100%: C&I	Acquired: Construction & Land
Acquired: Commercial Real Estate	Impaired: Farmland
Acquired: Single Family Sr Lien	Impaired: Single Family HELOC
Acquired: Single Family Jr Lien	Impaired: Agriculture
Acquired: Farmland
Acquired: Consumer
Acquired: Multifamily

All groups use the average charge-off method for calculating the ACL.

Groups using the average charge-off method utilize a 20-year lookback historical loss period. This includes several economic cycles and is more appropriate for real estate secured assets. Due to the Company's loss history not being sufficient and relevant enough to predict future losses, the Company is utilizing peer data from a peer group of 327 banks in the region with asset sizes less than $5 billion. The Company will compare our loan loss reserves against peer to determine if we are in line with the group. The Company's loan portfolio has changed significantly as loan growth has occurred. Thus, we don't deem the Company's historical portfolio to be quite as indicative of the future portfolio and, subsequently, loss exposure.

The reserves are calculated at the loan level and based on the note characteristics, essentially balances times loss rate + Q-factors + forward look, with the forward looking forecast eliminated after 12 months. As a percentage, the reserves are the highest against construction and land loans due to the life of loan being down and several larger loans being converted to permanent financing and therefore coming out of the construction bucket during 2023 thus affecting the reserves. The second largest reserve pool is the CRE construction and land loan, as these are loans that will convert to normal CRE loans after construction with permanent financing already in place, typically based on some leases signed before construction starts to reduce the risk profile of the loan. CRE loans are naturally reserved higher than multifamily loans given the stability in the multifamily sector. Ag loans have a low overall reserve, but they also have the lowest loss rates. Commercial and industrial loans have a lower reserve than CRE considering the average life of loan is much less (i.e., shorter amortization and lines of credit). The other loan groups did not have material changes during the quarter. We expect the Construction groups to have the most variability in the reserve, though having those higher reserves is important during this environment of construction delays and overruns.

In order to provide a consistent and supportable forward looking forecast from period-to-period, management is performing a regression analysis of the (Bank's/State's) historical loss rates against the following Federal Open Market Committee (FOMC) quarterly economic projections for Change in real GDP and National Unemployment. Annual projections are broken down using a straight-line approach for quarterly changes. Accounting guidance indicates the forecast period should be reasonable and supportable. Management believes that a forecast period of 12 months is reasonable as one year corresponds to the expected change in Fed policy given the current spreads between 1- and 10-year T-bills, the Company has annual line of credit maturities on many credits which gives the Company the ability to reassess risk, and the economic forecast in general is usually only feasible out to one year.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a modification to a borrower experiencing financial difficulty will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Inherent in most estimates is imprecision. Bank regulatory agencies and external auditors periodically review the Bank’s methodology and adequacy of the ACL. Any required changes in the ACL or loan charge-offs by these agencies or auditors may have a material effect on the ACL. For more information regarding the estimates and calculations used to establish the ACL please see Note 4 to the consolidated financial statements provided herewith.

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The categories of off-balance sheet exposures are the same as the categories for the ACL presented prior. The construction funding assumptions for the first six months were based on a sample of loans in the portfolio and their weighted average draw percentages. The remaining amounts are assumed to be drawn during the second six months. For all term loan groupings that are solely term loans, (e.g., CRE, Single Family, Farmland and Consumer), we have assumed 100% utilization after one year. For HELOC, we forecast utilization will return to 2019's level of 46% (pre-pandemic), which would result in a 9% increase - we have straight-lined that over the next year. For Agriculture loans, we assume year end 2022's line of credit usage will increase to 2019's level as well given the runoff of PPP, impact of inflation on input costs, which means Ag line utilization will increase. For C&I loans, we assume year end 2022's line of credit usage will increase to 2018's level given the runoff of PPP, impact of inflation on input costs, and slower inventory turns, which mean C&I loans (including term debt) will increase. As the Company adjusted funding assumptions, it did not have material effects on the calculation. We have utilized internal data to make these assumptions, which we believe is representative of our portfolio.

The Bank is also required to estimate the value of its servicing rights. These rights are composed of servicing rights for single-family mortgage loans and agricultural real estate loans. The Bank’s servicing rights relating to fixed rate single-family mortgage loans and agricultural real estate loans that it has sold without recourse but services for others for a fee represent an asset on the Bank’s balance sheet. The valuations are completed by independent third parties.

During the second quarter of 2023, the Company engaged an independent third party with expertise in the valuation of agricultural real estate servicing rights. The independent third party’s valuation of the agricultural real estate servicing rights is based on relevant characteristics of the Company’s agricultural real estate loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions. Management, with the advice from its third party valuation firm, reviewed the assumptions related to prepayment speeds, discount rates, and capitalized mortgage servicing income. Changes are reflected in the current quarter’s analysis related to the mortgage servicing asset.

While the process is similar to the process for valuing single family mortgage servicing rights, the ag servicing valuation utilizes different strata, prepayment speeds and other assumptions in order to account for the differences in behavior between ag loans and single 1-4 family mortgages. USDA rate indications, SBA market indications and Farmer Mac 3-month Cost of Funds Index adjustments are utilized in the quarterly valuation process.

As a result of this refined analysis, representing a change in accounting estimate, management recognized an additional $712 thousand of agricultural loan servicing rights during the quarter ended June 30, 2023. This change in estimate took place during the quarter ended June 30, 2023, and had no effect on past periods. Management intends to obtain the appraisal of the agricultural real estate loan servicing rights from the independent third party specialist on a quarterly basis.

The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.

The Bank’s servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included on the Company's Condensed Consolidated Balance Sheets. The servicing rights are then amortized as noninterest expense in proportion to, and over the period of the estimated future net servicing income of the underlying servicing rights. There are a number of factors, however, that can affect the ultimate value of the servicing rights to the Bank. The expected and actual rates of ag loans and single 1-4 family loan prepayments are the most significant factors driving the potential for the impairment of

the value of servicing assets. Increases in loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced, meaning that the present value of the servicing rights is less than the carrying value of those rights on the Bank's balance sheet.

Therefore, in an attempt to reflect an accurate expected value to the Bank of the servicing rights, the Bank receives a valuation of its servicing rights from an independent third party. The independent third party's valuation of the servicing rights is based on relevant characteristics of the Bank's loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions.

For purposes of determining impairment, the mortgage servicing assets are stratified into like groups based on loan type, term, new versus seasoned and interest rate. Management, with the advice from its third-party valuation firm, reviews the assumptions related to prepayment speeds, discount rates, and capitalized mortgage servicing income on a quarterly basis. Changes are reflected in the following quarter's analysis related to the mortgage servicing asset. In addition, based upon the independent third party's valuation of the Bank's servicing rights, management then establishes a valuation allowance by each stratum, if necessary, to quantify the likely impairment of the value of the servicing rights to the Bank. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Bank's net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying servicing rights based on market conditions.

The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights.

MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company has begun to experience a slowdown in its growth mode. It is partly due to a natural decrease in borrowers loan demand as higher interest rates have made projected capital outlays too costly. The Bank has also experienced a more challenging environment in which to raise lower cost core deposits. Therefore, the Bank has maintained an emphasis on servicing existing clients and focus on prudent growth within our newer markets. The Bank is focused on funding the loan growth with the least expensive source of deposits or borrowings. While securities are generally considered as a source of cash, in the current environment, it is unlikely that they would be sold for such funding needs. Growing deposits will be a focus especially in our newer markets. The Bank offers the Insured Cash Sweep (“ICS”) product accessed through the IntraFi network of financial institutions which helps to reduce the amount of pledged securities. This has provided more availability for runoff of securities by the Bank if warranted to fund loan growth.

As the competition for deposits has increased, the Company has increased emphasis on its liquidity position. The frequency of management liquidity meetings has increased to weekly in order to be more responsive to opportunities and threats as they arise. As a result of this increased emphasis on its liquidity position, additional real estate backed collateral has been pledged to the FHLB in order to increase borrowing capacity. The additional collateral of $165.2 million as of June 30, 2023 is tied to specific commercial real estate loans. Additional capacity has also been created through enrollment and pledging $64.5 million of securities, having a par value of $74.1 million, to the Federal Reserve's Bank Term Funding Program (BTFP). The BTFP collateral values are based on the par value of the securities rather than the fair values most other lenders utilize. Currently, par values are higher than fair value which results in a higher available balance for borrowings. As of June 30, 2023, the Company had not utilized any funding from the BTFP.

Liquidity in terms of cash and cash equivalents ended $13.2 million lower as of June 30, 2023 than it was at December 31, 2022. Cash and cash equivalents increased $6.9 million over March 31, 2023. Prior year’s excess liquidity along with an increase of Federal Home Loan Bank advances of $139.3 million helped to fund the $154.8 million increase in net loans since year end 2022. All loan portfolios with the exception of the Agricultural portfolio, Consumer Portfolio and Other portfolio increased compared to December 31, 2022 with the largest increase in the commercial real estate portfolio.

In comparing to the same prior year period, the June 30, 2023 (net of deferred fees and cost) loan balances of $2.5 billion accounted for $481.0 million or 23.6% increase when compared to 2022’s $2.0 billion. The year over year improvement was made up of a combined increase in commercial and industrial related loans of 26.5%, 18.5% of which was attributed to organic growth. Individual growth was comprised of 30.8% in commercial real estate loans and 8.7% in non-real estate commercial loans. Consumer real estate loans increased by 23.5% and consumer loans by 60.2%. Agricultural related loans increased 9.8% year over year. Individual growth was comprised of 15.5% in agricultural real estate and an increase of 1.0% in non-real estate agricultural loans. Other loans decreased by 7.2%. The Company credits the growth to the strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share. The acquisition of Peoples Federal Savings and Loan Association in 2022 brought $101.8 million of loans to the portfolio. See Note 2 to the consolidated financial statements.

The chart below shows the breakdown of the loan portfolio category as of June 30, for the last three years, net of deferred fees and costs.


	(In Thousands)
	June 30, 2023		June 30, 2022		June 30, 2021
	Amount		Amount		Amount
Consumer Real Estate	$	506,842	$	410,468	$	194,574
Agricultural Real Estate		230,531		199,650		189,426
Agricultural		128,593		127,340		100,905
Commercial Real Estate		1,278,445		977,588		689,728
Commercial and Industrial		253,248		232,881		213,707
Consumer		89,138		55,648		56,534
Other		28,996		31,243		13,549

Total Loans, net of deferred fees and costs	$	2,515,793	$	2,034,818	$	1,458,423

The following is a contractual maturity schedule by major category of loans excluding fair value adjustments as of June 30, 2023.


	(In Thousands)
			After One		After Five
	Within		Year Within		Years Within		After
	One Year		Five Years		Fifteen Years		Fifteen Years
Consumer Real Estate	$	11,553	$	33,776	$	150,558	$	315,924
Agricultural Real Estate		807		5,339		65,958		159,584
Agricultural		60,666		41,725		22,615		3,376
Commercial Real Estate		34,229		411,987		603,288		231,602
Commercial and Industrial		85,552		108,645		58,965		852
Consumer		2,010		49,563		36,948		136
Other		234		1,060		18,012		9,696

Management feels confident that liquidity needs for future growth can be met through additional maturities from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has $113 million and $73 million of unsecured borrowing capacity through its correspondent banks as of June 30, 2023 and December 31, 2022 respectively. The Bank also had access to $150.1 million through a Cash Management Advance with the Federal Home Loan Bank as of June 30, 2023 and December 31, 2022. Additionally, the BTFP had a borrowing capacity of $74.1 million at June 30, 2023.

While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2021, 2022, and 2023. The security portfolio decreased $27.6 million in the first six months of 2023 from year end 2022 due to the sale of $21.6 million of securities which was partially offset by a $2.9 million decrease in unrealized losses. The security portfolio decreased $36.5 million from June 2022 due to an increase of gross unrealized losses of $5.9 million and the aforementioned sale. The amount of pledged investment securities increased by $107.7 million as compared to year end and $112.4 million as compared to June 30, 2022. As of June 30, 2023, pledged investment securities totaled $242.5 million.

An additional $1.6 million is also available to the Bank from the Federal Home Loan Bank based on current amounts of pledged collateral. At the present time, only 1-4 family, home equity, limited commercial real estate portfolios and some securities are pledged.

With the exception of FHLB stocks, carried at cost, which is shown as other securities, all of the Company’s security portfolio is categorized as “available-for-sale” and as such is recorded at fair value.

Overall total assets increased 4.4% since year end 2022 and grew 17.7% since June 30, 2022. The largest growth in both periods was in the loan portfolios. Goodwill also increased $5.9 million compared to June 30, 2022. Refer to Note 2 for information on assets acquired from PPSF.

Federal Home Loan Bank advances accounted for the largest growth within liabilities, up 109.3% or $139.3 million since year end and 525.8% or $224.2 million over June 30, 2022 balances. Deposits decreased slightly, $124 thousand since year end 2022 and increased 11.0% or $244.7 million over June 30, 2022. The mix of deposits saw an increases in time deposits and NOW accounts since December 31, 2022. Noninterest-bearing accounts and savings accounts saw decreases from December 31,2022. Refer to Note 2 for information on liabilities acquired from PPSF. The limited change in deposits this year reflects the increased competition for deposits within the Bank's market area. At June 30, 2023, total uninsured deposits of the Bank were $442.3 million, or 17.9% of total deposits. This is down 20.7%, from $511.3 million at December 31, 2022.

Shareholders’ equity increased by $6.5 million as of the second quarter of 2023 compared to year end 2022. Earnings exceeded dividend declarations during the six months ended June 30, 2023. Accumulated other comprehensive loss decreased in unrealized loss position by $2.3 million from December 2022 to an unrealized loss of $35.9 million on June 30, 2023. A portion of this decrease is attributable to the aforementioned sale of securities making the loss realized in the first quarter 2023. The

implementation of ASU 2016-13 (CECL) resulted in an entry which reduced retained earnings $3.4 million on January 1, 2023. This adjustment is permitted to be spread over three years when calculating regulatory capital, which for 2023 is over $2.5 million. Dividends declared remained unchanged from the previous quarter at $0.21 per share. Compared to June 30, 2022, shareholders’ equity increased 8.5% or $23.8 million. Profits were lower year to date June 2023 than year to date June 2022 by $3.9 million.

Basel III regulatory capital requirements include a capital conservation buffer of 2.5%. As of June 30, 2023, the Company and the Bank are both positioned well above the current requirement.

While the Holding Company generally has sufficient liquidity to maintain its dividend policy without relying on the upstreaming of dividends from the Bank, the Bank declared a $1.0 million dividend during the second quarter.

The Bank continues to be well-capitalized at June 30, 2023 in accordance with Federal regulatory capital requirements as the capital ratios below show:


Tier I Leverage Ratio	9.01	%
Risk Based Capital Tier I	10.81	%
Total Risk Based Capital	11.88	%
Stockholders' Equity/Total Assets	10.45	%
Capital Conservation Buffer	3.88	%

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended June 30, 2023 and 2022

Interest Income

When comparing second quarter 2023 to second quarter 2022, average loan balances with the acquisitions of PPSF grew $477.4 million. This represented a 23.9% increase in a one-year time period. Interest income on loans increased $9.0 million as compared to the quarter ended June 30, 2022. During the current quarter, the Company reversed previously recognized loan interest income from one relationship in the amount of approximately $463 thousand.

The available-for-sale securities portfolio decreased in average balances by $20.6 million when comparing to the same quarter in 2022 while the income increased $165 thousand over second quarter 2022. Federal funds sold and interest-bearing deposits decreased in average balances by $31.9 million as compared to the same quarter in 2022 with increased income of $324 thousand for the current quarter. The decreased balances have been used to fund loan growth. Refer to Note 2 Business Combination and Asset Purchase for information on assets acquired from PPSF.

The overall total average balance of the Bank’s earning assets increased by $424.9 million and interest income for the quarter comparisons was higher for second quarter 2023 by 39.6% or $9.5 million as compared to second quarter 2022. Increases in the prime lending rate between periods has contributed to approximately 45% of the growth.

Annualized yield, for the quarter ended June 30, 2023, was 4.53% as compared to 3.79% for the quarter ended June 30, 2022. The following charts demonstrate increased loan balances accounted for 59.6% of the increased loan interest income while rate increases accounted for the remaining 40.4%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $139 and $143 thousand for the second quarter 2023 and 2022 which resulted in a federal tax savings of $29 and $30 thousand, respectively.


	(In Thousands)
	Quarter to Date Ended June 30, 2023				Annualized Yield/Rate
Interest Earning Assets:	Average Balance		Interest/Dividends		June 30, 2023			June 30, 2022
Loans	$	2,476,795	$	31,365		5.07	%		4.48	%
Taxable investment securities		399,257		1,486		1.49	%		1.27	%
Tax-exempt investment securities		24,259		93		1.94	%		1.64	%
Fed funds sold & other		49,160		433		3.52	%		0.54	%
Total Interest Earning Assets	$	2,949,471	$	33,377		4.53	%		3.79	%

Change in Interest Income Quarter to Date June 30, 2023 Compared to June 30, 2022


	(In Thousands)
Interest Earning Assets:	Total Change		Change Due to Volume			Change Due to Rate
Loans	$	8,977	$	5,347		$	3,630
Taxable investment securities		142		(74	)		216
Tax-exempt investment securities		23		11			12
Fed funds sold & other		324		(43	)		367
Total Interest Earning Assets	$	9,466	$	5,241		$	4,225

Interest Expense

Outpacing the higher interest income improvement for the quarter was an increase in interest expense in 2023 of $11.2 million or 547.7% compared to second quarter 2022. Since 2022, average interest-bearing deposit balances have increased $222.2 million or 12.7% and the Company recognized $9.1 million more in interest expense for the most recent quarter. March 2022 saw the first rate change since March of 2020 with an increase of 25 basis points which was followed by an increase of 50 basis points in May and four increases of 75 basis points in June, July, September and November with a final 50 basis point increase in December. To date in 2023, there have been three increases of 25 basis points in February, March and May. Deposit rates have been adjusted numerous times with all the rate increases. Interest expense on FHLB borrowings and other borrowings increased $1.9 million in the second quarter 2023 over the same time frame in 2022 due to borrowings taken on from the Peoples acquisition and new FHLB borrowings in 2022 and 2023 used to fund loan growth. Interest expense on fed funds purchased and securities sold under agreement to repurchase increased $261 thousand compared to second quarter 2022 due mainly to the increased rate environment. Another factor in the increased cost of funds is the change in the mix of funding. More growth has occurred in interest bearing deposit balances supplemented with increased borrowings. The Bank continues to focus on capturing the full customer relationship; however, it has resulted in more expensive deposits being brought in. The average cost of funds increased to 2.35% in second quarter 2023 compared to 0.44% in second quarter 2022. Refer to Note 8 for additional information on subordinated notes. Liabilities assumed from PPSF can be seen in Note 2.


	(In Thousands)
	Quarter to Date Ended June 30, 2023				Annualized Yield/Rate
Interest Bearing Liabilities:	Average Balance		Interest		June 30, 2023			June 30, 2022
Savings deposits	$	1,356,798	$	6,238		1.84	%		0.24	%
Other time deposits		612,929		4,196		2.74	%		0.55	%
Other borrowed money		215,884		2,113		3.92	%		2.23	%
Fed funds purchased & securities
sold under agreement to repurchase		39,966		427		4.27	%		1.88	%
Subordinated notes		34,625		285		3.29	%		3.29	%
Total Interest Bearing Liabilities	$	2,260,202	$	13,259		2.35	%		0.44	%

Change in Interest Expense Quarter to Date June 30, 2023 Compared to June 30, 2022


	(In Thousands)
Interest Bearing Liabilities:	Total Change		Change Due to Volume		Change Due to Rate
Savings deposits	$	5,461	$	26	$	5,435
Other time deposits		3,594		246		3,348
Other borrowed money		1,895		983		912
Fed funds purchased & securities
sold under agreement to repurchase		261		22		239
Subordinated notes		1		1		-
Total Interest Bearing Liabilities	$	11,212	$	1,278	$	9,934

Overall, net interest spread for the second quarter 2023 was 117 basis points lower than last year. As the following chart indicates, the improvement in yields on interest earning assets did not offset the increased cost of funds when comparing to the same period a year ago. Competition for deposits is intense with most competitors offering special rates for specific terms.


	June 30, 2023			June 30, 2022			June 30, 2021
Interest/Dividend income/yield		4.53	%		3.79	%		3.53	%
Interest Expense/cost		2.35	%		0.44	%		0.44	%
Net Interest Spread		2.18	%		3.35	%		3.09	%
Net Interest Margin		2.73	%		3.47	%		3.21	%

Net Interest Income

Net interest income decreased $1.7 million for the second quarter 2023 over the same time frame in 2022 with the increase in interest income of $9.5 million offset by the higher interest expense of $11.2 million as previously mentioned. As the new loans added in 2022 and 2023 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to increase interest income in the long run. Loans as a percentage of earning assets increased to 84.0% in second quarter 2023 compared to 79.2% in second quarter 2022. Loans to total assets increased to 79.4% in second quarter 2023 compared to 74.4% for the same period 2022. The percentage of earning assets to total assets increased to 94.6% in 2023 compared to 94.0% in 2022. In terms of net interest margin, the Bank recognizes competition for deposits continues to increase with higher interest rates putting pressure on the margin which may lead to a further tightening in the short term.

Comparison of Noninterest Results of Operations for three month periods ended June 30, 2023 and 2022

Provision Expense

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ACL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The agriculture real estate loan portfolio accounted for the largest component of recoveries and the consumer loan portfolio accounted for the largest component of charge-offs for three months ended June 30, 2023 and 2022. The commercial real estate portfolio is currently creating a large impact on the ACL due to the loan growth.

Total provision for credit losses was $1.5 million lower for the three months ended June 30, 2023 as compared to the same period in 2022. Management continues to monitor asset quality, making adjustments to the provision as necessary. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $57 thousand lower during the three months ended June 30, 2023 than the same period in 2022. Recoveries were $51 thousand higher during the three months ended June 30, 2023 as compared to same period in 2022. Combined net recoveries were $108 thousand higher in the three months ended June 30, 2023 than the same time period 2022.

Loans past due 30 or more days, which include no deferrals related to COVID-19, increased $5.6 million at June 30, 2023 as compared to June 30, 2022. The largest changes were attributed to the increase of past due balances in the agricultural portfolio, agricultural real estate portfolio, commercial real estate portfolio and commercial and industrial portfolio. The increase in the agricultural real estate portfolio was attributable to two larger relationships while the increase in the other categories were multiple, smaller relationships.

The following table breaks down the activity within the ACL for each loan portfolio class and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for the three months ended June 30, 2023 , 2022, and 2021.

* Nonperforming loans are defined as all loans on nonaccrual, plus any loans 90 days past due not on nonaccrual.


	(In Thousands)
	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Three Months Ended June 30, 2021
Loans, net of deferred fees and costs	$	2,515,793		$	2,034,818		$	1,458,423
Daily average of outstanding loans	$	2,476,795		$	1,999,357		$	1,419,531
Nonaccrual loans	$	6,295		$	5,247		$	7,031
Nonperforming loans*	$	6,295		$	5,247		$	7,031

Allowance for Credit Losses - April 1,	$	24,634		$	16,771		$	14,425
Adjustment for accounting change		-			-			-
Loans Charged off:
Consumer Real Estate		-			-			-
Agriculture Real Estate		-			-			-
Agricultural		-			-			-
Commercial Real Estate		-			-			-
Commercial and Industrial		-			-			-
Consumer		60			117			38
		60			117			38
Loan Recoveries:
Consumer Real Estate		6			4			3
Agriculture Real Estate		104			-			-
Agricultural		-			-			6
Commercial Real Estate		3			3			3
Commercial and Industrial		6			65			5
Consumer		74			70			42
		193			142			59
Net Charge Offs (Recoveries):
Consumer Real Estate		(6	)		(4	)		(3	)
Agriculture Real Estate		(104	)		-			-
Agricultural		-			-			(6	)
Commercial Real Estate		(3	)		(3	)		(3	)
Commercial and Industrial		(6	)		(65	)		(5	)
Consumer		(14	)		47			(4	)
		(133	)		(25	)		(21	)
Provision for Credit Losses		143			1,628			641
Allowance for Loan Losses - June 30,		24,910			18,424			15,087
Allowance for Unfunded Loan Commitments & Letters of Credit - June 30,		2,099			1,167			1,145
Total Allowance for Credit Losses - June 30,	$	27,009		$	19,591		$	16,232
Ratio of Net Charge-offs to Average Outstanding Loans		-0.01	%		0.00	%		0.00	%
Ratio of Nonaccrual Loans to Loans		0.25	%		0.26	%		0.48	%
Ratio of the Allowance for Loan Losses to Loans		0.99	%		0.91	%		1.03	%
Ratio of the Allowance for Loan Losses to Nonaccrual Loans		395.71	%		351.44	%		214.58	%
Ratio of the Allowance for Loan Losses to Nonperforming Loans*		395.71	%		351.44	%		214.58	%

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off of a loan, whether partial loan balance or full loan balance. The Bank is also following the guidelines established under the CARES Act. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. A broker’s price opinion or appraisal will be completed on all home loans in litigation and any deficiency will be charged off before reaching 150 days delinquent. Commercial and agricultural credits are charged down/allocated at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-offs may be realized as further unsecured positions are recognized.

Loans classified as nonaccrual were lower as of June 30, 2023 at $4.7 million as compared to $5.2 million as of June 30, 2022. The agricultural portfolio decreased $1.1 million as compared to June 30, 2022. This decrease offset the increases in the other portfolios.

The following table presents the balances for allowance for credit losses by loan type at June 30, 2023 and June 30, 2022.


	(In Thousands)					(In Thousands)
	June 30, 2023					June 30, 2022
Balance at End of Period Applicable To:	Amount		% of Loan Category			Amount		% of Loan Category
Consumer Real Estate	$	3,998		16.05	%	$	939		20.17	%
Agricultural Real Estate		237		0.95	%		346		9.81	%
Agricultural		107		0.43	%		754		6.26	%
Commercial Real Estate		16,681		66.96	%		10,427		48.04	%
Commercial and Industrial		2,767		11.11	%		5,365		12.99	%
Consumer		1,120		4.50	%		567		2.73	%
Unallocated		-		0.00	%		26		0.00	%
Allowance for Loan Losses		24,910					18,424
Off Balance Sheet Commitments		2,099					1,167
Total Allowance for Credit Losses	$	27,009				$	19,591

Noninterest Income

Noninterest income was up $952 thousand for the three months ended June 30, 2023 over the same time frame in 2022. Combined service fees increased by $1.0 million as compared to the three months ended June 30, 2022. Servicing rights income for 1-4 family and agricultural real estate loans increased $665 thousand as the valuation of the agricultural real estate servicing rights was refined by $712 thousand due to the previously described change in the accounting estimate. During the second quarter of 2023 the independent third party engaged by the Bank refined the analysis of the agricultural real estate servicing rights. It was determined that the servicing rights asset was undervalued by $712 thousand as of December 31, 2022 related to agricultural real estate servicing rights. This change in estimate was recognized during the quarter ended June 30, 2023, and had no effect on prior periods. Going forward, the third party valuation firm will complete the valuation quarterly to determine if any impairment needs to be recognized. Debit card income increased by $106 thousand and bank owned life insurance cash surrender value increased $41 thousand. Also contributing to the increase was overdraft and returned check charges which increased $78 thousand compared to the three months ended June 30, 2022. Fee income from credit cards decreased by $22 thousand as compared to 2022.

The Company has seen a decrease in its mortgage production volume due to the heightened borrowing costs and continued lack of housing inventory in many of our markets. The gain on the sale of these loans was $56 thousand lower for the three months ended June 30, 2023 over the same period in 2022. Loan originations on loans held for sale for the three months ended June 30, 2023 were $8.4 million with proceeds from sale at $8.0 million for 2023 compared to 2022’s activity of $20.9 million in originations and $22.9 million in sales. The mortgages sold were both 1-4 family and agricultural real estate loans originated for sale.

The impact of servicing rights, both to income and expense, is shown in the following table which reconciles the value of servicing rights. The capitalization runs through noninterest income while the amortization thereof is included in noninterest expense. For the six months ended June 30, 2023 and 2022, servicing rights caused a net $2.1 million in income and $44 thousand in income, respectively. The higher capitalized additions for 2023 are attributed to $2.2 million of rights related to agricultural loans. Amortization of agricultural rights was $74 thousand for the first half of 2023. For loans of 15 years and less, the market value of the servicing rights was 1.043% in the second quarter 2023 versus 0.97% in second quarter 2022. For loans over 15 years, the value was 1.464% versus 1.099% for the same periods respectively. A valuation allowance of $414 thousand was established during 2021. During the first quarter of 2022, $134 thousand of the valuation allowance was reversed with an additional $91 thousand of the valuation reversed during second quarter 2022. At June 30, 2023, the carrying value of two strata were slightly below the market value requiring a $2 thousand valuation allowance to be established.


	Three Months						Six Months
	(In Thousands)						(In Thousands)
	2023			2022			2023			2022
Beginning Balance	$	4,985		$	3,616		$	3,549		$	3,571
Capitalized Additions		814			149			2,409			354
Amortization		(162	)		(150	)		(321	)		(310	)
Ending Balance, June 30,		5,637			3,615			5,637			3,615
Valuation Allowance		(2	)		(189	)		(2	)		(189	)
Servicing Rights net, June 30,	$	5,635		$	3,426		$	5,635		$	3,426

Noninterest Expense

For the three months ended June 30, 2023, noninterest expenses were $3.6 million higher than for the same period in 2022. Salaries, wages, and employee benefits (includes normal merit increases, restricted stock expense, incentive payout and all employee benefits) increased $1.7 million in total. This was comprised of increased salaries of $1.1 million and increased benefits of $525 thousand of which $224 thousand is related to medical, $150 thousand to pension and $92 thousand for workers comp. The increase was due to the investment in people for our strategic growth initiative and staffing of new offices. The additional cost of the offices is also evident in the increased expenses in net occupancy and furniture and equipment. Advertising and public relations expense increased $530 thousand. This was due, in part, to our new logo launch. Data processing expenses increased $142 thousand. FDIC assessment expense increased $67 thousand.

Income Taxes

Income tax expense was $519 thousand lower for the three months ended June 30, 2023 compared to the same period in 2022 based mainly on lower earnings. Effective tax rates were 20.33% and 19.86% for 2023 and 2022 respectively.

Net Income

Results overall, net income in the three months ended June 30, 2023 was down $2.3 million as compared to the same period last year. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion.

Comparison of Results of Interest Earnings and Expenses for six month periods ended June 30, 2023 and 2022

Interest Income

When comparing the six months ended June 30, 2023 and June 30, 2022, average loan balances with the acquisitions of PPSF grew $483.5 million. This represented a 24.7% increase in a one-year time period. Interest income on loan balances increased $18.2 million as compared to the six months ended June 30, 2022. This increase was partly the result of the growth in the year over year loan balances, 5.1% of which was directly attributable to the Company’s recent acquisition and 18.5% of which was due to organic loan growth within the Bank’s broader markets. During the current quarter, the Company reversed previously recognized loan interest income from one relationship in the amount of approximately $463 thousand. The Company's loan portfolio is 28.8% variable with 20.7% of total loans repricing within the next year.

The available-for-sale securities portfolio decreased in average balances by $22.6 million when comparing to the same period in 2022 while the income increased $399 thousand over the six months ended June 30, 2022. Federal funds sold and interest-bearing deposits decreased in average balances by $65.2 million as compared to the same six month period ended June 30, 2022 with increased income of $745 thousand for the current period. The decreased balances have been 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. The loss will be recouped in 0.67 years.

The overall total average balance of the Bank’s earning assets increased by $395.7 million and interest income for the period comparisons was higher for the six months ended June 30, 2023 by 42.3% or $19.4 million as compared to the six month period ended June 30, 2022. Increases in the prime lending rate between periods has contributed to approximately 46% of the growth. Acquisition balances also contributed to the increase in comparison. Refer to Note 2 Business Combination and Asset Purchase for information on assets acquired from PPSF.

Annualized yield, for the six months ended June 30, 2023, was 4.47% as compared to 3.63% for the comparable period ended June 30, 2022. The following charts demonstrate the increased loan balances accounted for 58.2% of the increased loan interest income while rate increases accounted for the remaining 41.8%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $292 and $278 thousand for the six months ended June 2023 and 2022 which resulted in a federal tax savings of $61 and $60 thousand, respectively.


	(In Thousands)
	Year to Date Ended June 30, 2023				Annualized Yield/Rate
Interest Earning Assets:	Average Balance		Interest/Dividends		June 30, 2023			June 30, 2022
Loans	$	2,437,148	$	61,068		5.01	%		4.39	%
Taxable investment securities		398,383		2,985		1.50	%		1.24	%
Tax-exempt investment securities		25,303		193		1.93	%		1.76	%
Fed funds sold & other		58,853		933		3.17	%		0.30	%
Total Interest Earning Assets	$	2,919,687	$	65,179		4.47	%		3.63	%

Change in Interest Income Year to Date June 30, 2023 Compared to June 30, 2022


	(In Thousands)
Interest Earning Assets:	Total Change		Change Due to Volume			Change Due to Rate
Loans	$	18,225	$	10,607		$	7,618
Taxable investment securities		346		(172	)		518
Tax-exempt investment securities		53		46			7
Fed funds sold & other		745		(99	)		844
Total Interest Earning Assets	$	19,369	$	10,382		$	8,987

Interest Expense

Offsetting the higher interest income for the six months ended June 30, 2023 was an increase in interest expense of $19.2 million or 461.6% compared to the same period in 2022. Since 2022, average interest-bearing deposit balances have increased $225.2 million or 12.9% and the Company recognized $15.8 million more in interest expense for the most recent quarter. March 2022 saw the first rate change since March of 2020 with an increase of 25 basis points which was followed by an increase of 50 basis points in May and four increases of 75 basis points in June, July, September and November with a final 50 basis point increase in December. To date in 2023, there have been three increases of 25 basis points in February, March and May. Deposit rates have been adjusted numerous times with all of the rate increases. Interest expense on FHLB borrowings and other borrowings increased $2.8 million in the six months ended June 30, 2023 over the same time frame in 2022 due to borrowings taken on from the Peoples acquisition and new FHLB borrowings in 2022 and 2023 used to fund loan growth. Interest expense on fed funds purchased and securities sold under agreement to repurchase increased $514 thousand compared to 2022. The average cost of funds increased to 2.10% for the six months ended June 2023 compared to 0.44% for the six months ended June 2022. Liabilities assumed from PPSF can be seen in Note 2.


	(In Thousands)
	Year to Date Ended June 30, 2023				Annualized Yield/Rate
Interest Bearing Liabilities:	Average Balance		Interest		June 30, 2023			June 30, 2022
Savings deposits	$	1,378,518	$	11,181		1.62	%		0.21	%
Other time deposits		596,168		7,404		2.48	%		0.61	%
Other borrowed money		174,171		3,393		3.90	%		2.16	%
Fed funds purchased & securities
sold under agreement to repurchase		39,409		832		4.22	%		1.98	%
Subordinated notes		34,610		569		3.29	%		3.21	%
Total Interest Bearing Liabilities	$	2,222,876	$	23,379		2.10	%		0.44	%

Change in Interest Expense Year to Date June 30, 2023 Compared to June 30, 2022


	(In Thousands)
Interest Bearing Liabilities:	Total Change		Change Due to Volume		Change Due to Rate
Savings deposits	$	9,816	$	80	$	9,736
Other time deposits		6,030		457		5,573
Other borrowed money		2,840		1,329		1,511
Fed funds purchased & securities
sold under agreement to repurchase		514		71		443
Subordinated notes		16		2		14
Total Interest Bearing Liabilities	$	19,216	$	1,939	$	17,277

Overall, net interest spread for the six months ended June 30, 2023 was 82 basis points lower than last year. As the following chart indicates, the improvement in yields on interest earning assets did not offset the increased cost of funds when comparing to the same period a year ago. Competition for deposits is intense with most competitors offering special rates for specific terms.


	June 30, 2023			June 30, 2022			June 30, 2021
Interest/Dividend income/yield		4.47	%		3.63	%		3.61	%
Interest Expense/cost		2.10	%		0.44	%		0.48	%
Net Interest Spread		2.37	%		3.19	%		3.13	%
Net Interest Margin		2.87	%		3.30	%		3.27	%

Net Interest Income

Net interest income increased $153 thousand for the six months ended June 30, 2023 over the same time frame in 2022 with the increase in interest income of $19.4 million offset by the higher interest expense of $19.2 million as previously mentioned. As the new loans added in 2022 and 2023 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to increase interest income in the long run. Loans as a percentage of earning assets increased to 83.5% for the six months ended 2023 compared to 77.4% for the six months ended June 2022. Loans to total assets increased to 78.8% for the six months ended 2023 compared to 72.7% for the same time period 2022. The percentage of earning assets to total assets increased to 94.4% in 2023 compared to 93.9% in 2022. In terms of net interest

margin, the Bank recognizes competition for deposits continues to increase with higher interest rates putting pressure on the margin which may lead to a further tightening in the short term.

Comparison of Noninterest Results of Operations for six month periods ended June 30, 2023 and 2022

Provision Expense

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ACL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The consumer loan portfolio accounted for the largest component of charge-offs and recoveries for six months ended June 30, 2023 and 2022. The commercial real estate portfolio is currently creating a large impact on the ACL due to the loan growth.

Total provision for credit losses was $1.2 million lower for the six months ended June 30, 2023 as compared to the same period in 2022. Management continues to monitor asset quality, making adjustments to the provision as necessary. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $29 thousand lower for the six months ended June 30, 2023 than the same period in 2022. Recoveries were $70 thousand higher in the six months ended June 30, 2023 as compared to 2022. Combined net recoveries were $99 thousand higher for the six months ended June 30, 2023 than for combined net charge-offs for the same time period in 2022. This continues to highlight the strong credit quality of the loan portfolio.

Loans past due 30 days or more, which include no deferrals related to COVID-19, increased $5.6 million at June 30, 2023 as compared to June 30, 2022. The largest changes were attributed to the increase of past due balances in the agricultural portfolio, agricultural real estate portfolio, commercial real estate portfolio and commercial and industrial portfolio. The increase in the agricultural real estate portfolio was attributable to two larger relationships while the increase in the other categories were multiple, smaller relationships.


	(In Thousands)
	Six Months Ended June 30, 2023			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021
Loans, net of deferred fees and costs	$	2,515,793		$	2,034,818		$	1,458,423
Daily average of outstanding loans	$	2,437,148		$	1,953,671		$	1,374,302
Nonaccrual loans	$	6,295		$	5,247		$	7,031
Nonperforming loans*	$	6,295		$	5,247		$	7,031

Allowance for Credit Losses - January 1,	$	20,313		$	16,242		$	13,672
Adjustment for accounting change		3,564			-			-
Loans Charged off:
Consumer Real Estate		-			-			-
Agriculture Real Estate		-			-			-
Agricultural		-			-			142
Commercial Real Estate		-			-			-
Commercial and Industrial		-			6			809
Consumer		182			205			100
		182			211			1,051
Loan Recoveries:
Consumer Real Estate		13			9			6
Agriculture Real Estate		104			-			-
Agricultural		-			-			6
Commercial Real Estate		5			5			5
Commercial and Industrial		12			74			10
Consumer		121			97			98
		255			185			125
Net Charge Offs (Recoveries):
Consumer Real Estate		(13	)		(9	)		(6	)
Agriculture Real Estate		(104	)		-			-
Agricultural		-			-			136
Commercial Real Estate		(5	)		(5	)		(5	)
Commercial and Industrial		(12	)		(68	)		799
Consumer		61			108			2
		(73	)		26			926
Provision for credit loss		960			2,208			2,341
Allowance for Loan Losses - June 30,		24,910			18,424			15,087
Allowance for Unfunded Loan Commitments & Letters of Credit - June 30,		2,099			1,167			1,145
Total Allowance for Credit Losses - June 30,	$	27,009		$	19,591		$	16,232
Ratio of Net Charge-offs to Average Outstanding Loans		0.00	%		0.00	%		0.07	%
Ratio of Nonaccrual Loans to Loans		0.25	%		0.26	%		0.48	%
Ratio of the Allowance for Loan Losses to Loans		0.99	%		0.91	%		1.03	%
Ratio of the Allowance for Loan Losses to Nonaccrual Loans		395.71	%		351.44	%		214.58	%
Ratio of the Allowance for Loan Losses to Nonperforming Loans*		395.71	%		351.44	%		214.58	%

* Nonperforming loans are defined as all loans on nonaccrual, plus any loans 90 days past due not on nonaccrual.

Loans classified as nonaccrual were lower as of June 30, 2023 at $4.7 million as compared to $5.2 million as of June 30, 2022. The agricultural portfolio decreased $1.1 million as compared to June 30, 2022. These decreases offset the increases in the other portfolios.

Noninterest Income

Noninterest income was up $786 thousand for the six months ended June 30, 2023 over the same time frame in 2022. Servicing rights income for 1-4 family and agricultural real estate loans increased $2.1 million. This was due to the establishment of agricultural real estate servicing rights of $1.5 million in the first quarter and a change in the accounting estimate of $712 thousand in the second quarter. Combined service fees increased by $2.4 million as compared to the six months ended June 30, 2022. Debit card income increased by $181 thousand and bank owned life insurance cash surrender value increased $81 thousand. Also contributing to the increase was overdraft and returned check charges which increased $116 thousand compared to the six months ended June 30, 2022. Fee income from credit cards decreased by $154 thousand as compared to the six months ended June 30, 2022.

The Company has seen a decrease in its mortgage production volume and the gain on the sale of these loans was $686 thousand lower for the six months ended June 30, 2023 over the same period in 2022. Loan originations on loans held for sale for the six months ended June 30, 2023 were $15.0 million with proceeds from sale at $14.5 million for 2023 compared to 2022’s activity of $47.1 million in originations and $51.4 million in sales. Loan originations driven by refinance activity have drastically decreased with the higher interest rates in 2023. Inventory in many of our markets remain low. The mortgages sold were both 1-4 family and agricultural real estate loans originated for sale.

Noninterest Expense

For the six months ended June 30, 2023, noninterest expenses were $7.0 million higher than for the same period in 2022. Salaries, wages, and employee benefits (includes normal merit increases, restricted stock expense, incentive payout and all employee benefits) increased $2.9 million in total. This was comprised of increased salaries of $2.3 million and increased benefits of $636 thousand. The increase was due to the investment in people for our strategic growth initiative. Advertising and public relations expense increased $807 thousand. This was due, in part, to our new logo launch. Data processing expenses increased $264 thousand. Credit card expense increased $462 thousand related to the conversion of our credit card platform in the first quarter. The conversion expense also included a scorecard conversion expense of $108 thousand in the first quarter. This represented awards earned by customers that the Company paid to honor rather than allowing them to be lost in the conversion. FDIC assessment expense increased $418 thousand.

Income Taxes

Income tax expense was $887 thousand lower for the six months ended June 30, 2023 compared to the same period in 2022, due to lower earnings. Effective tax rates were 19.99% and 19.64% for six months ended June 30, 2023 and 2022 respectively.

Net Income

Results overall, net income for the six months ended June 30, 2023 was down $1.6 million as compared to the same period last year. As mentioned prior, the Company incurred a one-time expense in the first quarter of $541 thousand related to our credit card platform. A loss of $891 thousand arising from the sale of $21.6 million of investments was also recognized in the first quarter. The Company has done an exceptional job of growing loans while keeping past dues low. The increased cost of funding is impacting the bottom line as it is adjusting faster than our earning assets. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion.

FORWARD LOOKING STATEMENTS

Statements contained in this portion of the Company's report may be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "intend," "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Such forward-looking statements are based on current expectations, but actual results may differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Other factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank's market area, changes in relevant accounting principles and guidelines and other factors over which management has no control, including, but not limited to, the ongoing impact of the COVID-19 pandemic. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results differ from those projected in the forward-looking statements.

ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates and equity prices. The primary market risk to which the Company is subject is interest rate risk. The majority of our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading such as loans, available for sale securities, interest bearing deposits, short term borrowings and long term borrowings. Interest rate risk occurs when interest bearing assets and liabilities re-price at different times as market interest rates change. For example, if fixed rate assets are funded with variable rate debt, the spread between asset and liability rates will decline or turn negative if rates increase.

Interest rate risk is managed within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates.

Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liabilities management strategies are unsuccessful, our profitably may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.

The shocks presented below assume an immediate change of rate in the percentages and directions shown covering a twelve month period:


Interest Rate Shock on Net Interest Margin				Interest Rate Shock on Net Interest Income
Net Interest	% Change to	Rate	Rate	Cumulative		% Change to
Margin (Ratio)	Flat Rate	Direction	Changes by	Total ($000)		Flat Rate
3.33%	-1.10%	Rising	3.00%		92,359	-2.91%
3.39%	0.81%	Rising	2.00%		94,543	-0.62%
3.44%	2.28%	Rising	1.00%		96,383	1.32%
3.36%	0.00%	Flat	0.00%		95,132	0.00%
3.11%	-7.63%	Falling	-1.00%		89,085	-6.36%
2.92%	-13.09%	Falling	-2.00%		85,113	-10.53%
2.74%	-18.64%	Falling	-3.00%		81,062	-14.79%

The net interest margin represents the forecasted twelve month margin. The Company also reviews shocks with a 4.0% fluctuation with a delayed time frame of 10 months and over a 24 month time frame. It also shows the effect rate changes will have on both the margin and net interest income. The goal of the Company is to lengthen the term of some of the Bank’s fixed rate liabilities or sources of funds to decrease the exposure to a rising rate environment. Of course, customer desires also impact the Bank’s ability to attract longer term deposits.

The shock chart currently shows a widening in net interest margin over the next twelve months in a rising rate environment up to a 1.00% increase and a tightening as it moves from 1.00% towards the 2.00% and 3.00% increases as well as in the falling rate environments. The 1.00% rising rate scenario is predicted to expand the net interest margin and produce a higher level of net interest income. Cost of funds are at 2.10% for the year so the falling shock of 200 basis points is where the Bank can take partial advantage and reprice some funds to match the level of shock. Once the shocks are falling over 200 basis points, the cost of funds cannot lower to match and the loss on net interest income continues to build. The average duration of the majority of the assets is outside the 12 month shock period. The majority of the newer loans added to the commercial real estate portfolio begin with an initial fixed rate period of three to five years whose variable adjustment is outside of the current shock time frame. The Bank continues to adjust its assumptions by including decay rates and key rate ties on certain deposit accounts and continues to review and modify those rates as the index rates change. All shocks are within risk exposure guidelines at all levels. The effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from prediction.

Overall, the Company must concentrate on increasing loan spreads on variable loans and limit the increase on cost of funds where possible.

ITEM 4 CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company's management including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None

ITEM 1A RISK FACTORS

Except as indicated below, there have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Events Impacting the Financial Services Industry

Recent events impacting the financial services industry, including the failures of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company's common stock.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. Inability to access short-term funding or the loss of client deposits could increase our cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization. Moreover, we may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial and cascading disruption within the financial markets and increased expenses. In addition, the cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Inflation Risk

Periods of inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention. Additionally, inflation may lead to a decrease in our customers’ purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could also be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions.

Climate Change Risk

There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include discrete events, such as flooding and wildfires, and longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Under medium or longer-term scenarios, such events, if uninterrupted or unaddressed, could disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. While the timing and severity of climate change may not be entirely predictable and our risk management processes may not be effective in mitigating climate risk exposure, we continue to build capabilities to identify, assess, and manage climate risks.

Quantitative Modeling Risk

We rely on quantitative modeling to measure risks and to estimate certain financial values. Quantitative models may be used to help manage certain aspects of our business and to assist with certain business decisions, including estimating expected lifetime credit losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes. All models have certain limitations. For instance, these methodologies inherently rely on assumptions, historical analyses, and correlations which may not capture or fully incorporate all relevant conditions and circumstances. As a consequence, such limitations may result in losses, particularly in times of market distress. Additionally, as businesses and markets continue to rapidly evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, inaccurate data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.

Reliance on such models presents the risk that our resulting business decisions will be adversely affected due to incorrect, missing, or misleading information. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable. Also, information that we provide to the public or regulators based on poorly designed models could be inaccurate or misleading.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Treasury stock repurchased the quarter ended June 30, 2023.


Period	(a) Total Number of Shares Purchased			(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs (1)		(d) Maximum Number of Shares that may yet be purchased under the Plans or Programs
4/1/2023 to 4/30/2023		—			—		—		650,000

5/1/2023 to 5/31/2023		—			—		—		650,000

6/1/2023 to 6/30/2023		208	(2)		23.30		—		650,000
Total		208			23.30		—		650,000

(1)

From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 24, 2023. On that date, the Board of Directors authorized the repurchase of 650,000 common shares between January 24, 2023 and December 31, 2023.

(2)

Shares which are returned to account for tax payable on vested stock awards are outside of the Company’s stock repurchase program.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 OTHER INFORMATION

None

ITEM 6 EXHIBITS


3.1		Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 25, 2017).
3.2		Amended and Restated Code of Regulations of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 26, 2017).
4.1		Description of Registrant’s Common Stock (incorporated by reference to Exhibit 4.1 to Registrant's Annual Report on Form 10-K filed with the Commission on February 26, 2020).
31.1		Rule 13-a-14(a) Certification - CEO
31.2		Rule 13-a-14(a) Certification - CFO
32.1		Section 1350 Certification - CEO
32.2		Section 1350 Certification - CFO

101.INS		Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (1)
101.SCH		Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, has been formatted in Inline XBRL.

(1) Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				Farmers & Merchants Bancorp, Inc.,

Date:	August 2, 2023	By:	/s/ Lars B. Eller
				Lars B. Eller
				President and Chief Executive Officer



Date:	August 2, 2023	By:	/s/ Barbara J. Britenriker
				Barbara J. Britenriker
				Executive Vice-President and
				Chief Financial Officer

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Lars B. Eller, President and CEO of Farmers & Merchants Bancorp, Inc., certify that:

I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: 

August 2, 2023

/s/ Lars B. Eller

Lars B. Eller
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Barbara J. Britenriker, Executive Vice President and CFO of Farmers & Merchants Bancorp, Inc., certify that:

I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:	August 2, 2023	/s/ Barbara J. Britenriker
		Barbara J. Britenriker
		Executive Vice President and
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission ("the report"), I, Lars B. Eller, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Farmers & Merchants Bancorp, Inc. as of the dates and for the periods expressed in the Report.

Date: 

August 2, 2023

/s/ Lars B. Eller

Lars B. Eller
President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Farmers & Merchants Bancorp, Inc. and will be retained by Farmers & Merchants Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission ("the report"), I, Barbara J. Britenriker, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


Date:	August 2, 2023	/s/ Barbara J. Britenriker
		Barbara J. Britenriker
		Executive Vice President and
		Chief Financial Officer